Managerial Accounting (Week 5) Topics + What is managerial accounting? + Major functions of business managers © Business ethics © Manufacturing costs Managerial Accounting vs Financial Accounting «How do we distinguish between the two? Simple! Financial Accounting = Concerned with providing information to parties external to the organization (shareholders, creditors, government bodies) ~ Reporting is done on PAST happenings (ex. Last quarter's financial results) - Reporting usually follows a specific set of rules such as GAAP, ASPE, or IFRS. ‘Management Accounting = Focuses on internal exchange of information in the organization, usually to managers = _ Information is used to improve decision making with cost monitoring and improving efficiency (future emphasis) = Reporting can be customized to fit the user’s needs (relevant to an issue which a manager would like to address} Major Functions of Business Managers Planning: Establishing goals and specifying how to achieve them. Planning often involves developing detailed answers to key questions/issues. As going through planning and subsequent processes costs money, budgeting Is an important step in the planning phase. A budget can be viewed as a detailed quantitative plan for future business activity. Directing and Motivating: Mobilizing people to carry out plans and run routine operations. This set of functions involves using effective people skills to manage employees and make important decisions (hiring, scheduling, dispute resolution) on a day-to-day basis. Controlling: Gathering feedback to ensure that the plan is being properly executed or modified as circumstances change. A major part of the controlling process is comparing actual financial numbers to the budgets) developed in the planning phase. This can be done through a performance report, which helps identify potential areas for improvement. Regular performance reports can provide essential feedback to management which strengthens the decision-making process. Decision making: Selecting a course of action from competing alternatives. At the end of the day, a good manager needs to be able to make intelligent, data-driven decisions. Often a business's major decisions are centered around three questions- 1) what should we be selling; 2) whom should we be selling to; 3) how should we execute?Making long and short a —~ Comparing actual to planned Implementing plans performance (controlling) (directing and motivating) LD Measuring performance (controling) Decision making The model above (called the planning and control cycle) depicts decision-making as a central function ‘which occurs during the planning, directing and motivating, and controlling phases. The idea here is that decision-making occurs all the time, not only at the end of the cycle. As a broad concept, this can be referred to as business strategy. Strategy refers to a company's ability to attract and retain customers by distinguishing itself from competitors. There are a number of ways to accomplish this: 1) Customer intimacy- understanding and responding to customer needs in a better/quicker way than competitors 2) Operational excellence- delivering products and/or services in a quicker, more convenient, and/or more cost-effective manner than competitors 3) Product leadership- offering higher quality products than competitors Value chain Research & roduct ustomer Development {As its name suggests, a value chain is made up of key business functions which add value to a company’s products or services. Two examples of molding a firm’s value chain around strategy are lean production {producing goods only in response to customer orders instead of stockpiling inventory) and enterprise risk management (identifying risks before adverse events occur and managing the risks well). Ethics- Why do they matter? ‘© Critical for an economy's operational efficiency- confidence/trust factor for the company’s customers, employees, suppliers «Also very important for accountants- competence, confidentiality, integrity, and objectivity © Corporate governance- system by which a company is directed and controlled (performance measurement), enhances shareholder confidence © Corporate social responsibility- considering all stakeholders in decision making- “doing the right thing”Manufacturing: activities and processes which convert raw materials into finished goods. Manufacturing costs are made up of: 1. Direct materials: Raw materials which are acquired for the purposes of producing finished goods are classified into two categories, direct materials and indirect materials. Direct materials are easily identifiable parts of the finished product, As an example, think of a car. A car has distinct parts such as four wheels, seats, and an engine- these are direct materials which are used to build a car. 2. Direct labour: This refers to the work done directly on the finished product. Going back to the car example, the work completed by the assembly line workers on the product is categorized as direct, labour, 3, Manufacturing overhead: These are indirect costs which are incurred during the manufacturing of finished goods. There are several small categories which are “funneled” into manufacturing overhead. Indirect materials: These are minor inputs into a finished good. For example, a car has screws and ‘grease. It is pointless to measure how many minor items such as screws went into the car. Instead we allocate them as part of manufacturing overhead. = indirect lobour: This is labour which is part of the manufacturing process, but not directly on the product. Two good examples of indirect labour are supervisors and janitors. Both play key roles in goods being brought to completion, but they do not actually work on the product. Hence, their costs are allocated to manufacturing overhead. = Other costs: Costs such as heat, electricity, water, and depreciation are also classified as manufacturing overhead. Non-manufacturing costs: These are costs related to organizational activities outside the manufacturing process. We can categorize non-manufacturing costs into two main groups: 1. Selling and marketing expenses: These are costs incurred in efforts to sell products or services (ex. advertising, sales commission). 2, Administrative expenses: These are costs incurred in organization-sustaining activities (ex. human resources, accounting, executive salary). Note that the manufacturing costs are commonly referred to as product costs, while the non manufacturing costs are commonly referred to as period costs, Let's try an exercise: Categorize the following costs as Direct Materials (OM), Direct Labour (OL), Manufacturing Overhead (MOH), Selling (S), or Administrative (A). Also, state whether each item is 2 Product (R) or Period (E) cost. a) Hourly wages for assembly line workers DLR b) Commissions paid to salespeople ae €) Car seats used as parts of a new automobile OMes iS = 4) Salary paid to a supervisor overseeing production e) Salary paid to quality control/testing personnel f) Screws used in the production of new furniture 8} Hourly wage paid to the company's bookkeeper h) Commission paid to a recruiting agent to hire labourers i) Purchase of paper towels which are used by factory workers in the breakroom i) Year-end bonuses paid to the company’s senior executives EREPPER k) Hourly wage for the factory janitor |) Hourly wage for the product showroom janitor Ps Ne m) Production bonus paid to workers 1) Grease used in the assembly of new airplane engines ©) Shipping costs of finished goods Ww ey ERP ) Cost of packaging a special order (goods aren't usually packaged) 4g) Salary paid to the company’s human resources manager 1) Freight-in costs of raw materials to be used for production Beginning Work-in-Process Inventory + Total Manufacturing Costs = Total Cost of Work in Process Total Cost of Work in Process ~ Ending Inventory Work in Process On July 1%, the UCW Bookstore had a Work-in-Process (WIP) inventory balance of $10,000. Over the next month, it spent $17,500 on direct labour and $13,250 on direct materials. Manufacturing overhead totaled $11,350 for July. On July 31%, the Ending WIP Inventory balance was $5,000. What was the bookstore’s total cost of work in process? $0,000 + (H)7,S00 + $13,250 +8 Nl, 350) = $52, (oo What was the bookstore’s cost of goods manufactured? +L} Joo $52,100 - $5000 = #47,Let’s have a look at the bookstore’s Cost of Goods Manufactured Schedule: "UW Bookstore Cost of Goods Manufactured Schedule For the Month Ended July 31°, 2025, Workin Process July z Bloj,000 Direct Materials E I Raw material inventory, July $8,040 Raw material purchases 33.460 Total raw materials available for use 21,500 | Less: Raw material inventory, July 31 8,250 TZ, 250 Direct materials used = Direct Labour : 1, 200 [ Manufacturing Overhead z eauaia ae [indirect materials a 2,100 [Findirect labour 5,500 Factory repairs 800 Factory utilities 750 Factory depreciation [eao00-3 Factory insurance a 1,200 Total manufacturing overhead p3s0 Total Manufacturing Costs __42 Joo Total Cost of Workin Process aie __ £2,106 (Thess: Work in Process, July 31 ‘aie 1 Fo. Cost of Goods Manufactured L ei #E7, 100 ——— Note that we need to take beginning and ending inventory into consideration for both raw materials and inventory as a whole, Direct labour can’t really be shifted. between periods if you recognize the labour costs as people complete the work. Finally, manufacturing overhead can include a variety of items and ‘these costs can be split up within a manufacturing firm if different products are accounted for separately.