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© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Chapter 18
Managerial Accounting Concepts and Principles
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Conceptual Learning ObjectivesC1: Explain the purpose and nature of
managerial accountingC2: Describe the lean business modelC3: Describe accounting concepts useful in
classifying costsC4: Define product and period costs and
explain how they impact financial statements
C5: Explain how the balance sheets for manufacturing and merchandising companies differ
C6: Explain manufacturing activities and the flow of manufacturing costs.
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
A1: Compute cycle time and cycle efficiency, and explain their importance to production management
P1: Compute cost of goods sold for a manufacturer
P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.
Analytical Learning Objectives
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Managerial and Financial Accounting
C 1
Managerial accountingprovides financial and non-financial informationfor managers of anorganization and other decision makers
Financial accountingprovides generalpurpose financialinformation to thosewho are outsidethe organization.
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Financial Accounting Managerial Accounting
1. Users and Investors, creditors and Managers, employees and decision makers other external users other internal users
2. Purpose of Making investment, credit Planning and
information and other decisions control decisions
3. Flexibility Structured and often Relatively flexible
of practice controlled by GAAP (no GAAP)
4. Timeliness of Often available only Available quickly without
information after audit is complete need to wait for audit
5. Time dimension Historical information Many projections with some predictions and estimates
6. Focus of Emphasis on Projects, processes and
information whole organization segments of an organization
7. Nature of Monetary Monetary and
information information nonmonetary information
Nature of Managerial Accounting Exh.
18-2
C 1
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Lean Business Model
Customer Orientation
GlobalEconomy
LeanBusiness
Model
Eliminationof Waste
Satisfy theCustomer
PositiveReturn
C 2
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on
Quality improvementapplied to all aspects of
business activities.
Seek and uncover waste.
Employees encouragedto try new methodsto improve quality.
Company emphasizesvalue of quality through
quality awards.
Total Quality ManagementC 2
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Complete productsjust in time to
ship to customers.
Complete partsjust in time for
assembly into products.
Receive materialsjust in time for
production.
Scheduleproduction.
Receivecustomer
orders.
Just-In-Time (JIT) Manufacturing
C 2
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Just-In-Time (JIT) Manufacturing
C 2
To accomplish just-in-time manufacturing:
Processes must be aligned to eliminate
delays and inefficiencies
Companies must establish good relations with
suppliers
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Implications of Lean Manufacturing
C 2
Understand the nature and
sources of cost
Measure value provided to customers
Determine price
customers pay
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Behavior
Traceability
Controllability
Relevance
Function
Cost Accounting ConceptsC 3
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Cost behavior means how a cost will react to changes in the level of business activity.
Classification by BehaviorC 3
A fixed cost does not change with changes in the volume of activity
A variable cost changes in proportion to changes in the volume
of activity
A mixed cost refers to a combination of fixed and variable
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Rent
Co
st
Tires
Co
stClassification by Behavior
Cost behavior means how a cost will react to changes in the level of business activity. Total fixed costs do
not change when activity changes.
Total variable costs change in proportionto activity changes.
C 3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Direct costs Costs traceable to a
single cost object. Examples: material
and labor cost for a product.
Indirect costs Costs that cannot be
traced to a single cost object.
Example: maintenance expenditures benefiting two or more departments.
Classification by TraceabilityC 3
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The degree of control depends on thelevel of management in the organization.
More C
ontrolM
ore
Con
trol
Very little control
Classification by ControllabilityC 3
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All costs incurred in the past that cannot be avoided or changed.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.
Classification by Relevance:Sunk Costs
C 3
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Classification by Relevance:Out-of-Pocket Costs
C 3
A cost that requires a future outlay of cash.
Out-of-pocket costs should be considered in decisions.
Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The potential benefit lost by choosing a specific action from two or more alternatives
Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.
Classification by Relevance: Opportunity Costs
C 3
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TheProduct
Classification by Function:Product Costs
DirectLabor
DirectMaterial
Manufacturing Overhead
C 4
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Period costs are expensesnot attached to the product.
Classification by Function:Period Costs
Administrative Costs
Non-manufacturing costsof staff support and
administrative functions –accounting, data processing,
personnel, researchand development.
Selling Costs
Costs incurred to obtain customer orders and todeliver finished goods
to customers –advertising and shipping.
C 4
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Period Costs(Expenses)
Product Costs(Inventory)
Inventory Not Sold in 2008
OperatingExpenses
Cost ofGoods Sold
Raw MaterialsGoods in ProcessFinished Goods
Cost ofGoods Sold
2008 CostsIncurred
2008 IncomeStatement
2009 IncomeStatement
2008 BalanceSheet Inventory
InventorySold in 2008
Period and Product Costsin Financial Statements Exh.
18-8
C 4
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Cost Item Behavior Traceability Function
Materials Variable Direct Product
Assembly Wages Variable Direct Product
Advertising Fixed Indirect Period
Production Manager's Salary Fixed Indirect Product
Office Depreciation Fixed Indirect Period
Cost Item Behavior Traceability Function
Materials Variable Direct Product
Assembly Wages Variable Direct Product
Advertising Fixed Indirect Period
Production Manager's Salary Fixed Indirect Product
Office Depreciation Fixed Indirect Period
Potential Multiple Cost Classifications Exh.
18-9
C 4
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Merchandisers . . .Buy finished goods.
Sell finished goods.
SaleMart
Manufacturers . . .Buy raw materials.
Produce and sell finished goods.
Reporting Manufacturing Activities
C 5
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ManufacturingInventory
Classifications
Balance Sheet of a Manufacturer
RawMaterials
FinishedGoods
Goods inProcess
C 5
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Completedproductsfor sale.
Materialswaiting to beprocessed.
Can be director indirect.
Partially completeproducts.
Material to whichsome labor and/or
overhead havebeen added.
Balance Sheet of a Manufacturer
RawMaterials
FinishedGoods
Goods inProcess
C 5
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
MERCHANDISER
Current Assets Cash Receivables Merchandise
Inventory
MANUFACTURER
Current Assets Cash Receivables Inventories
Raw MaterialsGoods in ProcessFinished Goods
The only difference is inventory.
Balance Sheet of a Manufacturer
C 5
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Beginning Merchandise
Inventory
Beginning Finished Goods
Inventory
Cost of Goods Purchased
Cost of GoodsManufactured
Ending Merchandise
Inventory
EndingFinished Goods
Inventory
Cost of Goods Sold
Merchandiser Manufacturer
+
_
+
==
_
The major difference
Income Statement of a Manufacturer Exh.
18-11
P1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Manufacturing Company
Cost of goods sold: Beg. finished goods inv. 14,200$ + Cost of goods manufactured 234,150 = Goods available for sale 248,350$ - Ending finished goods inventory (12,100) = Cost of goods sold 236,250$
Merchandising Company
Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 = Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Income Statement of a Manufacturer Exh.
18-12
P1
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Direct Materials
Materials that are separately and readily traced to a particular product.
Direct Materials
Materials that are separately and readily traced to a particular product.
Example:Steel used tomanufacture
the automobile.
Example:Steel used tomanufacture
the automobile.
Income Statement of a Manufacturer
P1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Direct Labor
Labor costs that are separately and readily traced to finished product.
Direct Labor
Labor costs that are separately and readily traced to finished product.
Example:Wages paid to an
automobile assemblyworker.
Example:Wages paid to an
automobile assemblyworker.
Income Statement of a Manufacturer
P1
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Factory Overhead
All manufacturing costs exceptdirect material and direct labor
Factory costs that cannot beseparately or readily traced directly to
products.
Factory Overhead
All manufacturing costs exceptdirect material and direct labor
Factory costs that cannot beseparately or readily traced directly to
products.Examples:
Indirect labor – maintenanceIndirect material – cleaning supplies
Factory utility costsSupervisory costs
Income Statement of a Manufacturer
P1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftencombined as follows:
Income Statement of a Manufacturer
P1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Finished GoodsBeginning Inventory
Cost of GoodsManufactured
FinishedGoodsEnding
Inventory
RawMaterials
BeginningInventory
RawMaterials
Purchases
Raw MaterialsEnding Inventory
Costof
GoodsSold
Goods in ProcessBeginning Inventory
Direct Labor
FactoryOverhead
Raw MaterialsUsed
Sales activityProduction activityMaterialsactivity
Flow of Manufacturing Activities
Goods in ProcessEnding Inventory
Exh. 18-15
C 6
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Summarizes the types and amounts of costsIncurred 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
Manufacturing StatementP2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500$
Exh. 18-16
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500$
Exh. 18-16
Computation of Cost of Direct Material Used
Beginning raw materials inventory 8,000$
Add: Purchases of raw materials 86,500
Cost of raw materials available for use 94,500$
Deduct: Ending raw materials inventory 9,000
Cost of direct materials used in production 85,500$
P2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500$
Include all direct labor costs incurred during the
current period.
Exh. 18-16
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500$
Manufacturing Statement Exh. 18-16
Computation of Total Manufacturing Overhead
Indirect labor 9,000$
Factory supervision 6,000
Factory utilities 2,600
Property taxes, factory building 1,900
Factory supplies used 600
Factory insurance expired 1,100
Depreciation, building and equipment 5,300
Other factory overhead 3,500
Total factory overhead costs 30,000$
P2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500$
Beginning work in process inventory is carried over from the
prior period.
Exh. 18-16
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500$
Ending work in process inventory contains the cost of unfinished
goods, and is reported in the current assets section of the balance sheet.
Exh. 18-16
P2
Manufacturing Statement