John Wiley & Sons, Inc. © 2005 Managerial Accounting Tool for Business Decision Making Third Edition Prepared by Dan R. Ward Suzanne P. Ward University

John Wiley & Sons, Inc. © 2005

Managerial AccountingTool for Business Decision Making

Third Edition

Prepared byPrepared byDan R. WardDan R. Ward

Suzanne P. WardSuzanne P. WardUniversity of Louisiana at LafayetteUniversity of Louisiana at Lafayette

Managerial AccountingManagerial Accounting

Weygandt Weygandt •• Kieso • Kimmel Kieso • Kimmel

CHAPTER 1

MANAGERIAL ACCOUNTING

Study Objectives

Explain the distinguishing features of managerial accounting.

Identify the 3 broad functions of management.

Define the 3 classes of manufacturing costs.

Distinguish between product and period costs.

Study Objectives: Continued

Explain the difference between a merchandising and a manufacturing income statement.

Indicate how cost of goods manufactured is determined.

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

Identify trends in managerial accounting.

MANAGERIAL ACCOUNTING BASICS

Definition of Managerial Accounting

A field of accounting that provides

economic and financial information

for managers and other internal users

Also called Management Accounting


Managerial Activities

Explain manufacturing and nonmanufacturing costs and how they are

reported (Chapter 1).

Compute cost of providing a service or manufacturing a product (Chapters 2, 3, and 4).

Determine behavior of costs and expenses as activity changes (Chapter 5).


Managerial Activities: Continued

Gather and present relevant data for

management decision making (Chapter 6).

Evaluate effect of alternative ways to cost inventory (Chapter 7).

Determine prices for external and internal transactions (Chapter 8).


Managerial Activities: Continued

Assist in profit planning and formalizing plans in the form of budgets (Chapter 9).

Help to control costs by comparing actual results with planned objectives and standard costs (Chapters 10 and 11).

Collect and present data for capital expenditure decisions (Chapter 12).


Distinguishing Features

Applies to all types of businesses –

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: Continued

More responsible for strategic cost management.

Team includes members from production, marketing, engineering, etc.

Aid in making critical decisions.

COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING

Study Objective 1

Similarities

Both deal with economic events of a business.

Both require that economic events be quantified and communicated to interested parties.

COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING

Differences

MANAGEMENT FUNCTIONSStudy Objective 2

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

Planning

Directing

Controlling

MANAGEMENT FUNCTIONS

Planning

Look ahead

Establish objectives such as Maximize short-term profit Commit 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


Directing

Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including executives, managers, and supervisors


Controlling

Keep activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or a formal system of evaluation

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

controlling.

ORGANIZATIONAL STRUCTURE

Organizational Chart

Assists in carrying out management’s functions

Prepared by most companies

Organizational charts show: The interrelationships of activities The delegation of authority The delegation of responsibility

A TYPICAL COMPANY’SORGANIZATIONAL CHART

GOOD ETHICS - GOOD BUSINESSBusiness Ethics

Business scandals caused massive investment losses and employee layoffs.

Corporate fraud has increased 13 percent in last five years.

Employee fraud - 60% of all fraud expense account abuse, theft of assets,

etc.

Intentional misstatement of financial reports, or financial reporting fraud, - most costly to companies.

GOOD ETHICS - GOOD BUSINESS

Creating Proper Incentives

Monitoring and evaluating employees may produce incentives to act unethically

For example, overly ambitious budgets may produce unethical management actions to meet targets

Employees may feel that they must succeed no matter what

Ineffective and unrealistic controls may result in declining quality of product

GOOD ETHICS - GOOD BUSINESS

New Legislation – Sarbanes Oxley Act of 2002

Clarifies management’s responsibilities

CEO and CFO must certify fairness of financial statements and adequacy of internal control

Board of Directors, especially the Audit Committee, must meet certain criteria

Penalties for misconduct are substantially increased

Codes of Ethics are now required

MANAGERIAL COST CONCEPTSManufacturing Costs

Study Objective 3

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.

Typical Classification of Manufacturing Costs

MANAGERIAL COST CONCEPTS

Manufacturing Costs - Materials

Direct Materials

Raw materials - basic materials used in manufacturing.

Raw materials that can be physically and directly associated with the finished product are called direct materials.

Examples includeFlour in the baking of breadSyrup in the bottling of soft drinksSteel used in making automobiles


Manufacturing Costs- Materials

Indirect Materials

Raw materials that cannot be easily associated with the finished product are called indirect materials.

Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost

Considered part of manufacturing overhead


Manufacturing Costs - Labor

Direct Labor

Work of factory employees that can be physically and directly associated with converting raw materials into finished goods

Examples include Bottlers at Coca-Cola Bakers at Sara Lee Typesetters at a newspaper


Manufacturing Costs - Labor

Indirect Labor

Work of factory workers that have no physical association with the finished product or for which it is impractical to trace to the goods produced

Examples include Wages of maintenance workers Supervisors Time-Keepers


Manufacturing Costs – Manufacturing Overhead

Costs that are indirectly associated with manufacturing the product

Examples includeIndirect materialsIndirect laborDepreciation on factory buildingsInsurance, taxes, maintenance on

factory facilities

Basically manufacturing overhead includes all manufacturing costs except direct materials and direct labor.

PRODUCT VERSUS PERIOD COSTSStudy Objective 4

Product Costs

Consist of the direct material cost, the direct labor cost, and the manufacturing overhead cost

A necessary and integral part of producing the product

Recorded as inventory when incurred

Do not become expenses until the finished goods inventory is sold

PRODUCT VERSUS 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

Include all Selling expenses General and Administrative expenses

FOR RENT

PRODUCT VERSUS PERIOD COSTS

MANUFACTURING COSTS INFINANCIAL STATEMENTS

Study Objective 5

Income Statement

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

except for the cost of goods sold section.

MANUFACTURING COSTS INFINANCIAL STATEMENTS Cost of Goods Sold ComponentsMerchandiser versus Manufacturer

MANUFACTURING COSTS INFINANCIAL STATEMENTS

Cost of Goods Sold Section of the Income Statement

DETERMINING THE COST OF GOODS MANUFACTURED

Study Objective 6

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 year

COST OF GOODS MANUFACTURED SCHEDULE

BALANCE SHEET - InventoriesStudy Objective 7

Merchandising Company One category of

inventory:

Merchandise Inventory

Manufacturing Company May have three

inventory accounts: Raw Materials Work in Process Finished Goods

BALANCE SHEET - Inventories

Let’s ReviewLet’s Review

Direct Materials are a:

Product Manufacturing Period Cost Overhead Cost

a. Yes Yes No

b. Yes No No

c. Yes Yes Yes

d. No No No


Direct Materials are a:

Product Manufacturing Period Cost Overhead Cost

a. Yes Yes No

b. Yes No No

c. Yes Yes Yes

d. No No No

MANAGERIAL ACCOUNTING TODAYStudy Objective 8

Service Industry Trends

U.S economy in general has shifted toward an emphasis on providing services

Today over 50 percent of U.S. workers are employed by service companies

Trend is expected to continue in future

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

MANAGERIAL ACCOUNTING TODAY

Managerial Accounting Practices

Value Chain Refers to all activities associated with providing a

product or service.

For a manufacturing firm, these include the following:



Technological Change

Computerization and automation

Enterprise resource planning (ERP) - software systems that manage the value chain

In large companies an ERP system might replace as many as 200 individual software packages

Computer-integrated manufacturing (CIM) - make products untouched by human hands

Internet and business-to-business (B2B) e-commerce

MANAGERIAL ACCOUNTING TODAYManagerial Accounting Practices

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 neededTotal Quality Management (TQM) - a philosophy of zero

defects

Activity-Based Costing (ABC) Allocates overhead based on use of specific activities or

functions of the company (number of orders or number of machine set ups)

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



Theory of Constraints Used to identify and manage constraints or “bottlenecks”

Helps achieve overall goals of the company, particularly profits

Balanced Scorecard A performance-measurement approach to evaluate

operations in an integrated fashionUses both financial and non-financial measures

Links performance measures to overall company objectives

Summary of Study Objectives

Explain the distinguishing features of managerial accounting

The primary users of reports are internal users such as officers, department heads in the company

The internal reports are issued as needed

Special-purpose reports Provide information for a particular user for a

particular decision Pertain to subunits of the business May be very detailed and extend beyond the

double-entry accounting system

The reporting standard is the relevance of the information to the decision being made

Summary of Study Objectives Identify the three broad functions of management

PlanningDirectingControlling

Define the three classes of manufacturing costsDirect MaterialsDirect LaborManufacturing Overhead

Distinguish between product and period costsProduct costs are

an integral part of producing the product also called inventoriable costs do not become expenses until the product is sold.

Period costs are identified with a specific time period rather than a product selling and administrative expenses.

Summary of Study Objectives Explain the difference between a merchandising and a

manufacturing income statementIncome statements are similar except for the cost of goods sold section. CGS section shows beginning and ending finished goods

inventories and the cost of goods manufactured

Indicate how cost of goods manufactured is determinedBeginning work-in-process + total manufacturing costs for the period – ending work-in-process = cost of goods manufactured

Explain the difference between a merchandising and a manufacturing balance sheet

The difference is in the current asset section

Manufacturing firm - three inventories: finished goods, work-in-process, and raw

materials

Merchandising firm - only one inventory account: merchandise inventory

Summary of Study Objectives

Identify trends in managerial accounting

Shift toward the addressing the needs of service companies

Improving practices to better meet the needs of managers

Managing the value chain

Just-in-time inventory (JIT)

Enterprise resource planning (ERP)

Theory of Constraints

Activity based costing (ABC)

The balanced scorecard for a

comprehensive view of operations


Which of the following is not an element of manufacturing overhead?

a. Plant manager’s salary

b. Sales manager’s salary

c. Factory repairman’s wages

d. Product inspector’s salary


Which of the following is not an element of manufacturing overhead?

a. Plant manager’s salary

b. Sales manager’s salary

c. Factory repairman’s wages

d. Product inspector’s salary

Appendix Accounting Cycle

for a Manufacturing Company

Accounting cycle for a manufacturer is the same as for a merchandiser when a periodic inventory system is used.

Journalizing and posting transactions are the same with the manufacturer having additional

manufacturing inventories and manufacturing cost accounts.

Preparation of a trial balance and adjusting entries are also the same for both types of companies.

Appendix Accounting Cycle

for a Manufacturing Company

Changes occur in the use of a work sheet and in preparation of closing entries.

Worksheet has an additional set of columns between those for the adjusted trial balance and the income statement; these columns are for the Cost of Goods Manufactured.

In closing, a Manufacturing Summary account is used to close all accounts that appear in the cost of good manufactured schedule. The balance of the Manufacturing Summary account is then closed to Income Summary.

Closing Entries

Closing Entries

Closing Entries

After posting the summary accounts will show the following:

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Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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John Wiley & Sons, Inc. © 2005 Managerial Accounting Tool for Business Decision Making Third Edition Prepared by Dan R. Ward Suzanne P. Ward University