MANAGERIAL ACCOUNTING Accounting Principles, Eighth Edition CHAPTER 19 MANAGERIAL ACCOUNTING Accounting Principles, Eighth Edition

Study Objectives Explain the distinguishing features of managerial accounting. Identify the 3 broad functions of management. Define the 3 classes of manufacturing costs. Distinguish between product and period costs. Explain the differences between a merchandising and a manufacturing income statement. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Study Objectives Indicate how cost of goods manufactured is determined. Explain the difference between a merchandising and a manufacturing balance sheet. Identify trends in managerial accounting. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Preview of Chapter Managerial Accounting Basics Compare managerial and financial accounting Management functions and Business Ethics Managerial Cost Concepts Manufacturing costs Product vs. period costs Manufacturing Costs in Financial Statements Income Statement and Balance Sheet Cost concepts – A review Managerial Accounting Today Service industry trends Managerial accounting practices 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Managerial Accounting Managerial AccountingBasics Managerial Cost Concepts Manufacturing Costs in Financial Statements Managerial Accounting Today Compare Managerial and Financial Accounting Management Functions Business Ethics Manufacturing Costs Product vs Period Costs Income Statement Balance Sheet Cost Concepts – A Review Service Industry Trends Managerial Accounting Practices Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

Managerial Accounting Basics Definition of Managerial Accounting A field of accounting that provides economic and financial information for managers and other internal users. Also called Management Accounting

Managerial Accounting Basics Managerial Accounting Activities Explain manufacturing and nonmanufacturing costs and how they are reported (Chapter 19) Compute cost of providing a service or manufacturing a product. (Chapters 20 and 21) Determine behavior of costs and expenses as activity changes. (Chapter 22)

Managerial Accounting Basics Managerial Activities: Continued Assist management in profit planning and formalizing these plans in the form of budgets. (Chapter 23) Help to control costs by comparing actual results with planned objectives and standard costs. (Chapters 24 and 25) Accumulate and present data for making decisions. (Chapter 26)

Managerial Accounting Basics Distinguishing Features Applies to all types of business - Service, Merchandising, and Manufacturing Applies to all forms of businesses – Proprietorships, Partnerships, and Corporations Applies to not-for-profit and profit oriented companies LO 1 Explain the distinguishing features of managerial accounting.

Managerial Accounting Basics Distinguishing Features: Continued More responsible for strategic cost management Teams with people from production, marketing, engineering, etc. Aid in making critical decisions LO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial Accounting Similarities Both deal with economic events of a business – Thus, interests overlap Both require that economic events be quantified and communicated to interested parties – Determining unit cost is part of managerial accounting, Reporting cost of goods manufactured is a part of financial accounting LO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial Accounting Differences LO 1 Explain the distinguishing features of managerial accounting.

Managerial Accounting Basics Review Question Managerial accounting: a. Pertains to the entity as a whole and is highly aggregated. b. Places emphasis on special-purpose information. c. Is limited to cost data. d. Is governed by generally accepted accounting principles. LO 1 Explain the distinguishing features of managerial accounting.

Managerial Accounting Basics Management Functions Management’s activities and responsibilities can be classified into the following three broad functions: Planning Directing Controlling LO 2 Identify the 3 broad functions of management.

LO 2 Identify the 3 broad functions of management. Management Functions Planning Look ahead and establish objectives such as – Maximize short-term profit Commit to environmental protection Key Objective: Add value to the business Value measured by trading price of stock and by potential selling price of the company LO 2 Identify the 3 broad functions of management.

LO 2 Identify the 3 broad functions of management. Management Functions Directing Coordinate diverse activities and human resources Implement planned objectives Provide incentives to motivate employees Hire and train employees including executives, managers, and supervisors Produce smooth-running operation LO 2 Identify the 3 broad functions of management.

LO 2 Identify the 3 broad functions of management. Management Functions Controlling Keep activities on track Determine whether goals are met Decide changes needed to get back on track May use an informal or formal system of evaluations Good decision making is the outcome of good judgment in planning, directing, and controlling. LO 2 Identify the 3 broad functions of management.

Good Ethics – Good Business Business Ethics Business scandals caused massive investment losses and employee layoffs. Corporate fraud has increased 13% in last 5 years. Employee fraud – 60% of all fraud Intentional misstatement of financial reports Aka financial reporting fraud Most costly to companies

Good Ethics – Good Business Creating Proper Incentives Systems to monitor and evaluate employees may produce incentives for unethical actions. Employees may feel that they must succeed no matter what. Ineffective and unrealistic controls may result in declining product quality.

Good Ethics – Good Business Code of Ethical Standards Sarbanes-Oxley Act of 2002 Clarifies management’s responsibilities. Certifications by CEO and CFO - fairness of financial statements and adequacy of internal control Selection criteria for Board of Directors and Audit Committee Substantially increased penalties for misconduct IMA Statement of Ethical Professional Practices

Review Question Management Functions The management of an organization performs several broad functions. They are: a. Planning, directing, and selling. b. Directing, manufacturing, and controlling. c. Planning, manufacturing, and controlling. d. Planning, directing, and controlling. LO 2 Identify the 3 broad functions of management.

Managerial Cost Concepts Manufacturing Costs Manufacturing consists of activities to convert raw materials into finished goods. In contrast, a merchandising firm sells goods in the form in which they were bought. Categories of manufacturing costs include: LO 3 – Define the three classes of manufacturing costs.

Manufacturing Costs Materials Raw Materials Basic materials used in manufacturing Direct Materials Raw materials that can be physically and directly associated with the finished product LO 3 Define the three classes of manufacturing costs.

Manufacturing Costs Materials Indirect Materials Raw materials that cannot be easily associated with the finished product Not physically part of the finished product or they are an insignificant part of finished product in terms of cost Considered part of manufacturing overhead LO 3 Define the three classes of manufacturing costs.

Manufacturing Costs Labor Direct Labor Work of factory employees that can be physically and directly associated with converting raw materials into finished goods Indirect Labor Work of factory employees that has no physical association with the finished product or for which it is impractical to trace to the goods produced LO 3 Define the three classes of manufacturing costs.

Manufacturing Overhead Manufacturing Costs Manufacturing Overhead Costs that are indirectly associated with manufacturing the product Includes all manufacturing costs except direct materials and direct labor LO 3 Define the three classes of manufacturing costs.

Review Question Manufacturing Costs Which of the following is not an element of manufacturing overhead?: a. Sales manager’s salary. b. Plant manager’s salary. c. Factory repairman’s wages. d. Product inspector’s salary. LO 3 Define the three classes of manufacturing costs.

Product Versus Period Costs Product Costs Components: direct material cost, direct labor cost, and manufacturing overhead A necessary and integral part of producing the product Recorded as inventory when incurred Not an expense until the finished goods inventory is sold then cost of goods sold LO 4 Distinguish between product and period costs.

Product Versus Period Costs Matched with revenue of a specific time period and charged to expense as incurred Non-manufacturing costs Deducted from revenues in period incurred to determine net income Includes all selling and administrative expenses LO 4 Distinguish between product and period costs.

Product Versus Period Costs LO 4 Distinguish between product costs and period costs.

Manufacturing Costs in Financial Statements Income Statement The income statement for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section. CGS LO 5 Explain the difference between a merchandising and a manufacturing income statement.

Manufacturing Costs in Financial Statements Cost of Goods Sold Components Merchandiser versus Manufacturer LO 5 Explain the difference between a merchandising and a manufacturing income statement.

Manufacturing Costs in Financial Statements Cost of Goods Sold Section of the Income Statement LO 5 Explain the difference between a merchandising and a manufacturing income statement.

Manufacturing Costs in Financial Statements 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 LO 6 Indicate how cost of goods manufactured is determined.

Manufacturing Costs in Financial Statements LO 6 Indicate how cost of goods manufactured is determined.

Manufacturing Costs in Financial Statements Balance Sheet - Inventories Manufacturing Company May have three inventories: Raw Materials Work in Process Finished Goods Merchandising Company One category of inventory: Merchandise Inventory LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

Manufacturing Costs in Financial Statements Balance Sheet - Inventories LO 7 Explain the difference between a merchandising and a manufacturing balance sheet

Review Question Manufacturing Costs Direct Materials are a: Product Manufacturing Period Cost Overhead Cost a. Yes Yes No b. Yes No No c. Yes Yes Yes d. No No No

Managerial Accounting Today Service Industry Trends U.S. economy has shifted toward an emphasis on providing services rather than goods Over 50% of U.S. workers are now employed by service companies Trend is expected to continue in the future Most of the techniques learned for manufacturing firms are applicable to service companies LO 8 Identify trends in management accounting.

Managerial Accounting Today Managerial Accounting Practices Value Chain Refers to all activities associated with providing a product or service For a manufacturing firm these include the following: LO 8 Identify trends in management accounting.

Managerial Accounting Today Managerial Accounting Practices Just-In-Time (JIT) Inventory Methods Inventory system in which goods are manufactured or purchased just in time for use Quality Increased emphasis on product quality because goods are produced only as needed Total Quality Management (TQM) - a philosophy of zero defects - LO 8 Identify trends in management accounting.

Managerial Accounting Today Managerial Accounting Practices Activity-Based-Costing (ABC) Allocates overhead based on use of activities Results in more accurate product costing and scrutiny of all activities in the value chain Balanced Scorecard Evaluates operations in an integrated fashion Uses both financial and non-financial measures Links performance measures to overall company objectives LO 8 Identify trends in management accounting.

Managerial Accounting Today Review Question Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner? Just-in-time inventory. Total-quality management. Balanced scorecard. Activity-based costing. LO 8 Identify trends in management accounting.

Chapter Review - Brief Exercise 19-5 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

Chapter Review - Brief Exercise 19-6 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

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