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KE1013 Chapter Eight 1
Chapter Eight
MANAGEMENT ACCOUNTING
KE1013 Chapter Eight 2
Outline
• Difference between managerial and financial accounting.
• Purpose and importance of managerial accounting information for decision making.
• Cost concept• Preparing statement for goods manufactured.• Preparing financial statement for manufacturing
companies
KE1013 Chapter Eight 3
Difference between managerial and financial accounting
1. Users of the information
Internal and external users
Internal users
Financial Acc. Managerial Acc.
KE1013 Chapter Eight 4
2. Types and frequency of the reports
- classified financial statements
- issued quarterly & annually
- internal reports- issued as frequently
as needed
Financial Acc.Managerial Acc.
KE1013 Chapter Eight 5
3. Content of the reports
Objective: Standardreporting format
according togenerally accepted
accounting principles
Objective and subjective flexiblereporting format
according tomanagement needs
Financial Acc. Managerial Acc.
KE1013 Chapter Eight 6
4. Purpose of the reports
General-purpose information for
all users.
Special-purpose information for a particular user for
a specific decision.
Financial Acc. Managerial Acc.
KE1013 Chapter Eight 7
4. Verification
Annual independent audit by certified public accountant.
No independent audits
Financial Acc. Managerial Acc.
KE1013 Chapter Eight 8
Importance of managerial accounting information for decision making
Planning
Directing
Controlling
Improving
Decision making
KE1013 Chapter Eight 9
Cost Concept
Cost : a payment of cash; or its equivalent; or the commitment to pay cash in the future for the purpose of generating revenues
Classification of costs
By behavior
By function
By period
KE1013 Chapter Eight 10
Classification by behavior
1. Fixed costs
3. Semi variable costs
2. Variable costs
Does not change when the volume of activity changes.
Changes in proportion with the changes in the volume of activity.
A mixed of fixed and variable costs.
KE1013 Chapter Eight 11
Relationship between fixed costs and activity
Costs
Activity (unit)
Total fixed cost
10 20 30
KE1013 Chapter Eight 12
Relationship between variable costs and activity
Costs
Activity (unit)
Total variable cost
10 20 30
KE1013 Chapter Eight 13
Relationship between mixed costs and activity
Cost
Activity (unit)
Total mixed costs
10 20 30
KE1013 Chapter Eight 14
Classification by function
1. Manufacturing costs
2. Administration costs
3. Selling costs
Cost incurred in the process of transferring raw material to finished goods.
Cost incurred and related to administration activities.
Cost incurred and related to the selling and distributing activities.
KE1013 Chapter Eight 15
Manufacturing Cost Concept
Manufacturing consists of activities and processes that convert raw materials into finished goods.
Manufacturing costs are usually classified as follows:
Direct materials
Direct labor
Manufacturing overhead
KE1013 Chapter Eight 16
Manufacturing Cost : Direct Materials
Raw materials are the basic materials and parts that are to be used in the manufacturing process.
Raw materials that can be physically and directly associated with the finished product during the
manufacturing process are called direct materials.
KE1013 Chapter Eight 17
Manufacturing Cost : Indirect Materials
Some raw materials cannot be easily associated with the finished product. These are considered indirect materials.
Are accounted for as part of manufacturing overhead and :
1 do not physically become part of the finished product; or
2 cannot be traced because their physical association with the finished product is too small in terms of cost.
KE1013 Chapter Eight 18
Manufacturing Cost : Direct Labor
Direct labor is the work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
The wages of maintenance people, timekeepers, and supervisors are usually identified as indirect labor. Their efforts have no physical association with the finished product.
Like indirect materials, indirect labor is part of manufacturing overhead.
KE1013 Chapter Eight 19
Manufacturing Cost : Overhead
Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product.
These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor.
Manufacturing overhead includes1 indirect materials;2 indirect labor;3 depreciation on factory buildings and machines4 insurance, taxes, and maintenance on
factory facilities.
KE1013 Chapter Eight 20
Product Cost vs. Period Cost
Product costs include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead); they are costs that are a necessary and integral part of producing the finished product.
These costs are not expensed to cost of goods sold under the matching principle until the finished goods inventory is sold.
KE1013 Chapter Eight 21
Product Cost vs. Period Cost
Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product.
Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods.
KE1013 Chapter Eight 22
Product Cost vs. Period Cost
Period costs:
are identifiable with a specific time period,
relate to non-manufacturing non-inventoriable costs,
and
include selling and administrative expenses.
KE1013 Chapter Eight 23
Product Cost vs. Period Cost
Direct Material
Direct Labor
Factory OH
Prime Cost
Conversion Cost
Selling Expenses
Admin Expenses
Product Cost
Period Cost
Manufacturing Costs
Non-manufacturing Costs
KE1013 Chapter Eight 24
Financial Statement for Manufacturing Company
Statement of Cost of Goods Manufactured
Statement of Income
Balance Sheet
KE1013 Chapter Eight 25
Cost of Goods Manufactured
Total Current Manufacturing Cost
Beginning Work in Progress
+
- Ending Work in Progress
= Cost of Goods Manufactured /Total Manufacturing Cost
KE1013 Chapter Eight 26
Statement of Cost of Goods Manufactured for the year ended 31/12/2001
Opening work in progress xxxDirect material:Opening inventories xxx(+) Purchases xxxRaw material available for use xxx(-) Closing inventories (xx)Raw material consumed / used xxxDirect labor xxxFactory overhead: Indirect material xx Indirect labor xx Others xxTotal factory overhead xxxTotal current manufacturing cost xxx
xxxxLess: Closing work in progress (xx)
Total manufacturing costs xxxx
KE1013 Chapter Eight 27
Income Statement for the year ended 31/12/2001
Sales Revenue xxxx
Less: Cost of Goods SoldFinished Goods Inventory 1/1/2001 xxxCost of Goods Manufactured xxxx Cost of Goods Available for Sale xxxx(-) Finished Goods Inventory 31,12,2001 (xxx)
Cost of Goods Sold (xxx)
Gross Profit xxxxLess: Operating Expenses
Selling Expenses
Administrative Expenses xxxx
Net Income xxxx
KE1013 Chapter Eight 28
Balance Sheet (extracted) As at 31/12/2001
Current Assets:
Cash xxx
Accounts Receivable xxx
Inventories:Raw Materials xxxWork in Progress xxxFinished Goods xxx
xxx
Prepaid Insurance xxx
Total Current Assets xxxx
KE1013 Chapter Eight 29