Chapter

MANAGEMENT 16
ACCOUNTING
A BUSINESS PARTNER

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 Learning
Learning Objective
Objective

To explain the three

principles guiding the
design of management
accounting systems.

LO1
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 Management
Management Accounting:
Accounting:
Basic
Basic Framework
Framework

M a n a g e m e n t a c c o u n tin g a n d
a s s ig n in g d e c is io n - m a k in g a u t h o r it y .

A c c o u n t in g s y s t e m s h e lp to id e n t ify
w h o h a s a u th o r ity o v e r a s s e t s .

A c c o u n tin g in fo r m a tio n s u p p o r ts
p la n n in g a n d d e c is i o n - m a k i n g .

A c c o u n tin g r e p o r ts p r o v id e a m e a n s o f
m o n ito r in g , e v a lu a tin g , a n d r e w a r d in g p e r fo r m a n c e .
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 Management
Management Accounting
Accounting System
System
Framework
Framework
Top
Top Management
Management

Budget
Budget Plans:
Plans: Actual
Actual Results:
Results: Performance
Performance
Future
Future Current
Current Evaluation:
Evaluation: Past
Past

Assign
Assign Support
Support Evaluate
Evaluate
Decision
Decision Making
Making Decision
Decision Making
Making Decision
Decision Making
Making
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 Comparing
Comparing Financial
Financial Accounting
Accounting
and
and Management
Management Accounting
Accounting

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 Learning
Learning Objective
Objective

To describe the three

basic types of
manufacturing costs.

LO2
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 Accounting
Accounting for
for
Manufacturing
Manufacturing Operations
Operations

The
The cost
cost to
to
produce
produce aa unit
unit of
of
product
product includes:
includes:
Direct
Direct material
material
Direct
Direct labor
labor
Manufacturing
Manufacturing
overhead
overhead

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 Direct
Direct Materials
Materials

Raw materials
& component Can be traced
parts that directly and
become an conveniently
integral part to products.
of finished
products.

IfIf materials
materials cannot
cannot be
be traced
traced directly
directly to
toproducts,
products,
the
the materials
materialsareare considered
considered indirect
indirect and
andare
arepart
part
of
of manufacturing
manufacturingoverhead.
overhead.
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 Direct
Direct Labor
Labor

Includes
Includes the
the payroll
payroll cost
cost of
of direct
direct workers.
workers.

Those
Thoseemployees
employees
who
whowork
workdirectly
directly
on
onthe
thegoods
goodsbeing
being
manufactured.
manufactured.

The
Thecost
costof
ofemployees
employeeswhowhododonot
not work
work
directly
directlyon
onthe
thegoods
goods is
isconsidered
considered indirect
indirect
labor
labor and
andisispart
partof
ofmanufacturing
manufacturingoverhead.
overhead.
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 Manufacturing
Manufacturing Overhead
Overhead

All
All manufacturing
manufacturing costs
costs other
other than
than direct
direct
materials
materials and
and direct
direct labor.
labor.

Includes:
Includes:
 Indirect
 Indirect materials.
materials.
 Indirect
 Indirect labor.
labor.
 Machinery
 Machinery and
and
equipment
equipment costs.
costs. Does
Doesnot
not include
include
 Cost selling
sellingor
or general
generaland
 Cost of
of regulatory
regulatory administrative
administrative
and
compliance.
compliance. expenses.
expenses.
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 Flow
Flow of
of Physical
Physical
Goods
Goods in
in Production
Production
Direct
Direct Direct
Direct
Materials
Materials Materials
Materials
Purchased
Purchased Used
Used

Finished
Finished
Goods
Goods

Direct
Direct Manufacturing
Manufacturing
Labor Overhead Goods
Goods
Labor Overhead Sold
Sold
MegaLoMart

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 Accounting
Accounting for
for
Manufacturing
Manufacturing Operations
Operations

Manufacturing
Manufacturing costs
costs are
are often
often
combined
combined asas follows:
follows:

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead

Prime Conversion
Cost Cost

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 Learning
Learning Objective
Objective

To distinguish between
product and period costs.

LO3
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 Product
Product Costs
Costs versus
versus Period
Period Costs
Costs
Balance
BalanceSheet
Sheet
Product Costs
Current
Current assets
assets
(manufacturing
and
andfinished
finished
costs) as goods
goodsinventory
inventory
incurred
When
Whengoods
goods
Income are
aresold
sold
Income Statement
Statement
Period Costs Revenue
Revenue
(operating COGS
COGS
expenses and Gross
Grossmargin
margin
income taxes) Period
Periodexpenses
expenses
as Operating
Operatingprofit
profit
incurred
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 Ethics,
Ethics, Fraud,
Fraud, and
and
Corporate
Corporate Governance
Governance

Product costs are capitalized as part of

inventory and only charged to expense
when the inventory is sold.

Period costs are charged

to expense as incurred.

Income will be artificially inflated if

period costs are capitalized.

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 Learning
Learning Objective
Objective

To describe how
manufacturing costs
flow through
perpetual inventory
accounts.

LO4
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 Inventories
Inventories of
of aa
Manufacturing
Manufacturing Business
Business

Raw
Rawmaterials
materials-- inventory
inventoryon
on
hand
handand
andavailable
availableforforuse.
use.

Finished
Finished Work
Workinin
goods-
goods- process
process--
completed
completed partially
partially
goods
goodsawaiting
awaiting completed
completed
sale.
sale. goods.
goods.
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 Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production
Direct Materials Direct Work in Process
materials Inventory materials Inventory
purchased used
$$$ $$$ $$$ $$$

Direct labor &

Manufacturing Overhead

Cost of goods Finished Goods Cost of

manufactured Inventory Goods Sold
$$$ $$$ $$$
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 Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production

Pure-Ice
Pure-Ice Inc.
Inc. had
had $52,000
$52,000 ofof inventory
inventory inin
direct
direct materials
materials inventory
inventory onon January
January 1,1,
of
of this
this year.
year. During
During the
the year,
year, Pure-Ice
Pure-Ice
purchased
purchased $586,000
$586,000 of
of additional
additional direct
direct
materials.
materials. At At December
December 31 31 ofof this
this year
year
$78,000
$78,000 of of the
the direct
direct materials
materials werewere still
still
on
on hand.
hand.
How
How much
much direct
direct material
material was
was
placed
placed into
into production
production during
during
the
the year?
year?
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 Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production

In
In addition
addition to to the
the direct
direct materials,
materials, Pure-
Pure-
Ice
Ice incurred
incurred $306,000
$306,000 of of direct
direct labor
labor cost
cost
during
during thethe year.
year. Manufacturing
Manufacturing overhead
overhead
for
for the
the year
year was
was $724,000.
$724,000.
Pure-Ice
Pure-Ice started
started the
the year
year with
with $132,000
$132,000 in
in
work
work inin process.
process. During
During the
the year,
year, units
units
costing
costing $1,480,000
$1,480,000 were
were transferred
transferred to
to
finished
finished goods
goods inventory.
inventory.
What
What is
is the
the balance
balance in
in work
work in
in
process
process atat the
the end
end of
of the
the year?
year?
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 Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Learning
Learning Objective
Objective

To distinguish between
direct and indirect costs.

LO5
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 Direct
Direct Costs
Costs and
and Indirect
Indirect Costs
Costs
Direct costs Indirect costs
 Costs that can be  Costs cannot be easily
easily and and conveniently
conveniently traced to traced to a unit of
a unit of product or product or other cost
other cost objective. object.
 Examples: direct  Example:
material and direct manufacturing
labor overhead

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Learning
Learning Objective
Objective

To prepare a schedule
of the cost of finished
goods manufactured.

LO6
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 Determining
Determining the
the Cost
Cost of
of Finished
Finished
Goods
Goods Manufactured
Manufactured

A
A schedule
schedule of of the
the cost
cost
of
of finished
finished goods
goods
manufactured
manufactured is is
prepared
prepared to to provide
provide
managers
managers withwith anan
overview
overview of of
manufacturing
manufacturing
activities
activities during
during aa
period.
period.

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 The
Thecost
costof
ofgoods
goods
completed
completedduring
during
the
theperiod
periodisisused
used
to
tocompute
computeCOGS
COGS
for
for the
theperiod.
period.
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 The income
statement is
prepared
using
established
financial
accounting
procedures.

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 Manufacturers
Manufacturershave
havethree
threeinventory
inventoryaccounts.
accounts.
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 End
End of
of Chapter
Chapter 16
16

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