Unit 1: Managerial Accounting Concepts & Principles PDF

Unit 1. Managerial Accounting Concepts & Principles  What do we mean by Managerial Accounting? Managerial Accounting information designed to meet specific needs of the company’s management and includes historical data, which provide objective measures of the past operations, and esti...

Unit 1. Managerial Accounting Concepts & Principles  What do we mean by Managerial Accounting? Managerial Accounting information designed to meet specific needs of the company’s management and includes historical data, which provide objective measures of the past operations, and estimated data, which provide subjective estimates about future decisions. Managerial accounting reports do not always have to be: 1. Bounded by any formal criteria such as generally accepted accounting principles (GAAP). 2. Prepared at fixed interval. 3. Prepared for the business as whole.  Managerial accounting supports management and the management process. The Management Process five (5) basic phases: 1. Planning 2. Directing 3. Controlling 4. Improving 5. Decision making PLANNING Management uses PLANNING in developing the company’s objectives or goals, and translating these objectives into courses of action. It may be classified as follows: STRATEGIC PLANNING is developing long-term actions to achieve the company’s objectives. - Long-term courses of action are called strategies, often involve periods of five to ten years. OPERATIONAL PLANNING develops short-term actions for managing the day-to-day operations of the company. DIRECTING The process by which managers run day-to-day operations. Example: A production supervisor’s efforts to keep the production moving without interruptions. A credit manager’s development of guidelines for assessing the ability of potential customers to pay their bill. CONTROLLING Monitoring operating results and comparing actual results with the expected results. This feedback allows management to isolate areas for further investigation and possible remedial action. The philosophy of controlling by comparing actual and expected results is called “management by exception” IMPROVING Continuous process improvement is the philosophy of continually improving employees, business processes and products. The objective of continuous process improvement is to eliminate the source of problems in a process. DECISION MAKING Inherent in each of the preceding management process is decision making. Management must continually decide among alternative actions.  II. Differences of Managerial Accounting from Financial Accounting and Cost Accounting  Accounting Information Systems: Financial Accounting Managerial Accounting Is primarily concerned with producing The managerial accounting system information ( financial statements) for external produces information for internal users such users, including investors, creditors, customers, as managers, executives, and workers. Thus, suppliers, government agencies (Food and managerial accounting could be properly Drug Administration, Federal Communications called “internal accounting”. Managerial Commissions etc.) and labor unions. Financial accounting identifies, collects, measures, accounting could be called external classifies, and reports financial and accounting. nonfinancial information that is useful to internal users in planning, controlling and decision making. Accounting Information Systems: Cost Accounting One part of the overall accounting system which accumulates data about the costs of producing goods and services. Cost accounting systems measures, record, and report product costs, for setting product prices, controlling operations, and developing financial statements.  Accounting Information Systems: Cost Accounting Cost accounting is the intersection between financial and managerial accounting. Cost accounting provides product cost information to external parties such as stockholders, creditors and various regulatory boards for credit and investment decisions. Cost accounting provides product cost information also to internal parties such as managers for planning and controlling. Relationship of Financial, Management and Cost Accounting Financial Cost Management Accounting Accounting Accounting III. MANUFACTURING COSTS AND OPERATIONS  Although there are tens of thousands of manufacturing firms, their basic processes can be classified into four generic types. The nature of the manufacturing process can affect the manufacturing costs incurred. Therefore, the management team is in a better position to manage these costs if the relationship of the production process to the types of costs incurred is understood.  Types of Production Process Job Shop Assembly Custom, one-off production High-volume of standardized based on customer products, often using specifications. automated lines. Batch Continuous Flow Production in distinct batches or groups, more efficient than on-going, uninterrupted Job Order. production, typically in industries like chemicals or energy.  MANUFACTURING OPERATIONS The operations of business can be classified as SERVICE, RETAIL or MANUFACTURING. Example: Guitar-Making Operations of Legend Guitars Legend’s guitar-making process begins when a customer places an order for a guitar. Once the order is accepted, the manufacturing process begins by obtaining the necessary materials. An employee then cuts the body and neck of the guitar out of raw lumber. Once the wood is cut, the body and neck of the guitar are assembled. When the assembly is complete, the guitar is painted and finished.  One of the most important yet difficult tasks of managerial accounting is to determine the cost of products, services, customers, and other items of interest to managers. Therefore, we need to understand the meaning of cost and the ways in which costs can be used to make decisions - both for small entrepreneurial businesses and large international businesses. A cost is a sacrifice made to obtain some benefit. It is a payment of cash or the commitment to pay cash in the future for the purpose of generating revenues. For example, cash (or credit) used to purchase equipment is the cost of the equipment. If equipment is purchased by exchanging assets other than cash, the current market value of the assets given up is the cost of the equipment purchased.  Costs that are often classified in terms of how they relate to an object or segment of operations is called a cost object. A cost object may be a product, a sales territory, a department, or some activity. It can be anything to which costs are assigned and will vary depending upon the decision-making needs of management.  DIRECT COST INDIRECT COST Direct Costs are those costs that can Indirect costs are costs of an be easily and accurately traced to a organization that are not readily cost object. When we say that a cost is assignable to a particular project, but easy to trace, we often mean that the are necessary to the operation of the relationship between the cost and the organization and the performance of object can be physically observed and is the project. easy to track. Examples of costs usually treated as The more costs that can be traced indirect include those incurred for to the object, the more accurate are the facility operation and maintenance, cost assignments. depreciation, and administrative salaries. CLASSIFYING DIRECT AND INDIRECT COST MANUFACTURING COST It is the cost of manufactured product which includes the cost of materials used in making the product. It is further classified into the following categories: 1. Direct Material 2. Direct Labor 3. Manufacturing Overhead DIRECT MATERIAL COST Direct materials are those raw materials that is consumed in the manufacturing process, is physically incorporated in the finished product, and can be traced to products. - An integral part of the finished product - A significant portion of the total cost of the product. DIRECT LABOR COST Direct labor is the cost of employee wages that is an integral part of the finished product. - An integral part of the finished product - A significant portion of the total cost of the product. MANUFACTURING OVEHEAD OR FACTORY OVERHEAD COST All other costs of manufacturing are classified as manufacturing overhead, which includes three (3) types of costs: Indirect Material, Indirect Labor, and other manufacturing costs. 1. Indirect Material - the cost of materials that are required for the production process but do not become an integral part of the finished product. 2. Indirect Labor - the cost of personnel who do not work directly on the product but whose service are necessary for the manufacturing process. 3. Other Manufacturing Costs - all other manufacturing costs that are neither material nor labor costs are classified as manufacturing overhead. These costs include depreciation of plant and equipment, property taxes, insurance, and utilities such as electricity, as well as the costs of operating service departments. GROUPS FOR ANALYSIS AND REPORTING: PRIME COST Prime costs consist of direct materials and direct labor costs. Prime Cost=Direct Materials+Direct Labor CONVERSION COST Conversion costs consist of direct labor and factory overhead costs. Conversion costs are the costs of converting the materials into a finished product. Conversion Cost= Direct Labor+Manufacturing Overhead CLASSIFYING DIRECT MATERIALS, DIRECT LABOR AND FACTORY OVERHEAD Calculating Prime Cost and Conversion Cost in Total Illustration: BlueDenim Company makes blue jeans, Last week, direct materials ( denim, thread, zippers, and rivets) costing P48,000 were put into production. Direct labor of P30,000 (50 workers x 40 hours x 15 per hour) was incurred. Manufacturing overhead equaled P72,000. By the end of the week, BlueDenim had manufatured P30,000 pair of jeans. Required: 1.Calculate the total prime cost for last week 2.Calculate the per-unit prime cost 3.Calculate the total conversion cost for last week 4.Calculate the per-unit conversion cost Solution: 1. Direct Materials P48,000 Direct Labor 30,000 Total Prime Cost P 78,000 Calculating Prime Cost and Conversion Cost in Total Solution: 2. Per-Unit Prime Cost Total Product cost/ Number of units Produced P78,000/30,000 =P2.60 3. Direct Labor P30,000 Manufacturing Overhead 72,000 Total Conversion Cost P102,000 4. Per Unit Conversion Cost P102,000/30,000 units=P3.40 GROUPS FOR FINANCIAL REPORTING: PRODUCT COST For financial accounting purposes, Product Costs include all costs involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. PRODUCT COST Calculating Product Cost in Total and Per Unit Illustration: BlueDenim Company makes blue jeans, Last week, direct materials ( denim, thread, zippers, and rivets) costing P48,000 were put into production. Direct labor of P30,000 (50 workers x 40 hours x 15 per hour) was incurred. Manufacturing overhead equaled P72,000. By the end of the week, BlueDenim had manufactured 30,000 pair of jeans. Required: 1.Calculate the total product cost for last week 2.Calculate the cost of one pair of jeans that was produced last week Solution: 1.Direct Materials P48,000 2.Direct Labor 30,000 3.Manufacturing Overhead 72,000 Total Product Cost P150,000 2.Per-Unit Product Cost= Total Product cost/ Number of units Produced or P150,000/30,000= P5 GROUPS FOR FINANCIAL REPORTING: PERIOD COST Consist of selling and administrative expenses: Selling expenses - incurred in marketing the product and delivering the sold product to the customer or; Administrative expenses - incurred in managing the company and are nor directly related to the manufacturing or selling functions. IMPACT ON THE FINANCIAL STATEMENTS OF PRODUCT AND PERIOD COSTS IV. FINANCIAL STATEMENTS FOR A MANUFACTURING BUSINESS  The statement of stockholders’ equity and statement of cash flows for a manufacturing business are similar to those for service and retail businesses. However, the balance sheet and income statement for a manufacturing business are more complex. This is because a manufacturer makes the products that it sells and, thus, must record and report product costs. The reporting of product costs primarily affects the balance sheet and the income statement.  The Balance Sheet The Balance Sheet or Statement of Financial Position of a manufacturing company is similar to that of a merchandising company. However, their inventory accounts differ. A merchandising company has only one class of inventory goods purchased from suppliers for resale to customers. In contrast, manufacturing companies have three classes of inventories - materials inventory, work in process inventory, and finished goods inventory. BALANCE SHEET PRESENTATION OF INVENTORY IN MERCHANDISING AND MANUFACTURING COMPANIES MATERIALS INVENTORY (RAW MATERIAL INVENTORY) Consist of the costs of the direct and indirect materials that have not yet entered the manufacturing process. Materials that are used to make a product. WORK IN PROCESS INVENTORY Consist of the costs of the direct material costs, direct labor costs, and factory overhead costs for products that have entered the manufacturing process but are not yet completed (in process). Units of product that are only partially complete and will require further work before they are ready for sale to a customer. FINISHED GOODS INVENTORY Consist of complete units of product that have not yet been sold to customers. Income Statement for Merchandising and Manufacturing Company The income statements for retail and manufacturing businesses differ primarily in the reporting of the cost of merchandise (goods) available for sale and sold during the period. Income Statement for Merchandising and Manufacturing Company  A retail business determines its cost of goods sold by first adding its net purchases for the period to its beginning inventory. This determines inventory available for sale during the period. The ending inventory is then subtracted to determine the cost of goods sold. In contrast, a manufacturing business makes the products it sells using direct materials, direct labor, and factory overhead. As a result, a manufacturing business must determine its cost of goods manufactured during the period. The cost of goods manufactured is determined by preparing a statement of cost of goods manufactured. Income Statement for Manufacturing Company The total cost of making products that are available for sale during the period is called the cost of goods manufactured. The cost of goods manufactured is often determined by preparing a statement of cost of goods manufactured. Statement of Cost of Goods Manufactured The statement of Cost of Goods manufactured is prepared using the following three (3) steps: Step 1. Determine the cost of direct materials used during the period. The statement of Cost of Goods manufactured is prepared using the following three (3) steps: Step 2. Determine the total manufacturing costs incurred during the period. From Step One (1): The statement of Cost of Goods manufactured is prepared using the following three (3) steps: Step 3. Determine the cost of goods manufactured during the period. From Step Two (2): Manufacturing Company - Statement of Cost of Goods Manufactured Legend Guitar’s Financial Statements: Manufacturing Company - Income Statement with Statement of Cost of Goods Manufactured Legend Guitar’s Financial Statements: V. USES OF MANAGERIAL ACCOUNTING INFORMATION  Managerial accounting supports managers in all phases of the management process. For example, accounting reports comparing actual and expected operating results help managers plan and improve current operations. Such a report might compare the actual and expected costs of defective materials. If the cost of defective materials is unusually high, management might decide to change suppliers. Some examples of how managerial accounting could be used by a guitar manufacturer includes the following: The cost of manufacturing each guitar could be used to determine its selling price. Comparing the costs of guitars over time can be used to monitor and control costs. Some examples of how managerial accounting could be used by a guitar manufacturer includes the following: Performance reports could be used to identify any large amounts of scrap or employee down-time. For example, large amounts of unusable wood (scrap) after the cutting process should be investigated to determine the underlying cause. Such scrap may be caused by saws that have not been properly maintained. A report could analyze the potential efficiencies and savings of purchasing a new computerized saw to speed up the production process. Some examples of how managerial accounting could be used by a guitar manufacturer includes the following: A report could analyze how many guitars need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel. Thank You For Your Attention! REPORTERS: JANE ERIKA M. CACAY REMA F. HOSSAIN