Introduction to Management Accounting PDF

An Introduction to Management Accounting Chapter 10  CH10 – Key Concepts Managerial vs Financial Accounting Product Costs – “The Big Three” How does product costs flow? What does a Management Accountant do? Financial Accounting vs Managerial Account...

An Introduction to Management Accounting Chapter 10  CH10 – Key Concepts Managerial vs Financial Accounting Product Costs – “The Big Three” How does product costs flow? What does a Management Accountant do? Financial Accounting vs Managerial Accounting Financial accounting is not designed to satisfy all the information needs of business managers. Its scope is limited to the needs of external users such as investors and creditors The field of accounting designed to meet the needs of internal users is called managerial accounting.  Differences Between Managerial and Financial Accounting Financial accounting provides information primarily for investors, creditors, and others outside a business. Managerial accounting focuses on information for executives, managers, and employees who work inside the business. Internal users need information to plan, direct, and control business operations. External users (investors and creditors) have greater needs for general economic information than do internal users. Relationship between Type of User of Information  Level of Aggregation External users generally desire global information that reflects the performance of a company as a whole. Internal users focus on detailed information about specific subunits of the company. To meet the needs of the different user groups, financial accounting data are more aggregated than managerial accounting data.  Information Characteristics Financial vs Managerial Financial Managerial More Concerned with relevance Its objectivity, reliability, and timeliness. Characterized by: consistency, and historical Uses more estimates and fewer nature. facts than financial accounting. Reports what happened Reports what is expected to Timing: yesterday (past); happen tomorrow (future). Planning, controlling, and Time Horizon and directing require immediate Reported periodically, normally at Reporting attention. the end of a year. Frequency: Delivered on a continuous basis. Outsiders including creditors, Insiders including executives, Users investors, gov’t agencies, analyst, managers and operators reporters  Product Costing in Manufacturing Companies A major focus for managerial accountants is determining product cost. Managers need to know the cost of their products for a variety of reasons. For example, cost-plus pricing is a common business practice. Product costing is also used to control business operations.  Manufacturing Product Cost Summary The “Big 3” Sometimes called Raw Materials (1)DIRECT If the amount of a material in a product is known, it is MATERIALS usually classified as a DM The cost of DM can be easily traced to specific products Labor paid to workers involved in ‘hands-on’ contact (2)DIRECT with the product being manufactured LABOR Labor costs that can be easily-traced to specific products in order to be classified as a direct cost. Costs that cannot be easily traced to specific products, (3)Manufacturing these are considered indirect costs. Overhead Examples: Utility costs, Depreciation, Rent for Mfg Facility. Any costs needed to manufacture the product yet cannot be directly traced. How Cash is Transformed into Inventory Example: Tabor Manufacturing Company Q: How much is Tabor’s Expense? Build four Tables Costs A:Zero Direct Materials $390 __________ Q: What type of transaction is this? Direct Labor $470 (Carpenters) A:Asset Exchange Manufacturing $140 Overhead (Tools) Q: When will the expense for the tables be recognized? Total Costs $1,000 A: When the tables are sold. Q: How much did each table cost to build? A: $1000/4=$250 each _______________________  Cost Classification Assume that three of the four tables are sold. Costs Can Be Assets or Expenses All product costs (materials, labor, and overhead) remain in an inventory account until revenue is earned when the inventory is sold. Costs that are not classified as product costs are normally expensed in the period in which they are incurred. They include general, selling and administrative costs, interest costs, and the cost of income taxes.  Material Costs (Big Three - #1) Materials used to make products are usually called raw materials. The costs of materials that can be easily and conveniently traced to products are called direct raw materials costs The cost of raw materials is first recorded in an asset account (Inventory). The cost is then transferred from the Inventory account to the Cost of Goods Sold account at the time the goods are sold. Materials cost is only one component of total manufacturing costs.  Labor Costs (Big Three - #2) The salaries paid to selling and administrative employees and the wages paid to production workers are accounted for differently. Labor costs that can be easily and conveniently traced to products are called direct labor costs. Salaries paid to selling and administrative employees are expensed immediately Production wages are added to inventory and expensed as part of cost of goods sold at the time the inventory is sold.  Overhead Costs (Big Three - #3) Depreciation cost totaled $1,600 ($600 on office furniture and $1,000 on manufacturing equipment). Only the $600 of depreciation on the office equipment is expense directly on the income statement. The depreciation on the manufacturing equipment is split between the income statement (cost of goods sold) and the balance sheet (inventory). Overhead Costs: A Closer Look Costs that cannot be traced to products and services in a cost-effective manner are called indirect costs. The indirect costs incurred to make products are called manufacturing overhead. Some of the items commonly included are indirect materials, indirect labor, factory utilities, rent of manufacturing facilities, and depreciation on manufacturing assets. Since indirect costs cannot be effectively traced to products, they are normally assigned to products using cost allocation, a process of dividing a total cost into parts and assigning the parts to relevant cost objects.  Cost Classification Exercise Product or Cost Classification Period Direct materials used in a manufacturing company Product DirectMaterials Indirect materials used in a manufacturing company Product Materical Indirect Selling&Admin Salaries of employees working in the accounting department Period s Commissions paid to sales staff Period Selling&Admin Interest on the mortgage for the company’s corporate headquarters Period Selling&Admin Indirect labor used to manufacture inventory Product Overhead Attorney’s fees paid to protect the company from frivolous lawsuits. Period Selling&Admin Production employee salaries Product DL The cost of supplied by the clerk at a doctor’s office Period Selling&Admin Depreciation on the office furniture of the company president Period Selling&Admin Repair & maintenance salary costs of a manufacturing facility Product Overhead Repair & maintenance supplies costs of a manufacturing facility Product Overhead Quality department of a manufacturing facility Product Overhead Plant manager salary Product Overhead Depreciation on the production equipment in a manufacturing facility Problem #1 in Workbook Product Overhead Cost Classifications for Preparing Financial Statements Product costs include direct Period costs include all materials, direct labor, selling costs and and manufacturing administrative overhead. costs. Inventory Cost of Good Sold Expense Sale Balance Income Income Sheet Statement Statement The finished goods inventory on the balance sheet includes materials, labor, and overhead costs. Initially classifying a cost as a product cost delays, but does not eliminate, its recognition as an expense.  Cost Classification in Service and Merchandising Companies Service Organizations Merchandising provide services to customers, Businesses are rather than physical sometimes called retail products. or wholesale Manufacturing companies; they sell goods to other Companies make the companies. goods they sell to their customers. Service and merchandising companies incur materials, labor and overhead costs The primary difference between manufacturing entities and service companies is that the finished products provided by service companies are consumed immediately. While merchandising companies frequently hold inventory, they differ from manufacturing companies in that they do not make the products they sell. Manufacturing Inventory Accounts Most manufacturing companies accumulate product costs in three distinct inventory accounts: (1)Raw Materials Inventory, which includes lumber, metals, paints, and chemicals that will be used to make the company’s products; (2)Work in Process Inventory, which includes partially completed products; and (3)Finished Goods Inventory, which includes completed products that are ready for sale. The Flow of Manufacturing Costs through the Accounting Records  Schedule of Cost of Goods Manufactured and Sold Assumptions Beginning Ending Purchased Raw Materials $37,950 Raw Materials $ 0.00 $950 Incurred Labor Costs $34,600 Work In Process $ 0.00 $3,700 Incurred Overhead Costs $26,700 Finished Goods $2,000 $3,200 Completed Products $94,600 Raw Mfg WIP FGI Material Costs Beg 0.00 DM 37000 Beg 0.00 Beg FGI 2000 +Add +Add Add 37950 DL 34600 98300 94600 (purchase) (Mfg Cost) (completed) -Ending 37000 OH 26700 -Ending 94600 Ending (3200) (Goods available for use) Total Mfg Cost of Cost of =RM Used (S) 950 98300 3700 93400 Costs Goods Mfg Goods Sold Problem #2 in Workbook Schedule of Cost of Goods Manufactured and Sold  Just-in-Time Inventory Many inventory holding costs are obvious: financing, warehouse space, supervision, theft, damage, and obsolescence. Other costs are hidden: diminished motivation, sloppy work, inattentive attitudes, and increased production time. Many businesses have been able to simultaneously reduce their inventory holding costs and increase customer satisfaction by making products available just in time (JIT) for customer consumption. JIT Example: Paula Elliott supports herself by selling flowers. She reengineered her distribution system by purchasing her flowers from a florist within walking distance of her sales location. Elimination of nonvalue-added activity of driving to the former florist. Avoidance of lost opportunities by not turning away prospective customers.  Certified Management Accountant IMA Statement of Ethical Professional Practice Competence Confidentiality Resolution of Integrity Ethical Conflict Credibility  Management Accountants - Potential Conflicts of Interest Management accountants can face pressure to: 1. Undertake duties they have not been trained to perform competently. 2. Disclose confidential information. 3. Compromise their integrity through falsification, embezzlement, bribery, and so on. 4. Issue biased, misleading, or incomplete reports. End of Presentation