Managerial Accounting Concepts and PrinciplesChapter 14

PowerPoint Editor:Beth Kane, MBA, CPA

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Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

14-C1: Purpose of Managerial Accounting

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Managerial accountingprovides financial and

nonfinancial informationfor managers of an

organization and otherdecision makers.

Managerial Accounting Basics

C 13

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Purpose of Managerial Accounting

C 14

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Nature of Managerial Accounting

C 15

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Fraud and Ethics inManagerial Accounting

Fraud affects all business and it is costly: A 2014 Report to the Nation from the Association of Certified Fraud Examiners (ACFE) estimates the average U.S. business loses 5% of its annual revenues to fraud.

The Institute of Management Accountants has issued a code of ethics to help accountants involved in solving ethical dilemmas.

C 16

14-C2: Cost Classifications

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Activity

Co

st

Activity

Co

stTypes of Cost Classifications

Classification by Behavior Cost behavior refers to how a

cost will react to changes in the level of business activity.

• Total fixed costs donot change when activity changes.

• Total variable costs change in proportionto activity changes.

C 28

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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 asingle cost object.

Example: A maintenance expenditurebenefiting two ormore departments.

Types of Cost Classifications Classification by Traceability

C 29

14-C3: Comparing Product and Period Costs

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Product

Types of Cost Classifications Classification by Function

DirectLabor

DirectMaterial

Manufacturing Overhead

Period costs are expenses not attached to the product.

Administrative costs arenon-manufacturing costs

of staff support andadministrative functions.

Selling costs are incurred toobtain orders and to deliver

finished goods to customers.

C 311

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Period and Product Costsin Financial Statements

C 312

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Identifications of Cost Classifications

C 313

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Cost Concepts forService Companies

C 3

The cost concepts described are generally applicable to service organizations.

For example, the cost of beverages for

passengers of Southwest Airlines is a variable cost

based on number of passengers.

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NEED-TO-KNOWFollowing are the costs of a company that manufactures computer chips. Classify each as either a productcost or a period cost. Then classify each of the product costs as direct material, direct labor, or factoryoverhead.

1. Plastic board used to mount the chip 5. Real estate taxes paid on the factory2. Advertising costs 6. Factory supervisor salary3. Factory maintenance workers’ salaries 7. Depreciation on factory equipment4. Real estate taxes paid on the sales office 8. Assembly worker hourly pay to make chips

Direct Material

Direct Labor

Factory Overhead

Period Cost

1. Plastic board used to mount the chip X2. Advertising costs X3. Factory maintenance workers’ salaries X4. Real estate taxes paid on the sales office X5. Real estate taxes paid on the factory X6. Factory supervisor salary X7. Depreciation on factory equipment X8. Assembly worker hourly pay to make chips X

Product Costs

Product CostsAll Factory Costs

Assets on Balance Sheet

Period CostsNon-Factory Costs

Expensed on Income Statement as Selling, General and Administrative

C2/C 315

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Manufacturer’s Costs

C 316

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Example:Steel used in the

frame of amountain bike.

Direct Materials

Direct material costs are the expenditures for direct materials that are separately and

readily traced through the manufacturing process to finished goods.

C 317

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Example:Wages paid to amountain bike

assembly worker.

Direct Labor

Direct labor costs are the wages and salaries for direct labor that are separately and readily

traced through the manufacturing process to finished goods.

C 318

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Examples:Indirect labor – maintenance.Indirect material – cleaning supplies.Factory utility costs.Supervisory costs.

Factory Overhead

Factory overhead consists of all manufacturing costs that are not direct materials or direct labor

and the costs cannot be separately or readily traced to finished goods.

C 319

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DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as follows:

Prime and Conversion Costs

C 320

14-C4: Balance Sheet

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Merchandisers . . .Buy finished goods.Sell finished goods.

SaleMart

Manufacturers . . .Buy raw materials.Produce and sell

finished goods.

Reporting Manufacturing Activities

C 422

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MERCHANDISER

Current Assets Cash Receivables Merchandise

Inventory

MANUFACTURER

Current Assets Cash Receivables Inventories

Raw MaterialsGoods in ProcessFinished Goods

The primary difference is inventory.

Manufacturer’s Balance Sheet

C 423

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Manufacturer’s Balance Sheet

Completedproductsfor sale.

Materialswaiting to beprocessed.

Can be director indirect.

Partially completeproducts.

Material to whichsome labor and/or

overhead havebeen added.

RawMaterials

FinishedGoods

Goods inProcess

C 424

14-P1: Income Statement

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Manufacturer’s Income Statement

P 126

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Cost of Goods Sold for aMerchandiser and Manufacturer

P 1

Cost of goods sold for manufacturers differs

only slightly from cost of goods sold for

merchandisers.

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NEED-TO-KNOWIndicate whether the following financial statement items apply to a manufacturer, a merchandiser, or aservice provider. Some items apply to more than one type of organization.

1. Merchandise inventory 4. Operating expenses2. Finished goods inventory 5. Cost of goods manufactured3. Cost of goods sold 6. Supplies inventory

Manufacturer Merchandiser Service Provider1. Merchandise inventory X2. Finished goods inventory X3. Cost of goods sold X X4. Operating expenses X X X5. Cost of goods manufactured X6. Supplies inventory X X X

ManufacturerProduces units for sale

Balance Sheet includes: Raw Materials Inventory Work in Process Inventory Finished Goods Inventory

MerchandiserPurchases units for resale

Balance Sheet includes: Merchandise Inventory

Service ProviderDoes not provide a product to its

customers; no inventories.

P 128

14-C5: Flow of Manufacturing Activities

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Activities and Cost Flowsin Manufacturing

C 530

14-P2: Schedule of Cost of Goods Manufactured

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Summarizes the types and amounts of costsincurred in a company’s manufacturing process.

Schedule of Cost of Good Manufactured

Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured

P 232

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Manufacturing Statement

P 233

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P 2

Manufacturing Statement

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Include all direct labor costs incurred during the current period.

Manufacturing Statement

P 235

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Manufacturing Statement

P 236

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Manufacturing Statement

P 237

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Overhead Cost Flows Across Accounting Reports

P 238

NEED-TO-KNOWCompute the following three measures using the information below.

1. Cost of materials used

2. Cost of goods manufactured

3. Cost of goods sold

Beginning raw materials inventory $15,500 Ending raw materials inventory $10,600Beginning work in process inventory 29,000 Ending work in process inventory 44,000Beginning finished goods inventory 24,000 Ending finished goods inventory 37,400Raw materials purchased 66,000 Direct labor used 38,000Total factory overhead used 80,000

Beg. Inv. 15,500 Beg. Inv. 29,000 Beg. Inv. 24,000Purchases 66,000 Matls. Used 70,900 Cost of GM 173,900

Direct Labor 38,000Fact. OH 80,000

Avail for Use 81,500 Avail for Mfg. 217,900 Avail for Sale 197,900Matls. Used 70,900 Cost of GM 173,900 Cost of GS 160,500

End. Inv. 10,600 End. Inv. 44,000 End. Inv. 37,400

Finished Goods Inventory

Cost of Direct Materials transferred from Raw Materials Inventory to Work in Process Inventory.

Cost of goods completed in the current period and transferred from Work in Process Inventory to Finished Goods Inventory.

Cost of goods leaving Finished Goods Inventory and going to the customer. Expensed on the income statement.

Raw Materials Inventory Work in Process Inventory

$70,900

$173,900

$160,500

P1/P 239

NEED-TO-KNOW

Beg. Inv. 15,500 Beg. Inv. 29,000 Beg. Inv. 24,000Purchases 66,000 Matls. Used 70,900 Cost of GM 173,900

Direct Labor 38,000Fact. OH 80,000

Avail for Use 81,500 Avail for Mfg. 217,900 Avail for Sale 197,900Matls. Used 70,900 Cost of GM 173,900 Cost of GS 160,500

End. Inv. 10,600 End. Inv. 44,000 End. Inv. 37,400

Finished Goods InventoryRaw Materials Inventory Work in Process Inventory

Balance SheetCurrent assets:Raw Materials Inventory $10,600Work in Process Inventory 44,000Finished Goods Inventory 37,400

Income StatementSales $XXXXXCost of Goods Sold (160,500)

P1/P 240

14-C6: Trends in Managerial Accounting

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Trends in Managerial AccountingCustomer

Orientation

E-Commerce

Global Economy

Service Economy

Lean Practices Value Chain

C 642

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Customer Orientation

C 643

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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 Management

C 6

Constant Focus on Higher Standards

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Complete productsjust-in-time to

ship to customers

Complete partsjust-in-time for

assembly into products

Schedule Production

Receive materialsjust-in-time for

production

Receivecustomer

orders

Just-In-Time (JIT) Manufacturing

C 645

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Value Chain

The value chain refers to the series of activities that add value to a company’s products or services. Companies can use lean practices to increase

efficiency and profits.

C 646

Global View

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14-A1: Raw Materials Inventory Turnover and Days’

Sales

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Raw Materials Inventory Turnover

A1

Raw materialsInventory turnover =

Raw materials usedAverage materials

inventory

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End of Chapter 14

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