Introduction To Management Accounting

Introduction to Management Accounting Chapter 19

The Functions of Management Planning

Acting

Feedback

Controlling

Objective 1 Distinguish between financial accounting and management accounting.

Primary Users Financial Investors Creditors Government authorities (Income Tax Dep), (SEBI, etc.)

Management Internal managers of the business

Purpose of Information Financial • Help investors, creditors, and others make investment, credit, and other decisions

Management • Help managers plan and control business operations

Focus and Time Dimension Financial • Reliability, objectivity, and focus on the past

Management • Relevance

Type of Report Financial • Financial statements restricted by GAAP

Management • Internal reports not restricted by GAAP; determined by cost-benefit analysis

Verification Financial • Annual independent audit by Chartered Accountants

Management • No independent audit

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

Behavioral Implications Financial • Concern about adequacy of disclosure

Management • Concern about how reports will affect employees behavior

Service, Merchandising, and Manufacturing Companies Service • Provides intangible services, rather than tangible products

Merchandising • 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 & Development

Marketing

Design

Production or Purchases

Distribution

Customer Services

S19-3

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. • Cost drivers are any factors that affect cost.

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

Objective 4

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

Product Costs • What are product costs? • They are the costs to produce (or purchase) tangible products intended for sale.

Product Costs • There are two types of product costs: Full Full product product costs costs

Inventoriable Inventoriable product product costs costs

External Reporting

Inventoriable Inventoriable product product costs costs

Period Period costs costs

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

Inventoriable Product Costs • For external reporting, manufacturers’ 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.

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

Conversion Costs = Direct Labor + Manufacturing Overhead

Other

Objective 5 Prepare the financial statements of a manufacturing company.

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

Financial Statements for Merchandising Companies BALANCE SHEET Inventoriable Costs

Purchases of Inventory plus Freight-In

INCOME STATEMENT Sales Revenue

Inventory

when sales occur

deduct

Cost of Goods Sold

equals Gross Margin deduct

Operating Period Costs Expenses equals Operating Income

Financial Statements for Manufacturing Companies BALANCE SHEET

INCOME STATEMENT

Inventoriable Costs

Materials Inventory

Work in Process Inventory

Sales Revenue Finished Goods Inventory

when sales occur

deduct

Cost of Goods Sold

equals Gross Margin deduct

Operating Period Costs Expenses equals Operating Income

Manufacturing Company Example • Kendall 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.

Manufacturing Company Example • What is the cost of goods manufactured? Beginning work in process Direct labor $100,000 Direct materials 70,000 Mfg. overhead 150,000 Ending work in process Cost of goods manufactured

$ 20,000 320,000 (18,000) $322,000

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

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. • How much is the gross margin? Sales – Cost of goods sold = Gross margin

$627,000 327,000 $300,000

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

Manufacturing Company Example

Gross margin – Operating expenses = Operating income

$300,000 120,000 $180,000

Flow of Costs through a Manufacturer’s Accounts • Direct Materials Inventory • Beginning inventory + Purchases and freight-in = Direct materials available for use – Ending inventory – Direct materials used

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 • 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. • Speeding up of the production process reduces throughput time.

Just-in-Time • Throughput time is the time between buying raw materials and selling the finished products.

Total Quality Management • The goal of total quality management (TQM) is to please customers by providing them with superior products and services.

Total Quality Management • TQM emphasizes educating, training, and cross-training employees. • Quality improvement programs cost money today. • The benefits usually do not occur until later.

Total Quality Management Initial benefits and costs Additional expected benefits Total

Total Benefits

Total Cost

$170 million

$200 million

68 million $238 million

$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. • The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.

Standards of Ethical Conduct for Management Accountants Competence

Integrity

Confidentiality

Objectivity

End of Chapter 19