Survey of Accounting - Chapter 11 PDF

Survey of Accounting​ Third Edition Kimmel Weygandt Mitchell Chapter 11 Managerial Accounting For screen reader users: This file contains Animations. For improved screen reader experience, it is recomme...

Survey of Accounting​ Third Edition Kimmel Weygandt Mitchell Chapter 11 Managerial Accounting For screen reader users: This file contains Animations. For improved screen reader experience, it is recommended to disable Animations before proceeding further in this file. Copyright © John Wiley & Sons, Inc. Chapter Outline Learning Objectives LO 1 Identify the features of managerial accounting and the functions of management. LO 2 Describe the classes of manufacturing costs and the differences between product and period costs. LO 3 Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer. LO 4 Discuss trends in managerial accounting. Copyright © John Wiley & Sons, Inc. Learning Objective 1 Identify the features of managerial accounting and the functions of management. Copyright © John Wiley & Sons, Inc. LO 1 Managerial Accounting Basics Provides economic and financial information for managers and other internal users. Comparing Managerial and Financial Accounting Similarities and differences: Each field deals with economic events of a business Both require that economic events be quantified and communicated to interested parties Copyright © John Wiley & Sons, Inc. LO 1 Comparing Managerial and Financial Illustration 11.1: Differences between financial and managerial accounting Copyright © John Wiley & Sons, Inc. LO 1 Management Functions Planning Directing Controlling Maximize Coordinate diverse Keep and maintain short-term activities and activities on track profit and human resources Determine whether market share Implement planned goals are met Commit to objectives Decide what environmental Provide incentives changes are protection and to motivate needed to get back social programs employees on track Add value to Hire and train May use an the business employees informal or formal Produce a smooth- system of running operation evaluations Copyright © John Wiley & Sons, Inc. LO 1 Organizational Structure Illustration 11.2: A typical organization chart Organization charts show the interrelationships of activities and the delegation of authority and responsibility within the company. Copyright © John Wiley & Sons, Inc. LO 1 DO IT! 1: Managerial Accounting Part 1 Indicate whether the following statements are true or false. 1. Managerial accountants have a single False role within an organization: collecting and reporting costs to management. 2. Financial accounting reports are general- True purpose and intended for external users. 3. Managerial accounting reports are special- True purpose and issued as frequently as needed. Copyright © John Wiley & Sons, Inc. LO 1 DO IT! 1: Managerial Accounting Part 2 Indicate whether the following statements are true or false. 4. Managers’ activities and responsibilities can False be classified into three broad functions: cost accounting, budgeting, and internal control. 5. Managerial accounting reports must False now comply with generally accepted accounting principles (GAAP). Copyright © John Wiley & Sons, Inc. LO 1 Learning Objective 2 Describe the classes of manufacturing costs and the differences between product and period costs. Copyright © John Wiley & Sons, Inc. LO 2 Questions for Managers to Ask Managers should ask questions such as the following: 1. What costs are involved in making a product or providing a service? 2. If we decrease production volume, will costs change? 3. What impact will automation have on total costs? 4. How can we best control costs? Copyright © John Wiley & Sons, Inc. LO 2 Manufacturing Costs Activities and processes that convert raw materials into finished goods. Copyright © John Wiley & Sons, Inc. LO 2 Manufacturing Costs Direct Materials Raw materials are the basic materials and parts used in the manufacturing process Raw materials that can be physically and directly associated with finished product during the manufacturing process are direct materials Copyright © John Wiley & Sons, Inc. LO 2 Manufacturing Costs Indirect Materials Have one of two characteristics: 1. Not physically part of finished product 2. Are impractical to trace to the finished product because their physical association with the finished product is too small in terms of cost Considered part of manufacturing overhead Copyright © John Wiley & Sons, Inc. LO 2 Manufacturing Costs Direct Labor and Indirect Labor Direct Labor Work of factory employees that can be physically and directly associated with converting raw materials into finished goods. Indirect Labor Work of manufacturing-related employees that has no physical association with the making of the finished product or Costs for which it is impractical to trace to the goods produced. Copyright © John Wiley & Sons, Inc. LO 2 Manufacturing Costs Manufacturing Overhead Costs indirectly associated with manufacture of the finished product All manufacturing- related costs except direct materials and direct labor Also called factory overhead, indirect manufacturing costs, or burden Copyright © John Wiley & Sons, Inc. LO 2 Product Costs versus Period Costs Product Costs cost components: All manufacturing o Direct materials o Direct labor o Manufacturing overhead Costs that are an integral part of producing product Recorded in “inventory” account Not an expense (COGS) until goods are sold Copyright © John Wiley & Sons, Inc. LO 2 Product Costs versus Period Costs Period Costs Nonmanufacturing costs Includes all selling and administrative expenses Charged to expense as incurred Copyright © John Wiley & Sons, Inc. LO 2 Product Costs versus Period Costs Illustration 11.3: Product versus period costs Copyright © John Wiley & Sons, Inc. LO 2 Illustration of Cost Concepts Illustration: Suppose you started your own snowboard Items 1–3 factory, Terrain Park Boards. Here are some of the costs that your snowboard factory would incur. Assign the following costs: Product Cost (direct materials, Period Cost direct labor, or (non- manufacturing manufacturin Cost overhead) g) Explanation 1. Wood cores, Direct materials Essential elements of fiberglass, and finished product resin ($30 per board) 2. Labor to trim and Direct labor Physically and directly shape boards associated with ($40 per board) converting raw materials into finished goods 3. Factory Manufacturing Factory cost that is not equipment11.4: Assignment Illustration overhead of costs to cost categories direct materials or direct depreciation labor ($25,000) Copyright © John Wiley & Sons, Inc. LO 2 Illustration of Cost Concepts Items 4–8 (direct Product Cost materials, Period Cost direct labor, or (non- manufacturing manufacturin Cost overhead) g) Explanation 4. Property taxes on Manufacturing Factory cost that is not factory building overhead direct materials or direct ($6,000 per year) labor 5. Advertising costs X Not a cost associated with ($60,000 per year) producing product 6. Sales X Not a cost associated with commissions producing product ($20 per board) 7. Factory Manufacturing A factory cost, but maintenance overhead employees are not salaries ($25,000 physically and directly per year) involved with converting raw materials into finished goods 8. Salary of factory Manufacturing A factory cost, but manager ($70,000 overhead employees are not per year) Copyright © John Wiley & Sons, Inc. physically and directly LO 2 Illustration of Cost Concepts Items 9–10 Product Cost (direct materials, Period direct labor, or Cost (non- manufacturing manufacturi Cost overhead) ng) Explanation 9. Cost of X Not a cost associated shipping with producing product boards to customers ($8 per board) 10.Salary of Manufacturing A factory cost, but product quality overhead employees are not inspector physically and directly ($20,000 per involved with converting year) raw materials into finished goods Copyright © John Wiley & Sons, Inc. LO 2 Illustration of Cost Concepts Calculation Assuming of Terrain Park Total Boards Manufacturing produces 10,000 snowboards the first year, what would be the total Costs manufacturing costs? Cost Item Manufacturing Cost 1. Material cost ($30 × 10,000) $300,000 2. Labor cost ($40 × 10,000) 400,000 3. Depreciation on factory equipment 25,000 4. Property taxes on factory building 6,000 7. Factory maintenance salaries 25,000 8. Salary of factory manager 70,000 10. Salary of product quality inspector 20,000 Illustration 11.5: Computation of total manufacturing product costs Total manufacturing product costs $846,000 Copyright © John Wiley & Sons, Inc. LO 2 DO IT! 2: Managerial Cost Concepts A bicycle company has these costs: tires, wages of employees who put tires on the wheels, factory building depreciation, advertising expenditures, factory machine lubricants, spokes, salary of factory manager, salary of accountant, handlebars, salaries of factory maintenance employees, and salary of product quality inspector. Classify each of these costs as a product cost or a period cost. Specify direct materials, direct labor, or manufacturing overhead for Copyright © John Wiley & Sons, Inc. LO 2 DO IT! 2: Managerial Cost Concepts Solution Period Cost Product Cost Cost Tires Direct materials Wages of employees who put tires on Direct labor the wheels Factory building depreciation Manufacturing overhead Advertising expenditures X Factory machine lubricants Manufacturing overhead Spokes Direct materials Salary of factory manager Manufacturing overhead Salary of accountant X Handlebars Direct materials Salaries of factory maintenance Manufacturing Copyright © John Wiley & Sons, Inc. LO 2 employees overhead Learning Objective 3 Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer. Copyright © John Wiley & Sons, Inc. LO 3 Manufacturing Costs in Financial Statements The financial statements of a manufacturer are very similar to those of a merchandiser. Yet, the principal differences between their financial statements occur in two places: 1. The current assets section in the balance sheet. 2. The cost of goods sold section in the income statement. Copyright © John Wiley & Sons, Inc. LO 3 Balance Sheet Inventory accounts of a manufacturer Illustration 11.6: Inventory accounts for a manufacturer The balance sheet for a merchandising company shows just one category of inventory. Copyright © John Wiley & Sons, Inc. LO 3 Balance Sheet Example Merchandiser Versus Manufacturer Illustration 11.7: Current assets sections of merchandising and manufacturing balance sheets Copyright © John Wiley & Sons, Inc. LO 3 Income Statement Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section. Illustration 11.8: Merchandiser versus manufacturer cost of goods sold calculations Copyright © John Wiley & Sons, Inc. LO 3 Income Statement Cost of Goods Sold Sections Illustration 11.9: Cost of goods sold sections of merchandising and manufacturing income statements Copyright © John Wiley & Sons, Inc. LO 3 Cost of Goods Manufactured Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead incurred in the current year. Total Work in Process – (1) cost of beginning work in process and (2) total manufacturing costs for the current period. Illustration 11.10: Cost of goods manufactured calculation Copyright © John Wiley & Sons, Inc. LO 3 Cost of Goods Manufactured Schedule Illustration 11.11: Cost of goods manufactured schedule Copyright © John Wiley & Sons, Inc. LO 3 DO IT! 3: Cost of Goods Manufactured Given Data The following information is available for Keystone Company. March March 31 1 Raw materials inventory $12,000 $10,000 Work in process inventory 2,500 4,000 Materials purchased in $90,00 March 0 Direct labor in March 75,000 Manufacturing overhead in 220,00 March the cost of goods manufactured Prepare 0 schedule for the month of March 2025. (Assume that all raw materials used were direct materials.) Copyright © John Wiley & Sons, Inc. LO 3 DO IT! 3: Cost of Goods Manufactured Solution Copyright © John Wiley & Sons, Inc. LO 3 Learning Objective 4 Discuss trends in managerial accounting. Copyright © John Wiley & Sons, Inc. LO 4 Service Industries Much of U.S. economy has shifted toward an emphasis on providing services rather than goods Approximately 80% of U.S. workers are now employed by service companies Most techniques learned for manufacturing firms are applicable to service companies Copyright © John Wiley & Sons, Inc. LO 4 Focus on the Value Chain A Manufacturer’s Value Chain Refers to all business processes associated with providing a product or performing a service For a manufacturing firm, these include the following: Illustration 11.12: A manufacturer’s value chain Copyright © John Wiley & Sons, Inc. LO 4 Focus on the Value Chain JIT and TQM Just-In-Time (JIT) Inventory Method System in which goods are manufactured or purchased just in time for sale Total Quality Management (TQM) System implement to reduce defects in finished products, with goal of zero defects Copyright © John Wiley & Sons, Inc. LO 4 Focus on the Value Chain Theory of Constraints and ERP Theory of Constraints Constraints (“bottlenecks”) within the value chain that limit company’s potential profitability A specific approach to identify and manage these constraints in order to achieve company goals Enterprise Resource Planning (ERP) Software programs designed to manage all major business processes Copyright © John Wiley & Sons, Inc. LO 4 Focus on the Value Chain ABC Activity-Based Costing (ABC) Allocates overhead based on each product’s use of activities Results in more accurate product costing and increased efficiency in the value chain Copyright © John Wiley & Sons, Inc. LO 4 Balanced Scorecard Evaluates operations in an integrated fashion Uses both financial and nonfinancial measures Links performance in a cause-and-effect fashion ensure that they all tie to the company’s overall objectives Copyright © John Wiley & Sons, Inc. LO 4 Business Ethics All employees are expected to act ethically Many organizations have codes of business ethics Creating Proper Incentives Systems and controls sometimes create incentives for managers to take unethical actions Controls need to be effective and realistic Copyright © John Wiley & Sons, Inc. LO 4 Business Ethics Code of Ethical Standards Sarbanes-Oxley Act (SOX) Clarifies management’s responsibilities Requires certifications by CEO and CFO Selection criteria for Board of Directors and Audit Committee Substantially increased penalties for misconduct Copyright © John Wiley & Sons, Inc. LO 4 Corporate Social Responsibility Considers a company’s efforts to employ sustainable business practices Sometimes referred to as triple bottom line because it evaluates a company’s performance with regard to people, planet, and profit Recent reports indicate that nearly 80% of the 500 largest U.S. companies provide sustainability reports Copyright © John Wiley & Sons, Inc. LO 4 DO IT! 4: Trends in Managerial Accounting Instructions Match the descriptions that follow with the corresponding terms. Terms: a. Activity-based costing b. Balanced scorecard c. Corporate social responsibility d. Just-in-time (JIT) inventory e. Total quality management (TQM) f. Statement of Ethical Professional Practice g. Value chain Copyright © John Wiley & Sons, Inc. LO 4  DO IT! 4: Trends in Managerial Accounting Solution Items 1–5 1. All activities associated with providing a product g or performing service. 2. A method of allocating overhead based on each product’s use of activities in making the a product. 3. Systems implemented to reduce defects in finished products with the goal of achieving e zero defects. 4. A performance-measurement approach that uses both financial and nonfinancial b measures, tied to company objectives, to evaluate a company’s operations in an integrated fashion. 5. Inventory system in which goods are manufactured or purchased just as they are d needed for use or sale. Copyright © John Wiley & Sons, Inc. LO 4  DO IT! 4: Trends in Managerial Accounting Solution Items 6–7 6. A company’s efforts to employ sustainable c business practices with regards to its employees, society, and the environment. 7. A code of ethical standards developed by the f Institute of Management Accountants. Copyright © John Wiley & Sons, Inc. LO 4 Copyright Copyright © John Wiley & Sons, Inc. All rights reserved. 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