chapter 1-1 strange facts … continued 1 in new york, it is against the law for a blind person to...

Chapter 1-1

STRANGE FACTS … continuedSTRANGE FACTS … continuedhttp://www.strangefacts.com/laws.htmlhttp://www.strangefacts.com/laws.html

1

In New York, it is against the law for a blind person to drive an automobile. In New York, it is against the law for a blind person to drive an automobile. In West Virginia, only babies can ride in a baby carriage. In West Virginia, only babies can ride in a baby carriage. In Georgia, it is against the law to slap a man on the back or front. In Georgia, it is against the law to slap a man on the back or front. A barber is not to advertise prices in the State of Georgia. A barber is not to advertise prices in the State of Georgia. In Louisiana, a bill was introduced years ago in the State House of In Louisiana, a bill was introduced years ago in the State House of

Representatives that fixed a ceiling on haircuts for bald men of 25 cents. Representatives that fixed a ceiling on haircuts for bald men of 25 cents. In Oklahoma, no baseball team can hit the ball over the fence or out of a In Oklahoma, no baseball team can hit the ball over the fence or out of a

ballpark. ballpark. In Rochester, Michigan, the law is that anyone bathing in public must have In Rochester, Michigan, the law is that anyone bathing in public must have

the bathing suit inspected by a police officer ! the bathing suit inspected by a police officer ! In Kentucky, it's the law that a person must take a bath once a year. In Kentucky, it's the law that a person must take a bath once a year. In Utah, birds have the right of way on any public highway. In Utah, birds have the right of way on any public highway. In Ohio, one must have a license to keep a bear.In Ohio, one must have a license to keep a bear.

Chapter 1-2

CHAPTER CHAPTER 11

MANAGERIAL MANAGERIAL ACCOUNTINGACCOUNTING

Managerial Accounting, Fifth Edition

Chapter 1-3

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 Accounting.Management Accounting.

Definition of Managerial Accounting

Chapter 1-4


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

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

Chapter 1-5


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

Allows for valuable input from a variety of departments including production, marketing, ngineering, etc.

Aid in making critical strategic decisions.

Distinguishing Features (Continued)


Chapter 1-6

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting

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 1-7


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:

Planning,Planning, Directing, andDirecting, and

Controlling.Controlling.

Management Functions

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

Chapter 1-8

Within a company, organization charts show:

The interrelationships of activities andThe delegation of authority and

responsibility.

Organizational StructureOrganizational StructureOrganizational StructureOrganizational Structure

Illustration 1-2

Chapter 1-9

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 massiveinvestment losses and employee layoffs.Corporate fraud has increased 13% in

last 5 years.Employee fraud – 60% of all fraud.Intentional misstatement of financial

reports .(Financial reporting fraud is most

costly .)

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

Chapter 1-10

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 1-11

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 1-12

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:

Direct Materials

Direct Labor

Manufacturing Overhead

Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts

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

Illustration 1-3

Chapter 1-13

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

Materials

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

Raw Materials:Basic 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.

Chapter 1-14


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 1-15


Labor


Direct Labor:Work 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 1-16



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 1-17

BE1-4 page 35BE1-4 page 35

Determine whether each of the Determine whether each of the following costs should be classified as following costs should be classified as direct materials (DM), Direct Labor direct materials (DM), Direct Labor (DL), or Manufacturing Overhead (MO)(DL), or Manufacturing Overhead (MO)

Frames and tires used in manufacturing Frames and tires used in manufacturing bicyclesbicycles

Wages paid to production workersWages paid to production workers Insurance on factory equipment and Insurance on factory equipment and

machinerymachinery Depreciation on factory equipmentDepreciation on factory equipment

Chapter 1-18

Answers to BE1-4Answers to BE1-4

Frames and tires would be Frames and tires would be Direct Direct MaterialsMaterials

Wages to Production workers would be Wages to Production workers would be Direct LaborDirect Labor

Insurance on factory Equipment would be Insurance on factory Equipment would be Manufacturing OverheadManufacturing Overhead

Depreciation on factory Equipment would Depreciation on factory Equipment would be be Manufacturing OverheadManufacturing Overhead

Chapter 1-19

BE 1-5 page 35BE 1-5 page 35

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

• WindshieldWindshield• EngineEngine• Wages of assembly line workerWages of assembly line worker• depreciation of factory machinerydepreciation of factory machinery• factory machinery overheadfactory machinery overhead• tirestires• steering wheelsteering wheel• salary of painting supervisorsalary of painting supervisor

Chapter 1-20

BE 1-5 page 35BE 1-5 page 35

Windshield Windshield DMDM Engine Engine DMDM Wages of assembly line worker Wages of assembly line worker DLDL depreciation of factory machinery depreciation of factory machinery MOMO factory machinery overhead factory machinery overhead MOMO tires tires DMDM steering wheel steering wheel DMDM salary of painting supervisor salary of painting supervisor IL or MOIL or MO

Chapter 1-21

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

SO 4 Distinguish between product and period costs.SO 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 1-22


SO 4 Distinguish between product and period costs.SO 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 1-23


SO 4 Distinguish between product costs and period SO 4 Distinguish between product costs and period

costscosts..

Illustration 1-4

Chapter 1-24

BE 1-6 PAGE 36BE 1-6 PAGE 36

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

• Manufacturing OverheadManufacturing Overhead• Selling ExpensesSelling Expenses• Administrative ExpensesAdministrative Expenses• Advertising ExpensesAdvertising Expenses• Direct laborDirect labor• Direct materialsDirect materials

Chapter 1-25

BE 1-6 PAGE 36BE 1-6 PAGE 36

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

• Manufacturing Overhead - Manufacturing Overhead - Product CostProduct Cost• Selling Expenses – Selling Expenses – Period CostPeriod Cost• Administrative Expenses – Administrative Expenses – Period CostPeriod Cost• Advertising Expenses – Advertising Expenses – Period CostPeriod Cost• Direct labor – Direct labor – Product CostProduct Cost• Direct materials – Direct materials – Products CostProducts Cost

Chapter 1-26

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements


SO 5 Explain the difference between a SO 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 1-27



Cost of Goods Sold Section of the Income Statement


statementstatement..

Illustration 1-6

Chapter 1-28



Determining the Cost of Goods Manufactured

SO 6 Indicate how cost of goods manufactured is determinedSO 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.

Illustration 1-7

Chapter 1-29



SO 6 Indicate how cost of goods manufactured is determinedSO 6 Indicate how cost of goods manufactured is determined ..

Illustration 1-8

Chapter 1-30

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

The cost of goods sold is:The cost of goods sold is:a.a. $450,000.$450,000.

b. $500,000.

c. $550,000.

d. $600,000.

Review Review QuestionQuestion



Chapter 1-31

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

The cost of goods sold is:The cost of goods sold is:a.a. $450,000.$450,000.

b. $500,000.

c. $550,000.

d. $600,000.

Review Review QuestionQuestion




statement.statement.

Beginning Inventory $200,000Cost of Goods Manufactured 600,000

$800,000Minus Ended Finished Goods 250,000Cost of Goods Sold $550,000

Chapter 1-32



Balance Sheet - Inventories

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

Merchandising Company

One category of inventory:

Merchandise Inventory

Manufacturing Company

May have three inventories:

Raw Materials Work in ProcessFinished Goods

Chapter 1-33



Balance Sheet - Inventories

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

Illustration 1-10

Chapter 1-34

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

SO 8 Identify trends in management accounting.SO 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 1-35



Managerial Accounting Practices

Value Chain

Refers to all activities associated with providing a product or service.

For a manufacturing firm these include the following:

Illustration 1-13

Chapter 1-36




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 sale.

Chapter 1-37




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 1-38




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 1-39

A Music Company has these costs: Classify A Music Company has these costs: Classify these cost as period or product and these cost as period or product and indicate if the cost are part of direct indicate if the cost are part of direct materials (DM), direct labor (DL) or materials (DM), direct labor (DL) or manufacturing overhead (MO).manufacturing overhead (MO).

Chapter Review – Do it! 1-2Chapter Review – Do it! 1-2Chapter Review – Do it! 1-2Chapter Review – Do it! 1-2

______ a. Advertising______ b. Blank CDs______ c. Depreciation on CD image burner______ d. Salary of Factory manager______ e. Factory supplies used______ f. Paper inserts for CD cases______ g. CD plastic cases______ h. Salaries of factory maintenance employees______ i. Salaries of employee who burn music onto CDs

Chapter 1-40

Any Questions?

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Chapter 1-41

Copyright © 2010 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 permission 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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