Saudi Electronic University Accounting Discussion

The value chain includes costs associated  with research, product design, production, marketing, sales,  distribution, and customer support after the sale. Which areas of the  value chain do you think should be included in calculating product  costs? Why? Where would the other costs be reported (if at all)? What is  the cost behavior based on the variability of cost variances and  revenue volatility?

Chapter 1
Introduction to
Managerial
Accounting
Learning Objectives
• Obj. 1: Describe managerial accounting, including its
differences with financial accounting, its place in the
organization, and its uses.
• Obj. 2: Describe and illustrate the nature of manufacturing
operations, including different types and classifications of
costs.
• Obj. 3: Describe and illustrate financial statements for a
manufacturing business, including the balance sheet,
statement of cost of goods manufactured, and income
statement.
• Obj. 4: Describe and illustrate utilization rates in evaluating
performance for service companies.
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Differences Between Managerial and Financial
Accounting (slide 1 of 4)
Types of
accounting
information
Financial
accounting
Managerial
accounting
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Financial Accounting and Managerial
Accounting
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Differences Between Managerial and Financial
Accounting (slide 2 of 4)
• Financial accounting information is reported at
fixed intervals (monthly, quarterly, yearly) in
general-purpose financial statements.
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Differences Between Managerial and Financial
Accounting (slide 3 of 4)
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Differences Between Managerial and Financial Accounting
(slide 4 of 4)
• Unlike the financial statements prepared in financial
accounting, managerial accounting reports do not always
have to be:
1.
Prepared according to generally accepted accounting
principles (GAAP).
▪ Only the company’s management uses the information.
▪ In many cases, GAAP are not relevant to the specific decisionmaking needs of management.
2.
Prepared at fixed intervals (monthly, quarterly, yearly).
▪ Although some management reports are prepared at fixed intervals,
most reports are prepared as management needs the information.
3.
Prepared for the business as a whole.
▪ Most management reports are prepared for products, projects, sales
territories, or other segments of the company.
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Managerial Accounting in the Organization
(slide 1 of 2)
• Most large companies are organized in terms of
“verticals” and “horizontals.”
o Verticals are sometimes referred to as business
units, because they are often structured as separate
businesses within the parent company.
▪ Verticals develop products that are sold directly co
customers.
o Horizontals are departments within the company that
are not responsible for developing products.
▪ Horizontals provide services to the various verticals and
other horizontals.
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Partial Organization Chart for McAfee
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Managerial Accounting in the Organization
(slide 2 of 2)
Manager of the accounting
function of a vertical
Controller
Chief financial officer
Rank within the accounting and
finance function
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The Management Process
(slide 1 of 2)
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The Management Process
(slide 2 of 2)
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Planning
• Management uses planning in developing the
company’s objectives (goals) and translating
these objectives into courses of action.
• Planning may be classified as follows:
1.
Strategic planning, which is developing long-term
actions to achieve the company’s objectives.
▪ These long-term courses of action are called strategies,
which often involve periods of 5 to 10 years.
2.
Operational planning, which develops short-term
actions for managing the day-to-day operations of
the company.
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Directing
• The process by which managers run day-to-day
operations is called directing.
o For example, directing is a production supervisor’s
efforts to keep the production line moving without
interruption (downtime).
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Controlling
• Monitoring operating results and comparing
actual results with the expected results is
controlling.
1.
This feedback allows management to isolate areas
for further investigation and possible remedial
action.
• The philosophy of controlling by comparing
actual and expected results is called
management by exception.
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Improving
• Continuous process improvement is the
philosophy of continually improving employees,
business processes, and products.
1.
The objective of continuous process improvement is
to eliminate the source of problems in a process.
▪ In this way, the right products (or services) are delivered in
the right quantities at the right time.
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Decision Making
• Inherent in each of the preceding management
processes is decision making.
1.
In managing a company, management must
continually decide among alternative actions.
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Uses of Managerial Accounting Information
• Managerial accounting provides information and reports
for managers to use in operating the business.
1.
2.
3.
4.
5.
The cost of manufacturing a product could be used to determine
its selling price.
Comparing the costs of manufacturing products over time and
can be used to monitor and control costs.
Performance reports could be used to identify any large amounts
of scrap or employee downtime.
A report could analyze the potential efficiencies and savings of
purchasing a new computerized equipment to speed up the
production process.
A report could analyze how many units need to be sold to cover
operating costs and expenses. Such information could be used
to set monthly selling targets and bonuses for sales personnel.
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Check Up Corner
1.
Indicate whether the following statements are true or false:
Managerial accounting information is designed primarily to meet the needs of
external users such as shareholders, creditors, and the general public.
Managerial accounting reports must be prepared for the business as a whole.
Operational planning develops short-term actions for managing the day-to-day
operations of the company.
a.
b.
c.
2.
Management Process
Three phases of the management process are planning, controlling, and
improving. Match the following descriptions to the proper phase:
Phase of management
process
Description
Planning
Monitoring the operating results and comparing the actual
results with expected results
Controlling
Rejects solving problems with temporary solutions that fail
to address the root cause of the problem
Improving
Used by management to develop the company’s
objectives
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Check Up Corner
Management Process Solution
1.
False. The primary focus and design of managerial accounting information is
to meet the specific needs of a company’s management.
b. False. Managerial accounting reports do not have to be prepared for the
business as a whole. Most management reports are prepared for products,
projects, sales territories, or other segments of the company.
c. True. Operational planning develops short-term actions for managing the dayto-day operations of the company. In contrast, strategic planning develops
long-term actions (strategies) to achieve the company’s objectives.
a.
2. Planning: c. Used by management to develop the company’s objectives
Controlling: a. Monitoring the operating results and comparing the actual results
with expected results
Improving: b. Rejects solving problems with temporary solutions that fail to
address the root cause of the problem
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Manufacturing Operations
• The operations of a business can be classified
as service, retail, or manufacturing.
1.
Most of the managerial accounting concepts that
apply to manufacturing businesses also apply to
service and merchandising businesses.
▪ The manufacturing operations for a guitar manufacturer,
Legend Guitars, is illustrated on the following slide.
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Guitar-Making Operations of Legend Guitars
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Direct and Indirect Costs
(slide 1 of 2)
• A cost is a sacrifice made to obtain some
benefit.
1.
In managerial accounting, costs are often classified
according to the decision-making needs of
management.
▪ For example, costs are often classified by their relationship
to a segment of operations, called a cost object.
– A cost object may be a product, a sales territory, a department,
or an activity, such as research and development.
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Direct and Indirect Costs
(slide 2 of 2)
• Costs identified with cost objects are either
direct costs or indirect costs.
1.
Direct costs are identified with and can be traced
to a cost object.
▪ For example, the cost of wood used to make guitars is a
direct cost.
2.
Indirect costs cannot be identified with or traced
to a cost object.
▪ For example, the salaries of production supervisors are
indirect costs of producing a guitar because their salaries
cannot be identified with or traced to any individual guitar.
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Direct Costs of Legend Guitars
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Indirect Costs of Legend Guitars
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Classifying Direct and Indirect Costs
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Manufacturing Costs
• The cost of a manufactured product includes the
cost of materials used in making the product.
• In addition, the cost of a manufactured product
includes the cost of converting the materials into
a finished product.
• Thus, the cost of a finished product includes:
1.
Direct materials cost
2.
Direct labor cost
3.
Factory overhead cost
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Manufacturing Costs of Legend Guitars
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Direct Materials Cost
• Manufactured products begin with raw materials that are
converted into finished products.
• To be classified as a direct materials cost, the cost
must be both of the following:
1.
An integral part of the finished product
2.
A significant portion of the total cost of the product
• Examples of direct materials costs include the following:
1.
The cost of the wood used in producing a guitar
2.
The cost of electronic components for a television
3.
Silicon wafers for microcomputer chips
4.
Tires for an automobile
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Direct Labor Cost
• Most manufacturing processes use employees to convert
materials into finished products.
• The cost of employee wages that is an integral part of the
finished product is classified as direct labor cost.
• A direct labor cost must meet both of the following criteria:
1.
An integral part of the finished product
2.
A significant portion of the total cost of the product
• Examples of direct labor costs include the following:
1.
2.
3.
4.
The wages of employees who cut guitars out of raw lumber and
assemble them
Mechanics’ wages for repairing an automobile
Machine operators’ wages for manufacturing tools
Assemblers’ wages for assembling a laptop computer
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Factory Overhead Cost
(slide 1 of 2)
• Costs other than direct materials cost and direct labor that
are incurred in the manufacturing process are combined
and classified as factory overhead cost (sometimes
called manufacturing overhead or factory burden).
• All factory overhead costs are indirect costs of the product.
• Some factory overhead costs include the following:
1.
Heating and lighting the factory
2.
Repairing and maintaining factory equipment
3.
Property taxes on factory buildings and land
4.
Insurance on factory buildings
5.
Depreciation of factory plant and equipment
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Prime Costs and Conversion Costs
(slide 1 of 2)
• Direct materials, direct labor, and factory
overhead costs may be grouped together for
analysis and reporting.
1.
Two such common groupings are as follows:
▪ Prime costs, which consist of direct materials and direct
labor costs
▪ Conversion costs, which consist of direct labor and
factory overhead costs
– Conversion costs are the costs of converting the materials
into a finished product.
• Direct labor is both a prime cost and a
conversion cost.
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Prime Costs and Conversion Costs
(slide 2 of 2)
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Product Costs and Period Costs
(slide 1 of 2)
Direct materials
Product costs
Direct labor
Factory overhead
Costs
Selling expenses
Incurred while marketing and
delivering the product to the
customer
Administrative
expenses
Incurred while managing the
company and are not directly
related to the manufacturing
or selling functions
Period costs
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Examples of Product Costs
and Period Costs—Legend Guitars
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Product Costs and Period Costs
(slide 2 of 2)
• As product costs are incurred, they are recorded
and reported on the balance sheet as inventory.
When the inventory is sold, the cost of the
manufactured product sold is reported as cost of
goods sold on the income statement.
• Period costs are reported as expenses on the
income statement in the period in which they are
incurred, and, thus, they never appear on the
balance sheet.
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Product Costs, Period Costs, and the Financial
Statements
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Check Up Corner
•
A partial list of the costs for MLB Mitt Company, a baseball glove manufacturer, is
as follows:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
•
Manufacturing Operations
Ink used to print a player’s autograph
Salesperson’s salary and commission
Padding material
Coolants for machines that sew the baseball gloves
Wages of assembly line employees
Cost of endorsement from a professional baseball player
Salary of manufacturing plant supervisor
Leather used to make the gloves
Office supplies used at company headquarters
Wages of office administrative staff
Using the following headings, classify each cost as a product cost or a period cost.
In addition, identify product costs as:
a.
b.
Direct materials, direct labor, or factory overhead, and
Prime cost, conversion cost, or both.
Product Cost
Item
Direct
Direct
Materials Labor
Factory
Overhead
Period Cost
Prime
Cost
Conversion
Cost
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Check Up Corner
Manufacturing Operations
Solution
Product
Cost
Item
Direct Materials
Direct
Labor
a.
Factory
Overhead
Period
Cost
Prime
Cost
X
Conversion
Cost
X
b.
c.
X
X
X
d.
X
e.
X
X
X
X
f.
X
g.
h.
X
X
X
X
i.
X
j.
X
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Financial Statements for a Manufacturing Business
• The statement of stockholders’ equity and
statement of cash flows for a manufacturing
business are similar to those for service and retail
businesses.
• However, the balance sheet and income statement
for a manufacturing business are more complex.
1.
This is because a manufacturer makes the products
that it sells and, thus, must record and report product
costs.
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Balance Sheet for a Manufacturing Business
• A manufacturing business reports three types of inventory
on its balance sheet as follows:
1.
Materials inventory (sometimes called raw materials inventory)
consists of the costs of the direct and indirect materials that have
not yet entered the manufacturing process.
2.
Work in process inventory consists of the direct materials, direct
labor, and factory overhead costs for products that have entered
the manufacturing process, but are not yet completed (in process).
3.
Finished goods inventory consists of completed (or finished)
products that have not been sold.
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Balance Sheet Presentation of Inventory for
Manufacturing and Merchandising Companies
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Income Statement for a Manufacturing Business
(slide 1 of 7)
• The income statements for retail and
manufacturing businesses differ primarily in the
reporting of the cost of goods (merchandise)
available for sale and sold during the period.
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Income Statements for Merchandising
and Manufacturing Businesses
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Income Statement for a Manufacturing Business
(slide 2 of 7)
• A retail business determines its cost of good sold
by first adding its net purchases for the period to its
beginning inventory.
o This determines inventory available for sale during the
period. The ending inventory is then subtracted to
determine the cost of good sold.
• A manufacturing business makes the products it
sells, using direct materials, direct labor, and
factory overhead.
o Manufacturing business must determine its cost of
goods manufactured during the period.
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Income Statement for a Manufacturing Business
(slide 3 of 7)
• The cost of goods manufactured is determined
by preparing a statement of cost of goods
manufactured.
o
This statement summarizes the cost of goods
manufactured during the period
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Income Statement for a Manufacturing
Business (slide 4 of 7)
Beginning work in process inventory
$XXX
Direct materials:
Beginning materials inventory
$XXX
Purchases
$XXX
Cost of materials available for use
$XXX
Ending materials inventory
$XXX
Cost of direct materials used
$XXX
Direct labor
$XXX
Factory overhead
$XXX
Total manufacturing costs incurred in period
$XXX
Total manufacturing costs
$XXX
Ending work in process inventory
$XXX
Cost of goods manufactured
$XXX
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Income Statement for a Manufacturing
Business (slide 5 of 7)
• The following
data for
Legend
Guitars are
used:
Jan. 1, 20Y8
Dec. 31, 20Y8
Materials
$65,000
$35,000
Work in process
$30,000
$24,000
Finished goods
$60,000
$62,500
Total inventories
$155,000
$121,500
Inventories:
Manufacturing costs incurred during 20Y8:
Materials purchased
$100,000
Direct labor
$110,000
Factory overhead:
Indirect labor
$24,000
Depreciation on factory equipment
$10,000
Factory supplies and utility costs
$10,000
Total factory overhead
$44,000
Total
$254,000
Sales
$366,000
Selling expenses
$20,000
Administrative expenses
$15,000
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Income Statement for a Manufacturing
Business (slide 6 of 7)
• The statement of cost of goods manufactured is
prepared using three steps
Determine the cost of materials used
Determine the total manufacturing costs
incurred
Determine the cost of goods manufactured
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Income Statement for a Manufacturing
Business (slide 7 of 7)
•
Using the data for Legend Guitars, the cost of materials used, total manufacturing
costs, and cost of goods manufactured are computed as follows:
1.
2.
3.
The cost of materials used in production is determined as follows:
Materials inventory, January 1, 20Y8
$65,000
Purchases
$100,000
Cost of materials available for use
$165,000
Materials inventory, December 31, 20Y8
$35,000
Cost of direct materials used
$130,000
The total manufacturing costs incurred is determined as follows:
Direct materials used in production (step 1)
$130,000
Direct labor
$110,000
Factory overhead
$44,000
Total manufacturing costs incurred in 20Y8
$284,000
The cost of goods manufactured is determined as follows:
Work in process inventory, January 1, 20Y8
$30,000
Total manufacturing costs incurred (step 2)
$284,000
Total manufacturing costs incurred
$314,000
Work in process inventory, December 31, 20Y8
$24,000
Cost of goods manufactured in 20Y8
$290,000
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Manufacturing Company—Income Statement
with Statement of Cost of Goods Manufactured
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Flow of Manufacturing Costs
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Check Up Corner
•
•
Manufacturing financial
statements
The following information is available for January for MLB Mitt Company, a
baseball glove manufacturer:
Cost of direct materials used in production
$25,000
Direct labor
$35,000
Factory overhead
$20,000
Work in process inventory, January 1
$30,000
Work in process inventory, January 31
$25,000
Finished goods inventory, January 1
$15,000
Finished goods inventory, January 31
$12,000
For January, determine (a) the cost of goods manufactured and (b) the cost
of goods sold.
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Check Up Corner
•
Manufacturing financial
statements Solution
The cost of goods manufactured is determined by adding the total manufacturing
costs incurred to the beginning work in process inventory.
a.
b.
Work in process inventory, January 1
$30,000
Cost of direct materials used
$25,000
Direct labor
$35,000
Factory overhead
$20,000
Total manufacturing costs incurred in January
$80,000
Total manufacturing costs
$110,000
Work in process inventory, January 31
$25,000
Cost of goods manufactured
$85,000
Finished goods inventory, January 1
$15,000
Cost of goods manufactured
$85,000
Cost of finished goods available for sale
$100,000
Finished goods inventory, January 31
$12,000
Cost of goods sold
$88,000
The cost of goods
manufactured is
added to the
beginning finished
goods inventory to
determine the
finished goods
available for sale.
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Managerial Accounting Differences Between
Manufacturing and Service Companies
Manufacturing
Services
Users materials, work in process, and
finished goods inventory.
Inventory is often limited to supplies.
Uses both product and period costs.
Uses only period costs.
Uses costs of good sold on the income
statement.
May use cost of services on the income statement.
Manufacturing requires a physical
production site.
Many services require a network that connects service to the
customer. Examples include telecommunications, banking,
power distribution, distributed entertainment, and
transportation.
Manufacturing overhead is an indirect cost
in manufacturing products.
Overhead is an indirect cost incurred in serving customers.
Labor is a direct cost to products.
Labor is not a direct cost to products, but may be direct cos
to customers. Examples are accountants in accounting firm
or doctors in a medical practice.
Materials are a direct cost to products.
Materials are often an indirect cost, but may be significant,
such as fuel for transportation or utilities. In other cases,
materials are not significant, such as financial, leisure,
information, or education services.
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Utilization Rates (slides 1 of 3)
• A utilization rate measures the use of a fixed
asset in serving customers relative to the asset’s
capacity.
o A higher utilization rate is considered favorable, while
a lower utilization rate is considered unfavorable.
• Different service industries will have different
names and computations used for measuring
utilization rates.
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Utilization Rates (slides 2 of 3)
• In the hotel industry, for example, utilization is
measured by the occupancy rate, which is
computed as:
Occupancy rate =
Guest nights
Available room nights
o Where,
▪ Guest nights = Number of guests × Number of nights per visit
(per time period)
▪ Available room nights = Number of available rooms ×
Number of nights per time period
o The number of guests is determined under single
room occupancy, so that the number of guests is
equal to the number of occupied rooms.
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Utilization Rates (slides 3 of 3)
• Assume EasyRest Hotel is a single hotel with
150 rooms. During the month of June, the hotel
had 3,600 guests, each staying for a single
night. The occupancy rate would be determined
as follows:
Guest nights
Available room nights
3,600 guest nights
=
= 80%
150 rooms × 30days
Occupancy rate =
o The hotel was occupied to 80% of capacity, which
would be considered favorable.
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