1. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-1 Management Accounting: A Value-added Discipline Chapter 1

2. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-2 Distinguishing Between Managerial and Financial Accounting

3. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-3 Distinguishing Between Managerial and Financial Accounting

4. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-4 Relationship Between Type of User and Type of Information Economic DataFinancial DataNonfinancial Data Outsiders Insiders Investors and Creditors Senior Executives Middle Managers Operating Workers

5. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-5 Total Quality Management (TQM) A systematic problem-solving philosophy that encourages front- line workers to achieve zero defects. An organizational commitment to achieving customer satisfaction.

6. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-6 Work of Management Planning Controlling Directing

7. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-7 Product Costing Managers need to know the cost of products to help... Set the selling price of the product. Control costs within the organization. Properly determine inventory costs.

8. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-8 The Product Materials Labour Overhead Product Costs in Manufacturing Companies

9. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-9 Product Costs in Manufacturing Companies Financial AssetsManufacturing Process Physical Assets $1,000 Cash $390 Materials $470 Labour $140 Overhead $1,000 of Finished Goods Converted

10. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-10 Cost Per Unit Financial AssetsManufacturing Process Physical Assets $1,000 Cash $390 Materials $470 Labour $140 Overhead $1,000 of Finished Goods Converted In this example, the cost of each unit manufactured is $125. ($1,000 ÷ 8 horses) In this example, the cost of each unit manufactured is $125. ($1,000 ÷ 8 horses)

11. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-11 Costs Can Be Assets or Expenses Cost CategoryBalance Sheet Income Statement $1,000 Product Costs Materials Labour Tools $200 Selling and Administrative Costs $1,000 Cost of Finished Goods $750 Cost of Good Sold $250 Products Not Sold (Ending Inventory $200 Selling and Administrative Costs

12. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-12 Effect of Product Costs on Financial Statements Balance Sheet Income Statement Inventory Cost of Goods Sold Material Costs

13. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-13 Effect of Product Costs on Financial Statements Production Wages Balance Sheet Income Statement Inventory Cost of Goods Sold Salary Expense Labour Costs Selling and Administrative Salaries

14. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-14 Effect of Product Costs on Financial Statements Amortization on Manufacturing Equipment Amortization on Manufacturing Equipment Balance Sheet Income Statement Inventory Cost of Goods Sold Amortization Expense Overhead Costs Amortization on Office Equipment

15. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-15 Total Product Cost

16. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-16 Overhead Costs - A Closer Look indirect costs Cost that cannot be traced to products and services in a cost effective manner are called indirect costs and are part of manufacturing overhead. Manufacturing Overhead Indirect Materials Indirect Labour Factory Utilities Rent on Manufacturing Facilities Amortization on Manufacturing Assets Production Planning

17. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-17 Overhead Costs - A Closer Look allocated Since indirect costs cannot be traced to products, they are normally allocated to the product in a reasonable manner. Allocation Rate Total Manufacturing Overhead Relevant Activity =

18. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-18 Product Costs Direct Materials Direct Labour Manufacturing Overhead * Manufacturing Product Cost Summary * Indirect materials Indirect labour

19. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-19 Importance of Cost Classification Everyone interested in a company’s financial statements will be concerned with how costs are classified. I guess you know that the amount of total assets and net income will be higher if a cost is classified as an asset than if it is expensed. I guess you know that the amount of total assets and net income will be higher if a cost is classified as an asset than if it is expensed.

20. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-20 Importance of Cost Classification The financial statement impact of cost classification may impact both the availability of financing and motivation of management. Efficient Markets Hypothesis Creditors and investors look to the substance of business events regardless of how the transactions are reported in the financial statements.

21. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-21 Ethical Considerations Common conflicts faced by accountants: Pressure to perform duties that require abilities for which they are not competently trained. Disclosure of confidential information. Compromise their integrity through falsification, embezzlement, bribery,etc. Distort objectivity by issuing misleading or incomplete reports.

22. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-22 Ethical Considerations Users must be able to trust information provided by accountants.

23. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-23 Standards of Ethical Conduct for Management Accountants Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage. Confidentiality Ensure that subordinates do not disclose confidential information.

24. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-24 Common Features of Criminal and Ethical Misconduct Three factors common to all trust violation cases...  The existence of a secret problem.  The presence of an opportunity.  The capacity for rationalization.

25. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-25 Upstream and Downstream Costs Upstream Costs incurred before the manufacturing process begins. Example: R&D costs. Downstream Costs incurred after the manufacturing process is complete. Example: Advertising. Profitability analysis requires close attention to these costs as well as manufacturing costs.

26. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-26 Product Costs in Service Companies Output of service company is consumed immediately. Materials Labour Overhead

27. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-27 Trends in Managerial Accounting Re-engineering production and delivery systems to eliminate waste, reduce errors, and minimize costs. Re-engineering production and delivery systems to eliminate waste, reduce errors, and minimize costs. Benchmarking best practices used by world-class competitors. Benchmarking best practices used by world-class competitors.

28. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-28 Activity-Based Management We manage activities that cause costs to be incurred. Identify value-added and nonvalue-added activities. Identify ways to reduce or eliminate the nonvalue-added activities. A value-added activity is work that contributes to a product’s ability to satisfy customer needs.

29. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-29 The Value Chain Research and Development Research and Development Obtain Materials Manufacturing Marketing Delivery Value-added activities include all steps involved in the actual processing of goods or performing of services. Value-added activities include all steps involved in the actual processing of goods or performing of services.

30. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-30 Complete parts just in time for assembly into products. Just-in-Time (JIT) Inventory Complete products just in time to ship to customers. Receive materials just in time for production. Schedule production. Receive customer orders.

31. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-31 Just-in-Time (JIT) Inventory Flexible workforce Reduced setup time Zero production defects Improved plant layout Most Favored Customer Status Fewer, but more reliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries. Most Favored Customer Status Fewer, but more reliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries.

32. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-32 More rapid response to customer orders Less warehouse space needed Just-in-Time (JIT) Inventory Reduced inventory costs Greater customer satisfaction Higher quality products

33. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 1-33 End of Chapter 1 Chapter 2 is waiting