Chapter 14 Planning And Management Control Systems PDF

PLANNING AND MANAGEMENT CONTROL SYSTEMS Maurizio Massaro Chapter 14 Managerial Accounting Concepts and Principles Chapter 14 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. ...

PLANNING AND MANAGEMENT CONTROL SYSTEMS Maurizio Massaro Chapter 14 Managerial Accounting Concepts and Principles Chapter 14 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  11 - 3 Chapter 14 Learning Objectives CONCEPTUAL C1 Explain the purpose and nature of, and the role of ethics in, managerial accounting. C2 Describe accounting concepts useful in classifying costs. C3 Define product and period costs and explain how they impact financial statements. C4 Explain how balance sheets and income statements for manufacturing, merchandising, and service companies differ. C5 Explain manufacturing activities and the flow of manufacturing costs. C6 Describe trends in managerial accounting. ANALYTICAL A1 Assess raw materials inventory management using raw materials inventory turnover and days’ sales in raw materials inventory. PROCEDURAL P1 Compute cost of goods sold for a manufacturer and for a merchandiser. P2 Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements. © McGraw-Hill Education 3  Learning Objective C1: Explain the purpose and nature of, and the role of ethics in, managerial accounting. © McGraw-Hill Education 4  18 - 5 Managerial Accounting Basics Managerial accounting provides financial and nonfinancial information for managers of an organization and other decision makers. Learning Objective C1: Explain the purpose and nature of, and the role of ethics in, managerial © McGraw-Hill Education 5 accounting.  18 - 6 Purpose of Managerial Accounting Exhibit 14.1 Planning Control Develop new products? Are costs too high? Expand into new markets? Are services profitable? Build a new factory? Are customers satisfied? Learning Objective C1: Explain the purpose and nature of, and the role of ethics in, managerial © McGraw-Hill Education 6 accounting.  18 - 7 Nature of Managerial Accounting Exhibit 14.2 Learning Objective C1: Explain the purpose and nature of, and the role of ethics in, managerial © McGraw-Hill Education 7 accounting.  18 - 8 Fraud and Ethics in Managerial Accounting Fraud affects all business and it is costly: The 2016 Report to the Nations from the Association of Certified Fraud Examiners (ACFE) estimates the average U.S. business loses 5% of its annual revenues to fraud. An internal control system is the policies and procedures used to: 1. Ensure reliable accounting 2. Protect assets 3. Uphold company policies 4. Promote efficient operations. The Institute of Management Accountants has issued a code of ethics to help accountants involved in solving ethical dilemmas. Learning Objective C1: Explain the purpose and nature of, and the role of ethics in, managerial © McGraw-Hill Education 8 accounting.  18 - 9 Career Paths Managerial accounting information is used in many careers: Marketing staff need sales and cost data to decide which products to promote. Management needs sales force details to evaluate performance. Entrepreneurs use costs, budgets, and financial statements. Nonbusiness majors use accounting information as their careers advance. Exhibit 14.4 Learning Objective C1: Explain the purpose and nature of, and the role of ethics in, managerial © McGraw-Hill Education 9 accounting.  Let’s see if you got it Managerial accounting reports and information are used by external users and financial accounting by internal users. True False (T) 10  Learning Objective C2: Describe accounting concepts useful in classifying costs. © McGraw-Hill Education 11  18 - 12 Types of Cost Classifications Fixed versus Variable Cost behavior refers to how a cost will change, in total, with changes in the volume of Cost activity. Total fixed costs do Activity not change when activity changes. Cost Total variable costs change in proportion Activity to activity changes. © McGraw-Hill Education 12 Learning Objective C2: Describe accounting concepts useful in classifying costs.  18 - 13 Types of Cost Classifications Direct versus Indirect Direct costs Indirect costs ⚫ Costs traceable to a ⚫ Costs that cannot single cost object. be traced to a ⚫ Examples: material single cost object. and labor cost for a ⚫ Example: product. maintenance expenditure benefiting two or more departments. © McGraw-Hill Education 13 Learning Objective C2: Describe accounting concepts useful in classifying costs.  18 - 14 Let’s see if you got it Which of the following is not a direct cost for a scooter manufacturer A. Office rent (T) B. Wheels C. Handle bars D. Brakers E. Grip tape 14  18 - 15 Let’s see if you got it Which of the following is an indirect cost for a scooter manufacturer A. Office rent B. Wheels C. Supervisor salary (T) D. Brakers E. Assembly worker employee benefit 15  Learning Objective C3: Define product and period costs and explain how they impact financial statements. © McGraw-Hill Education 16  18 - 17 Types of Cost Classifications Product versus Period Costs Direct Direct Manufacturing Labor Material Overhead Product Period costs are expenses not attached to the product. Administrative costs are Selling costs are incurred to non-manufacturing costs obtain orders and to deliver of staff support and finished goods to customers. administrative functions. Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 17 statements.  18 - 18 Period and Product Costs in Financial Statements Exhibit 14.7 Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 18 statements.  18 - 19 Identifications of Exhibit Cost Classifications 14.9 Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 19 statements.  18 - 20 Cost Concepts for Service Companies The cost concepts described are generally applicable to service organizations. For example, the cost of beverages for passengers of Southwest Airlines is a variable cost based on number of passengers. Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 20 statements.  18 - 21 Managerial Reporting Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 21 statements.  18 - 22 Direct Materials Direct materials costs are the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods. Example: Steel used in the frame of a mountain bike. Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 22 statements.  18 - 23 Direct Labor Direct labor costs are the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods. Example: Wages paid to a mountain bike assembly worker. Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 23 statements.  18 - 24 Factory Overhead Factory overhead consists of all manufacturing costs that are not direct materials or direct labor and are not separately traced to finished goods. Examples: Indirect labor – maintenance. Indirect material – cleaning supplies. Factory utility costs. Supervisory costs. Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 24 statements.  18 - 25 Prime and Conversion Costs Manufacturing costs are often combined as follows: Direct Direct Manufacturing Material Labor Overhead Prime Conversion Cost Cost Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 25 statements.  18 - 26 Nonmanufacturing Costs Recorded as expenses on the income statement when incurred. Expenses are period cost. Selling and administrative expenses. Not part of Factory Overhead because they are not incurred in manufacturing products. Learning Objective C3: Define product and period costs and explain how they impact financial © McGraw-Hill Education 26 statements.  18 - 27 Let’s see if you got it Costs that flow directly to the income statement as expenses are called: A. Period costs (T) B. Product costs C. General costs D. Balance sheet costs E. Capitalized costs 27  18 - 28 Let’s see if you got it For product costs associated with a particular product to be reported on the income statement: A. The product must be transferred to Finished Goods Inventory B. The product must still be in WIP inventory C. The product must be sold (T) D. The product may be in any of the manufacture’s inventory accounts E. The company must expect to sell the product during the next 12 months 28  Let’s see if you got it A company's prime costs total $3,000,000 and its conversion costs total $7,000,000. If direct materials are $1,000,000 and factory overhead is $5,000,000, then direct labor is $2,000,000. Prime cost=Direct material + Direct labor 3m= 1m+ x 29  Learning Objective C4: Explain how balance sheets and income statements for manufacturing, merchandising, and service companies differ. © McGraw-Hill Education 30  18 - 31 Reporting Manufacturing Activities Merchandisers... Manufacturers... ❖ Buy finished goods. ❖ Buy raw materials. ❖ Sell finished goods. ❖ Produce and sell finished goods. © McGraw-Hill Education 31 Learning Objective C4: Explain how balance sheets and income statements for manufacturing, merchandising, and service companies differ.  18 - 32 Manufacturer’s Balance Sheet Raw Work in Finished Materials Process Goods Inventory Inventory Inventory Materials Partially complete Completed waiting to be products. products processed. for sale. Material to which Can be direct some labor and/or or indirect. overhead have been added. © McGraw-Hill Education 32 Learning Objective C4: Explain how balance sheets and income statements for manufacturing, merchandising, and service companies differ.  18 - 33 Balance Sheets for Manufacturers, Merchandisers and Servicers Exhibit 14.11 The primary difference is inventory. © McGraw-Hill Education 33 Learning Objective C4: Explain how balance sheets and income statements for manufacturing, merchandising, and service companies differ.  18 - 34 Let’s see if you got it Products that are in the process of being manufactured but are not yet complete are called: A. Raw material inventory B. Conversion costs C. Cost of goods sold D. Work in process inventory (T) E. Finished goods inventory 34  Learning Objective P1: Compute cost of goods sold for a manufacturer and for a merchandiser. © McGraw-Hill Education 35  18 - 36 Costs and the Income Statement Exhibit 14.12 © McGraw-Hill Education 36 Learning Objective P1: Compute cost of goods sold for a manufacturer and for a merchandiser.  18 - 37 Exhibit Cost of Goods Sold for a 14.13 Merchandiser and Manufacturer Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. © McGraw-Hill Education 37 Learning Objective P1: Compute cost of goods sold for a manufacturer and for a merchandiser.  Learning Objective C5: Explain manufacturing activities and the flow of manufacturing costs. © McGraw-Hill Education 38  18 - 39 Flow of Manufacturing Activities Exhibit 14.15 © McGraw-Hill Education 39 Learning Objective C5: Explain manufacturing activities and the flow of manufacturing costs.  Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements. © McGraw-Hill Education 40  18 - 41 Schedule of Cost of Good Manufactured Summarizes the types and amounts of costs incurred in a company’s manufacturing process. Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured © McGraw-Hill Education 41 Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.  18 - 42 Manufacturing Statement Exhibit 14.16 © McGraw-Hill Education 42 Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.  18 - 43 Exhibit Manufacturing Statement (Pt. 2) 14.16 © McGraw-Hill Education 43 Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.  18 - 44 Exhibit Manufacturing Statement (Pt. 3) 14.16 Include all direct labor costs incurred during the current period. © McGraw-Hill Education 44 Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.  18 - 45 Exhibit Manufacturing Statement (Pt. 4) 14.16 © McGraw-Hill Education 45 Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.  18 - 46 Exhibit Manufacturing Statement (Pt. 5) 14.16 © McGraw-Hill Education 46 Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.  18 - 47 Manufacturing Cost Flows Across Accounting Reports Exhibit 14.17 © McGraw-Hill Education 47 Learning Objective P2: Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.  Let’s see if you got it Asteroid Industries accumulated the following cost information for the year: Direct materials 16,000 Indirect materials 4,000 Indirect labor cost 8,500 Factory depreciation 12,800 Direct labor cost 37,000 Using the above information, total factory overhead costs equal to: A. 78,300 B. 25,300 (T) C. 12,800 D. 16,800 E. 53,000 Factory overhead= indirect materials+nIndirect labor+Factory depreciation=4,000+8,500+12,800=25,300 48  Learning Objective C6: Describe trends in managerial accounting. © McGraw-Hill Education 49  18 - 50 Trends in Managerial Accounting Customer Global Orientation Economy Service E-Commerce Economy Lean Practices Value Chain © McGraw-Hill Education 50 Learning Objective C6: Describe trends in managerial accounting.  18 - 51 Customer Orientation © McGraw-Hill Education 51 Learning Objective C6: Describe trends in managerial accounting.  18 - 52 Total Quality Management Quality improvement Seek and uncover applied to its waste. business activities. Constant Focus on Higher Standards Employees encouraged Company emphasizes to try new methods value of quality through to improve quality. quality awards. © McGraw-Hill Education 52 Learning Objective C6: Describe trends in managerial accounting.  18 - 53 Just-In-Time (JIT) Manufacturing Receive customer Complete products orders just-in-time to ship to customers Schedule Production Receive materials Complete parts just-in-time for just-in-time for production assembly into products © McGraw-Hill Education 53 Learning Objective C6: Describe trends in managerial accounting.  18 - 54 Value Chain Exhibit 14.18 The value chain refers to the series of principles that add value to a company’s products or services. Companies can use lean principles to increase efficiency and profits. © McGraw-Hill Education 54 Learning Objective C6: Describe trends in managerial accounting.  18 - 55 Lean Model Practices Impact for Managerial Accounting Adopting the lean practices means that all systems and procedures must be realigned. Managerial accounting has an important role in providing accurate cost and performance information. © McGraw-Hill Education 55 Learning Objective C6: Describe trends in managerial accounting.  18 - 56 Corporate Social Responsibility Corporations must consider demands of employees, suppliers, and society. Corporate social responsibility (CSR) goes beyond law. Triple bottom line focuses on financial, social and environmental measures. Adopting a triple bottom line impacts how business report. © McGraw-Hill Education 56 Learning Objective C6: Describe trends in managerial accounting.  18 - 57 Let’s see if you got it Explain what is meant by the "lean business model" and why many businesses have adopted it. Answer: The lean business model is a model whose main principle is the elimination of waste while satisfying the customer and provide a positive return to the company. It is based on the changes in the business environment, including an increased emphasis on customers and the expanding global economy. A primary force behind its adoption is competition both domestic and international 57  Learning Objective A1: Assess raw materials inventory management using raw materials inventory turnover and days’ sales in raw materials inventory. © McGraw-Hill Education 58  18 - 59 Raw Materials Inventory Turnover Raw materials Raw materials used Inventory turnover = Average materials inventory Beg material Inv. + End material Inv. Where Average materials inventory = 2 Learning Objective A1: Assess raw materials inventory management using raw materials inventory © McGraw-Hill Education 59 turnover and days’ sales in raw materials inventory.  18 - 60 Days’ Sales in Raw Materials Inventory Ending raw materials Days’ sales in raw inventory X 365 materials inventory = Raw materials used Learning Objective A1: Assess raw materials inventory management using raw materials inventory © McGraw-Hill Education 60 turnover and days’ sales in raw materials inventory.  18 - 61 End of Chapter 14 © McGraw-Hill Education 61