Chapter

16 Management Accounting:
A Business Partner

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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 th o rity .

A c c o u n tin g s y s te m s h e lp to id e n tify
w h o h a s a u th o r ity o v e r a s s e ts .

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 io n -m a k in 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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 Comparing
Comparing Financial
Financial Accounting
Accounting
and
and Management
Management Accounting
Accounting

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 Accounting
Accounting for
for Manufacturing
Manufacturing
Operations
Operations
Steps in the Manufacturing Process:
Convert
Convertraw
raw Sell
Sell
Buy
Buyraw
raw materials
materialsinto
into finished
finished
materials.
materials. finished
finishedgoods.
goods. goods.
goods.

Direct
Direct Direct
Directlabor
laborand
and Cost
Cost of
of
materials
materials manufacturing
manufacturing goods
goods
costs.
costs. overhead
overheadcosts.
costs. sold.
sold.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 Direct
Direct Labor
Labor
Includes
Includes the
the payroll
payroll cost
cost of
of direct
direct workers.
workers.

Those
Thoseemployees
employees
who
who work
workdirectly
directly
on
onthe
thegoods
goods
being
being
manufactured.
manufactured.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

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

The
Thecost
cost of
of
employees
employees whowho dodo
not Those
Thoseemployees
employees
notwork
workdirectly
directlyon
on
the who
who work
workdirectly
directly
the goods
goods isis
considered on
onthe
thegoods
goods
considered indirect
indirect
labor being
being
labor and
andis
ispart
partofof
manufacturing manufactured.
manufactured.
manufacturing
overhead.
overhead.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 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.
 Cost
 Cost of
of regulatory
regulatory
compliance.
compliance.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 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.
Does
Doesnot
not include
 Indirect
 Indirect labor.
labor. include
selling
sellingor
orgeneral
general
 Machinery
 Machinery and
and and
andadministrative
administrative
equipment
equipment costs.
costs. expenses.
expenses.
 Cost
 Cost of
of regulatory
regulatory
compliance.
compliance.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 Manufacturing
Manufacturing Overhead
Overhead

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 Manufacturing
Manufacturing Overhead
Overhead

The
The cost
cost to
to
produce
produce aa unit
unit of
of
product
product includes:
includes: Manufacturing
Manufacturingoverhead
overhead
Direct must
must be bemathematically
Direct material
material allocated
mathematically
Direct allocatedto toeach
eachunit
unit of
of
Direct labor
labor product
product using
usingaa
Manufacturing
Manufacturing predetermined
predeterminedoverhead
overhead
overhead application
applicationrate.
rate.
overhead (This
(Thiswill
willbebediscussed
discussed
later
laterin
inthis
thischapter.)
chapter.)
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 Product
Product Costs
Costs Versus
Versus Period
Period Costs
Costs
Balance
BalanceSheet
Sheet
Product Costs
(manufacturing Current
Current assets
assets
costs) as and
andinventory
inventory
incurred
When
Whengoods
goods
Income
Income are
aresold.
sold.
Statement
Statement
Period Costs Revenue
Revenue
(operating COGS
COGS
expenses and Gross
Grossprofit
profit
income taxes.) Expenses
Expenses
as Net
Netincome.
income.
incurred
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 The
The Flow
Flow of
of Physical
Physical Goods
Goods
Direct Materials Direct Factory
materials Warehouse materials
purchased used

Direct labor &

Manufacturing overhead
Finished
goods
Finished goods
Warehouse
Goods
sold
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 The
The Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Direct Materials Direct Work in Process
materials Inventory materials Inventory
purchased used
$$$ $$$ $$$ $$$

Direct labor &

Manufacturing overhead
Cost of goods
manufactured
Cost of Finished Goods
Goods Sold Inventory

$$$ $$$ $$$

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 The
The Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Example
Example

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,
2002.
2002. 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, 2002,
2002, $78,000
$78,000
of
of the
the direct
direct materials
materials were
were still
still on
on hand.
hand.
How
How much
much direct
direct material
material was
was
placed
placed into
into production
production during
during 2002?
2002?

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 The
The Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Example
Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 The
The Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Example
Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 The
The Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Example
Example
In
In addition
addition to
to the
the direct
direct materials,
materials, Pure-
Pure-
Ice
Ice incurred
incurred $306,000
$306,000 ofof direct
direct labor
labor cost
cost
during
during 2002.
2002. Manufacturing
Manufacturing overhead
overhead for
for
2002
2002 was
was $724,000.
$724,000.
Pure-Ice
Pure-Ice started
started 2002
2002 with
with $132,000
$132,000 inin
work
work in
in process.
process. During
During 2002,
2002, units
units
costing
costing $1,480,000
$1,480,000 were
were transfered
transfered toto
finished
finished goods
goods inventory.
inventory.
What
What isis the
the ending
ending balance
balance in
in work
work
in
in process
process at at December
December 31,
31, 2002?
2002?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 The
The Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Example
Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 The
The Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Example
Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 Overhead
Overhead Application
Application Rates
Rates
The
The overhead
overhead application
application rate
rate expresses
expresses an
an
expected
expected relationship
relationship between
between
manufacturing
manufacturing overhead
overhead costs
costs and
and some
some
activity
activity base
base related
related to
to the
the production
production
process.
process.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 Overhead
Overhead Application
Application Rates
Rates
Overhead
Overhead costs
costs are
are estimated
estimated based
based
on
on budgets
budgets and
and using
using mathematical
mathematical
estimation
estimation techniques.
techniques.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 Overhead
Overhead Application
Application Rates
Rates
The
The base
base isis the
the activitiy
activitiy that
that “drives”
“drives” the
the
cost,
cost, called
called the
the cost
cost driver.
driver.
Direct
Direct labor
labor hours
hours and
and machine
machine hours
hours are
are
commonly
commonly used used cost
cost drivers.
drivers.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 Overhead
Overhead Application
Application Rates
Rates
Example
Example
Big
Big “T”
“T” Company
Company produces
produces
engines
engines for
for big
big trucks.
trucks. Total
Total
overhead
overhead forfor 2002
2002 isis estimated
estimated to
to
be
be $2,600,000.
$2,600,000. Big
Big “T”
“T” applies
applies
overhead
overhead based
based onon machine
machine hours.
hours.
Big
Big “T”
“T” estimates
estimates machine
machine hours
hours
for
for 2002
2002 to
to be
be 162,500
162,500 hours.
hours.
Compute
Compute Big
Big “T’s”
“T’s”
predetermined
predetermined overhead
overhead rate
rate
for
for 2002.
2002.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 Overhead
Overhead Application
Application Rates
Rates
Example
Example

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 Overhead
Overhead Application
Application Rates
Rates
Example
Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 Overhead
Overhead Application
Application Rates
Rates
Some
Some companies
companies use
use different
different cost
cost drivers
drivers
for
for different
different manufacturing
manufacturing activities,
activities, aa
process
process called
called ACTIVITY
ACTIVITY BASED
BASED COSTING.
COSTING.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 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 toto assist
assist
managers
managers in in
understanding
understanding and and
evaluating
evaluating the
the overall
overall
cost
cost ofof manufacturing
manufacturing
products.
products.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 The
Thecost
costof
ofgoods
goods
completed
completedduring
during
the
theperiod
periodisisused
used
to
tocompute
computeCOGS
COGS
for
for the
theperiod.
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 The income
statement is
prepared
using
established
financial
accounting
procedures.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 End
End of
of Chapter
Chapter 16
16

This is a great job, but

the overhead is killing
my profit margin!

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