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15-15-11Copyright Houghton Mifflin Company. All rights reserved.
Chapter 15Chapter 15Introduction toIntroduction to
Management AccountingManagement Accounting
Belverd E. Needles, Jr.Belverd E. Needles, Jr.
Marian PowersMarian Powers
Sherry K. MillsSherry K. Mills
Henry R. AndersonHenry R. Anderson- - - - - - - - - - -- - - - - - - - - - -
Multimedia Slides by:Multimedia Slides by:
Dr. Paul J. RobertsonDr. Paul J. RobertsonNew Mexico State UniversityNew Mexico State University
Steve LeaskSteve LeaskNew Mexico State UniversityNew Mexico State University
15-15-22Copyright Houghton Mifflin Company. All rights reserved.
Introduction to Introduction to Management AccountingManagement Accounting
OBJECTIVE 1OBJECTIVE 1
DefineDefine management accounting management accounting and and distinguish between management distinguish between management accounting and financial accounting.accounting and financial accounting.
15-15-33Copyright Houghton Mifflin Company. All rights reserved.
Management AccountingManagement Accounting» Management accounting is an Management accounting is an
extension of financial accounting and extension of financial accounting and applies mainly to internal operations.applies mainly to internal operations.
» Management accounting focuses on Management accounting focuses on the techniques and procedures for the techniques and procedures for information gathering and reporting information gathering and reporting to management.to management.
15-15-44Copyright Houghton Mifflin Company. All rights reserved.
Management AccountingManagement Accounting
Product and service costing information.Product and service costing information.
Information for planning of and control Information for planning of and control over operations.over operations.
Special reports and analyses to assist in Special reports and analyses to assist in managerial decision making.managerial decision making.
» Managers need various types of Managers need various types of timely, accurate information.timely, accurate information.
15-15-55Copyright Houghton Mifflin Company. All rights reserved.
Management AccountingManagement Accounting» Management accounting is necessary Management accounting is necessary
for all forms and sizes of business.for all forms and sizes of business.
The types of data needed to ensure The types of data needed to ensure efficient operations do not depend on an efficient operations do not depend on an organization’s size.organization’s size.
All organizations can become more All organizations can become more cost-effective and more profitable.cost-effective and more profitable.
15-15-66Copyright Houghton Mifflin Company. All rights reserved.
What Is Management What Is Management Accounting?Accounting?
» Management accounting differs from Management accounting differs from financial accounting in many respects.financial accounting in many respects. Report format.Report format.
Purpose of reports.Purpose of reports.
Primary users.Primary users.
Units of measure.Units of measure.
Nature of information.Nature of information.
Frequency of reporting.Frequency of reporting.
15-15-77Copyright Houghton Mifflin Company. All rights reserved.
The Management CycleThe Management Cycle
OBJECTIVE 2OBJECTIVE 2
Explain the management cycle Explain the management cycle and its connection to management and its connection to management accounting.accounting.
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The Management CycleThe Management Cycle» Management is expected to use Management is expected to use
resources wisely, operate profitably, resources wisely, operate profitably, pay debts, and abide by laws and pay debts, and abide by laws and regulations.regulations.
» Expectations motivate managers to Expectations motivate managers to establish the objectives, goals, and establish the objectives, goals, and strategic plans of the organization.strategic plans of the organization.
15-15-99Copyright Houghton Mifflin Company. All rights reserved.
The Management CycleThe Management Cycle
15-15-1010Copyright Houghton Mifflin Company. All rights reserved.
The Management CycleThe Management Cycle» Management accounting services Management accounting services
information needs of management by:information needs of management by:
1.1. Developing plans and analyzing Developing plans and analyzing alternatives.alternatives.
2.2. Communicating plans to key personnel.Communicating plans to key personnel.
3.3. Evaluating performance.Evaluating performance.
4.4. Reporting the results of activities.Reporting the results of activities.
5.5. Accumulating, maintaining, and Accumulating, maintaining, and processing an organization’s financial processing an organization’s financial and nonfinancial information.and nonfinancial information.
15-15-1111Copyright Houghton Mifflin Company. All rights reserved.
Meeting the DemandsMeeting the Demandsof Global Competitionof Global Competition
OBJECTIVE 3OBJECTIVE 3
Identify the new management Identify the new management philosophies for continuous philosophies for continuous improvement and discuss the role improvement and discuss the role of management accounting in of management accounting in implementing these philosophies.implementing these philosophies.
15-15-1212Copyright Houghton Mifflin Company. All rights reserved.
New Management New Management PhilosophiesPhilosophies
» Three significant new management Three significant new management philosophies are as follows:philosophies are as follows:
1. Just-in-time (JIT) operating environment.1. Just-in-time (JIT) operating environment.
2. Total quality management (TQM).2. Total quality management (TQM).
3. Activity-based management (ABM).3. Activity-based management (ABM).
15-15-1313Copyright Houghton Mifflin Company. All rights reserved.
New Management New Management PhilosophiesPhilosophies
» All of these approaches are designed All of these approaches are designed to:to:
1. Increase product quality.1. Increase product quality.
2. Reduce waste and inefficiency.2. Reduce waste and inefficiency.
3. Reduce cost.3. Reduce cost.
4. Increase customer satisfaction.4. Increase customer satisfaction.
15-15-1414Copyright Houghton Mifflin Company. All rights reserved.
The Continuous The Continuous Improvement EnvironmentImprovement Environment
Just-in-TimeOperating
Environment
Total QualityManagement
Activity-BasedManagement
Reduces or eliminates wasted time
Reduces or eliminateswasted resources
Reduces or eliminates nonvalue-adding
activities
Product/service costs and time reduced
Product/service quality andcustomer satisfaction increased
Means of Continuous Improvement
15-15-1515Copyright Houghton Mifflin Company. All rights reserved.
Performance MeasuresPerformance Measures
OBJECTIVE 4OBJECTIVE 4
Define Define performance measures,performance measures, recognize the uses of these recognize the uses of these measures in the management measures in the management cycle, and prepare an analysis of cycle, and prepare an analysis of nonfinancial data.nonfinancial data.
15-15-1616Copyright Houghton Mifflin Company. All rights reserved.
Performance MeasuresPerformance Measures
» Performance measures provide an Performance measures provide an
indication of an organization’s indication of an organization’s
performance in relation to a specific performance in relation to a specific
process, activity, or task.process, activity, or task.
15-15-1717Copyright Houghton Mifflin Company. All rights reserved.
Performance MeasuresPerformance Measures» Financial performance measures:Financial performance measures:
1. Return on investment.1. Return on investment.
2. Net income as a percentage of sales.2. Net income as a percentage of sales.
3.3. Costs of poor quality as a percentage of Costs of poor quality as a percentage of sales.sales.
» Nonfinancial performance measures:Nonfinancial performance measures:
1. Number of customer complaints.1. Number of customer complaints.
2. Hours of inspection.2. Hours of inspection.
3. Time to fill an order.3. Time to fill an order.
15-15-1818Copyright Houghton Mifflin Company. All rights reserved.
Performance MeasuresPerformance Measures
» Performance measures are useful Performance measures are useful in reducing waste in operating in reducing waste in operating activities.activities.
» Management uses performance Management uses performance measures in all stages of the measures in all stages of the management cycle.management cycle.
15-15-1919Copyright Houghton Mifflin Company. All rights reserved.
Merchandising Versus Merchandising Versus Manufacturing OrganizationsManufacturing Organizations
OBJECTIVE 6OBJECTIVE 6
Compare accounting for Compare accounting for
inventories and cost of goods sold inventories and cost of goods sold
in merchandising and in merchandising and
manufacturing organizations.manufacturing organizations.
15-15-2020Copyright Houghton Mifflin Company. All rights reserved.
ManufacturersManufacturers» Manufacturers design and Manufacturers design and
manufacture products for sale.manufacture products for sale.
1.1. They must accumulate the costs They must accumulate the costs
of manufacturing products.of manufacturing products.
2.2. Their inventory consists of Their inventory consists of
materials, work in process, materials, work in process,
and and finished goods.finished goods.
15-15-2121Copyright Houghton Mifflin Company. All rights reserved.
Manufacturing OrganizationManufacturing Organization
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
- Ending Finished Goods Inventory
= Cost of Goods Sold
15-15-2222Copyright Houghton Mifflin Company. All rights reserved.
MerchandisersMerchandisers» Merchandisers purchase goods Merchandisers purchase goods
already manufactured, and resell them.already manufactured, and resell them.
1.1. They accumulate the They accumulate the purchasedpurchased cost of goods.cost of goods.
2.2. They have only one type of They have only one type of inventory (merchandise inventory).inventory (merchandise inventory).
15-15-2323Copyright Houghton Mifflin Company. All rights reserved.
Merchandising OrganizationMerchandising Organization
Beginning Merchandise Inventory
+ Cost of Goods Purchased
- Ending Merchandise Inventory
= Cost of Goods Sold
15-15-2424Copyright Houghton Mifflin Company. All rights reserved.
ManufacturingManufacturingVersus MerchandisingVersus Merchandising
» Both types of organizations report:Both types of organizations report:
The cost of unsold goods on the The cost of unsold goods on the balance sheet.balance sheet.
The cost of goods sold on the The cost of goods sold on the income statement.income statement.
15-15-2525Copyright Houghton Mifflin Company. All rights reserved.
Cost ClassificationCost Classification
OBJECTIVE 7OBJECTIVE 7
Identify various approaches Identify various approaches managers use to classify costs managers use to classify costs and show how the purpose of a and show how the purpose of a manager’s cost analysis can manager’s cost analysis can change the classification of a change the classification of a single cost item.single cost item.
15-15-2626Copyright Houghton Mifflin Company. All rights reserved.
Cost ClassificationCost Classification» In management accounting, a single In management accounting, a single
cost can be classified as:cost can be classified as:
1. Direct or indirect.1. Direct or indirect.
2. Variable or fixed.2. Variable or fixed.
3. Value-adding or nonvalue-adding.3. Value-adding or nonvalue-adding.
4. Product or period.4. Product or period.
5. Inventoriable or noninventoriable.5. Inventoriable or noninventoriable.
15-15-2727Copyright Houghton Mifflin Company. All rights reserved.
Purposes of Cost AnalysisPurposes of Cost Analysis» Purposes of cost analysis by Purposes of cost analysis by
classification:classification:
1.1. Traceability (direct or indirect).Traceability (direct or indirect).
2.2. Financial reporting (product or period, Financial reporting (product or period, inventoriable or noninventoriable).inventoriable or noninventoriable).
3.3. Behavior (variable or fixed).Behavior (variable or fixed).
4.4. Value (value-adding or nonvalue-Value (value-adding or nonvalue-adding).adding).
15-15-2828Copyright Houghton Mifflin Company. All rights reserved.
Sweet Treasures Candy StoreSweet Treasures Candy Store
Cost of GoodsCost of GoodsAvailable for SaleAvailable for Sale
$26,000$26,000
Net CostNet Costof Purchasesof Purchases$23,000$23,000
Beginning Beginning MerchandiseMerchandiseInventoryInventory$3,000$3,000
Ending Ending MerchandiseMerchandiseInventoryInventory$4,500$4,500Cost ofCost of
Goods SoldGoods Sold$21,500*$21,500*
*Cost of goods sold = $3,000 + $23,000 - $4,500 = $21,500
Balance SheetBalance SheetCurrent Assets SectionCurrent Assets Section
Merchandise Inventory(Finished Product Ready for Resale)
Income StatementIncome StatementCost of Goods SoldCost of Goods Sold
15-15-2929Copyright Houghton Mifflin Company. All rights reserved.
Hatcher Candy CompanyHatcher Candy Company
Cost ofCost ofGoodsGoodsManufacturedManufactured$144,000$144,000
Beginning Beginning FinishedFinishedGoodsGoodsInventoryInventory$52,000$52,000
Cost of GoodsCost of GoodsAvailable for SaleAvailable for Sale
$196,000$196,000
Balance SheetBalance SheetCurrent Assets SectionCurrent Assets Section
Materials Inventory(Unused Materials)Work in Process Inventory(Unfinished Product)Finished Goods Inventory(Finished Product Readyfor Sale)
Income StatementIncome StatementCost of Goods SoldCost of Goods Sold
Ending Ending Finished GoodsFinished GoodsInventoryInventory$78,000$78,000
Cost ofCost ofGoods SoldGoods Sold$118,000*$118,000*
*Cost of goods sold = $52,000 + $144,000 - $78,000 = $118,000
15-15-3030Copyright Houghton Mifflin Company. All rights reserved.
Cost Classification Cost Classification and Cost Analysisand Cost Analysis
Purpose of Cost Classification
CostExamples
TraceabilityOf Product
CostBehavior Value
FinancialReporting
Sugar forcandy
Direct Variable Value-adding
Product
Depreciation onmixing machine
Indirect Fixed Value-adding
Product
Salescommission ____
Variable Value-adding
Period
Accountant'ssalary ____
Fixed Nonvalue-adding
Period