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1 Managerial Accounting

Learning Objectives
Identify the features of managerial accounting and the
1 functions of management.

Describe the classes of manufacturing costs and the


2
differences between product and period costs.

Demonstrate how to compute cost of goods manufactured


3
and prepare financial statements for a manufacturer.

4 Discuss trends in managerial accounting.

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LEARNING
OBJECTIVE
1 Identify the features of managerial accounting and
the functions of management.
Comparing Managerial and Financial
Accounting
Managerial accounting provides economic and financial
information for managers and other internal users.

ILLUSTRATION 1-1
Differences between financial
and managerial accounting
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Management Functions

Planning Directing Controlling

 Maximize short-term  Coordinate diverse  Keeping activities on


profit and market activities and human track.
share. resources.  Determine whether
 Commit to  Implement planned goals are met.
environmental objectives.  Decide changes
protection and social  Provide incentives to needed to get back
programs. motivate employees on track.
 Add value to the  Hire and train  May use an informal
business. employees. or formal system of
 Produce a smooth- evaluations.
running operation.

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Organizational Structure 1 Managerial Accounting

Indicate whether the following statements are true or false.


Organization charts show
the interrelationships of 1. Managerial accountants have a single role within an
False
activities and the delegation organization, collecting and reporting costs to
of authority and management.
responsibility within the
company. True 2. Financial accounting reports are general-purpose and
intended for external users.

3. Managerial accounting reports are special-purpose and


True
issued as frequently as needed.
Illustration 1-2
A typical corporate
organization chart

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Describe the classes of manufacturing costs


1 Managerial Accounting LEARNING
OBJECTIVE
2 and the differences between product and
period costs.

Indicate whether the following statements are true or false.


Managers should ask questions such as the following.
4. Managers’ activities and responsibilities can be
False 1. What costs are involved in making a product or
classified into three broad functions: cost accounting,
providing a service?
budgeting, and internal control.
2. If we decrease production volume, will costs decrease?
False 5. Managerial accounting reports must now comply with
generally accepted accounting principles (GAAP). 3. What impact will automation have on total costs?

4. How can we best control costs?

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Manufacturing Costs Manufacturing Costs

Manufacturing consists of activities and processes that Direct Materials


convert raw materials into finished goods. Raw Materials
Basic materials and parts used in
manufacturing process.

Direct Materials
Raw materials that can be physically and directly associated
with the finished product during the manufacturing process.

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Manufacturing Costs Manufacturing Costs

Direct Materials Direct Labor


Indirect Materials Work of factory employees that can
be physically and directly associated
1. Not physically part of the finished product or
with converting raw materials into
2. they are an impractical to trace to the finished finished goods.
product because their physical association with the
finished product is too small in terms of cost. Indirect Labor
Work of factory employees that has no physical association
Considered part of manufacturing overhead.
with the finished product or for which it is impractical to trace
costs to the goods produced.

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Manufacturing Costs

Manufacturing Overhead
 Costs that are indirectly associated with manufacturing
the finished product.

 Includes all manufacturing costs except direct materials


and direct labor.

 Also called factory overhead, indirect manufacturing


costs, or burden.

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Product Versus Period Costs Product Versus Period Costs

Product Costs Period Costs


 Direct materials
 Components:  Direct labor  Charged to expense as incurred.
 Manufacturing overhead
 Non-manufacturing costs.

 Costs that are an integral part of producing the  Includes all selling and administrative expenses.
product.

 Recorded in “inventory” account.

 Not an expense (COGS) until the goods are sold.

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Product Versus Period Costs Product Versus Period Costs

Illustration: Suppose you started your own snowboard factory,


Illustration 1-3
Product versus period costs

KRT Boards. Here are some of the costs that your snowboard
factory would incur. Assign the following costs:

Illustration 1-4

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Product Versus Period Costs Product Versus Period Costs

If KRT Boards produces 10,000 snowboards the first year,


Illustration 1-4

what would be the total manufacturing costs?

Illustration 1-5
Computation of total
manufacturing costs

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2 Managerial Cost Concepts


LEARNING
OBJECTIVE
3 Demonstrate how to compute cost of goods manufactured
and prepare financial statements for a manufacturer.

A bicycle company has these costs: tires, salaries of employees who Income Statement
put tires on the wheels, factory depreciation, advertising expenditures,
lubricants, spokes, salary of factory manager, salary of accountant, Under a periodic inventory system, the income statements of
handlebars, and salaries of factory maintenance employees. Classify a merchandiser and a manufacturer differ in the cost of
each cost as direct materials, direct labor, overhead, or a period cost. goods sold section.
Direct Materials Direct Labor Overhead



Tires.
Spokes.
Handlebars.
 Salaries of
employees who put
tires on the wheels.


Factory depreciation.
Lubricants
Factory manager
“COGS”
salary.
Advertising expenditures and salary  Factory maintenance
of accountant are period costs. employees salary.
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Helpful Hint
Income Statement Assume a periodic
inventory system in
Income Statement
this illustration.

Cost of goods sold sections of merchandising and manufacturing


income statements

Illustration 1-7
Cost of goods sold sections of
merchandising and manufacturing
Income statements
Illustration 1-6
Cost of goods sold components
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Cost of Goods Manufactured Illustration 1-9


Cost of goods
manufactured schedule

Total Manufacturing Costs – sum of direct material costs, direct


labor costs, and manufacturing overhead in the current year.
Total Work in Process – (1) cost of beginning work in process
and (2) total manufacturing costs for the current period.

Illustration 1-8
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3 Cost of Goods Manufactured 3 Cost of Goods Manufactured

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Balance Sheet Balance Sheet

Inventory accounts for a manufacturer Illustration 1-10 Current assets sections of merchandising and manufacturing
balance sheets

The balance sheet for a merchandising company shows just Illustration 1-11
Current assets sections of
one category of inventory. merchandising and manufacturing
balance sheets

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LEARNING
OBJECTIVE
4 Discuss trends in managerial accounting.

Service Industries
 Much of the U.S. economy has shifted toward an
emphasis on providing services rather than goods.

 Over 50% of U.S. workers are now employed by service


companies.

 Most of the techniques learned for manufacturing firms


are applicable to service companies.

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Focus on the Value Chain Focus on the Value Chain

Refers to all business processes associated with providing Just-In-Time (JIT) Inventory Methods
a product or service.
 Inventory system in which goods are manufactured or
For a manufacturing firm these include the following:
purchased just in time for sale.

Total Quality Management (TQM)


 Reduce defects in finished products, with the goal of
zero defects.

Illustration 1-12
A manufacturer’s value chain

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Focus on the Value Chain Focus on the Value Chain

Theory of Constraints Activity-Based Costing (ABC)


 Constraints (“bottlenecks” ) limit the company’s  Allocates overhead based on use of activities.
potential profitability.
 Results in more accurate product costing and scrutiny
 A specific approach to identify and manage these of all activities in the value chain.
constraints in order to achieve company goals.

Enterprise Resource Planning (ERP)


 Software programs designed to manage all major
business processes.

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Balanced Scorecard Business Ethics

 Evaluates operations in an integrated fashion.  All employees are expected to act ethically.

 Uses both financial and non-financial measures.  Many organizations have codes of business ethics.

 Links performance to overall company objectives.  Past financial frauds:


► Enron,

► Global Crossing,

► WorldCom

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Business Ethics Business Ethics

Creating Proper Incentives Code of Ethical Standards


 Systems and controls sometimes create incentives Sarbanes-Oxley Act (SOX)
for managers to take unethical actions.
 Clarifies management’s responsibilities.
 Controls need to be effective and realistic.
 Requires certifications by CEO and CFO.

 Selection criteria for Board of Directors and Audit


Committee.

 Substantially increased penalties for misconduct.

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Corporate Social Responsibility 4 Trends in Managerial Accounting

 Considers a company’s efforts to employ sustainable Match the descriptions that follow with the corresponding terms.
business practices with regard to its employees, g All activities associated with
1. ______
society, and the environment.
providing a product or performing
 Is sometimes referred to as the triple bottom line service.
because it evaluates a company’s performance with a A method of allocating
2. ______
regard to people, planet, and profit. overhead based on each product’s
use of activities in making the
 Recent reports indicate that over 50% of the 500
product.
largest U.S. companies provide sustainability reports.
e Systems implemented to reduce defects in finished
3. ______
products with the goal of achieving zero defects.

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4 Trends in Managerial Accounting 4 Trends in Managerial Accounting

Match the descriptions that follow with the corresponding terms. Match the descriptions that follow with the corresponding terms.
b A performance-
4. ______ c A company’s efforts to
6. ______
measurement approach that uses employ sustainable business
both financial and nonfinancial practices with regards to its
measures, tied to company employees, society, and the
objectives, to evaluate a environment.
company’s operations in an
f Inventory system in which
7. ______
integrated fashion.
goods are manufactured or
d Inventory system in which goods are manufactured or
5. ______ purchased just as they are needed
purchased just as they are needed for use. for use.

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Copyright

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