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Managerial Accounting
Dr. BaldwinUniversity of Arkansas – Fort
SmithFall 2010
CHAPTER 14
Managerial Accounting Concepts & Principles
___________ accounting provides financial and non-financial information for managers of an organization and other internal decision makers
_________ accounting provides general purpose financial information to those who are outside the organization.
Managerial & Financial Accounting
C 1
Activities of a Managerial Accountant
• Determining costs of products– Predicting Future Costs– Product Pricing– Profitability Analysis– Make or Buy Decisions
• Planning– Strategic Plans – long term– Budgeting - Short Terms Plans
• Controlling costs• Applying Cost-Volume-Profit techniques• Standard costing and variance analysis
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
C 1
Internal Reporting• Management functions include the
following:– Planning – set goals, budgets– Executing – carrying out plans– Reviewing – monitoring progress towards
goals.– Reporting – to outside parties
• Management accountants provide information to facilitate these processes.
Goal of Lean Business?
Provide high product at low .
Implementing a lean business model allows companies to focus on their core competencies (what they do best) which will help them achieve these two goals.
Lean Business Model
Customer Orientation
GlobalEconomy
LeanBusiness
Model
Quality whileeliminating
Waste
Satisfy theCustomer
PositiveReturn
C 2
Continuous Improvement• The following ideas have
emerged to deal with increasing competition and the need to continually improve business practices. – Just-in-time Operations– Total Quality Management– Activity-based Management
(and costing)
Just-in-Time…• JIT involves the reduction of
inventories and the purchase and production of merchandise only when needed. (Demand – pull system)
• Operations become much more _________ and waste is virtually eliminated.
• Quality of the products typically improves as well.
Total Quality Management• In an effort to drive down the cost
of poor quality, firms have decided to build quality into their products. – They have been able to reduce total
costs and improve their products at the same time.
• This same approach can be applied to all business functions and settings.
Activity Based Management• This approach requires that
management identify value-added and non-value-added activities.
• The goal is to reduce or eliminate non-value-added costs and activities.
• In doing so, the company becomes more efficient and can devote more time and energy to value-added activities.
Understanding Costs• Common Questions to consider:
– What costs are incurred in making our product?
– How do these costs behave?– What factors affect these costs?– How can we control costs, without our
quality suffering?
What Next?• Once we understand our costs, we
can use that information to determine– Budgets– Setting prices– Value of inventory– Performance evaluation– What products to make
Classification of CostsMany ways to classify costs in order
to understand them…• Direct versus ______ costs• Variable versus _____ costs• Product versus _____ costs• Controllable versus ___________
costs.• ______ versus out-of-pocket costs
versus ___________ costs.
C 3
Classification by BehaviorIn planning, we must understand how costs
behave. For example, do costs change as production activity changes or do they stay the same?
• Variable cost – costs that ______ as production activity increases (direct materials, direct labor)
• Fixed cost – costs that ____________ over a range of activity levels (depreciation, rent)
• Mixed cost – costs that have ____ a fixed and variable component
Classification by Traceability• We need to be able to associate costs
with particular cost objects (units of product or department).
• Costs can either be considered:– ____ costs can be easily traced to an
object (some materials or labor).– ______ costs are allocated to objects
because they cannot be easily traced (plant depreciation, rent of equipment).
Classification by Relevance• ______Costs – already incurred and can not
be avoided or changed – always irrelevant to short term decision analysis
• Out-of-pocket costs – require future outlay of cash – possibly relevant to short term decision making
• ____________costs – benefit or revenue lost when choosing one alternative over another– relevant to short term decision analysis
Classification by FunctionProduct costs• include all costs associated with
making or buying a product for resale (COGS)– Direct Materials (DM)– Direct Labor (DL)– Manufacturing or Factory Overhead (FOH)
• Costs attach to _________ and are expensed only when items are _____.
C 4
Classification by FunctionPeriod Costs• Selling Costs
– Costs incurred to obtain customer orders and to deliver finished goods to customers
• General & Administrative Expenses– Non-manufacturing costs of staff support and
administrative functions – accounting, data processing, personnel, research and development.
• These costs _____attach to inventory.• They are expensed in the ________ in which
they are incurred or used up.– Advertising, insurance, interest etc.
Manufacturing CostsThree categories of product costs for
manufacturing companies:• Direct ________
– the cost of specific parts or materials that can be directly traced to a product (raw materials)
• Direct ________– the labor costs that can be directly traced
to individual units or batches of products• _________
Manufacturing Costs…
Manufacturing overhead costs: all other costs of production which cannot be directly traced to individual units or batches of products
• Indirect _______ – supervisory salaries• Indirect _______ – grease,
nails, etc.• Other – depreciation,
insurance, maintenance
Other Cost Terminologyprime costs versus conversion costs• ________ costs include the direct costs of
production.– Material and Labor
• ________ costs include– Labor and Overhead.
• Obviously these categories are not mutually exclusive.
Selling and
Administrative
Selling andAdministrative
Cost ofGoods Sold
Cost ofGoods Sold
FinishedGoods
Inventory
FinishedGoods
Inventory
Work inProcess
Inventory
Work inProcess
Inventory
Balance Sheet
Raw MaterialsInventory
Raw MaterialsInventory
Product Costs
MaterialsPurchases
MaterialsPurchases
Period Costs
Income Statement
DirectLabor
DirectLabor
Factory Overhead
Factory Overhead
Selling andAdministrative
Selling andAdministrative
Costs
Period costs flow directly to the
income statement
Period costs flow directly to the
income statement
C5
P1
Mfg. Cost Flow & Classifications
Cost of Materials Used…• Some of the key relationships need to
be defined.• Cost of Materials Used =
– Beg RM inventory + Materials purchased during the period – End RM inventory
• Manufacturing Costs Incurred = – Direct materials used + direct labor for the
period + Overhead Applied to products• NOTE: all three types of product costs here!
P2
Cost of Goods Manufactured• Cost of Goods ____________ =
– Beg WIP inventory + Manufacturing Costs Incurred – End WIP inventory
• Cost of Goods ____________ =– beg FG inventory– + cost of goods manufactured– - ending FG inventory
Flow of Costs in Perpetual Inventory Accounts
DM
Materials Work in Process Finished Goods
Wages Payable
DL
Factory Overhead
Cost of Goods Sold
IM
SOLD
IL
DM
IM
DL
FOHA
IL
OFOH
COGMCOGM SOLDMaterialsPurchased
TotalWages
Based on predetermined overhead rate
FOHA
Summary of cost flows
FOHA = Factory Overhead Applied COGM = Cost of Goods Manf.
Let’s take a look at Rocky Mountain Bikes’ Manufacturing Statement.
P2
Manufacturing Statement
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
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
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
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 StatementExh. 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
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
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