Transcript Introduction to-Management Accounting.ppt

Managerial Accounting - 7.1
Introduction to
Management Accounting
Chapter 19
Managerial Accounting - 7.2
Dell Computer
Dell’s first quarter 1997 net income soared
to $198 million, more than double the
income in the first quarter of 1996.
 How did Michael Dell turn his company
from a $40 million loss in 1994 to this net
income?

Managerial Accounting - 7.3
Dell Computer
Michael Dell knew that cost control would
drive the computer business.
 Why?
 Most customers want a good price more
than a specific brand name.
 Dell executives also had to market and
distribute the computers.

Managerial Accounting - 7.4
Dell Computer

Accounting information helps executives
such as Dell make business decisions.
Managerial Accounting - 7.5
Dell Computer

–
–
–
The accounting system provides managers
with cost and profit information broken
down by:
Type of product
Marketing strategy
Geographic business units
Managerial Accounting - 7.6
Chapter Objectives
1
2
Distinguish between financial accounting
and management accounting, and use
management accounting information for
decision making.
Describe the value chain and classify costs
by value chain functions.
Managerial Accounting - 7.7
Chapter Objectives
3
4
5
Distinguish direct costs from indirect costs.
Distinguish among full product costs,
inventoriable product costs and period
costs.
Prepare the financial statements of a
manufacturing company.
Managerial Accounting - 7.8
Chapter Objectives
6
7
Identify major trends in the business
environment and use cost-benefit analysis
to make business decisions.
Use reasonable standards to make ethical
judgments.
Managerial Accounting - 7.9
The Functions of Management
Planning - choosing goals and deciding how
to achieve those goals.
 Controlling - taking action to implement the
plans and then evaluating results.

Managerial Accounting - 7.10
The Functions of Management

Budget - a tool that helps management
implement plans.
Managerial Accounting - 7.11
Objective 1
Distinguish between financial
accounting and management
accounting, and use
management accounting
information for decision
making.
Primary Users Financial Accounting
Managerial Accounting - 7.12
Investors
– Creditors
– Government authorities (IRS, SEC, etc.)
 Financial accounting reports information to
outsiders based on past performance.
–
Managerial Accounting - 7.13
Primary Users Management Accounting
Internal managers of the business
 Management accounting presents information
for insiders to use in planning the future of
the business.
–
Managerial Accounting - 7.14
Focus
An important characteristic of management
accounting information is relevance.
 Characteristics of financial accounting
information include reliability and objectivity.

Reports and Scope
of Information
Managerial Accounting - 7.15
Management accounting has no GAAP-type
standards.
 Managers tailor the company’s management
accounting system to provide detailed
reports on parts of the company.

Reports and Scope
of Information
Managerial Accounting - 7.16
Financial accounting is restricted by GAAP.
 Reports present summarized information on
the company as a whole.
 These reports are usually on a quarterly or
annual basis.

Managerial Accounting - 7.17
Behavioral Implications
Management accounting concern is about
how reports will affect the behavior of
employees.
 Financial accounting concern is about
adequacy of disclosure.

Managerial Accounting - 7.18
Management’s Use of
Accounting Information
–
1
2
3
Three purposes:
To determine the cost of products and
services.
To plan and control business operations.
To report the company’s financial position
and results of operations to external parties.
Managerial Accounting - 7.19
Manufacturing Firms
A manufacturing business uses labor, plant
and equipment to convert materials into new
finish products.
 Manufacturers have three kinds of inventory:
1 Materials inventory
2 Work in process inventory
3 Finished goods inventory

Managerial Accounting - 7.20
Manufacturing Firms
Materials inventory - materials for use in
the manufacturing process.
 For example, a glass container factory’s raw
material inventory includes sand, soda ash
and limestone.

Managerial Accounting - 7.21
Manufacturing Firms
Work in process inventory - goods that are
partially completed.
 Finished goods inventory - completed goods
that have not yet been sold.
 Finished goods are what the manufacturer
sells to a merchandising business, another
manufacturer or the ultimate consumer.

Managerial Accounting - 7.22
Objective 2
Describe the value chain and
classify costs by value chain
functions.
Managerial Accounting - 7.23
Value Chain
Research and development (R&D) conducted to determine what new or
improved products are to be introduced to
the market.
 Design - the detailed engineering of
products and services, or the process for
producing them.

Managerial Accounting - 7.24
Value Chain
Production of products and services or
purchases of merchandise inventory - the
use of resources to produce the product or
service or to purchase merchandise
inventory.
 Marketing - the promotion of the product or
service.

Managerial Accounting - 7.25
Value Chain
Distribution - the delivery of the product or
service to the customer.
 Customer service - the support provided for
customers after the sale.

Managerial Accounting - 7.26
Value Chain
Upstream costs (research and development)
occur before manufacturing.
 Downstream costs (marketing and
distribution) occur after manufacturing.

Managerial Accounting - 7.27
Objective 3
Distinguish direct costs
from indirect costs.
Managerial Accounting - 7.28
Cost Objects, Direct Costs
and Indirect Costs
Cost objects are anything for which a
separate measurement of costs is desired.
 Cost drivers are any factors that affect cost.

Managerial Accounting - 7.29
Cost Objects, Direct Costs
and Indirect Costs

–
–
–
–
Cost objects may include...
individual products (laptop computers,
desktop models).
alternative marketing strategies (telephone
sales, sales to retailers).
geographic segments of the business (U.S.,
Europe).
departments (personnel, accounting).
Managerial Accounting - 7.30
Cost Objects, Direct Costs
and Indirect Costs
Direct costs are those costs that can be
specifically traced to the cost object.
 Indirect costs are costs that cannot be
specifically traced to the cost object.

Managerial Accounting - 7.31
Objective 4
Distinguish among full product
costs, inventoriable product
costs and period costs.
Managerial Accounting - 7.32
Product Costs...
are the costs to produce (or purchase)
tangible products intended for sale.
 There are two types of product costs:
1 Full product costs
2 Inventoriable product costs
–
Managerial Accounting - 7.33
Product Costs
Full product costs include all resources used
from designing a product to delivering it to
a customer.
 Full product costs are the costs of all
resources used throughout the value chain.

Managerial Accounting - 7.34
Inventoriable Product Costs
Versus Period Costs
Inventoriable product costs are used for
external reporting.
 They do not include costs from all elements
of the value chain.
 They are narrower in scope than full
product costs.
 Inventoriable product costs must conform to
GAAP.

Managerial Accounting - 7.35
Inventoriable Product Costs
Versus Period Costs
For external reporting, merchandisers’
inventoriable product costs include only
costs that are incurred in the purchase of
goods.
 These costs are included in the third
element of the value chain.
 Costs incurred in other elements of the
value chain are period costs.

Managerial Accounting - 7.36
Inventoriable Product Costs
Versus Period Costs
Inventoriable costs are an asset.
 They become an expense when the items
are sold.
 Period costs flow as expenses directly to the
income statement.

Managerial Accounting - 7.37
Inventoriable Product Costs
Versus Period Costs
For external reporting, manufacturer’s
inventoriable product costs include raw
materials plus all other costs incurred in the
manufacturing process.
 Inventoriable product costs are incurred
only in the third element of the value chain.
 Costs incurred in other elements of the
value chain are period costs.

Managerial Accounting - 7.38
Major Categories of
Inventoriable Product Costs
–
–
–
Direct materials
Direct labor
Manufacturing overhead
Managerial Accounting - 7.39
Major Categories of
Inventoriable Product Costs
Direct materials must meet two requirements:
 They must become a physical part of the
finished product.
 Their costs must be separately and
conveniently traced to the
finished product.

Managerial Accounting - 7.40
Major Categories of
Inventoriable Product Costs

Direct labor is the compensation of
employees who physically convert materials
into the company’s products.
Managerial Accounting - 7.41
Major Categories of
Inventoriable Product Costs

–
–
–
–
Manufacturing overhead includes all
manufacturing costs other than direct
materials and direct labor.
Indirect materials
Indirect labor
Factory utilities, rent, insurance
Depreciation
Managerial Accounting - 7.42
Manufacturing Overhead Includes:
Indirect materials.
 These cannot be conveniently or economically
traced to a particular finished product.
 Indirect materials are part of the manufacturing
overhead cost.
– Glue, nails
– Thread, buttons
– Bolts, squirt of oil
–
Managerial Accounting - 7.43
Manufacturing Overhead Includes:
Indirect labor.
 This is a cost difficult to
trace to a specific product.
– Forklift operators
– Janitors
– Plant managers
– Supervisors
– Machine helpers
–
Prime Cost and
Conversion Costs
Managerial Accounting - 7.44
Prime costs are the direct costs incurred in
the manufacturing process (direct materials
plus direct labor).
 Conversion costs are the costs of converting
direct materials into finished products
(direct labor plus manufacturing overhead).

Managerial Accounting - 7.45
Objective 5
Prepare financial statements
of a manufacturing company.
Managerial Accounting - 7.46
Financial Statements for
Service Companies
There is no inventory and thus no
inventoriable costs.
 The income statement does not include cost
of goods sold.
 Revenues - Expenses = Operating income

Managerial Accounting - 7.47
Financial Statements for
Merchandising Companies
A merchandising company buys goods that
are ready for immediate resale.
 Inventoriable costs are for the purchase of
these goods plus freight-in.

Managerial Accounting - 7.48
Financial Statements for
Merchandising Companies
Beginning inventory
+ Purchases and Freight-in
= Cost of goods available for sale
– Ending inventory
= Cost of goods sold

Managerial Accounting - 7.49
Financial Statements for
Merchandising Companies
When sales occur, Inventory decreases and
Cost of Goods Sold increases.
 On the income statement, cost of goods sold
is deducted from sales revenue to obtain the
gross margin.

Managerial Accounting - 7.50
Financial Statements for
Manufacturing Companies

1
2
3
Manufacturing firms have the most
complicated accounting with three types of
inventory accounts.
Materials
Work in process
Finished goods
Managerial Accounting - 7.51
Financial Statements for
Manufacturing Companies
Materials inventory is the cost of materials
on hand intended for use in manufacturing.
 Work in process inventory is the cost of
goods that are in the manufacturing process
but not yet complete.
 Finish goods inventory is the cost of the
completed goods that are not yet sold.

Managerial Accounting - 7.52
Financial Statements for
Manufacturing Companies
Hickory, Inc., is a small furniture
manufacturing company.
 Beginning and ending work in process
inventories were $20,000 and $18,000.
 Direct materials used were $70,000.
 Direct labor was $100,000.
 Manufacturing overhead incurred
was $150,000.

Managerial Accounting - 7.53
Financial Statements for
Manufacturing Companies
What is the cost of goods manufactured?
 Beginning work in process
$ 20,000
+ Direct labor
$100,000
+ Direct materials 70,000
+ Mfg. Overhead 150,000
320,000
– Ending work in process
18,000
= Cost of goods manufactured
$ 322,000

Managerial Accounting - 7.54
Financial Statements for
Manufacturing Companies

Hickory, Inc.’s, beginning finished goods
inventory was $60,000 and its ending
finished goods inventory was $55,000.
Managerial Accounting - 7.55
Financial Statements for
Manufacturing Companies
How much is the cost of goods sold?
 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

Managerial Accounting - 7.56
Financial Statements for
Manufacturing Companies
Hickory, Inc., had sales of $627,000 for the
period.
 How much is the gross margin?
 Sales
$627,000
– Cost of goods sold 327,000
= Gross margin
$300,000

Managerial Accounting - 7.57
Financial Statements for
Manufacturing Companies
Hickory, Inc., had operating expenses as
follows:
 Sales salaries and commissions $ 80,000
 Delivery expense
10,000
 Administrative expenses
60,000
 Total
$150,000
 What is Hickory’s operating income?

Managerial Accounting - 7.58
Financial Statements for
Manufacturing Companies
Gross margin
– Operating expenses
= Operating income

$300,000
150,000
$150,000
Managerial Accounting - 7.59
Flow of Costs through a
Manufacture’s Accounts
Beginning direct material inventory
+ Purchases
= Direct materials available for use
– Ending inventory
= Direct materials used

Managerial Accounting - 7.60
Flow of Costs through a
Manufacture’s Accounts
Work in
Material
Process
Beg. Inv. 10 40 used Beg. Inv. 80
Purchases 50
Material 40
End. Inv. 20
Direct Lab. 90
Overhead 90 200 finished
End. Inv. 100
Managerial Accounting - 7.61
Flow of Costs through a
Manufacture’s Accounts
Finished Goods
Inventory
Beg. Inv. 50
Finished 200 210 Sold
End. Inv. 40
Cost of Goods Sold
210
Managerial Accounting - 7.62
Objective 6
Identify major trends in the
business environment and use
cost-benefit analysis to make
business decisions.
Managerial Accounting - 7.63
Just-in-Time
JIT philosophy means that the company
schedules production just in time to satisfy
needs.
 Materials are purchased and finished goods
are completed only as needed to satisfy
customer demand.

Managerial Accounting - 7.64
Just-in-Time
Firms adopting JIT report sharp reductions
in inventory.
 Speeding up of the production process
reduces throughput time.
 Throughput time is the time between buying
raw materials and selling the finished
products.

Managerial Accounting - 7.65
Quality
The goal of total quality management
(TQM) is to please customers by providing
them with superior products and services.
 Each business function examines its own
activities and works to improve by setting
higher and higher goals.

Managerial Accounting - 7.66
Quality
TQM emphasizes educating, training and
cross-training employees to do multiple
tasks.
 Quality improvement programs cost money
today.
 The benefits usually do not occur until later.

Managerial Accounting - 7.67
Quality




Total Benefits Total Cost
Initial benefits
and costs
$170 million $200 million
Additional expected
benefits
68 million
Total
$238 million $200 million
Managerial Accounting - 7.68
Objective 6
Use reasonable standards to
make ethical judgments.
Managerial Accounting - 7.69
Professional Ethics for
Management Accountants
In many situations the ethical path is not so
clear.
 The Institute of Management Accountants
(IMA) has developed standards to help
management accountants deal with these
situations.

Managerial Accounting - 7.70
Professional Ethics for
Management Accountants

–
–
–
These standards require management
accountants to:
maintain their professional competence.
preserve the confidentially of the
information they handle.
act with integrity and objectivity.
Managerial Accounting - 7.71
Professional Ethics for
Management Accountants

Management accountants have an
obligation to the organizations they serve,
their profession, the public and themselves
to maintain the highest standards of ethical
conduct.