ACCOUNTING PRINCIPLES Third Canadian Edition Prepared by: Keri Norrie, Camosun College

MANAGERIAL ACCOUNTING CHAPTER 19

Managerial accounting is a field of accounting that provides economic and financial information to managers and other internal users to assist them in making decisions and evaluating the effectiveness of those decisions. MANAGERIAL ACCOUNTING BASICS BASICS

ILLUSTRATION 19-1 DIFFERENCES BETWEEN FINANCIAL AND MANAGERIAL ACCOUNTING Financial Accounting Managerial Accounting External users such as shareholders, creditors, and regulatory agencies. Financial statements, issued at least annually. General-purpose information for all users. Reports pertain to company as a whole; are highly aggregated; are limited to double-entry accounting and cost data; use standard of GAAP. Annual independent audit. Internal users such as managers and officers. Internal reports, issued as frequently as needed. Special purpose for specific decisions. Reports pertain to subunits of the company; are very detailed; can include any relevant data; use standard of relevance to decisions. No independent audit.

MANAGERIAL ACCOUNTING BASICS Management Functions MANAGERIAL ACCOUNTING BASICS Management Functions 1.Planning Management looks ahead and establishes objectivesManagement looks ahead and establishes objectives A key objective is to add value to the businessA key objective is to add value to the business 2.Organizing and Directing Management coordinates the company’s diverse activities and human resources to produce an operation that runs smoothlyManagement coordinates the company’s diverse activities and human resources to produce an operation that runs smoothly This function relates to the implementation of planned objectivesThis function relates to the implementation of planned objectives

MANAGERIAL ACCOUNTING BASICS Management Functions MANAGERIAL ACCOUNTING BASICS Management Functions 3.Controlling The process of keeping the firm’s activities on trackThe process of keeping the firm’s activities on track M anagement determines whether planned objectives are being met and whether changes are necessaryM anagement determines whether planned objectives are being met and whether changes are necessary Managerial accounting assists in all three management functions by providing the necessary information to management.

MANAGERIAL ACCOUNTING BASICS Contemporary Developments MANAGERIAL ACCOUNTING BASICS Contemporary Developments The role of managerial accounting has expanded to meet the information needs of businessesThe role of managerial accounting has expanded to meet the information needs of businesses The following trends have contributed to this expanded role:The following trends have contributed to this expanded role: Value Chain ManagementValue Chain Management Technological ChangeTechnological Change Just-In-Time Inventory MethodsJust-In-Time Inventory Methods Product Quality Management SystemsProduct Quality Management Systems Activity-Based Costing (ABC)Activity-Based Costing (ABC) Cost ManagementCost Management

MANAGERIAL COST CONCEPTS What costs are involved in making a product? If production is decreased, will costs decrease? To perform the three managerial functions effective and reliable information is needed. Cost information is when answering questions such as the following: What impact will automation have on total costs? How can costs best be controlled in the organization?

MANAGERIAL COST CONCEPTS Manufacturing Costs MANAGERIAL COST CONCEPTS Manufacturing Costs Manufacturing consists of activities and processes that convert raw materials into finished goodsManufacturing consists of activities and processes that convert raw materials into finished goods Manufacturing costs are typically classified as follows:Manufacturing costs are typically classified as follows: Direct materialsDirect materials Direct labourDirect labour Manufacturing overheadManufacturing overhead

MANAGERIAL COST CONCEPTS Manufacturing Costs MANAGERIAL COST CONCEPTS Manufacturing Costs Raw materials represent the basic materials and parts that are to be used in the manufacturing process. They can be classified as either: Direct MaterialsIndirect Materials Or Raw materials that can be physically and conveniently associated with the finished product during the manufacturing process. Raw materials that cannot be easily associated with the finished product. Indirect materials are accounted for as part of manufacturing overhead.

MANAGERIAL COST CONCEPTS Manufacturing Costs MANAGERIAL COST CONCEPTS Manufacturing Costs Direct labourDirect labour The work of factory employees that can be physically and conveniently associated with converting raw materials into finished goods.The work of factory employees that can be physically and conveniently associated with converting raw materials into finished goods. Indirect labourIndirect labour The labour costs that have no physical association with the finished product or it is impractical to trace the costs to the goods producedThe labour costs that have no physical association with the finished product or it is impractical to trace the costs to the goods produced Like indirect materials, indirect labour is classified as manufacturing overheadLike indirect materials, indirect labour is classified as manufacturing overhead

MANAGERIAL COST CONCEPTS Manufacturing Costs MANAGERIAL COST CONCEPTS Manufacturing Costs Manufacturing overhead costs are indirectly associated with the manufacture of the finished product such as: Indirect materials and labourIndirect materials and labour Amortization on factory buildings and equipmentAmortization on factory buildings and equipment Insurance, taxes, and maintenance on factory facilitiesInsurance, taxes, and maintenance on factory facilities Allocating manufacturing overhead to specific products is challenge faced in managerial accounting.

MANAGERIAL COST CONCEPTS Product versus Period Costs MANAGERIAL COST CONCEPTS Product versus Period Costs The three manufacturing costs are also known as product costs since they become the cost of the finished product. Direct materials Direct labour Manufacturing overhead Finished Goods Inventory Cost of Goods Sold Expense Under the matching principle, the product costs are expensed when the finished goods are sold.

MANAGERIAL COST CONCEPTS Product versus Period Costs MANAGERIAL COST CONCEPTS Product versus Period Costs Non-manufacturing costs are known as period costs as they are related to a specific time period rather than to a saleable productNon-manufacturing costs are known as period costs as they are related to a specific time period rather than to a saleable product Period costs include operating costs that are deducted from revenues in the period incurredPeriod costs include operating costs that are deducted from revenues in the period incurred Operating costs are often subdivided into:Operating costs are often subdivided into:  selling expenses (e.g. delivery and promotion)  administrative expenses (e.g. accounting and personnel management)

ILLUSTRATION 19-2 Product versus Period Costs Direct Materials Direct Labour Manufacturing Overhead Selling Expense Administrative Expenses All costs Product costs Manufacturing Costs Period costs Non-manufacturing Costs

MANUFACTURING COSTS IN FINANCIAL STATEMENTS: Balance Sheet A manufacturing company’s balance sheet will have three inventory accounts based on the stage of production.

MANUFACTURING COSTS IN FINANCIAL STATEMENTS: Income Statement Beginning Merchandise Inventory Cost of Goods Purchased Beginning Finished Goods Inventory Cost of Goods Manufactured Ending Finished Goods Inventory Ending Merchandise Inventory Cost of Goods Sold = = Merchandising Company Manufacturing Company Unlike a merchandise company which purchases its products, a manufacturer has cost of goods manufactured

ILLUSTRATION 19-6 MANUFACTURING COSTS IN FINANCIAL STATEMENTS: Income Statement ILLUSTRATION 19-6 MANUFACTURING COSTS IN FINANCIAL STATEMENTS: Income Statement

ILLUSTRATION 19-7 MANUFACTURING COSTS IN FINANCIAL STATEMENTS Income Statement Cost of Goods Manufactured ILLUSTRATION 19-7 MANUFACTURING COSTS IN FINANCIAL STATEMENTS Income Statement Cost of Goods Manufactured Beginning Work In Process Inventory Total Current Manufacturing Costs Total Cost of Work In Process Ending Work In Process Inventory Cost of Goods Manufactured Total Cost of Work In Process + - = =

The Cost of Goods Manufactured Schedule – as shown on the right is an internal financial schedule that shows each of the cost elements explained in Illustration ILLUSTRATION 19-8 MANUFACTURING COSTS IN FINANCIAL STATEMENTS

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