Management Accounting

Financial Accounting

• Provides info used primarily by investors, creditors, and others outside a business

• Example – Balance Sheet & Income Statement

• Characterized by objectivity, reliability, and historical nature

Managerial Accounting• Provides info used primarily by executives,

managers, and employees who work inside the business

• Internal users need info to plan, direct and control business operations.

• Example – Budget

• Characterized by relevance and timeliness

Insert Exhibit 1-2 Here

Product Costing

• This is a major focus of the course

• As managers, we want to

know how much the product

cost

I wonder how much it cost to

make this pencil?

Product CostsProducts are made up of 3 “kinds” of costs:

Direct Materials

Direct Labor

Manufacturing Overhead

Knowing Cost Is Important…for companies making tangible products

Materials$390

Labor$470

Overhead$140

Insert Exhibit 1-3 Here

What is the average cost per table?

Average Cost per Unit

Total Product Cost

Number of Units Produced

= Average Cost per Unit

= $250$1,000

4

Tabor Example Average Cost Per Unit

Costs Can Be Assets or Expenses

Period Cost

Expense

COGSAssetProduct

Cost

Asset or Expense?

• Product Costs are assets

• When a product cost is incurred, is recorded in the inventory account

• Product costs are expensed when the product is sold

• All other costs (period costs) are expensed when incurred

Cost ClassificationsCost Classifications

PeriodPeriodCostsCosts

PeriodPeriodCostsCosts

SellingExpenses

SellingExpenses

AdministrativeExpenses

AdministrativeExpenses

Direct (Raw)Materials

Direct (Raw)Materials

FactoryOverhead

FactoryOverhead

DirectLabor

DirectLabor

ProductProductCostsCosts

ProductProductCostsCosts

Raw Materials

Labor Costs

Wages paid to production workers

i.e. People working on the products directly

Manufacturing Overhead

Costs that cannon be traced to products and services directly – INDIRECT COSTS

INDIRECT MATERIALS

INDIRECT LABOR

FACTORY UTILITIES

RENT ON FACTORYDEPRECIATION ON MANUFACTUTING ASSETS

Which of the following is classified as factory overhead?

1. Salary of maintenance workers

2. Glue, Nails, Etc.

3. Electric bill

4. Rent on factory

5. All of the above

Manufacturing CostsManufacturing Costs

1. Enters directly into the product.2. Is significant amount of total product cost.

1. Enters directly into manufacturing the product.2. Is significant amount of total product cost.

Cost other than direct materials cost and direct labor cost incurred in the manufacturing of product.

Direct Materials:Direct Materials:

Direct Labor:Direct Labor:

Factory Overhead:Factory Overhead:

General, Selling & Admin Costs

• Expensed in the period in which they are incurred.

Patillo Manufacturing Company Transactions

Event 1 Acquired additional $15,000 cash by issuing common stock. Event 2 Paid $2,000 for the materials that were used to make its products. All

products started were completed during the period. Event 3 Paid $1,200 for salaries of selling and administrative employees. Event 4 Paid $1,300 for wages of production workers. Event 5 Paid $2,800 for furniture used in selling and administrative offices. Event 6 Recognized depreciation expense on office furniture purchased in Event 5.

The furniture acquired on January 1 had a $400 estimated salvage value and a four-year useful life. The annual depreciation charge is $600 [($2,800 - $400)/4].

Event 7 Paid $4,500 for manufacturing equipment. Event 8 Recognized depreciation expense on equipment purchased in Event 7.

The equipment acquired on January 1 had a $1,500 estimated salvage value and a three-year useful life. The annual depreciation charge is $1,000 [($4,500 - $1,500)/3].

Event 9 Sold inventory to customers for $7,500 cash. Event 10 The inventory sold in Event 9 cost $4,000 to make.

Patillo Manufacturing Company experienced the following transactions:

What happens if costs are misclassified?

Marion Manufacturing Company

Marion Manufacturing Company (MMC) had the following transactions:

1. MMC was started when it acquired $12,000 from issuing common stock.

2. MMC incurred specifically identifiable product costs of $8,000.

3. MMC incurred $4,000 of costs to design its product and plan the manufacturing process.

4. MMC made 1,000 units of product and sold 700 of the units for $18 each.Let’s look at two scenarios for MMC.

Marion Manufacturing Company

Scenario 1

The $4,000 of design and

planning costs are classified as selling

and general and administrative.

Scenario 2

The $4,000 of design and

planning costs are classified as

product costs, meaning they are

first accumulated in the inventory

account and then expensed when the

goods are sold.

Upstream Costs

• Costs that occur before the manufacturing process begins.

• Example: Research & Development

Downstream Costs

• Costs that occur after the manufacturing process is complete

• Examples: Transportation, Advertising, Sales Commissions, and Bad Debts

Emerging Trends in Managerial Accounting

Benchmarking

Best Practices

Total Quality Management

Activity-Based

ManagementValue-Added Assessment

Just-in-Time Inventory

Total Quality Management (TQM)

Continuous Improvemen

t

Problem-Solving

Philosophy

Customer Satisfaction

to

achieve

Activity-Based Management and Value-Added Assessment

An organization cannot manage costs. Instead, it manages the activities that cause costs to be incurred. Activities

represent the measures an organization takes to accomplish its goals.

Just-in-Time Inventory

Inventory Holding Costs

Nonvalue- Added Activity

Many business have been able to simultaneously reduce their inventory holding costs and increase customer

satisfaction by making products available just in time (JIT) for customer

consumption.

End of Chapter One