Chapter 16 1

Financial Accounting versus Managerial Accounting Financial accounting is for external reporting Managerial accounting: Reports are generated for planning. One planning tool is the budget. Controlling involves evaluating the plan and comparing the actual results to the budget. Weighing the costs against the benefits is called cost/benefit analysis. 2

3 Management versus Financial Accounting

Management Accountability Management accountability is the manager’s responsibility to the various stakeholders to wisely manage the organization’s resources. Stakeholders have an interest in the business and include the following: Customers Creditors Suppliers Investors 16-4

Today’s Business Environment Shift toward a service economy Global competition Time-based competition: Enterprise Resource Planning (ERP) systems integrate companies data. E-commerce allows companies to sell products to customers around the world. Just-in-Time (JIT) Management is an inventory management tool. 16-5

Today’s Business Environment Total Quality Management (TQM) is a philosophy of continuous improvement in products and processes. Creates a culture of cooperation. Each step adds value to the end product, and this is referred to as the value chain. The economic, social, and environmental impact of doing business is referred to as the triple bottom line, which includes: Profits People Planet 16-6

Institute of Management Accountants (IMA) Developed standards to help meet ethical challenges Require management accountants to: Maintain their professional competence Preserve the confidentiality of the information Act with integrity and credibility 7

The standards of ethical practice include the following: I. Competence 1. Maintain an appropriate level of professional expertise. 2. Perform professional duties in accordance with laws, regulations, and standards. 3. Provide information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional limitations. 8

The standards of ethical practice include the following: II. Confidentiality 1. Keep information confidential except when authorized or legally required. 2. Inform relevant parties regarding appropriate use of confidential information. 3. Refrain from using confidential information to your advantage. 9

The standards of ethical practice include the following: III. Integrity 1. Mitigate actual conflicts of interest. 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3. Abstain from engaging in activity that might discredit the profession. 10

The standards of ethical practice include the following: IV. Credibility 1. Communicate information fairly and objectively. 2. Disclose all relevant information. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls. 11

Learning Objective 2 Describe the differences between service, merchandising, and manufacturing companies 16-12

Service companies sell their time, skill, and knowledge. All of their costs are period costs and are expensed in the period incurred. Merchandising companies resell products they previously bought from suppliers. Cost of goods sold is an inventoriable product cost, also called a product cost. Manufacturing companies create products customers want

Manufacturing Companies Manufacturing companies convert raw materials into finished products. The three types of inventory are: Raw Materials Inventory (RM) Materials used to manufacture a product. Work-in-Process Inventory (WIP) Goods that have been started but are not compete. Finished Goods Inventory (FG) Completed goods that have not yet been sold

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Learning Objective 3 Classify costs for service, merchandising, and manufacturing companies 16-17

How Are Costs Classified? Product Costs Direct costs Traced to a cost objectDirect materialsDirect labor Indirect costs Not traced to a cost object Manufacturing overhead

Product Costs Direct materials (DM) Raw materials used in production Direct labor (DL) Labor of employees working on the products Manufacturing overhead (MOH) The indirect product costs associated with production, including: Indirect materials Indirect labor Factory costs for rent, utilities, insurance, etc

Product Costs 16-20

Prime and Conversion Costs Prime costs combine direct costs of direct materials and direct labor. Conversion costs are the costs to convert raw materials into finished goods: direct labor plus manufacturing overhead.

22 Product costs Part of inventory Expensed when sold Period costs Not part of inventory Expensed when incurred

Learning Objective 4 Prepare an income statement and schedule of cost of goods manufactured for a manufacturing company and calculate cost per item 16-23

Income statement Calculating cost of goods sold The Finished Goods Inventory account provides information for the cost of goods sold section of the income statement Gross profit Gross profit = Net Sales Revenue – Cost of Goods Sold Operating income Operating income = Gross profit – sales and administrative expenses 16-24

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Calculating Cost of Goods Manufactured Cost of goods manufactured is the manufacturing costs of the goods that finished the production process in a given accounting period. Costs are determined from activities that took place in the past

Calculating Cost of Goods Manufactured 16-27

Determining the Cost of Goods Manufactured Work in Process – partially completed units of product Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period 28

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30 Materials Inventory Finished Goods Inventory Sales Cost of Goods Sold INCOME STATEMENT Operating Expenses = Operating Income When sales occur - - Work in Process Inventory Period Costs Purchases of materials Direct labor & manufacturing overhead

Calculating Unit Product Cost Managers make decisions on pricing products based on unit cost. Cost per unit is found by dividing cost of goods manufactured by total units produced. The cost per unit is used to determine the Cost of Goods Sold for the units sold to customers.

Merchandising Company Resell products purchased from suppliers Keep an inventory of products Cost of goods sold is a major expense Product costs flow through the inventory GAAP requires companies to record inventoriable product costs as an asset until sold 32

33 Sales Cost of Goods Sold INCOME STATEMENT Operating Expenses = Operating Income When sales occur - - Merchandise Inventory Period Costs Purchases of inventory + freight in

Includes cost to purchase goods plus freight-in Beginning Inventory + Net Purchases + Freight In – Ending Inventory = Cost of Goods Sold(Cost of Sales) 34

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Cost of Goods Sold Components Merchandiser versus Manufacturer 36

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Classify costs and prepare an income statement for a service company 37

Service Company Service companies sell their time, skills, and knowledge Seek to provide services with: High quality Reasonable prices Timely delivery Simplest accounting No inventory or products for sale All costs are period costs Incurred and expensed in same accounting period 38

Cost per service Helps to set the price of each service provided Consider all operating expenses (period costs) Unit cost per service 39

Income Statement of a Service Company 40

Indicate whether each of the following costs of an automobile manufacturer would be classified as direct materials, direct labor, or manufacturing overhead. ______ a. Windshield ______ b. Engine ______ c. Wages of assembly line worker ______ d. Depreciation of factory machinery ______ e. Factory machinery lubricants ______ f. Tires ______ g. Steering wheel ______ h. Salary of painting supervisor DM DL MO DM MO 41

Identify whether each of the following costs should be classified as product costs or period costs. ____________ a. Manufacturing overhead ____________ b. Selling expenses ____________ c. Administrative expenses ____________ d. Advertising expense ____________ e. Direct labor ____________ f. Direct material Product Period Product 42