CHAPTER 19

Managerial Accounting Basics 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. John Wiley & Sons, 2016

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 and/or IFRS Annual independent audit. Internal users such as managers and officers. Internal reports, issued as frequently as needed. Special-purpose information 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. John Wiley & Sons, 2016

Managerial Accounting Basics Management Functions Planning Management looks ahead and establishes objectives A key objective is to add value to the business Directing Management coordinates the company’s diverse activities and human resources to produce an operation that runs smoothly This function relates to the implementation of planned objectives John Wiley & Sons, 2016

Managerial Accounting Basics Management Functions Controlling The process of keeping the firm’s activities on track Management 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. John Wiley & Sons, 2016

Managerial Accounting Basics Contemporary Developments The role of managerial accounting has expanded to meet the information needs of businesses The following trends have contributed to this expanded role: The Value Chain The Supply Chain Technological Change Just-In-Time Inventory Methods Product Quality Management Systems Activity-Based Costing (ABC) Theory of Constraints Balanced Scorecard John Wiley & Sons, 2016

Managerial Cost Concepts To perform the three managerial functions effective and reliable information is needed. Cost information is gathered by answering questions such as the following: What costs are involved in making a product? If production is decreased, will costs decrease? How can costs best be controlled in the organization? What impact will automation have on total costs? John Wiley & Sons, 2016

Managerial Cost Concepts Manufacturing Costs Manufacturing consists of activities and processes that convert raw materials into finished goods Manufacturing costs are typically classified as follows: Direct materials Direct labour Manufacturing overhead John Wiley & Sons, 2016

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 Materials Indirect 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. John Wiley & Sons, 2016

Managerial Cost Concepts Manufacturing Costs Direct labour The work of factory employees that can be physically and conveniently associated with converting raw materials into finished goods. Indirect labour The 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 overhead John Wiley & Sons, 2016

Managerial Cost Concepts Manufacturing Costs Manufacturing overhead costs are indirectly associated with the manufacture of the finished product such as: Indirect materials and labour Depreciation on factory buildings and equipment Insurance, taxes, and maintenance on factory facilities Allocating manufacturing overhead to specific products is a challenge faced in managerial accounting . John Wiley & Sons, 2016

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 Under the matching principle, the product costs are expensed when the finished goods are sold. Cost of Goods Sold Expense John Wiley & Sons, 2016

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 product Period costs include operating costs that are deducted from revenues in the period incurred Operating costs are often subdivided into: selling expenses (e.g. delivery and promotion) administrative expenses (e.g. accounting and personnel management) John Wiley & Sons, 2016

Product versus Period Costs Illustration 19-2 Product versus Period Costs All costs Product costs Manufacturing Costs Period costs Non-manufacturing Costs Direct Materials Selling Expenses Direct Labour Administrative Expenses Manufacturing Overhead John Wiley & Sons, 2016

Manufacturing Company Balance Sheet (partial) Illustration 19-4 Balance Sheet (partial)   Manufacturing Company Balance Sheet (partial) Current Assets Cash $ 23,800 Accounts receivable 84,900 Inventories Raw materials $ 18,100 Work in process 15,300 Finished Goods 41,200 74,600 Total current assets $ 183,300 A manufacturing company’s balance sheet will have three inventory accounts based on the stage of production. John Wiley & Sons, 2016

Cost of Goods Sold Components Illustration 19-5 Cost of Goods Sold Components Merchandising Company Beginning Merchandise Inventory Cost of Goods Purchased Ending Merchandise Inventory + - = Cost of Goods Sold Manufacturing Company Beginning Finished Goods Inventory Cost of Goods Manufactured Ending Finished Goods Inventory + - = Unlike a merchandise company which purchases its products, a manufacturer instead includes the cost of goods manufactured John Wiley & Sons, 2016

Manufacturing Company Income Statement (partial) Illustration 19-6 Manufacturing Income Statement (partial)   Manufacturing Company Income Statement (partial) Cost of goods sold Finished goods inventory, Jan 1 $ 33,800 Cost of goods manufactured 385,600 Cost of goods available for sale 419,400 Finished goods inventory, Dec 31 41,200 $ 378,200 John Wiley & Sons, 2016

Cost of Goods Manufactured Formula Illustration 19-7 Cost of Goods Manufactured Formula Beginning Work In Process Inventory Total Current Manufacturing Costs Total Cost of Work In Process + = Total Cost of Work In Process Ending Work In Process Inventory Cost of Goods Manufactured - = John Wiley & Sons, 2016

Manufacturing Company Schedule of Cost of Goods Manufactured Illustration 19-8 Cost of Goods Manufactured Schedule   Manufacturing Company Schedule of Cost of Goods Manufactured Year ended December 31, 2017 Work in process, January 1 $ 19,550 Direct material Raw material inventory, January 1 $ 17,500 Raw material purchases 123,600 Total raw materials available for use 141,100 Less: Raw materials inventory, December 31 18,100 Direct materials used $ 123,000 Direct labour 156,800 Manufacturing overhead Indirect labour 11,400 Factory repairs 23,000 Factory utilities 27,750 Factory depreciation 29,500 Factory insurance 9,900 Total manufacturing overhead 101,550 Total manufacturing costs 381,350 Total cost of work in process 400,900 Less: Work in process, December 31 15,300 Cost of goods manufactured $ 385,600 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 19-7. John Wiley & Sons, 2016