[ACCTG] Management Accounting.pdf

MANAGEMENT ACCOUNTING The financial reports Focuses on how to are historical in improve the company...

MANAGEMENT ACCOUNTING The financial reports Focuses on how to are historical in improve the company nature. for future MANAGERIAL ACCOUNTING improvements. The practice of using accounting information — from revenues to production inputs and outputs affecting the supply chain — Verifiability Emphasis on Emphasis on internally, in support of organization-wide efficiency and for vs. verifiability relevance for planning tracking the organization’s progress toward attaining its relevance and control stated goals. Precision Emphasis on precision Emphasis on It involves the presentation of financial information for internal versus timeliness purposes to be used by management in making key business timeliness decisions. ○ Techniques used by managerial accountants are not Subject Primary focus is on Focuses on segments the whole of an organization dictated by accounting standards, unlike financial organization accounting. Requireme Must follow GAAP and Need not to follow PLANNING AND CONTROL CYCLE nts prescribed formats GAAP or any prescribed format MANAGERIAL ACCOUNTING AND COST ACCOUNTING Cost accounting ○ A managerial accounting process that involves recording, analyzing, and reporting a company’s costs. Importance of Cost Management ○ Cost management is a form of management accounting that helps a business reduce the chance of going over budget with more accurate forecasts of impending expenditures. ○ Cost control - is the process of monitoring and regulating Controlling the expenses of an organization to ensure that they remain ○ Measure the performance. within the planned budget. ○ Check whether the target has been achieved or surpassed, Price increase - expenses exceed the budget; in that way, you are controlling the performance. understatement of the budget. (1:06:00)… MANAGERIAL ACCOUNTING AND FINANCIAL ACCOUNTING Inaccurate forecast - did not foresee other expenses Managerial accounting like natural disasters. ○ Accounting provides information for managers of an organization who direct and control its operations. LINE AND STAFF RELATIONSHIPS Financial accounting Line position are directly related to achievement of the basic ○ Accounting provides information to stockholders, creditors objectives of an organization and others who are outside the organization. ○ Ex.: production supervisors in a manufacturing plant. Staff positions support and assist line positions. ○ Ex.: Cost accountants in the manufacturing plant. Differences between Financial and Managerial Accounting Financial Managerial THE CONTROLLER The chief accountant in an organization with responsibility for: Users External persons Managers who plan ○ Financial planning and analysis (stockholders, and control an ○ Cost control investors, organization ○ Financial reporting government, etc.) ○ Accounting information systems who make financial The finance department is divided into two: the treasury decisions department and accounting department. Time focus Historical perspective Future emphasis  MANAGEMENT ACCOUNTANT ○ If one supplier charges $5 per unit and another charges $7 The management accountant’s functions in an organization per unit, the differential cost is $2 per unit. are: Marginal Costs ○ Analyze financial information and implement effective ○ The additional cost incurred by producing one more unit of strategies a product. ○ Budgeting and reporting ○ If producing 100 units costs $1,000 and producing 101 units ○ Advises strategic and business planning costs $1,010, the marginal cost of the 101st unit is $10. ○ Advisory to internal and external company requirements Direct Costs ○ Other auxiliary functions ○ Costs that can be directly traced to a specific product, Soft skills needed are: project, or department. ○ Strong attention to detail ○ Direct labor and direct materials used in manufacturing a ○ Organization skills specific product. ○ Problem-solving skills Indirect Costs ○ Critical and analytical skills ○ Costs that cannot be directly traced to a specific product ○ Communication skills or project and are instead allocated. ○ Utilities and rent for the factory. ASYNCHRONOUS ACTIVITY Sunk Costs Manufacturing Costs ○ Costs that have already been incurred and cannot be ○ The total costs incurred to produce goods. This includes recovered. direct materials, direct labor, and manufacturing ○ Money spent on research and development that cannot be overhead. recouped regardless of future decisions. ○ If a factory spends $100,000 on raw materials, $50,000 on Out-of-Pocket Costs labor, and $30,000 on utilities for machinery, the total ○ Costs that require a cash payment at the time they are manufacturing costs would be $180,000. incurred. Prime Costs ○ Paying for raw materials or office supplies with cash. ○ The sum of direct materials and direct labor costs directly Future Costs associated with the production of goods. ○ Costs that will be incurred in the future as a result of a ○ For a company producing furniture, if direct materials cost decision or activity. $20,000 and direct labor costs $10,000, the prime costs ○ Projected expenses for expanding a business in the coming would be $30,000. year. Conversion Costs Relevant Costs ○ The costs incurred to convert raw materials into finished ○ Costs that will be directly affected by a specific decision. products, including direct labor and manufacturing ○ The cost of raw materials for a special order that impacts overhead. production. ○ If a company spends $15,000 on labor and $8,000 on Discretionary Costs/Avoidable Costs factory utilities, the conversion costs total $23,000. ○ Costs that are not essential and can be adjusted or Product Costs eliminated based on decisions. ○ Costs that are directly associated with the production of ○ Advertising expenses or employee training programs. goods, including direct materials, direct labor, and Opportunity Costs manufacturing overhead. ○ The potential benefit lost when one alternative is chosen ○ For a car manufacturer, product costs include the cost of over another. steel, labor, and factory overhead. ○ If you choose to invest in one project over another, the Fixed Costs opportunity cost is the potential returns from the project ○ Costs that do not change with the level of production or you did not choose. sales volume. Irrelevant Costs ○ Rent for factory space or salaries of permanent employees ○ Costs that will not be affected by a particular decision and are fixed costs. should not be considered. Variable Costs ○ Sunk costs are typically irrelevant to future decisions. ○ Costs that vary directly with the level of production or sales Period Costs volume. ○ Costs that are expensed in the period they are incurred ○ The cost of raw materials used in production or rather than being included in product costs. commissions paid to sales staff. ○ Selling expenses and administrative salaries. Differential Costs Mixed Costs ○ The difference in cost between two alternatives. ○ Costs that have both fixed and variable components.  ○ A utility bill with a fixed service charge plus a variable Materials used to support the production process. charge based on usage. Ex.: lubricants and cleaning supplies used in the Committed Costs automobile assembly plant. ○ Costs that are already committed and cannot be easily ○ Classification of Costs changed in the short term. Prime costs: Direct Material and Direct Labor ○ Long-term lease agreements or salaried employee Conversion Costs: Direct Labor and Manufacturing contracts. Overhead Imputed Costs Nonmanufacturing Costs ○ Costs that do not involve a direct cash outlay but represent ○ Marketing and Selling Costs an opportunity cost. Costs necessary to get the order and deliver the ○ The cost of using a company-owned building rather than product. renting it out. Marketing cost ex.: advertising Explicit Costs Selling cost ex.: delivery charge ○ Direct, out-of-pocket payments for expenses. ○ Administrative Costs ○ Wages, rent, and materials that involve actual monetary All executive, organizational, and clerical costs. transactions. QUICK CHECK: COST Which of the following costs would be considered Cost manufacturing overhead at Boeing? ○ The amount of money spent to produce a product or good. a. All executive, organizational, and clerical costs. ○ The monetary value of goods and services purchased by b. Sales commissions. producers and consumers. c. The cost of a flight recorder in a Boeing 767. Cost accounting d. The wages of a production shift supervisor. ○ A form of management accounting that aims to capture a company’s total cost of production by assessing all of its PRODUCT COST VS. PERIOD COST variable and fixed costs. Product cost ○ It does not strictly comply with the accounting standards. ○ Include direct materials, direct labor, and manufacturing ○ For internal use only. overhead. ○ One method a company can use to estimate how well the business is running. ○ Looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. ○ Individually assessing a company’s cost structure allows management to improve the way it runs its business and, therefore, improve the value of the firm. ○ Period cost MANUFACTURING COST ○ Not included in product costs. They are expensed on the Direct Materials income statement. ○ Those materials that become an integral part of the product and that can be conveniently traced directly to it. ○ Ex.: A radio installed in an automobile. Direct Labor ○ Those labor costs that can be easily traced to individual units of product. ○ Ex.: Wages paid to automobile assembly workers. Manufacturing Overhead ○ ○ Manufacturing costs that cannot be traced directly to specific units produced. QUICK CHECK: ○ Ex.: Indirect labor and indirect materials. Which of the following costs would b e considered a period ○ Indirect labor rather than a product cost in a manufacturing company? Wages paid to employees who are not directly involved a. Manufacturing equipment depreciation. in production work. b. Property taxes on corporate headquarters. Ex.: maintenance workers, janitors, and security guards. c. Direct materials costs. ○ Indirect materials d. Electrical costs to light the production facility.  Which of the following transactions would immediately BALANCE SHEET result in an expense? Raw materials - materials waiting to be processed. a. Work in process is completed. Work in process - partially complete products - some b. Finished goods are sold. material, labor, or overhead has been added. c. Raw materials are placed into production. Finished goods - completed products awaiting sale. d. Administrative salaries are accrued and paid. Current Assets INVENTORY FLOWS Merchandiser Manufacturer Cash Cash Receivables Receivables Prepaid expense Prepaid expenses Merchandise inventory Inventories ○ Raw materials ○ Work in process ○ Finished goods INCOME STATEMENT QUICK CHECK: Costs of goods sold for manufacturers differs only slightly from If your bank balance at the beginning of the month was cost of goods sold for merchandisers. $1,000, you deposited $100 during the month, and withdrew $300 during the month, what would be the balance at the Merchandising Company end of the month? a. $1,000 COGS: b. $800 Beg. merchandise inv. $ 14,200 c. $1,200 + Purchases 234,150 d. $200 —-------- Goods available for sale 248,350 Beginning balance $1,000 - Ending merchandise inv. (12,100) + Deposit 100 —-------- - Withdrawal (300) Costs of goods sold $ 236,250 —------- Ending balance $800 Manufacturing Company PRODUCT COST COGS: Beg. finished goods inv. $ 14,200 + Cost of goods manufactured 234,150 Raw Materials —-------- Beginning raw materials inventory Goods available for sale 248,350 + Raw materials purchased - Ending finished goods inv. (12,100) = Raw materials available for use in production —-------- - Ending raw materials inventory Costs of goods sold $ 236,250 = Raw materials used in production MANUFACTURING COST FLOWS Manufacturing Costs As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Conversion costs are costs incurred to convert the direct material into a finished product. ○ Direct labor ○ Manufacturing overhead Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs QUICK CHECK: Work in Process b. $910,000 All manufacturing costs incurred during the period are c. $760,000 added to the beginning balance of work in process. d. Cannot be determined. Beginning work in process inventory Beginning work in process inventory $125,000 + Total manufacturing costs + Mfg. costs incurred for the period 835,000 = Total work in process for the period —--------- - Ending work in process inventory Total work in process during the period $960,000 = Cost of goods manufactured - Ending work in process inventory (200,000) —--------- Finished Goods Cost of goods manufactured $760,000 Costs associated with the goods that are completed during the period are transferred to finished goods inventory Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the Beginning finished goods inventory ending finished goods inventory was $150,000. What was the + Cost of goods manufactured cost of goods sold for the month? = Cost of goods available for sale a. $20,000 - Ending finished goods inventory b. $740,000 = Cost of goods sold c. $780,000 d. $760,000 QUICK CHECK: Beginning finished goods inventory $130,000 Beginning raw materials inventory was $32,000. During the + Cost of goods manufactured 760,000 month, $276,000 of raw material was purchased. A count at —--------- the end of the month revealed that $28,000 of raw material Cost of goods available for sale $890,000 was still present. What is the cost of direct material used? - Ending finished goods inventory (150,000) a. $276,000 —--------- b. $272,000 Cost of goods sold $740,000 c. $280,000 d. $2,000 COST CLASSIFICATION FOR PREDICTING COST BEHAVIOR Beg. raw materials $32,000 + Raw materials purchased 276,000 Behavior of Cost (within the relevant range) —--------- Raw materials available for use in production $308,000 Cost In Total Per Unit - Ending raw materials inventory (28,000) —--------- Variable Total variable cost Variable cost per unit Raw materials used in production $280,000 changes as activity remains the same over level changes. wide ranges of activity. Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What Fixed Total fixed cost remains Fixed cost per unit goes were total manufacturing costs incurred for the month? the same even when down as activity level a. $555,000 the activity level goes up. b. $835,000 changes. c. $655,000 d. Cannot be determined. Behavior of Cost (within the relevant range) Illustration Direct materials $280,000 Cost In Total Per Unit + Direct labor 375,000 + Mfg. overhead 180,000 Variable Your total long distance The cost per long —--------- telephone bill is based distance minute talked Manufacturing costs incurred for the month $835,000 on how many minutes is constant. For example, you talk. 10 cents per minute. Beginning work in process was $125,000.Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory Fixed Your monthly basic The average cost per at the end of the month. What was the cost of goods telephone bill probably local call decreases as manufactured during the month? does not change when more calls are made. a. $1,160,000  you make more local b. No calls. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? QUICK CHECK: a. Yes Which of the following costs would be variable with respect b. No to the number of cones sold at a Baskins & Robbins shop? a. The cost of lighting the store. Is the annual cost of licensing your car relevant in this b. The wages of the store manager. decision? c. The cost of ice cream. a. Yes d. The cost of napkins for customers. b. No Which of the following costs would b e variable with respect Is the depreciation on your car relevant in this decision? to the number of people who buy a ticket for a show at a a. Yes movie theater? b. No a. The cost of renting the film. **YES. Depreciation that is a function of miles driven would b. Royalties on ticket sales. be relevant. c. Wage and salary costs of theater employees. NO. depreciation that is a function of the passage of time d. The cost of cleaning up after the show. would not be relevant. DIRECT COSTS AND INDIRECT COSTS OPPORTUNITY COSTS Direct Costs The potential benefit that is given up when one alternative is ○ Costs that can be easily and conveniently traced to a unit selected over another. of product or other cost objective. Ex.: If you were not attending college, you could be earning ○ Ex.: direct material and direct labor. $15,000 per year. Your opportunity cost of attending college for Indirect Costs one year is $15,000. ○ Costs that cannot be easily and conveniently traced to a unit of product or other cost object. SUNK COSTS ○ Ex.: indirect material and indirect labor. Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making DIFFERENTIAL COSTS AND REVENUES decisions. Costs and revenues that differ among alternatives. Example: Every decision involves a choice from among at least two You bought an automobile that cost $10,000 two years ago. alternatives. The $10,000 cost is sunk because whether you drive it, park it, Only those costs and benefits that differ between alternatives trade it, or sell it, you cannot change the $10,000 cost. (i.e., differential costs and benefits) are relevant in a decision. All other costs and benefits can and should be ignored. Ex.: You have a job paying $1,500 per month in your hometown. QUICK CHECK: You have a job offer in a neighboring city that pays $2,000 per Suppose that your car could be sold now for $5,000. Is this a Sunk cost? month. The commuting cost to the city is $300 per month. a. Yes ○ Differential revenue: b. No $2,000 - $1,500 = $500 ○ Differential cost: OTHER TYPES OF COSTS $300 Out-of-pocket costs - cost you paid with your own money, whether or not it is reimbursed. QUICK CHECK: Discretionary costs - costs or capital expenditures that can be Suppose you a r e trying to decide whether to drive or take curtailed or even eliminated in the short term without having the train to Portland to attend a concert. You have ample an immediate impact on the short-term profitability of a cash to do either, but you don't want to waste money business. needlessly. ○ Ex.: Advertising, maintenance, training, R&D, etc. Is the cost of the pizza you ate last night relevant in this Marginal costs - the cost to produce one additional unit of decision? In other words, should the cost of the pizza affect production. the decision of whether you drive or take the train to Mixed costs - cost that is a combination of fixed and variable Portland? costs. a. Yes  Future costs - costs that will be incurred in the future based on a decision made. Irrelevant costs - a cost that will not change as the result of a management decision ○ Ex.: sunk cost and committed cost. Explicit costs - actual costs incurred by the business that are recorded and require a payment to be paid. Imputed or Notional Costs - is the cost allocated for resources or use of a service that does not involve a cash outlay. Period costs - is more closely associated with the passage of time than with a transactional event. Committed costs - project expenses that have been committed to in advance but have not yet been paid or incurred. ○ Ex.: Rental amount to be paid, fixed amount to be paid to employees.