Managerial Accounting

Chapter 19-1

Chapter 19-2

CHAPTER CHAPTER 1919

MANAGERIAL MANAGERIAL ACCOUNTINGACCOUNTING

Accounting Principles, Eighth Edition

Chapter 19-3

1. Explain the distinguishing features of managerial accounting.

2. Identify the 3 broad functions of management.

3. Define the 3 classes of manufacturing costs.

4. Distinguish between product and period costs.

5. Explain the differences between a merchandising and a manufacturing income statement.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 19-4

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

6. Indicate how cost of goods manufactured is determined.

7. Explain the difference between a merchandising and a manufacturing balance sheet.

8. Identify trends in managerial accounting.

Chapter 19-5

Managerial Accounting BasicsCompare managerial and financial

accounting

Management functions and Business Ethics

Managerial Cost ConceptsManufacturing costs

Product vs. period costs

Manufacturing Costs in Financial StatementsIncome Statement and Balance Sheet

Cost concepts – A review

Managerial Accounting TodayService industry trends

Managerial accounting practices

Preview of ChapterPreview of ChapterPreview of ChapterPreview of Chapter

Chapter 19-6

Managerial AccountingManagerial AccountingManagerial AccountingManagerial Accounting

Managerial Managerial

AccountingAccounting

BasicsBasics


AccountingAccounting

BasicsBasics


Cost Cost

ConceptsConcepts


Cost Cost

ConceptsConcepts


Accounting Accounting

TodayToday


Accounting Accounting

TodayToday

Compare Compare Managerial and Managerial and Financial Financial AccountingAccounting

Management Management FunctionsFunctions

Business Ethics Business Ethics

Manufacturing Manufacturing CostsCosts

Product vs Product vs Period CostsPeriod Costs

Service Service Industry Industry TrendsTrends

Managerial Managerial Accounting Accounting PracticesPractices

Manufacturing Manufacturing

Costs in Costs in

Financial Financial

StatementsStatements

Manufacturing Manufacturing

Costs in Costs in

Financial Financial

StatementsStatements

Income Income StatementStatement

Balance SheetBalance Sheet

Cost Concepts Cost Concepts – A Review – A Review

Chapter 19-7

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

A field of accounting that provides economic A field of accounting that provides economic and financial information for managers and and financial information for managers and

other internal users.other internal users.

Also calledAlso called Management AccountingManagement Accounting

Definition of Managerial Accounting

Chapter 19-8


Managerial Accounting Activities

Explain manufacturing and nonmanufacturing costs and how they are reported (Chapter 19)

Compute cost of providing a service or manufacturing a product. (Chapters 20 and 21)

Determine behavior of costs and expenses as activity changes. (Chapter 22)

Chapter 19-9


Managerial Activities: Continued

Assist management in profit planning and formalizing these plans in the form of budgets. (Chapter 23)

Help to control costs by comparing actual results with planned objectives and standard costs. (Chapters 24 and 25)

Accumulate and present data for making decisions. (Chapter 26)

Chapter 19-10


Applies to all types of business -Service, Merchandising, and Manufacturing

Applies to all forms of businesses –Proprietorships, Partnerships, and Corporations

Applies to not-for-profit and profit oriented companies

Distinguishing Features

LO 1 Explain the distinguishing features of managerial accounting.LO 1 Explain the distinguishing features of managerial accounting.

Chapter 19-11


More responsible for strategiccost management

Teams with people from production,marketing, engineering, etc.

Aid in making critical decisions

Distinguishing Features: Continued


Chapter 19-12

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting


Both deal with economic events of a business – Thus, interests overlap

Both require that economic events be quantified and communicated tointerested parties –

Determining unit cost is part of managerial accounting,

Reporting cost of goods manufactured is a part of financial accounting

Similarities


Chapter 19-13



Differences

LO 1 Explain the distinguishing features of managerial accountingLO 1 Explain the distinguishing features of managerial accounting ..

Chapter 19-14

Managerial accounting:Managerial accounting:

a.a. Pertains to the entity as a whole and is highly Pertains to the entity as a whole and is highly aggregatedaggregated.

b. Places emphasis on special-purpose information.

c. Is limited to cost data.

d. Is governed by generally accepted accounting principles.

Review QuestionReview Question


LO 1 Explain the distinguishing features of managerial LO 1 Explain the distinguishing features of managerial accounting.accounting.

Chapter 19-15


Management’s activities and responsibilities Management’s activities and responsibilities can be classified into the following three can be classified into the following three

broad functions:broad functions:

PlanningPlanning DirectingDirecting

ControllingControlling

Management Functions

LO 2 Identify the 3 broad functions of management.LO 2 Identify the 3 broad functions of management.

Chapter 19-16

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

Look ahead and establish objectives such as –

Maximize short-term profitCommit to environmental protection

Key Objective: Add value to the business

Value measured by trading price of stock and by potential selling price of the company

Planning


Chapter 19-17


Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including executives, managers, and supervisors

Produce smooth-running operation

Directing


Chapter 19-18


Keep activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or formal system of evaluations

Good decision making is the outcome of good judgment in planning, directing, and

controlling.

Controlling


Chapter 19-19

Business Ethics

Business scandals caused massive investment losses and employee layoffs.

Corporate fraud has increased 13% in last 5 years.

Employee fraud – 60% of all fraud

Intentional misstatement of financial reports Aka financial reporting fraud

Most costly to companies

Good Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good Business

Chapter 19-20

Creating Proper Incentives

Systems to monitor and evaluate employees may produce incentives for unethical actions.

Employees may feel that they must succeed no matter what.

Ineffective and unrealistic controls may result in declining product quality.


Chapter 19-21

Sarbanes-Oxley Act of 2002

Clarifies management’s responsibilities.

Certifications by CEO and CFO -fairness of financial statements and

adequacy of internal control

Selection criteria for Board of Directors and Audit Committee

Substantially increased penalties for misconduct

IMA Statement of Ethical Professional Practices


Code of Ethical Standards

Chapter 19-22

The management of an organization performs The management of an organization performs several broad functions. They are:several broad functions. They are:

a.a. Planning, directing, and sellingPlanning, directing, and selling.

b. Directing, manufacturing, and controlling.

c. Planning, manufacturing, and controlling.

d. Planning, directing, and controlling.




Chapter 19-23

Manufacturing Costs

Manufacturing consists of activities to convert raw materials into finished goods.

In contrast, a merchandising firm sells goods in the form in which they were bought.

Categories of manufacturing costs include:

Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts

LO 3 – Define the three classes of manufacturing costs.LO 3 – Define the three classes of manufacturing costs.

Chapter 19-24

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

Materials

LO 3 Define the three classes of manufacturing LO 3 Define the three classes of manufacturing costs.costs.

Raw MaterialsBasic materials used in manufacturing

Direct Materials Raw materials that can be physically and directly associated with the finished

product

Chapter 19-25


Materials


Indirect Materials

Raw materials that cannot be easily associated with the finished product

Not physically part of the finished product or they are an insignificant part of finished product in terms of cost

Considered part of manufacturing overhead

Chapter 19-26


Labor


Direct LaborWork of factory employees that can be

physically and directly associated with converting raw materials into finished goods

Indirect Labor Work of factory employees that has no

physical association with the finished product or for which it is impractical to trace to the goods produced

Chapter 19-27



Manufacturing Overhead

Costs that are indirectly associated with manufacturing the product

Includes all manufacturing costs except direct materials and direct labor

Chapter 19-28

Which of the following is Which of the following is notnot an element an element of manufacturing overhead?:of manufacturing overhead?:

a.a. Sales manager’s salary.Sales manager’s salary.

b. Plant manager’s salary.

c. Factory repairman’s wages.

d. Product inspector’s salary.




Chapter 19-29

Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs

LO 4 Distinguish between product and period costs.LO 4 Distinguish between product and period costs.

Product Costs

Components: direct material cost, direct labor cost, and manufacturing overhead

A necessary and integral part of producing the product

Recorded as inventory when incurred

Not an expense until the finished goods inventory is sold then cost of goods sold

Chapter 19-30


LO 4 Distinguish between product and period costs.LO 4 Distinguish between product and period costs.

Period Costs

Matched with revenue of a specific time period and charged to expense as incurred

Non-manufacturing costs

Deducted from revenues in period incurred to determine net income

Includes all selling and administrative expenses

Chapter 19-31


LO 4 Distinguish between product costs and LO 4 Distinguish between product costs and

period costsperiod costs..

Chapter 19-32

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements


LO 5 Explain the difference between a LO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statement.statement.

Income Statement

The income statement for a manufacturer is similar to that of a merchandiser except

for the cost of goods sold section.

Chapter 19-33



Cost of Goods Sold ComponentsMerchandiser versus Manufacturer


statement.statement.

Chapter 19-34



Cost of Goods Sold Section of the Income Statement


statementstatement..

Chapter 19-35



Determining the Cost of Goods Manufactured

LO 6 Indicate how cost of goods manufactured is determinedLO 6 Indicate how cost of goods manufactured is determined ..

Work in Process – partially completed units of product

Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period

Chapter 19-36



LO 6 Indicate how cost of goods manufactured is determinedLO 6 Indicate how cost of goods manufactured is determined ..

Chapter 19-37



Balance Sheet - Inventories

LO 7 Explain the difference between a merchandising and a LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.manufacturing balance sheet.

Merchandising Company

One category of inventory:Merchandise Inventory

Manufacturing CompanyMay have three inventories:

Raw Materials Work in Process Finished Goods

Chapter 19-38



Balance Sheet - Inventories

LO 7 Explain the difference between a merchandising and a LO 7 Explain the difference between a merchandising and a manufacturing balance sheetmanufacturing balance sheet

Chapter 19-39

Direct Materials are a:Direct Materials are a:

Product Manufacturing PeriodProduct Manufacturing Period CostCost Overhead Overhead Cost Cost

a.a. Yes Yes No Yes Yes No

b. Yes No No

c. Yes Yes Yes

d. No No No



Chapter 19-40

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management accounting.LO 8 Identify trends in management accounting.

Service Industry Trends

U.S. economy has shifted toward an emphasis on providing services rather than goods

Over 50% of U.S. workers are now employed by service companies

Trend is expected to continue in the future

Most of the techniques learned for manufacturing firms are applicable to service companies

Chapter 19-41



Managerial Accounting Practices

Value Chain

Refers to all activities associated with providing a product or service

For a manufacturing firm these include the following:

Chapter 19-42




Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured or purchased just in time for use

Quality

Increased emphasis on product quality because goods are produced only as needed

Total Quality Management (TQM) - a philosophy of zero defects -

Chapter 19-43




Activity-Based-Costing (ABC)

Allocates overhead based on use of activities

Results in more accurate product costing and scrutiny of all activities in the

value chain

Balanced Scorecard

Evaluates operations in an integrated fashion

Uses both financial and non-financial measures

Links performance measures to overall company objectives

Chapter 19-44

Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner?

a. Just-in-time inventory.

b. Total-quality management.

c. Balanced scorecard.

d. Activity-based costing.



LO 8 Identify trends in management LO 8 Identify trends in management accounting.accounting.

Chapter 19-45

Indicate whether each of the following Indicate whether each of the following costs of an automobile manufacturer would costs of an automobile manufacturer would be classified as direct materials, direct be classified as direct materials, direct labor, or manufacturing overhead.labor, or manufacturing overhead.

Chapter Review - Brief Exercise 19-5Chapter Review - Brief Exercise 19-5Chapter Review - Brief Exercise 19-5Chapter Review - Brief Exercise 19-5

______ a. Windshield______ b. Engine______ c. Wages of assembly line worker______ d. Depreciation of factory machinery______ e. Factory machinery lubricants______ f. Tires______ g. Steering wheel______ h. Salary of painting supervisor

DMDMDLMOMODMDMMO

Chapter 19-46

Identify whether each of the following costs Identify whether each of the following costs should be classified as product costs or should be classified as product costs or period costs.period costs.

Chapter Review - Brief Exercise 19-6Chapter Review - Brief Exercise 19-6Chapter Review - Brief Exercise 19-6Chapter Review - Brief Exercise 19-6

____________ a. Manufacturing overhead____________ b. Selling expenses____________ c. Administrative expenses____________ d. Advertising expense____________ e. Direct labor____________ f. Direct material

ProductPeriodPeriodPeriod

ProductProduct

Chapter 19-47

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