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Chapter 1-1

ISV MANAGERIAL ACCOUNTINGTOOLS FOR BUSINESS DECISION MAKING

Chapter 1-2

CHAPTER CHAPTER 11

MANAGERIAL MANAGERIAL ACCOUNTINGACCOUNTING

Managerial Accounting, Fourth Edition

Chapter 1-3

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 1-4

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 1-5

Managerial Accounting BasicsCompare managerial and financial

accounting,

Management functions, Organizational structure,

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 1-6

Managerial AccountingManagerial AccountingManagerial AccountingManagerial Accounting

Managerial Managerial

AccountingAccounting

BasicsBasics


AccountingAccounting

BasicsBasics


Cost Cost

ConceptsConcepts


Cost Cost

ConceptsConcepts


Accounting Accounting

TodayToday


Accounting Accounting

TodayToday

Comparing Comparing managerial and managerial and financial financial accountingaccounting

Management Management functionsfunctions

Organizational Organizational structurestructure

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 1-7

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 1-8


Managerial Accounting Activities

Explaining manufacturing and nonmanufacturing costs and how they are reported in the financial statements. (Chapter 1)

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

Determining the behavior of costs and expenses as activity levels change and analyzing cost-volume-profit relationships within a company. (Chapters 5 and 6)

Chapter 1-9


Managerial Activities: Continued

Accumulating and presenting data for management decision making. (Chapter 7)

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

Assisting management in profit planning and formalizing these plans in the form of budgets. (Chapter 9)

Chapter 1-10


Managerial Activities: Continued

Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard costs. (Chapters 10 and 11)

Accumulating and presenting data for capital expenditure decisions. (Chapter 12)

Chapter 1-11


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

Applies to all forms of business organizations –Proprietorships, Partnerships, and Corporations

Applies to not-for-profit as well as profit-oriented companies

Distinguishing Features

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

Chapter 1-12


Changed role in collecting and reporting costs to management as a result of increasingly automated business environment

Now more responsible for strategic cost management – assisting in evaluating how well resources are employed by the company.

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

Aid in making critical strategic decisions

Distinguishing Features: Continued


Chapter 1-13

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting


Both managerial and financial accounting 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 1-14


Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccountingDifferences

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

Chapter 1-15

Managerial accounting:Managerial accounting:

a.a. Is governed by generally accepted accounting principles.

b. Places emphasis on special-purpose information.

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

d. Is limited to cost data.

Review QuestionReview Question


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

Chapter 1-16


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 1-17

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

Look ahead and establish objectives such as –

Maximize short-term profit and market share

Commit to environmental protectionand social programs

Key Objective: Add value to the businessValue measured by trading price of stock and by

potential selling price of the company

Planning


Chapter 1-18


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 1-19


Process of keeping 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

Decision making is not a separate management function, but the outcome of the exercise of good judgment in planning, directing, and

controlling.

Controlling


Chapter 1-20

Within a company, organization charts show:

The interrelationships of activities andThe delegation of authority and

responsibility

Organizational StructureOrganizational StructureOrganizational StructureOrganizational Structure

Chapter 1-21

Business Ethics

All employees are expected to act ethically

An increasing number of organizations have codes of business ethics

Despite organizational efforts:Business scandals have caused massive

investment losses and employee layoffs.

Corporate fraud has increased 13% in last 5 years.

Employee fraud – 60% of all fraudIntentional misstatement of financial

reports Aka financial reporting fraud is most

costly

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

Chapter 1-22

Creating Proper Incentives

Companies like Motorola, IBM, and Nike expend substantial resources to monitor and evaluate the actions of employees & managers.

Monitoring can have the negative result of producing incentives for unethical actions.

Employees may feel that they must succeed no matter what.

Ineffective and unrealistic controls may also result in declining product quality.


Chapter 1-23

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 1-24

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 1-25

Manufacturing Costs

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

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

Manufacturing costs are typically classified as:

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 1-26

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 and parts used

in manufacturing process

Direct Materials Raw materials that can be

physically and directly associated with the finished product during the manufacturing process

Materials

Chapter 1-27


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 1-28


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 costs to the goods produced

Chapter 1-29



Manufacturing Overhead

Costs that are indirectly associated with manufacturing the finished product

Includes all manufacturing costs except direct materials and direct labor

Allocation of overhead to products can present problems

Also called factory overhead, indirect manufacturing costs, or burden

Chapter 1-30

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 1-31

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

Costs that are a necessary and integral part of producing the product

Recorded as inventory when incurred, thus may be called inventoriable costs

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

Chapter 1-32


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 1-33


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

period costsperiod costs..

Chapter 1-34

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 1-35



Cost of Goods Sold ComponentsMerchandiser versus Manufacturer



Chapter 1-36



Cost of Goods Sold Section of the Income Statement


statementstatement..

Chapter 1-37

For the year, Red Company has cost of goods For the year, Red Company has cost of goods manufactured of $600,000, beginning finished manufactured of $600,000, beginning finished goods inventory of $200,000, and ending goods inventory of $200,000, and ending finished goods inventory of $250,000. finished goods inventory of $250,000.

The cost of goods sold isThe cost of goods sold is

a.a. $450,000.$450,000.

b. $500,000.

c. $550,000.

d. $600,000.






Chapter 1-38



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 1-39



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

Chapter 1-40



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 1-41



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 1-42

A cost of goods manufactured schedule shows A cost of goods manufactured schedule shows

beginning and ending inventories for:beginning and ending inventories for: a.a. Raw materials and work in process only Raw materials and work in process only

b. Work in process only

c. Raw materials only

d. Raw materials, work in process, and finished goods




Chapter 1-43

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, in general, 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 1-44



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 1-45




Technological Change

Enterprise Resource Planning (ERP) – software programs designed to manage all major business processes

Computer-Integrated Manufacturing (CIM) – manufacturing products with increased automation

Just-In-Time (JIT) Inventory Methods

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

Chapter 1-46




Quality

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

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

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

Chapter 1-47




Theory of Constraints

Constraints (“bottlenecks” ) limit the company’s potential profitability

A specific approach to identify and manage these constraints in order to achieve company goals

Balanced Scorecard

Evaluates operations in an integrated fashion

Uses both financial and non-financial measures

Links performance measures to overall company objectives

Chapter 1-48

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 1-49

All About YouAll About YouAll About YouAll About You

Outsourcing and Jobs

To reduce costs and remain competitive many companies are turning to outsourcing

“Outsourcing means hiring an outside supplier to provide elements of a product rather than producing them internally”

While outsourcing can be to another provider within the U.S., many professional services as well as manufacturing jobs have become candidates for outsourcing to foreign providers

By 2015, it has been predicted that 3.3 million service jobs will have been outsourced offshore.

Chapter 1-50

All About YouAll About YouAll About YouAll About You

Outsourcing and Jobs – What do you think?

Do you think outsourcing really reduces costs?

If costs are reduced, do you think that it justifies the loss of jobs to U.S. workers?

What would you say to your employees whose jobs have been outsourced?

Do you think that outsourced professional services performed in a foreign country or parts manufactured offshore will have the same quality and standards as those performed/manufactured in the U.S.?

Chapter 1-51

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 1-5Chapter Review - Brief Exercise 1-5Chapter Review - Brief Exercise 1-5Chapter Review - Brief Exercise 1-5

______ 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 1-52

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 1-6Chapter Review - Brief Exercise 1-6Chapter Review - Brief Exercise 1-6Chapter Review - Brief Exercise 1-6

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

ProductPeriodPeriodPeriod

ProductProduct

Chapter 1-53

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