___________ accounting provides financial and non-financial information for managers of an organization and other internal decision makers _________ accounting provides general purpose financial information to those who are outside the organization. Managerial & Financial Accounting C 1
Activities of a Managerial Accountant Determining costs of products –Predicting Future Costs –Product Pricing –Profitability Analysis –Make or Buy Decisions Planning –Strategic Plans – long term –Budgeting - Short Terms Plans Controlling costs Applying Cost-Volume-Profit techniques Standard costing and variance analysis
Internal Reporting Management functions include the following: –Planning – set goals, budgets –Executing – carrying out plans –Reviewing – monitoring progress towards goals. –Reporting – to outside parties Management accountants provide information to facilitate these processes.
Goal of Lean Business? Provide high product at low. Implementing a lean business model allows companies to focus on their core competencies (what they do best) which will help them achieve these two goals.
Lean Business Model Customer Orientation Global Economy Lean Business Model Quality while eliminating Waste Satisfy the Customer Positive Return C 2
Continuous Improvement The following ideas have emerged to deal with increasing competition and the need to continually improve business practices. –Just-in-time Operations –Total Quality Management –Activity-based Management (and costing)
Just-in-Time… JIT involves the reduction of inventories and the purchase and production of merchandise only when needed. (Demand – pull system) Operations become much more _________ and waste is virtually eliminated. Quality of the products typically improves as well.
Total Quality Management In an effort to drive down the cost of poor quality, firms have decided to build quality into their products. –They have been able to reduce total costs and improve their products at the same time. This same approach can be applied to all business functions and settings.
Activity Based Management This approach requires that management identify value-added and non-value-added activities. The goal is to reduce or eliminate non-value- added costs and activities. In doing so, the company becomes more efficient and can devote more time and energy to value-added activities.
Understanding Costs Common Questions to consider: –What costs are incurred in making our product? –How do these costs behave? –What factors affect these costs? –How can we control costs, without our quality suffering?
What Next? Once we understand our costs, we can use that information to determine –Budgets –Setting prices –Value of inventory –Performance evaluation –What products to make
Classification of Costs Many ways to classify costs in order to understand them… Direct versus ______ costs Variable versus _____ costs Product versus _____ costs Controllable versus ___________ costs. ______ versus out-of-pocket costs versus ___________ costs. C 3
Classification by Behavior In planning, we must understand how costs behave. For example, do costs change as production activity changes or do they stay the same? Variable cost – costs that ______ as production activity increases (direct materials, direct labor) Fixed cost – costs that ____________ over a range of activity levels (depreciation, rent) Mixed cost – costs that have ____ a fixed and variable component
Classification by Traceability We need to be able to associate costs with particular cost objects (units of product or department). Costs can either be considered: –____ costs can be easily traced to an object (some materials or labor). –______ costs are allocated to objects because they cannot be easily traced (plant depreciation, rent of equipment).
Classification by Relevance ______Costs – already incurred and can not be avoided or changed –always irrelevant to short term decision analysis Out-of-pocket costs – require future outlay of cash –possibly relevant to short term decision making ____________costs – benefit or revenue lost when choosing one alternative over another –relevant to short term decision analysis
Classification by Function Product costs include all costs associated with making or buying a product for resale (COGS) –Direct Materials (DM) –Direct Labor (DL) –Manufacturing or Factory Overhead (FOH) Costs attach to _________ and are expensed only when items are _____. C 4
Classification by Function Period Costs Selling Costs –Costs incurred to obtain customer orders and to deliver finished goods to customers General & Administrative Expenses –Non-manufacturing costs of staff support and administrative functions – accounting, data processing, personnel, research and development. These costs _____attach to inventory. They are expensed in the ________ in which they are incurred or used up. –Advertising, insurance, interest etc.
Manufacturing Costs Three categories of product costs for manufacturing companies: Direct ________ –the cost of specific parts or materials that can be directly traced to a product (raw materials) Direct ________ –the labor costs that can be directly traced to individual units or batches of products _________
Manufacturing Costs… Manufacturing overhead costs: all other costs of production which cannot be directly traced to individual units or batches of products Indirect _______ – supervisory salaries Indirect _______ – grease, nails, etc. Other – depreciation, insurance, maintenance
Other Cost Terminology prime costs versus conversion costs ________ costs include the direct costs of production. –Material and Labor ________ costs include –Labor and Overhead. Obviously these categories are not mutually exclusive.
Selling and Administrative Selling and Administrative Cost of Goods Sold Cost of Goods Sold Finished Goods Inventory Finished Goods Inventory Work in Process Inventory Work in Process Inventory Balance Sheet Raw Materials Inventory Raw Materials Inventory Product Costs Materials Purchases Materials Purchases Period Costs Income Statement Direct Labor Direct Labor Factory Overhead Selling and Administrative Selling and Administrative Costs Period costs flow directly to the income statement C5 P1 Mfg. Cost Flow & Classifications
Cost of Materials Used… Some of the key relationships need to be defined. Cost of Materials Used = –Beg RM inventory + Materials purchased during the period – End RM inventory Manufacturing Costs Incurred = –Direct materials used + direct labor for the period + Overhead Applied to products NOTE: all three types of product costs here! P2
Cost of Goods Manufactured Cost of Goods ____________ = –Beg WIP inventory + Manufacturing Costs Incurred – End WIP inventory Cost of Goods ____________ = –beg FG inventory –+ cost of goods manufactured –- ending FG inventory
Flow of Costs in Perpetual Inventory Accounts DM Materials Work in Process Finished Goods Wages Payable DL Factory Overhead Cost of Goods Sold IM SOLD IL DM IM DL FOHA IL OFOH COGMCOGM SOLD Materials Purchased Total Wages Based on predetermined overhead rate FOHA Summary of cost flows FOHA = Factory Overhead AppliedCOGM = Cost of Goods Manf.
Let’s take a look at Rocky Mountain Bikes’ Manufacturing Statement. P2 Manufacturing Statement