Introduction to Management Accounting

JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN

PlanningActing Feedback Controlling The Functions of Management

Objective 1 Distinguish between financial accounting and management accounting.

Primary Users Financial 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 Financial statements restricted by GAAP Management Internal reports not restricted by GAAP; determined by cost-benefit analysis

Verification Financial Annual independent audit by CPAs Management No independent audit

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

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

Service, Merchandising, and Manufacturing Companies Service 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 and classify costs by value-chain functions. Objective 2

Value Chain Research & Development Design Production or Purchases MarketingDistribution Customer Services

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Distinguish direct costs from indirect costs. Objective 3

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.

Distinguish among full product costs, inventoriable product costs, and period costs. Objective 4

Product Costs What are product costs? They are the costs to produce (or purchase) tangible products intended for sale.

Inventoriable product costs Inventoriable product costs Full product costs Full product costs Product Costs There are two types of product costs:

External Reporting Inventoriable product costs Inventoriable product costs Period 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.

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 Conversion Costs = Direct Labor + Manufacturing Overhead Direct Labor Indirect Labor Indirect Materials Other

Prepare the financial statements of a manufacturing company. Objective 5

Revenues – Expenses = Operating income Financial Statements for Service Companies There is no inventory and thus no inventoriable costs. The income statement does not include cost of goods sold.

Financial Statements for Merchandising Companies Purchases of Inventory plus Freight-In Inventory Sales Revenue Cost of Goods Sold INCOME STATEMENT Operating Expenses Inventoriable Costs BALANCE SHEET equals Operating Income when sales occur deduct equals Gross Margin deduct Period Costs

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

Manufacturing Company Example Kendall Manufacturing Company: Beginning and ending work-in-process inventories were $20,000 and $18,000. Direct materials used were $70,000. Direct labor was $100,000. Manufacturing overhead incurred was $150,000.

Manufacturing Company Example What is the cost of goods manufactured? Beginning work in process$ 20,000 Direct labor$100,000 Direct materials 70,000 Mfg. overhead 150, ,000 Ending work in process (18,000) Cost of goods manufactured$322,000

Manufacturing Company Example Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000. How much is the cost of goods sold?

Manufacturing Company Example Beg. finished goods inventory$ 60,000 + Cost of goods manufactured 322,000 = Cost of goods available for sale$382,000 – Ending finished goods 55,000 = Cost of goods sold$327,000

Manufacturing Company Example Kendall Manufacturing Company had sales of $627,000 for the period. How much is the gross margin? Sales$627,000 – Cost of goods sold 327,000 = Gross margin$300,000

Manufacturing Company Example Kendall Manufacturing Company had operating expenses as follows: $80,000 Sales salaries 10,000 Delivery expense 30,000 Administrative expenses $120,000 Total What is Kendall’s operating income?

Manufacturing Company Example Gross margin$300,000 – Operating expenses 120,000 = Operating income$180,000

Flow of Costs through a Manufacturer’s Accounts Direct Materials Inventory Beginning inventory +Purchases and freight-in =Direct materials availablefor 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 cost-benefit analysis to make business decisions. Objective 6

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 Initial benefits and costs$170 million$200 million Additional expected benefits 68 million Total$238 million$200 million Total Benefits Total Cost

Use reasonable standards to make ethical judgments. Objective 7

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 Confidentiality Integrity Objectivity Competence

JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN