Introduction to Management Accounting Chapter 19

The Functions of Management
Planning Acting Controlling

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Objective 1 Distinguish between financial accounting and management accounting.

Management Accounting and Financial Accounting
Primary Users Internal managers of the business Investors, Creditors, Government authorities (IRS, SEC, etc.)

Management Accounting and Financial Accounting
Purpose of Information Help managers plan and control business operations Help investors, creditors, and others make investment, credit, and other decisions

Management Accounting and Financial Accounting
Focus and Time Dimension

Relevance Reliability, objectivity, and focus on the past

Management Accounting and Financial Accounting
Type of Report Internal reports not restricted by GAAP Financial statements restricted by GAAP

Management Accounting and Financial Accounting
Verification No independent audit Annual independent audit by CPAs

Management Accounting and Financial Accounting
Scope of Information Detailed reports on parts of the company Summary reports primarily on the company as a whole

Management Accounting and Financial Accounting
Behavioral Implications Concern about how reports will affect employees behavior Concern about adequacy of disclosure

Service, Merchandising, and Manufacturing Companies
Service Company: provides intangible services, rather than tangible products Merchandising Company: resells products previously bought from suppliers

Service, Merchandising, and Manufacturing Companies
Manufacturing Company: uses labor, plant, and equipment to convert raw materials into finished products Materials inventory Work in process inventory Finished goods inventory

Objective 2 Describe the value chain and classify costs by value-chain functions.

Value Chain

Research and Development

Design

Production or Purchases

Marketing

Distribution

Customer Services

Objective 3 Distinguish direct costs from indirect costs.

Cost Objects, Direct Costs, and Indirect Costs
Cost objects are anything for which a separate measurement of costs is desired. s Cost drivers are any factors that affect cost.
s

Cost Objects, Direct Costs, and Indirect Costs
s – – – –

What are examples of cost objects? individual products alternative marketing strategies geographic segments of the business departments

Cost Objects, Direct Costs, and Indirect Costs
What are direct costs? s Direct costs are those costs that can be specifically traced to the cost object. s What are indirect costs? s Indirect costs are costs that cannot be specifically traced to the cost object.
s

Objective 4 Distinguish among full product costs, inventoriable product costs, and period costs.

Product Costs
What are product costs? s They are the costs to produce (or purchase) tangible products intended for sale. s There are two types of product costs:
s

Full product costs

Inventoriable product costs

External Reporting

Inventoriable product costs

Period costs

Inventoriable Product Costs
For external reporting, merchandisers’ inventoriable product costs include only costs that are incurred in the purchase of goods. s Inventoriable costs are an asset. s Period costs flow as expenses directly to the income statement.
s

Inventoriable Product Costs
For external reporting, manufacturers’ inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process. s Inventoriable product costs are incurred only in the third element of the value chain. s Costs incurred in other elements of the value chain are period costs.
s

Inventoriable Product Costs
Direct Materials Direct Labor Indirect Indirect Labor Materials Other

Manufacturing Overhead

Inventoriable Product Costs
Direct Materials Direct Labor

Prime Costs = Direct Materials + Direct Labor

Inventoriable Product Costs
Direct Labor Indirect Labor Indirect Materials Other

Conversion Costs = Direct Labor + Manufacturing Overhead

Objective 5 Prepare the financial statements of a manufacturing company.

Financial Statements for Service Companies
There is no inventory and thus no inventoriable costs. s The income statement does not include cost of goods sold.
s

Revenues – Expenses = Operating income

Financial Statements for Merchandising Companies
BALANCE SHEET
Inventoriable Costs

INCOME STATEMENT Sales Revenue
when sales occur deduct

Purchases of Inventory plus Freight-In

Inventory

Cost of Goods Sold

equals Gross Margin deduct

Operating Period Costs Expenses equals Operating Income

Financial Statements for Manufacturing Companies
BALANCE SHEET
Inventoriable Costs

INCOME STATEMENT Sales Revenue
deduct

Materials Inventory

Finished Goods Inventory

when sales occur

Cost of Goods Sold

Work in Process Inventory

equals Gross Margin deduct

Operating Period Costs Expenses equals Operating Income

Manufacturing Company Example
Kendall Manufacturing Company: s Beginning and ending work-in-process inventories were $20,000 and $18,000. s Direct materials used were $70,000. s Direct labor was $100,000. s Manufacturing overhead incurred was $150,000.
s

Manufacturing Company Example
s

What is the cost of goods manufactured? $ 20,000 320,000 18,000 $322,000

Beginning work in process Direct labor $100,000 Direct materials 70,000 Mfg. overhead 150,000 Ending work in process Cost of goods manufactured

Manufacturing Company Example
Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000. s How much is the cost of goods sold?
s

Manufacturing Company Example

Beg. finished goods inventory + Cost of goods manufactured = Cost of goods available for sale – Ending finished goods = Cost of goods sold

$ 60,000 322,000 $382,000 55,000 $327,000

Manufacturing Company Example
Kendall Manufacturing Company had sales of $627,000 for the period. s How much is the gross margin?
s

Sales – Cost of goods sold = Gross margin

$627,000 327,000 $300,000

Manufacturing Company Example
Kendall Manufacturing Company had operating expenses as follows: s Sales salaries and commissions $ 80,000 Delivery expense 10,000 Administrative expenses 30,000 Total $120,000 s What is Kendall’s operating income?
s

Manufacturing Company Example

Gross margin – Operating expenses = Operating income

$300,000 120,000 $180,000

Flow of Costs through a Manufacturer’s Accounts
s s +

Direct Materials Inventory Beginning inventory Purchases and freight-in Direct materials available for use Ending inventory Direct materials used

s s + + +

= – =

= – =

Work in Process Inventory Beginning inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs to account for Ending inventory Cost of goods manufactured

Flow of Costs through a Manufacturer’s Accounts
s s + = – =

Finished Goods Inventory Beginning inventory Cost of goods manufactured Cost of goods available for sale Ending inventory Cost of goods sold

Objective 6 Identify major trends in the business environment, and use cost-benefit analysis to make business decisions.

Shift to a Service Economy
Service Industries Other

In the U.S., 55% of the workforce is employed in service companies.

Competing in the Global Marketplace
Foreign Operations Other

Foreign operations account for over 30% of GE’s revenues.

Just-in-Time
JIT philosophy means that the company schedules production just in time to satisfy needs. s Speeding up of the production process reduces throughput time. s Throughput time is the time between buying raw materials and selling the finished products.
s

Total Quality Management
The goal of total quality management (TQM) is to please customers by providing them with superior products and services. s TQM emphasizes educating, training, and cross-training employees. s Quality improvement programs cost money today. s The benefits usually do not occur until later.
s

Total Quality Management
Total Benefits Initial benefits and costs Additional expected benefits Total $170 million 68 million $238 million $200 million Total Cost $200 million

Objective 7 Use reasonable standards to make ethical judgments.

Professional Ethics for Management Accountants
In many situations the ethical path is not so clear. s The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.
s

Standards of Ethical Conduct for Management Accountants
Competence Integrity

Confidentiality

Objectivity

End of Chapter 19