Managerial Accounting

Differences between Financial And Managerial Accounting.

Financial Accounting
1. Concerned with, compliance with GAAP & GAAS 2. End product is the financial statements prepared for external use and relied upon by outside 3rd parties (investors, auditors, bankers, SEC, governmental agency, customers etc.) 3. Deals with reporting on activity after the transactions have occurred. The decision has been made and the transaction must be recorded on the books.

Managerial Accounting
1. Used by managers of a business to evaluate operating performance and to formulate decisions relating to the operating activities of the business. 2. Financial statements do not comply with GAAP 3. Financial statements are used for internal purposes to evaluate operations (revenue, cost control, profit margins, departmental or product line reporting) 4. Information is needed quarterly & on a timely basis so as to change current operating strategies. 5. Useful in make or buy decisions, Cost-Volume-Profit (CVP) analysis, present value concepts etc.

Cost terms, Concepts and Classifications
1. Manufacturing costs – (Inventoriable or product costs involved with the conversion of raw material into work-in-process and ultimately to finished goods inventory.


2. Basic elements of the cost of a manufactured product (a) Direct material (1) raw material (2) Materials that become an integral part of the product being manufactured & can be directly traced to it (b) Direct labor (1) Costs of labor directly traceable to the product being manufactured (ex: assembly line workers, workers who work directly on the product being made) (c) Manufacturing overhead (factory overhead or factory burden) (1) All other costs excluding direct materials & direct labors, that relate to the operation of the factory Includes: 1. Indirect materials: material not directly traceable to the product being manufactured (glue welding materials, factory supplies, nails, lubricating, oil) 2. Indirect labor: labor not directly traceable to the product being manufactured (janitor, supervisors, security, guards, etc) 3. Heat, light, property taxes, depreciation on factory facilities (building + equipment) insurance on factory facilities. NOTE: The costs in (c) above only relate to the operation of the factory. Excludes: Similar costs: which relate to the office are not included as manufacturing overhead, but are strictly period non-manufactory costs, expensed when incurred. Methods of accounting for additional labor costs: (1) Idle time – cost of direct labor workers who are unable to perform their assignments due to machine breakdowns, material shortages, etc. The cost of idle time is part of factory overhead. 2

(2) Overtime premium – considered part of factory overhead regardless if payment was made to direct or indirect labor employees. (3) Labor fringe benefits – - Method 1: All such costs are treated as indirect labor add to factory Overhead. - Method 2: Fringe benefits related to direct labor employees are classified as additional direct labor cost.

Prime costs = Direct materials + direct labor Conversion costs = direct labor + manufacturing overhead

3. Period Costs vs. Product Costs Period Costs – matched against revenues on a time period basis when incurred. All selling & administrative expenses are classified as period costs. (Office rent, commissions, etc). Non-manufacturing costs incurred which are not connected to the manufacturing process. (1) Selling Costs Costs necessary to service the customers and to bring the finished product into the hands of the customers. Examples: Advertising, Shipping, sales salaries etc. (2) General & Administrative Costs Costs that are incurred which relate to the general administration and support of the company as a whole. Examples: executive salaries, general accounting salaries secretarial costs etc.


Product Costs (also called inventoriable costs). The products costs remain with the inventory produced as an asset and are not expensed until the product (inventory) is sold (COGS), and they are matched against revenues at the point of sale. 4. Comparison of Income Statements (Cost of Goods Sold Section) (a) Merchandise Company Cost of Goods Sold: Beginning Inventory Add net purchases Goods available for sale Less: Ending inventory COGS (b) Manufactory Company Cost of Goods Sold: Beginning finished goods inventory Add Πcosts of goods manufactured Goods available for sale Less: Ending finished goods inventory COGS 110,000 850,000 960,000 <150,000> 810,000 50,000 600,000 650,000 <250,000> 400,000


(c) ΠSchedule of Cost of Goods Manufactured MANUFACTURING COMPANY
Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2001

Direct materials:
Beginning raw materials inventory* Add: Purchases of raw materials Raw materials available for use Deduct: Ending raw materials inventory Raw materials used in production Direct Labor $70,000 390,000 460,000 50,000 $410,000 60,000 6,000 100,000 50,000 75,000 21,000 90,000 8,000 350,000 820,000 90,000 910,000 60,000

Manufacturing Overhead: (Costs that relate to the factory)
Insurance. Factory Indirect labor Machine rental Utilities, factory Supplies Depreciation, factory Property taxes, factory Total overhead costs Total manufacturing costs Add: Beginning work in process inventory (Costs already put into process in the prior periods) Total Goods in Process Deduct: Ending work in process inventory Costs of goods manufactured (COGM)


The amount of COGM is transferred to the COGS section of the income statement in (b) above.


5. Comparisons of Balance Sheets (a) Merchandise Company One class of inventory (merchandise inventory) is only its finished state no work is performed on the inventory (b) Manufacturing Company - Three classes of inventory exist: • Raw material – the integral part of the product being manufactured. • Work-in-process – goods partially completed at the end of the period. This inventory will include material, labor, and factory overhead. • Finished goods – Completed units of product awaiting shipment to customers in the ordinary course of business. 6. Just in time inventory system – company only purchases enough material each day to meet that day’s needs. All material is received and completed just in time to be shipped and sold the same day. Therefore in theory, there is no ending inventory that exists.


Cost Flows and Classifications in a Manufacturing Company
Costs Product Costs Raw Materials Purchase Direct Labor Raw Materials Inventory Direct materials used in production Work in Process Balanced Sheet inventory Goods completed (cost of
goods manufactured)

Income Statement

Manufacturing Overhead

Cost of goods sold

Period Costs Selling and administrative

Finished Goods Inventory

Goods Sold

Selling and administrative expenses


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