chapter 14 managerial accounting concepts and principles
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Chapter 14
Managerial Accounting Concepts and Principles
14-2
Conceptual Learning ObjectivesC1: Explain the purpose and nature of managerial
accounting.C2: Describe the lean business model.C3: Describe fraud and the role of ethics in managerial
accounting. C4: Describe accounting concepts useful in classifying
costs.C5: Define product and period costs and explain how
they impact financial statements.C6: Explain how the balance sheets and income
statements for manufacturing and merchandising companies differ.
C7: Explain manufacturing activities and the flow of manufacturing costs.
14-3
A1: Compute cycle time and cycle efficiency, and explain their importance to production management.
Analytical Learning Objectives
14-4
P1: Compute cost of goods sold for a manufacturer.
P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.
Procedural Learning Objectives
14-5
Managerial accountingprovides financial and
non-financial informationfor managers of an
organization and other decision makers
Financial accountingprovides generalpurpose financial
information to thosewho are outsidethe organization.
Managerial and Financial Accounting
C 1
14-6
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 constraints)
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
14-7
Lean Business Model
Customer Orientation
GlobalEconomy
LeanBusiness
Model
Eliminationof Waste
Satisfy theCustomer
PositiveReturn
C 2
14-8
Lean Practices
CustomerOrientationin a GlobalEconomy
C 2
14-9
on
Quality improvementapplied to all aspects of
business activities.
Seek and uncover waste.
Employees encouragedto try new methodsto improve quality.
Company emphasizesvalue of quality through
quality awards.
Total Quality ManagementC 2
14-10
Complete productsjust in time to
ship to customers.
Complete partsjust in time for
assembly into products.
Receive materialsjust in time for
production.
Scheduleproduction.
Receivecustomer
orders.
Just-In-Time (JIT) Manufacturing
C 2
14-11
Just-In-Time (JIT) Manufacturing
C 2
To accomplish just-in-time manufacturing:
Processes must be aligned to eliminate
delays and inefficiencies
Companies must establish good relations with
suppliers
14-12
Implications of Lean Manufacturing
C 2
Understand the nature and
sources of cost
Measure value provided to customers
Determine price
customers pay
14-13
Fraud in Accounting
Fraud is the use of one’s job for personal gain through the deliberate misuse of the employer’s assets.
It is estimated that 5% of annual revenues are lost to fraud.
All fraud is committed to provide direct or indirect benefit to the perpetrator, violates the employee’s duty to his/her employer, costs the employer money, and is carried out in secret.
C 3
14-14
Ethics in Accounting
Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior.
The IMA’s Statement of Ethical Professional Practice requires management accountants to be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner.
The Sarbanes-Oxley Act requires each issuer ofsecurities to disclose whether it has adopted a code of ethics for its senior officers and the content of that code.
C 3
14-15
Behavior
Traceability
Controllability
Relevance
Function
Managerial Cost ConceptsC 4
14-16
Cost behavior means how a cost will react to changes in the level of business activity.
Classification by BehaviorC 4
A fixed cost does not change with changes in the volume of activity. Example: Depreciation of Equip, Plant Rent
A variable cost changes in proportion to changes in the volume of activity: Example: Sales Commission based on % of Sales
A mixed cost refers to a combination of fixed and variable. Example: Equipment Rental: $10K + $1
14-17
Direct costs Costs traceable to a
single cost object. Examples: material
and labor cost for a product.
Indirect costs Costs that cannot be
traced to a single cost object.
Example: -maintenance expenditures benefiting two or more departments.
-Production Floor Supplies
Classification by TraceabilityC 4
14-18
The degree of control depends on thelevel of management in the organization.
Investment in Equipment, Labor Overtime
More C
ontrolM
ore
Con
trol
Very little control
Classification by ControllabilityC 4
14-19
All costs incurred in the past that cannot be avoided or changed.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.
Classification by Relevance:Sunk Costs
C 4
14-20
Classification by Relevance:Out-of-Pocket Costs
C 4
A cost that requires a future outlay of cash.
Out-of-pocket costs should be considered in decisions.
Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future
14-21
The potential benefit lost by choosing a specific action from two or more alternatives
Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.
Classification by Relevance: Opportunity Costs
C4
14-22
TheProduct
Classification by Function:Product Costs
–Capitalized in Inventory
DirectLabor
DirectMaterial
Manufacturing Overhead
C 5
14-23
Product vs. Period Costs Product Cost:
Identifiable with the product.Capitalized in Inventory.Example: DM, DL, OH
Period Cost: Expenses identified more with the time period than with the product.Example: Selling & Admin Expenses
14-24
Period Costs(Expenses)
Product Costs(Inventory)
Inventory Not Sold in 2010
OperatingExpenses
Cost ofGoods Sold
Raw MaterialsGoods in ProcessFinished Goods
Cost ofGoods Sold
2010 CostsIncurred
2010 IncomeStatement
2011 IncomeStatement
2010 BalanceSheet Inventory
InventorySold in 2010
Period and Product Costsin Financial Statements
C 5
Exercise 6 (Page 620)
Exercise 8 (Page 620)
14-26
Completedproductsfor sale.
Materialswaiting to beprocessed.
Can be director indirect.
Partially completeproducts.
Material to whichsome labor and/or
overhead havebeen added.
Balance Sheet of a Manufacturer
RawMaterials
FinishedGoods
Goods inProcess
C 6
14-27
Beginning Merchandise
Inventory
Beginning Finished Goods
Inventory
Cost of Goods Purchased
Cost of GoodsManufactured
Ending Merchandise
Inventory
EndingFinished Goods
Inventory
Cost of Goods Sold
Merchandiser Manufacturer
+
_
+
==
_
The major difference
Income Statement of a Manufacturer
P1
14-28
Manufacturing Company
Cost of goods sold: Beg. finished goods inv. $11,200 + Cost of goods manufactured 170,500 = Goods available for sale 181,700 - Ending finished goods inventory (10,300) = Cost of goods sold 171,400$
Merchandising Company
Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 = Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
Cost of goods (CGS) sold for manufacturers differs only slightly from CGS for merchandisers.
Income Statement of a Manufacturer
P1
Exercise 10 (page 621)
14-30
Direct Materials
Materials that are separately and readily traced to a particular product.
Direct Materials
Materials that are separately and readily traced to a particular product.
Example:Steel used tomanufacture
the automobile.
Example:Steel used tomanufacture
the automobile.
Income Statement of a Manufacturer
C7
14-31
Direct Labor
Labor costs that are separately and readily traced to finished product.
Direct Labor
Labor costs that are separately and readily traced to finished product.
Example:Wages paid to an
automobile assemblyworker.
Example:Wages paid to an
automobile assemblyworker.
Income Statement of a Manufacturer
C7
14-32
Factory Overhead
All manufacturing costs exceptdirect material and direct labor
Factory costs that cannot beseparately or readily traced directly to
products.
Factory Overhead
All manufacturing costs exceptdirect material and direct labor
Factory costs that cannot beseparately or readily traced directly to
products.Examples:
Indirect labor – maintenanceIndirect material – cleaning supplies
Factory utility costsSupervisory costs
Income Statement of a Manufacturer
C7
14-33
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftencombined as follows:
Income Statement of a Manufacturer
C7
14-34
Finished GoodsBeginning Inventory
Cost of GoodsManufactured
FinishedGoodsEnding
Inventory
RawMaterials
BeginningInventory
RawMaterials
Purchases
Raw MaterialsEnding Inventory
Costof
GoodsSold
Goods in ProcessBeginning Inventory
Direct Labor
FactoryOverhead
Raw MaterialsUsed
Sales activityProduction activity-WIP Inventory
Materialsactivity
Flow of Manufacturing Activities
Goods in ProcessEnding Inventory
C 7
14-35
Summarizes the types and amounts of costsIncurred in a company’s manufacturing process.
Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured
Manufacturing StatementP2
14-36
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2009
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$
P2
Manufacturing Statement
14-37
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2009
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$
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
14-38
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2009
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.
P2
Manufacturing Statement
14-39
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 Statement
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
14-40
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2009
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.
P2
Manufacturing Statement
14-41
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 20009
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.
P2
Manufacturing Statement
Exercise 11 (Page 621)Exercise 13 (Page 622)Exercise 14 (page 622)
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