Introduction to Management Accounting So far – financial accounting For whom are financial accounting reports prepared primarily? Managerial – internal users.

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The Functions of Management Planning Acting Controlling Planning – Choosing goals and deciding how to achieve them Acting – carry out plan Controlling – evaluating results by comparing the actual results to the plan. You work for Baskin Robins – one of its goals is to increase operating income How do you do it? Incr sales price Incr sales volume Lower costs The accounting system, by tracking costs, helps managers evaluate performance Feedback

Objective 1 Distinguish between financial accounting and management accounting.

Primary Users Financial Management Investors Creditors Government authorities (IRS, SEC, 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 Management Financial statements restricted by GAAP Management Internal reports not restricted by GAAP; determined by cost-benefit analysis Cost benefit analysis Weighing costs against benefits But must always consider qualitative factors as well

Verification Financial Management Annual independent audit by CPAs No independent audit

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

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Behavioral Implications Financial Concern about adequacy of disclosure Management Concern about how reports will affect employees behavior

Service, Merchandising, and Manufacturing Companies 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

Describe the value chain value-chain functions. Objective 2 Describe the value chain and classify costs by value-chain functions.

Value Chain Research & Development Design Production or Purchases Activities that add value to a firm’s products and services Marketing Distribution Customer Services

Distinguish direct costs 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.

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Distinguish among full product costs, inventoriable product 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 Inventoriable

External Reporting Inventoriable product costs Period 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 Labor Indirect 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 Other Conversion Costs = Direct Labor + Manufacturing Overhead

Prepare the financial statements of a manufacturing company. 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 INCOME STATEMENT Inventoriable Costs Sales Revenue when sales occur deduct Purchases of Inventory plus Freight-In Inventory Cost of Goods Sold equals Gross Margin deduct Period Costs Operating Expenses equals Operating Income

Financial Statements for Manufacturing Companies BALANCE SHEET INCOME STATEMENT Inventoriable Costs Sales Revenue Materials Inventory when sales occur deduct Finished Goods Inventory Cost of Goods Sold equals Gross Margin deduct Work in Process Inventory Period Costs Operating Expenses equals Operating Income

Manufacturing Company Example Kendall Manufacturing Company: Beginning and ending work-in-process inventories were Rs20,000 and Rs18,000. Direct materials used were Rs70,000. Direct labor was Rs100,000. Manufacturing overhead incurred was Rs150,000.

Manufacturing Company Example What is the cost of goods manufactured? Beginning work in process Rs 20,000 Direct labor Rs100,000 Direct materials 70,000 Mfg. overhead 150,000 320,000 Ending work in process (18,000) Cost of goods manufactured Rs322,000

Manufacturing Company Example Kendall Manufacturing Company’s beginning finished goods inventory was Rs60,000 and its ending finished goods inventory was Rs55,000. How much is the cost of goods sold?

Manufacturing Company Example Beg. finished goods inventory Rs 60,000 + Cost of goods manufactured 322,000 = Cost of goods available for sale Rs382,000 – Ending finished goods 55,000 = Cost of goods sold Rs327,000

Manufacturing Company Example Kendall Manufacturing Company had sales of Rs627,000 for the period. How much is the gross margin? Sales Rs627,000 – Cost of goods sold 327,000 = Gross margin Rs300,000

Manufacturing Company Example Kendall Manufacturing Company had operating expenses as follows: Rs80,000 Sales salaries 10,000 Delivery expense 30,000 Administrative expenses Rs120,000 Total What is Kendall’s operating income?

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Manufacturing Company Example Gross margin Rs300,000 – Operating expenses 120,000 = Operating income Rs180,000

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

Identify major trends in the business environment, and use Objective 6 Identify major trends in the business environment, and use cost-benefit analysis to make business decisions.

Shift to a Service Economy In the U.S., 55% of the workforce is employed in service companies.

Competing in the Global Marketplace 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. 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. 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 Total Benefits Total Cost Initial benefits and costs Rs170 million Rs200 million Additional expected benefits 68 million Total Rs238 million Rs200 million

Use reasonable standards to make ethical judgments. 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

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