University of Technology, Sydney

22107 Accounting for Business Decisions A

Introduction to
management accounting
and costing
Workshop 8

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 Important updates
• Mid-session exam this week (May 13)
– See mid-session exam arrangements reminder
• Next week’s tutorial:
– Aiming for mid-session exam feedback
– Covering both Inventory Costing AND Management
Accounting homework
• Questions?

15-2
 Learning Objectives
1.Managerial and financial accounting compared
2.Describe the contemporary view of accounting information systems
3.Recognise the role of relevant factors in decision making
4.Describe the business model and associated management decisions
5.Describe the manufacturing context
6.Distinguish manufacturing and non-manufacturing costs. Classify
manufacturing costs as direct material, direct labour, or overhead
7.Diagram the flow of costs in manufacturing companies and calculate
the cost of manufacturing
8.Prepare the manufacturer financial statements

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4
5
15-6
15-7
 Objective 1

Management and financial

accounting compared

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 Users of Accounting Information

External • Shareholders, potential

investors, creditors,
Users suppliers, etc.

Internal • Employees, teams,

departments and top
Users management.

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 You are considering opening a Tiffany &
Co franchise store at Westfield Chatswood

• Store rental will cost $265,000 per year

• What further information do you need before
making your decision?

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 Types of Information Needed By
Internal Users
Internal users, particularly management, need more
flexible and detailed information that will allow them to
perform:

Planning

Operating

Controlling
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 Objective 2

Describe the contemporary view

of accounting information systems

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What brand of phone do you have?
• Apple
• Google
• HTC
• Huawei
• LG
• Nokia
• Samsung
• Other
Accounting Information Systems – Contemporary View

TRADITIONAL NON-FINANCIAL
FINANCIAL Information
Accounting
Information
Quantitative Qualitative
Financial Information: Information:
Information: • Percentage of • Customer &
• Assets Defects Employee
• Liabilities • # Customer Satisfaction
• Revenues Complaints • Product &
• Gross Margin • Warranty Claims Service
• Operating • Inventory Units Quality
Expenses • Budgeted Hours • Reputation

Important for decision making! 14

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 Objective 3

Recognise the role of relevant

factors in decision making

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 You decide

Uber Black driver – which car will you buy?

Mercedes S-class or Tesla Model S

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 Decision-Making
An effective decision-making model is one that
focuses on relevant factors that differ between
alternatives.
• Relevant costs: differ between alternatives
• Sunk costs: already incurred & cannot be changed

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 Objective 4

Describe the business model and

associated management decisions

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 The Business Model
Business Model: Defines the organisation’s approach to conducting core
activities – Mission, vision, values, business strategy

The management accountant is crucial in modern business, assisting

the organisation to formulate and implement its business model

http://www.coca-colacompany.com/our-company/mission-vision-values
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 The Value Chain

Research and
Design Production
development

Customer
Marketing Distribution
service

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 Successful and not so successful business models:

vs

Did the management accounting function have a role?

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 Objective 5

Describe the manufacturing context

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 An example of a manufacturing operation:
Ford Fiesta

https://www.youtube.com/watch?v=ErSZmor1qok

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 If you have more time:
• Tesla:
https://www.youtube.com/watch?v=KA18tusTgE4

• Tech Asia
https://www.youtube.com/channel/UCrgVIJD4dy
mgvTiEcOSoyFA

15-25
 Types of Companies

Manufacturing: Take raw materials

and produce new products from them.
Service: Provide a service such as airlines,
hospitals, repair shops, law firms, CPA firms.
Retailers: Merchandising companies sell
products that someone else has manufactured.

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 Inventories in a Traditional Environment

• Inventories serve as buffers in case of unexpected

demand for products or unexpected problems in
production.

Three inventories exist in a traditional environment:

Raw Work-In-
1 Materials 2 Process 3
Finished Goods

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 Objective 6

Distinguish manufacturing and non-

manufacturing costs. Classify
manufacturing costs as direct
material, direct labour, or overhead

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Which is not a manufacturing cost:
• Sheet steel cost for metal pressings
• Labour cost for product assembly
• Car shipping cost
• Electricity cost for factory lighting
Manufacturing Versus Non-manufacturing Costs
Manufacturing Costs
• Costs incurred in the factory or plant

Non-manufacturing Costs
• Costs that are incurred outside the plant or factory and typically
categorised (R&D, design, distribution, selling, after sales service
and administrative costs) – expensed in the income statement.

Research and
Design Production
development

Customer
Marketing Distribution
service 30
Which cost of manufacturing your phone
will be most difficult to estimate?

• Battery
• Charger
• Circuit board
• Glue
• Touch screen
 Manufacturing Costs
Direct Direct Manufacturing
Materials Labour Overhead
• Various •Labour costs •Indirect materials
materials that of assembly- such as welding
can be directly line workers. material, glue,
and screws, etc.
conveniently •Indirect labour
traced to a such as factory
product. maintenance
workers and
factory cleaners
•Other factory costs

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 Objective 7

Diagram the flow of costs in

manufacturing companies and
calculate the cost of manufacturing

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 Cost Flows in a
Traditional Manufacturing Environment

As Goods
Direct
Are Finished
Materials

Cost of
Direct Work-in- Finished
Goods
Labour Process Goods
Sold

Manufacturing
Overhead
As Goods
Are SOLD

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 Typical Cost Flows and T-Accounts

Finished
Storeroom Factory Goods Customer
Warehouse

Raw Materials Work-in-Process Finished Goods Cost of Goods Sold

Beg. Inv. Beg. Inv. Beg. Inv.

Raw + Raw Mat.
+ Purchases Cost of + Cost of Cost of
Mat.
Used
Used
Goods Goods Goods X
+ Direct Manu. Manu. Sold
Labour
End Inv. + Man.
Overhead
End Inv. End Inv.

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Northern Territory Lights (NTL) Custom
Cabinets Example
Northern
Lights

custom cabinets

• Let’s see how the accounting for the production

process of NTL Custom Cabinets works.

• NTL uses the Cost-of-Goods-Sold Model for a

Traditional Manufacturing Company with Inventory.

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 Raw Materials Purchase:
Journal Entry

NTL purchased an additional $40 000 of raw materials

during the year.

GENERAL
JOURNAL
Date De s c riptio n De bit Cre dit
2010
XX XX Raw Materials Inventory 40 000
Accounts Payable (or
Cash 40 000

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 Moving Raw Materials to WIP: T-Accounts

NTL moves $45 000 of raw materials to the factory for

use in manufacturing cabinets; $5000 of raw materials
remains in raw materials inventory.

Raw Materials Work-in-Process

$10 000    
+ 40 000  
- $45 000 + $45 000  
       
$5,000   

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 Moving Raw Materials to WIP: Journal
Entry
When NTL moves $45 000 of raw materials to the factory
for use in manufacturing cabinets.

GENERAL
JOURNAL
Da te De s c riptio n De bit Cre dit
2010
XX XX Work-in-Process Inventory 45 000
Raw Materials Inventory 45 000

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 Direct Labour: Journal Entry

As direct labour costs of $65 000 are incurred (factory

workers work on the cabinets), the cost of the workers is
added to the raw material cost in the WIP inventory
account.

GENERAL
JOURNAL
Da te De s c riptio n De bit Cre dit
2010
XX XX Work-in-Process Inventory 65 000
Wages Payable (or Cash) 65 000

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 Manufacturing Overhead: Journal Entry
As manufacturing overhead costs ($85 000 of machine
costs, rent, depreciation, utilities, indirect materials, and
so forth) are incurred, they are added to the WIP
account.

GENERAL
JOURNAL
Da te De s c riptio n De bit Cre dit
2010
XX XX Work-in-Process Inventory 85 000
Accounts Payable or Cash 85 000

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 The Transfer between WIP and Finished Goods
Inventories

Raw materials used, direct labour, and manufacturing

overhead are added to the beginning WIP balance. The
cost of goods (cabinets) manufactured and transferred
to finished goods was $190 000.

Work-In-Process Finished Goods

$15 000 -$190 000  
+45 000  
 +65 000  
 +85 000    + $190 000  
$20 000    
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 WIP to Finished Goods Transfer: Journal
Entry
The journal entry to record the transfer of finished
goods from WIP to finished goods inventory is:

GENERAL
JOURNAL
Date De s c ription De bit Cre dit
2010
XX XX Finished Goods Inventory 190 000
Work-in-Process Inventory 190 000

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 The Sale of Finished Goods:
the T-Accounts Involved
When cabinets are sold, the accumulated costs in the
finished goods inventory account are moved to the
cost of goods sold account.

Finished Goods Cost of Goods Sold

$30 000 -$215 000  
+190 000  
 
     + $215 000  
$5,000   

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 The Sale of Finished Goods:
Journal Entry

The journal entry to record the sale of finished goods

inventory results in costs being accumulated in the cost of
goods sold account.

GENERAL
JOURNAL
Date De s c riptio n De bit Cre dit
2010
XX XX Cost of Goods Sold 215 000
Finished Goods Inventory 215 000

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 Cost Flows in a
Traditional Manufacturing Environment

Direct
Materials As
Products As
Are Products
Produced Are SOLD
Direct
Labour
Balance
Income
Sheet
Statement
Inventories
Manufacturing
Overhead

Period Costs

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 Objective 8

Prepare the manufacturer financial

statements

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 Manufacturing Company Example

• Varsity Manufacturing Company:

• Beginning and ending work-in-process
inventories were $20,000 and $18,000.
• Direct labour was $100,000.
• Direct materials used were $70,000.
• Manufacturing overhead incurred was
$150,000.

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 Manufacturing Company Example

• What is the cost of goods manufactured?

Schedule of Cost Goods Manufactured

Beginning work in process $ 20,000
Direct labour $100,000
Direct materials 70,000
Mfg. overhead 150,000 320,000
Ending work in process 18,000
Cost of goods manufactured $322,000
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 Manufacturing Company Example

• Varsity Manufacturing Company’s beginning

finished goods inventory was $60,000 and its
ending finished goods inventory was $55,000.
• How much is the cost of goods sold?

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 Manufacturing Company Example

Beg. finished goods inventory $ 60,000

+ Cost of goods manufactured 322,000
= Cost of goods available for sale $382,000
– Ending finished goods 55,000
= Cost of goods sold $327,000

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 Manufacturing Company Example

• Varsity Manufacturing Company had sales of

$627,000 for the period.
• How much is the gross profit?

Sales $627,000
– Cost of goods sold 327,000
= Gross profit $300,000

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 Manufacturing Company Example

• Varsity Manufacturing Company had operating

expenses as follows:

Sales salaries and commissions $ 80,000

Delivery expense
. 10,000 .

Administrative expenses 30,000.

Total 120,000

• What is Varsity’s net profit?

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Manufacturing Company Example

Gross profit $300,000

– Operating expenses 120,000
= Net Profit $180,000

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 Multiple choice question - information
• Beginning and ending work-in-process inventories
were $37,000 and $18,000 respectively
• Beginning and ending finished goods inventories
were $97,000 and $38,000 respectively
• Direct material used were $24,000
• Direct labour were $42,000
• Manufacturing overhead incurred was $53,000
• Advertising expenses were $13,000
• Administration expenses were $24,000
• Sales totaled $550,000 (ignore GST)
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Q1: What is the cost of goods manufactured?
a. $138,000
b. $174,000
c. $151,000
d. $175,000

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Q2: What is the cost of goods sold:
a. $100,000
b. $159,000
c. $197,000
d. $210,000

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End of workshop 8

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