You are on page 1of 40

Managerial Accounting

Wild and Shaw


2010 Edition
McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All

Chapter 1
Managerial Accounting
Concepts and Principles

Conceptual Learning Objectives


C1: Explain the purpose and nature of managerial
accounting.
C2: Describe the lean business model.
C3: Describe fraud and the role of ethics in managerial
accounting.
C4: Describe accounting concepts useful in classifying
costs.
C5: Define product and period costs and explain how
they impact financial statements.
C6: Explain how the balance sheets and income
statements for manufacturing and merchandising
companies differ.
C7: Explain manufacturing activities and the flow of
manufacturing costs.

1-3

Analytical Learning Objectives


A1: Compute cycle time and cycle
efficiency, and explain their importance
to production management.

1-4

Procedural Learning Objectives


P1: Compute cost of goods sold for a
manufacturer.
P2: Prepare a manufacturing statement
and explain its purpose and links to
financial statements.

1-5

C1

Managerial and Financial


Accounting

Managerial accounting
provides financial and
non-financial information
for managers of an
organization and other
decision makers

Financial accounting
provides general
purpose financial
information to those
who are outside
the organization.

1-6

C1

Nature of Managerial
Accounting

1-7

C2

Lean Business Model


Customer
Orientation

Global
Economy
Lean
Business
Model

Elimination
of Waste

Satisfy the
Customer

Positive
Return
1-8

C2

Lean Practices

Customer
Orientation
in a Global
Economy

1-9

C2

Total Quality Management


Quality improvement
applied to all aspects of
business activities.

Seek and uncover


waste.

on

Employees encouraged
to try new methods
to improve quality.

Company emphasizes
value of quality through
quality awards.
1-10

Just-In-Time (JIT)
Manufacturing

C2

Receive
customer
orders.

Complete products
just in time to
ship to customers.

Schedule
production.
Receive materials
just in time for
production.

Complete parts
just in time for
assembly into products.
1-11

C2

Just-In-Time (JIT)
Manufacturing
To accomplish just-in-time
manufacturing:

Processes must be
aligned to eliminate
delays and
inefficiencies

Companies must
establish good
relations with
suppliers
1-12

C2

Implications of Lean
Manufacturing

Understand
the nature and
sources of
cost

Measure
value provided
to customers

Determine
price
customers
pay

1-13

C3

Fraud in Accounting

Fraud is the use of ones job for personal


gain through the deliberate misuse of the
employers assets.
It is estimated that 5% of annual revenues
are lost to fraud.
All fraud is committed to provide direct or
indirect benefit to the perpetrator, violates the
employees duty to his/her employer, costs
the employer money, and is carried out in
secret.
1-14

C3

Ethics in Accounting

Ethics are beliefs that distinguish right from wrong.


They are accepted standards of good and bad
behavior.
The IMAs Statement of Ethical Professional Practice
requires management accountants to be competent,
maintain confidentiality, act with integrity, and
communicate information in a fair and credible
manner.
The Sarbanes-Oxley Act requires each issuer of
securities to disclose whether it has adopted a code of
ethics for its senior officers and the content of that
code.

1-15

C4

Managerial Cost Concepts

Behavior
Traceability
Controllability
Relevance
Function
1-16

C4

Classification by Behavior
Cost behavior means how a cost will
react to changes in the level of
business activity.
A fixed cost does not change with
changes in the volume of activity
A variable cost changes in
proportion to changes in the volume
of activity
A mixed cost refers to a combination of
fixed and variable
1-17

C4

Classification by Traceability
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 a single cost
object.

Example:
maintenance
expenditures
benefiting two or
more departments.

1-18

C4

Classification by Controllability

tr o

Co
ntr

n
Co
l

Mo
re

e
or
M

ol

The degree of control depends on the


level of management in the organization.

Very little control


1-19

C4

Classification by Relevance:
Sunk Costs
All costs incurred in the past that cannot be avoided
or changed.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost
$15,000 two years ago. The $15,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $15,000 cost.

1-20

C4

Classification by Relevance:
Out-of-Pocket Costs
A cost that requires a future outlay of cash.
Out-of-pocket costs should be considered in
decisions.
Example: You plan on buying a new car for
$25,000 next month. The cost of the new car is
an out-of-pocket cost because you can choose
to spend the $25,000 or not in the future

1-21

C4

Classification by Relevance:
Opportunity Costs
The potential benefit lost by choosing a specific
action from two or more alternatives

Example: If you were not attending college,


you could be earning $20,000 per year.
Your opportunity cost of attending college
for one year is $20,000.
1-22

C5

Classification by Function:
Product Costs
Direct
Labor

Direct
Material

Manufacturing
Overhead

The
Product
1-23

C5

Period and Product Costs


in Financial Statements

Period Costs
(Expenses)

2010 Income
Statement
Operating
Expenses

2010 Costs
Incurred

Cost of
Goods Sold

Inventory
Sold in 2010

Product Costs
(Inventory)
Inventory Not
Sold in 2010

2010 Balance
Sheet Inventory
Raw Materials
Goods in Process
Finished Goods

2011 Income
Statement
Cost of
Goods Sold
1-24

Balance Sheet of a
Manufacturer

C6

Raw
Materials

Materials
waiting to be
processed.
Can be direct
or indirect.

Goods in
Process

Partially complete
products.
Material to which
some labor and/or
overhead have
been added.

Finished
Goods

Completed
products
for sale.

1-25

Income Statement of a
Manufacturer

P1

Merchandiser

Manufacturer

Beginning
Merchandise
Inventory

Beginning
Finished Goods
Inventory

Cost of Goods
Purchased

The major
difference

Ending
Merchandise
Inventory

Cost of Goods
Manufactured

Ending
Finished Goods
Inventory
Cost of Goods
Sold

=
1-26

P1

Income Statement of a
Manufacturer
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
+ Purchases
= Goods available
for sale
- Ending
merchandise
inventory
= Cost of goods
sold

$ 14,200
234,150
$ 248,350

(12,100)
$ 236,250

1-27

C7

Income Statement of a
Manufacturer
Direct
Direct Materials
Materials
Materials
Materials that
that are
are separately
separately and
and
readily
readily traced
traced to
to aa particular
particular product.
product.
Example:
Example:
Steel
Steel used
used to
to
manufacture
manufacture
the
theautomobile.
automobile.

1-28

C7

Income Statement of a
Manufacturer
Direct
Direct Labor
Labor
Labor
Labor costs
costs that
that are
are separately
separately and
and
readily
readily traced
traced to
to finished
finished product.
product.

Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.
1-29

C7

Income Statement of a
Manufacturer
Factory
Factory Overhead
Overhead
All
All manufacturing
manufacturing costs
costs except
except
direct
direct material
material and
and direct
direct labor
labor
Factory
Factory costs
costs that
that cannot
cannot be
be
separately
separately or
or readily
readily traced
traced directly
directly to
to
products.
products.
Examples:
Indirect labor maintenance
Indirect material cleaning supplies
Factory utility costs
Supervisory costs
1-30

Income Statement of a
Manufacturer

C7

Manufacturing costs are often


combined as follows:
Direct
Material

Direct
Labor

Prime
Cost

Manufacturing
Overhead

Conversion
Cost
1-31

Flow of Manufacturing
Activities

C7

Materials
activity

Production activity

Sales activity

Raw
Materials
Beginning
Inventory

Goods in Process

Finished Goods

Raw
Materials
Purchases

Factory
Overhead

Beginning Inventory

Beginning Inventory

Direct Labor

Cost of Goods
Manufactured

Raw Materials
Used

Finished
Goods
Ending
Inventory

Raw Materials

Goods in Process

Ending Inventory

Ending Inventory

Cost
of
Goods
Sold

1-32

P2

Manufacturing Statement
Summarizes the types and amounts of costs
Incurred in a companys manufacturing process.
Direct Materials Used
+Direct Labor
+Factory Overhead
=Total Manufacturing Costs
+Beginning Work in Process

Ending Work in Process


=Cost of Goods Manufactured

1-33

P2

Manufacturing Statement

1-34

P2

Computation of Cost of Direct Material Used


Beginning raw materials inventory
Add: Purchases of raw materials

8,000
86,500

Cost of raw materials available for use


Deduct: Ending raw materials inventory

$ 94,500
9,000

Cost of direct materials used in production

$ 85,500

1-35

P2

Manufacturing Statement
Include all direct labor
costs incurred during the
current period.

1-36

P2

Computation of Total Manufacturing Overhead


Indirect labor

9,000

6,000
Manufacturing Statement

Factory supervision
Factory utilities

2,600

Property taxes, factory building

1,900

Factory supplies used

600

Factory insurance expired

1,100

Depreciation, building and equipment


Other factory overhead

5,300
3,500

Total factory overhead costs

30,000

1-37

P2

Manufacturing Statement
Beginning work in
process inventory is
carried over from the
prior period.

1-38

P2

Manufacturing Statement
Ending work in process inventory
contains the cost of unfinished
goods, and is reported in the current
assets section of the balance sheet.

1-39

End of Chapter 1

1-40