14-1 managerial accounting accounting, fifth edition 14

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MANAGERIAL ACCOUNTING

Accounting, Fifth Edition

14

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After studying this chapter, you should be able to:

1. Explain the distinguishing features of managerial accounting.

2. Identify the three broad functions of management.

3. Define the three classes of manufacturing costs.

4. Distinguish between product and period costs.

5. Explain the difference between a merchandising and a manufacturing income statement.

6. Indicate how cost of goods manufactured is determined.

7. Explain the difference between a merchandising and a manufacturing balance sheet.

8. Identify trends in managerial accounting.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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Preview of Chapter 14

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Managerial accounting is a field of accounting

that provides economic and financial information for

managers and other internal users.

Managerial accounting applies to all types of businesses.

Corporations

Proprietorships

Partnerships

Not-for-profit

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

14-5 LO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial Accounting

Illustration 14-1


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a. Is governed by generally accepted accounting

principles.

b. Places emphasis on special-purpose information.

c. Pertains to the entity as a whole and is highly

aggregated.

d. Is limited to cost data.

Managerial accounting:

Review Question

LO 1 Explain the distinguishing features of managerial accounting.


14-7 LO 2 Identify the three broad functions of management.

Management Functions

PlanningPlanning

Maximize short-term profit and market share.

Commit to environmental protection and social programs.

Add value to the business.

DirectingDirecting ControllingControlling

Coordinate diverse activities and human resources.

Implement planned objectives.

Provide incentives to motivate employees

Hire and train employees.

Produce smooth-running operation.

Keeping activities on track.

Determine whether goals are met.

Decide changes needed to get back on track.

May use an informal or formal system of evaluations.



Illustration 14-2

Organization charts show the

interrelationships of activities

and the delegation of authority

and responsibility within the

company.

Organizational Structure



Business Ethics

All employees are expected to act ethically.

Many organizations have codes of business ethics.

Past financial frauds:

► Enron,

► Global Crossing,

► WorldCom



Business Ethics

Creating Proper Incentives

Systems and controls sometimes create incentives

for managers to take unethical actions.

Controls need to be effective and realistic.



Business Ethics

Sarbanes-Oxley Act (SOX)

Clarifies management’s responsibilities.

Requires certifications by CEO and CFO.

Selection criteria for Board of Directors and Audit

Committee.

Substantially increased penalties for misconduct.

Code of Ethical Standards


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a. Planning, directing, and selling.

b. Directing, manufacturing, and controlling.

c. Planning, manufacturing, and controlling.

d. Planning, directing, and controlling.

The management of an organization performs several broad

functions. They are:

LO 2 Identify the three broad functions of management.

Review Question


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Indicate whether the following statements are true or false.

1. Managerial accountants have a single role within an

organization, collecting and reporting costs to

management.

2. Financial accounting reports are general-purpose and

intended for external users.

3. Managerial accounting reports are special-purpose and

issued as frequently as needed.

False

True

True


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False

False

True

Indicate whether the following statements are true or false.

4. Managers’ activities and responsibilities can be classified

into three broad functions: cost accounting, budgeting,

and internal control.

5. As a result of the Sarbanes-Oxley Act, managerial

accounting reports must now comply with generally

accepted accounting principles (GAAP).

6. Top managers must certify that a company maintains an

adequate system of internal controls.


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Managers should ask questions such as the following:

1. What costs are involved in making a product or providing

a service?

2. If we decrease production volume, will costs decrease?

3. What impact will automation have on total costs?

4. How can we best control costs?

Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts

14-16 LO 3 Define the three classes of manufacturing costs.

Manufacturing consists of activities and processes that

convert raw materials into finished goods.

Manufacturing Costs


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Raw Materials

Basic materials and parts used in manufacturing process.

LO 3 Define the three classes of manufacturing costs.


Example: Steel or Fiber Glass used to manufacture automobile.

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Indirect Materials

Not physically part of the finished product or they

are an insignificant part of finished product in

terms of cost. EXAMPLE: Cleaning Supplies

Considered part of manufacturing overhead.


Direct Materials

Raw materials that can be physically and directly associated with or traced to the finished product during the manufacturing process.

Managerial Cost Concepts: Raw MaterialsManagerial Cost Concepts: Raw MaterialsManagerial Cost Concepts: Raw MaterialsManagerial Cost Concepts: Raw Materials

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Work of factory employees that can

be physically and directly

associated with converting raw

materials into finished goods.

Indirect Labor

Work of factory employees that has no physical

association with the finished product or for which it is

impractical to trace costs to the goods produced.

EXAMPLE: Maintenance Worker


Direct Labor


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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.

Example: Factory utility costs; Supervisory costs


Manufacturing Overhead

aka Factory Overhead


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TheProduct

Product Costs & Period Cost Product Costs & Period Cost –Capitalized in Inventory–Capitalized in Inventory

DirectLabor

DirectMaterial

Manufacturing Overhead

C 5

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Which of the following is not an element of manufacturing

overhead?

a. Sales manager’s salary.

b. Plant manager’s salary.

c. Factory repairman’s wages.

d. Product inspector’s salary.

Review Question



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Components:

Costs that are an integral part of producing the product.

Identifiable with the product => Manufacturing Process!!

Recorded in “inventory” account of the Balance Sheet

Expensed as COGS on Income Statement

WHEN the goods are sold.

Product Costs

Direct materials Direct labor Manufacturing overhead

Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs

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Charged to expense (Income Statement) as incurred.

Non-manufacturing costs.

Includes all selling and administrative expenses.

LO 4 Distinguish between product and period costs.


Period Costs

14-25 LO 4 Distinguish between product and period costs.

Illustration 14-3


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Period Costs(Expenses)

Product Costs(Inventory)

Inventory Not Sold in 2010

OperatingExpenses

Cost ofGoods Sold

Raw MaterialsGoods in ProcessFinished Goods

Cost ofGoods Sold

2010 CostsIncurred

2010 IncomeStatement

2011 IncomeStatement

2010 BalanceSheet Inventory

InventorySold in 2010

Period and Product Costs in Financial Period and Product Costs in Financial StatementsStatements

14-27 LO 4 Distinguish between product and period costs.

A bicycle company has these costs: tires, salaries of employees who

put tires on the wheels, factory building depreciation, wheel nuts,

spokes, salary of factory manager, handlebars, and salaries of

factory maintenance employees. Classify each cost as direct

materials, direct labor, or overhead.

Direct MaterialsDirect Materials

Tires.

Spokes.

Handlebars.

Direct LaborDirect Labor OverheadOverhead

Salaries of employees who put tires on the wheels.

Factory depreciation.

Factory manager salary.

Factory maintenance employees salary.

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Exercise 3 Exercise 4

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Under a periodic inventory system, the income statements

of a merchandiser and a manufacturer differ in the cost of

goods sold section.

LO 5 Explain the difference between a merchandising and a manufacturing income statement.

Income Statement

“COGS”

Manufacturing Costs in Financial StatementsManufacturing Costs in Financial StatementsManufacturing Costs in Financial StatementsManufacturing Costs in Financial Statements

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Finished GoodsBeginning Inventory

Cost of GoodsManufactured

FinishedGoodsEnding

Inventory

RawMaterials

BeginningInventory

RawMaterials

Purchases

Raw MaterialsEnding Inventory

Costof

GoodsSold

Goods in ProcessBeginning Inventory

Direct Labor

FactoryOverhead

Raw MaterialsUsed

Sales activityProduction activity-WIP Inventory

Materialsactivity

Flow of Manufacturing ActivitiesFlow of Manufacturing Activities

Goods in ProcessEnding Inventory

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Completedproductsfor sale.

Materialswaiting to beprocessed.

Can be director indirect.

Partially completeproducts.

Material to whichsome labor and/or

overhead havebeen added.

Balance Sheet Balance Sheet of a Manufacturerof a Manufacturer

RawMaterials

FinishedGoods

Goods inProcess

C 6

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Beginning Merchandise

Inventory

Beginning Finished Goods

Inventory

Cost of Goods Purchased


Ending Merchandise

Inventory

EndingFinished Goods

Inventory

Cost of Goods Sold

Merchandiser Manufacturer

+

_

+

==

_

The major difference

Income Statement Income Statement of a Manufacturerof a ManufacturerP1

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Cost of goods sold (FG) sections of

merchandising and manufacturing income statements

Illustration 14-5


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a. $450,000.

b. $500,000.

c. $550,000.

d. $600,000.

For the year, Red Company has cost of goods manufactured (FG) of

$600,000, beginning finished goods inventory of $200,000, and ending

finished goods inventory of $250,000. The cost of goods sold is ???

Review Question

Beg. Inventory (FG) $200,000

+ COGs Manufactured (FG) 600,000

Goods Available for Sale (FG) 800,000

- End. Inventory (FG) 250,000

Cost of Goods Sold $550,000


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Finished GoodsBeginning Inventory


FinishedGoodsEnding

Inventory

RawMaterials

BeginningInventory

RawMaterials

Purchases

Raw MaterialsEnding Inventory

Costof

GoodsSold

Goods in ProcessBeginning Inventory

Direct Labor

FactoryOverhead

Raw MaterialsUsed

Sales activityProduction activity-WIP Inventory

Materialsactivity

Flow of Manufacturing ActivitiesFlow of Manufacturing Activities

Goods in ProcessEnding Inventory

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Summarizes the types and amounts of costsIncurred in a company’s manufacturing process.

Direct Materials UsedDirect Materials Used ++ Direct LaborDirect Labor ++ Factory OverheadFactory Overhead == Total Manufacturing CostsTotal Manufacturing Costs ++ Beginning Work in ProcessBeginning Work in Process – – Ending Work in ProcessEnding Work in Process == Cost of Goods ManufacturedCost of Goods Manufactured

Manufacturing ScheduleManufacturing ScheduleP2

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Illustration 14-7

14-38 LO 6 Indicate how cost of goods manufactured is determined.

14-39 LO 6 Indicate how cost of goods manufactured is determined.

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Exercise 7 Exercise 8Exercise 9

14-41LO 7 Explain the difference between a merchandising

and a manufacturing balance sheet.

Illustration 14-8Inventory accounts for a manufacturer

The balance sheet for a merchandising company shows just one category of inventory.

Balance Sheet




Illustration 14-9

Current assets sections of merchandising and manufacturing balance

sheets

Balance Sheet


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a. Raw materials and work in process only

b. Work in process only

c. Raw materials only

d. Raw materials, work in process, and finished goods

A cost of goods manufactured schedule shows beginning

and ending inventories for:

Review Question

LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.




Illustration 14-10

Illustration: Suppose you started your own snowboard

factory, KRT Boards. Here are some of the costs that your

snowboard factory would incur. Assign the following costs:


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Illustration 14-10


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

what would be the total manufacturing costs?


Illustration 14-11


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U.S. economy, in general, has shifted toward an

emphasis on providing services rather than goods.

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

companies.

Trend is expected to continue in the future.

Most of the techniques learned for manufacturing firms

are applicable to service companies.

Product Costing For Service Industries



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Refers to all business process associated with providing a product or service.

For a manufacturing firm these include the following:

LO 8 Identify trends in managerial accounting.

Focus on the Value Chain

Illustration 14-12

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

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Just-In-Time Inventory Methods

Inventory system in which goods are manufactured or purchased just in time for sale.


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

Total Quality Management (TQM)


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Constraints (“bottlenecks” ) limit the company’s potential profitability.

A specific approach to identify and manage these constraints in order to achieve company goals.

Theory of Constraints


Software programs designed to manage all major business processes.

Enterprise Resource Planning (ERP)


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Allocates overhead based on use of activities.

Results in more accurate product costing and scrutiny of all activities in the value chain.


Activity-Based Costing (ABC)


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Evaluates operations in an integrated fashion.

Uses both financial and non-financial measures.

Links performance to overall company objectives.

Balanced Scorecard



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Which of the following managerial accounting techniques

attempts to allocate manufacturing overhead in a more

meaningful manner?

a. Just-in-time inventory.

b. Total-quality management.

c. Balanced scorecard.

d. Activity-based costing.

Review Question



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3. ______ Systems implemented to reduce defects in finished

products with the goal of achieving zero defects.

1. ______ All activities associated

with providing a product or service.

2. ______ A method of allocating

overhead based on each product’s

use of activities in making the

product.

Match the descriptions that follow with the corresponding terms.

e

a

d


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5. ______ Inventory system in which goods are manufactured or

purchased just as they are needed for use.

4. ______ A performance-

measurement approach that uses

both financial and nonfinancial

measures, tied to company

objectives, to evaluate a

company’s operations in an

integrated fashion.

b

c


Match the descriptions that follow with the corresponding terms.

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