Financial and Managerial Accounting

Wild, Shaw, and Chiappetta

Fourth Edition

Wild, Shaw, and Chiappetta

Fourth Edition

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 14

Managerial Accounting Concepts and Principles

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

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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

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Behavior

Traceability

Controllability

Relevance

Function

Managerial Cost ConceptsC2

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Cost behavior means how a cost will react to changes in the level of business activity.

Classification by BehaviorC 2

A fixed cost does not change with changes in the volume of activity

A variable cost changes in proportion to changes in the volume

of activity

A mixed cost refers to a combination of fixed and variable

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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.

Classification by TraceabilityC 2

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The degree of control depends on thelevel of management in the organization.

More C

ontrolM

ore

Con

trol

Very little control

Classification by ControllabilityC 2

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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

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Classification by Relevance:Out-of-Pocket Costs

C2

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

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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

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TheProduct

Classification by Function:Product Costs

DirectMaterial

DirectLabor

Manufacturing Overhead

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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.

Direct Materials UsedC5

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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

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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

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Period Costs(Expenses)

Product Costs

(Inventory) Inventory Not Sold in 2011

OperatingExpenses

Cost ofGoods Sold

Raw MaterialsGoods in ProcessFinished Goods

Cost ofGoods Sold

2011 CostsIncurred

2011 IncomeStatement

2012 IncomeStatement

2011 BalanceSheet Inventory

InventorySold in 2011

Period and Product Costsin Financial Statements

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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

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DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as follows:

Income Statement of a Manufacturer

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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

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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 sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

Income Statement of a Manufacturer

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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 activityMaterialsactivity

Flow of Manufacturing Activities

Goods in ProcessEnding Inventory

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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

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ROCKY MOUNTAIN BIKES

Manufacturing Statement

For Year Ended December 31, 2011

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

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ROCKY MOUNTAIN BIKES

Manufacturing Statement

For Year Ended December 31, 2011

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

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ROCKY MOUNTAIN BIKES

Manufacturing Statement

For Year Ended December 31, 2011

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

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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

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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

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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

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Lean Practices

CustomerOrientationin a GlobalEconomy

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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 6

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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

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Just-In-Time (JIT) Manufacturing

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To accomplish just-in-time manufacturing:

Processes must be aligned to eliminate

delays and inefficiencies

Companies must establish good relations with

suppliers

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Cycle Time and Cycle EfficiencyA1

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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 7% 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.

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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.

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End of Chapter 14

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