ma1_mod1

Management AccountingFundamentals

Module 1Basic concepts of management

accounting

Lectures and handouts by:Shirley Mauger, HB Comm, CGA

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MA1 Modules1. Basic concepts of management accounting2. Job-order costing3. Process costing4. Cost behavior and cost-volume-profit analysis5. Activity-based costing and service department costing6. Absorption and variable costing and budgeting7. Standard costs for materials, labour, and variable

overhead8. Flexible budgets and decentralization9. Relevant costs for decision making and inventory

management10. Pricing and trends in management accounting

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These materials focus on course content ascontained in the lesson notes and the textbook

Audio and visual lectures are designed to be usedtogether

Past examinations are not updated with newmaterial

Review technical updates

Introductory Course Information

4 Keep up with the modules on a weeklybasis

Do the practice problems provided witheach audio lecture

Do additional problems from pastexaminations from the CGA website

Keep in mind the MA1 examination blueprint

Overall study tips.

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Module 1 - Table of Contents

Course introduction1.1 The managers need for information1.2 Comparing financial and managerial accounting1.3 Organizational structure1.4 The changing business environment1.5 Ethical standards1.6 General cost classifications1.7 Cost classifications on financial statements1.8 Costs for planning, costing, and decision makingReview: Just in time inventory and calculating balancesReview: Manufacturing statements and cost

classificationReview: Multiple choice

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2

3456

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Part Content

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Part 1

The managers need for informationComparing financial and managerial

accountingOrganizational structure

Topics 1.1-1.3

MA1 MODULE 1

7Part 1 The managers need for information (Topic 1.1)Describe the role of management accountants in anorganization. (level 2)

DecisionMaking

Formulating long-and short-term

plans (Planning)

Measuringperformance(Controlling)

Implementing plans (Directingand Motivating)

Comparing actualto planned

performance(Controlling)

Garrison, Noreen, Chesley, Carroll, Managerial Accounting, 6th Canadian edition, 2004 p. 6

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Part 1 The managers need for information (Topic 1.1)

DecisionMaking


plans (Planning)



Describe the role of management accountants in anorganization. (level 2)


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Part 1 The managers need for information (Topic 1.1)

DecisionMaking


plans (Planning)



Comparing actualto planned

performance(Controlling)

Describe the role of management accountants in anorganization. (level 2)


Part 1 Comparing financial and managerial accounting(Topic 1.2)

Identify the major differences and similarities betweenfinancial and managerial accounting. (level 2)

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FinancialAccounting

ManagerialAccounting

External reporting Internal reportingEmphasis on past Emphasis on futureData is objectiveand verifiable

Emphasis on datarelevance

Summarized data Can be detailedGAAP oriented Not GAAP oriented

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Part 1 Organizational structure (Topic 1.3)

Identify job descriptions as either line or staff positions andexplain the problems that can arise between the two. (level 2)

Board of directors

CEO

VP of financeVP of

manufacturingDirector of

humanresources

Treasurer Controller

Vancouverplant

Hong Kongplant

Decentralizationdelegation of

authority

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Board of directors

CEO

VP of financeVP of


humanresources


Vancouverplant

Hong Kongplant

Line positions:directly related toachievement of thebasic objectives of anorganization.

13



Board of directors

CEO

VP of financeVP of


humanresources


Vancouverplant

Hong Kongplant

Staff positions:support and assist linepositions.

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Part 2

The changing business environmentEthical standards

General cost classifications

Topics 1.4-1.6

MA1 MODULE 1

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Just-in-time systems Total quality management Process re-engineering Theory of constraints

Part 2 The changing business environment (Topic 1.4)

Explain the basic concepts underlying just-in-time (JIT),total quality management (TQM), process re-engineering, and the theory of constraints (TOC). (level 2)

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Just-in-time systemsPart 2 The changing business environment (Topic 1.4)

Purpose: Better working capital position Reduced need for storage More responsive

Implementation: Goods are pulled through the system not pushed Use of reliable suppliers and good communication systems Focused factories with optimized plant layouts Better machinery with reduced set-up reduces throughput

time Multi-skilled workers Zero defects

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Total quality management


Purpose:Focus on quality and productivity

Implementation: Focus on serving customers Focus on continuous improvement Systematic problem solving by front line workers TOOLS

Plan-do-check-act cycle Benchmarking

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Process re-engineering


Purpose:Radically redesign business processes to ensure value is

added and cycle time is reducedImplementation: Simplify processes Eliminate non-value-added activities in a process

PROBLEM: It takes too long to take customer ordersSOLUTION: Let customers enter their own order information

online

CONCERN: Employee resistance because of job loss

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Theory of constraints


Purpose:Importance of managing constraints

Implementation: Focus on the weakest point in the process Use continuous improvement to strengthen this point in

the process

PROBLEM: You cant take any more pizza orders becauseyou have only one oven.

SOLUTION: Buy another oven

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Managers need for information

Members shall not be associated with any informationwhich the member knows, or ought to know, to befalse or misleading, whether by statement oromission.

(Code of Ethical Principles and Rules of Conduct -CGA Canada)

Managers are responsible to: Shareholders through the board of directors Workers

Part 2 Ethical standards (Topic 1.5)

Explain the importance of upholding ethical standards. (level 2)

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Part 2 General cost classifications (Topic 1.6)

Identify and give examples of each of the three basic costelements involved in the manufacture of a product. (level 2)

Merchandising

MegaLoMart

Buy finished goods.Sell finished goods.

Manufacturer Buy raw materials. Produce and sell finished

goods.

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Identify and give examples of each of the three basic costelements involved in the manufacture of a product. (level 2)

Merchandising

MegaLoMart

Buy finished goods.Sell finished goods.

Manufacturer Buy raw materials. Produce and sell finished

goods.

Retail inventory Finished goodsWork in processRaw materials

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Manufacturing costs

DirectMaterials

Tires, seat, handlebars


Manufacturing costs

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DirectMaterials

Tires, seat, handlebars Direct Labour

Workers who assemble bikes


Manufacturing costs

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Manufacturing Overhead

DirectMaterials




Manufacturing costs

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Indirect labourIndirect materials

HeatElectricity

RentEtc.



Any manufacturing costthat cannot easily be tracedto the product

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DirectMaterials




Manufacturing costs

Prime Cost



HeatElectricity

RentEtc. 28

DirectMaterials




Manufacturing costs

Conversion costManufacturing

OverheadIndirect labour

Indirect materialsHeat

ElectricityRentEtc. 29

DirectMaterials




Manufacturing costs

Productcosts



HeatElectricity

RentEtc. 30


Product costs(inventoriable)

Period costs

Direct materials Direct labour Manufacturing

overhead

Assigned toinventory

Selling costs Administrative

costs

Expensed on theincome statement

31

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Product costs(inventoriable)

Period costs

Direct materials Direct labour Manufacturing

overhead

Assigned toinventory

Selling costs Administrative

costs

Expensed on theincome statement

Become cost ofgoods sold aftera sale takes place

Expensed inperiod in whichthey are incurred

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Part 3

Cost classifications onfinancial statements

Topic 1.7

MA1 MODULE 1

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Part 3 Cost classifications on financial statements(Topic 1.7)

Prepare and explain the cost classifications on amanufacturing income statement. (level 2)

Finished goods

Directmaterials

WorkIn process

Manufacturing inventories

Flow of Costs Example

AJ Bike Co. had $5,000 of direct materials inventoryon January 1

Direct MaterialsJan.1 5,000


Work in process Finished goods

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Purchases during the period amounted to $18,000and ending inventory was $3,000.

Direct MaterialsJan. 1 5,000



18,000

Dec.31 3,000

36


How much direct materials were used?

$5,000 + $18,000 $3,000 = $20,000


Where are materials used recorded?



18,000

Dec.31 3,000

37


How much direct materials were used?

$5,000 + $18,000 $3,000 = $20,000


To the work in process inventory account



18,000

Dec.31 3,000

20,000to WIP

20,000

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Direct labour costs were $10,500




18,000

Dec.31 3,000

20,00010,50020,000

to WIP

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Manufacturing overhead costs were $19,500




18,000

Dec.31 3,000

20,00010,50019,50020,000

to WIP

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What were the total manufacturing costs incurred?$20,000 + $10,500 + $19,500 = $50,000




18,000

Dec.31 3,000

20,000to WIP

20,00010,50019,500

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Assume that the work in process inventory at thebeginning of the period was $3,000, and $3,500 at the

end of the period.




18,000

Dec.31 3,000

20,00010,50019,500

Jan. 1 3,000

Dec.31 3,500

20,000to WIP

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What is the cost of goods manufactured?




18,000

Dec.31 3,000

20,000to WIP

20,00010,50019,500

Jan. 1 3,000

Dec.31 3,500

$3,000 + $20,000 + $10,500 + $19,500 $3,500 = $49,500

49,500to finishedgoods

49,500

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Assume that the finished goods inventory at thebeginning of the period was $1,000, and $1,500 at the

end of the period.What is the cost of goods sold?




18,000

Dec.31 3,000

20,000to WIP

20,00010,50019,500

Jan. 1 3,000

Dec.31 3,500


49,500Jan. 1 1,000

Dec.31 1,500

44

45


Cost of goods sold




18,000

Dec.31 3,000

20,000to WIP

20,00010,50019,500

Jan. 1 3,000

Dec.31 3,500


49,500

$1,000+$49,500-$1,500=$49,000

Jan. 1 1,000

Dec.31 1,500

49,000 tocost ofgoodssold

Finishedgoods

inventory

Revenues

Cost ofgoods sold

Operatingexpenses

Balance sheet

= Operating Income

whensalesoccur

deduct

Work in processinventory

PeriodCosts

Direct materialsinventory

= Gross margin


deduct

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Incomestatement

Revenues

Cost ofgoods sold

Incomestatement

Operatingexpenses

= Operating Income

deduct

PeriodCosts

= Gross margin


deduct

Beginningfinished goods

inventory

Cost of goodssold

plusCost of goodsmanufactured

deductEnding

finished goodsinventory= Cost of

goods sold 47

Direct materials Beginning inventory Add: purchasesDeduct: Ending inventoryRaw materials available for usein production

Direct labour

Schedule of cost ofgoods manufactured

= Total manufacturing costsAdd: Beginning work in processDeduct: Ending work in process= Cost of goods manufactured


Beginningfinished goods

inventory

Cost of goodssold

plusCost of goodsmanufactured

deductEnding

finished goodsinventory= Cost of

goods sold

Manufacturing overhead

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Stop the audio and prepare a schedule of cost ofgoods manufactured based on the figures in these Taccounts then come back and listen to the solution.




18,000

Dec.31 3,000

20,000to WIP

20,00010,50019,500

Jan. 1 3,000

Dec.31 3,500


49,500Jan. 1 1,000

Dec.31 1,500

49,000 tocost ofgoodssold

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Schedule of Cost of Goods Manufactured

Direct materials: Beginning raw materials inventory $ 5,000 Add: Purchases of raw materials 18,000 Raw materials available for use 23,000 Deduct: Ending raw materials inventory 3,000 Raw materials used in production $20,000Direct labour 10,500Manufacturing overhead 19,500Total manufacturing costs 50,000Add: Beginning work in process inventory 3,000

53,000Deduct: Ending work in process inventory 3,500Cost of goods manufactured $49,500


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Schedule of Cost of Goods Manufactured

Direct materials: Beginning raw materials inventory $ 5,000 Add: Purchases of raw materials 18,000 Raw materials available for use 23,000 Deduct: Ending raw materials inventory 3,000 Raw materials used in production $20,000Direct labour 10,500Manufacturing overhead 19,500Total manufacturing costs 50,000Add: Beginning work in process inventory 3,000

53,000Deduct: Ending work in process inventory 3,500Cost of goods manufactured $49,500


To cost of goods soldon the income statement 51

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Part 4

Costs for planning, costing, anddecision making

Topic 1.8

MA1 MODULE 1

53

Product and period cost Cost object Direct cost and indirect cost Variable and fixed cost Differential cost Opportunity cost Sunk cost Labour costs Overtime premium Idle time Fringe benefits

Part 4 Costs for planning, costing, and decision making(Topic 1.8)

Compare, contrast, and give an example of each of thefollowing types of costs: product and period; variable andfixed; direct and indirect; differential, opportunity, and sunk.(level 1)

Activity 1-1

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Product cost: Inventoriable costs Associated with purchase and manufacture of goods Recorded as an asset when the products associated with

them are not yet sold Expensed when product is sold (as cost of goods sold)

e.g. Direct materials, direct labour, manufacturing overhead

Period cost: Not associated with purchase and manufacture of goods Expensed in period incurrede.g. Selling and administrative expenses


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Cost object: Anything for which cost data are desirede.g. A desk, a textbook

Direct cost: Any cost that can be easily traced back to the cost objecte.g. Wood for a desk, paper for a textbook

Indirect cost: Any cost that cannot be easily trace back to the cost objecte.g. depreciation of cutting equipment, glue for a textbook


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Variable cost:Total cost changes in directproportion to activityUnit cost stays the samee.g. The cost of skateboardsfor a sports retailer is variable.


Skateboards sold

Cos

t of s

kate

boar

ds

Numberof skate-

boardssold

Costper

skate-board

Totalcost ofskate-

boards1 $150 $1502 $150 $300

10 $150 $1,500

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Fixed cost:Total cost remains constantregardless of changes inactivityUnit cost becomes smaller asthe activity increases. e.g. The rental cost for thesports retailers shop is fixed


Skateboards sold

Cos

t of s

tore

rent

Numberof skate-

boardssold

Cost ofrent per

skate-board

Totalcost of

rent

1 $2,000 $2,0002 $1,000 $2,000

10 $200 $2,000

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Differential (incremental) cost: The change in costs that are considered between

alternatives.e.g. Buying preassembled skateboards versus assembling

them at the store.


Pre-assembled

In storeassembly

Direct materials XDirect labour XVariable overhead XOutside purchaseprice

X

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Opportunity cost: Benefits lost because one course of action was taken

as opposed to another

e.g. The dollars in lost sales because the space taken up toassemble skateboards cannot be used to sellsnowboards.

Sunk cost: Any cost that has already been incurred and cannot be

changed by any future decision

e.g. The cost of a feasibility analysis for a project.


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Classification of labour costs Overtime premium

Paid to workers who work above normal time requirements. TREATMENT: Applied as direct labour if the overtime is job

specific, otherwise treated as overhead Idle time

Unproductive timee.g. waiting for materials or machine downtime

TREATMENT: Direct labour cost if it is job specific,otherwise treated as overhead

Fringe benefits Employer contributions to employee benefits

e.g. pension plans and life insurance TREATMENT: Base cost for direct labour. Overhead for

indirect labour


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Part 5

Review questions:Just in time inventoryCalculating balances

(download the additional questions handout: ma1_mod1_handout1.pdf)

MA1 MODULE 1

62

Question 1 June 1998Handout page 1Required:a. Outline and discuss briefly the four key elements that are

necessary in the successful operation of a JIT inventorysystem

b. The JIT philosophy states that management should focusits efforts on simplification and on elimination of waste.Identify and discuss briefly the three ideas that are key tothis philosophy

c. Identify three benefits that can result from theimplementation of a JIT inventory system

Part 5 Review questions: Just-in-time inventory

Stop the audio, read and attempt thequestion in the handout then come back tolisten to the solution.

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Question 2 December 1993Handout page 3Required:Compute the following

a. Direct labour

b. Ending work-in-process inventory

c. Goods available for sale

d. Ending finished goods inventory

e. Operating expenses

Part 5 Review questions: Calculating balances


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a. Direct labour







65


a. Direct labour







66

Part 6

Review questions:Manufacturing financial

statementsCost classification


MA1 MODULE 1

67

Question 6 March 1992Handout page 4Required:a. Prepare the cost of goods manufactured statement for

Zewing Co. for the year ended November 30, 1991 ingood form.

b. What were the prime costs incurred during 1991?

c. How much conversion costs were charged to work-in-process during 1991?

Part 6 Review questions: Manufacturing financialstatements


68







69







70

Problem 2-19 page 71Handout page 5Required:1. Prepare a schedule of cost of goods manufactured

2. Prepare an income statement

3. Assume that the company produced the equivalent of10,000 units of product during the year. What was theaverage cost per unit for direct materials? What wasthe average cost per unit for factory depreciation?



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Problem 2-19 page 71Handout page 5Required:1. Prepare a schedule of cost of goods manufactured

2. Prepare an income statement

3. Assume that the company produced the equivalent of10,000 units of product during the year. What was theaverage cost per unit for direct materials? What wasthe average cost per unit for factory depreciation?



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Problem 2-19 page 71Handout page 5Required:a. Prepare a schedule of cost of goods manufactured

b. Prepare an income statement

c. Assume that the company produced the equivalent of10,000 units of product during the year. What was theaverage cost per unit for direct materials? What wasthe average cost per unit for factory depreciation?



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Problem 2-19 page 71Handout page 5Required:4. Assume that the company expects to produce 15,000

units of product during the coming year. What averagecost per unit and what total cost would you expect thecompany to incur for direct materials at this level ofactivity? For factory depreciation?

5. As the manager responsible for production costs,explain to the president any difference in the averagecosts per unit between (3) and (4).



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Problem 2-19 page 71Handout page 5Required:4. Assume that the company expects to produce 15,000

units of product during the coming year. What averagecost per unit and what total cost would you expect thecompany to incur for direct materials at this level ofactivity? For factory depreciation?

5. As the manager responsible for production costs,explain to the president any difference in the averagecosts per unit between (3) and (4).



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Problem 2-15 pages 68-69Handout page 6Required:Analyze each cost item and classify as:

Variable or fixed

Selling or administrative

Direct or indirect

Part 6 Review questions: Cost classification


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Part 7

Review questions:Multiple Choice Questions


MA1 MODULE 1

77

Multiple choice questionsHandout pages 6 thru 10

June 1999 examPage 7 of handoutQ1

a. Calculate prime costb. Calculate conversion costc. Calculate cost of goods manufactured

Part 7 Review questions: Multiple choice


78


June 2001 examPage 8 of handout

Q2 Calculate cost of goods manufacturedQ3 Calculate gross profit


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Pages 9 thru 10 of handoutQ4 thru 13Theory questions


ma1_mod1

Documents

role of management accountants

managerial accounting1

managerial accountingtopic

management accounting3

information topic

canadian edition

cost behavior

informationcomparing