Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 14 Managerial Accounting Concepts and Principles

Conceptual Learning Objectives C1: Explain the purpose and nature of, and the role of ethics in, managerial accounting. C2: Describe accounting concepts useful in classifying costs. C3: Define product and period costs and explain how they impact financial statements. C4: Explain how the balance sheets and income statements for manufacturing and merchandising companies differ. C5: Explain manufacturing activities and the flow of manufacturing costs. C6: Identify trends in managerial accounting. 14-3

A1: Assess raw materials inventory management using raw materials inventory turnover and days’ sales in raw materials inventory. Analytical Learning Objectives 14-4

P1: Compute cost of goods sold for a manufacturer. P2: Prepare a manufacturing statement and explain its purpose and links to financial statements. Procedural Learning Objectives 14-5

Managerial accounting provides financial and nonfinancial information to an organization’s managers and other internal decision makers Financial accounting provides general purpose financial information to those who are outside the organization. Managerial and Financial Accounting C1 14-6

Nature of Managerial Accounting C1 14-7

Fraud in Accounting Fraud is the use of one’s job for personal gain through the deliberate misuse of the employer’s assets. It is estimated that 5% of annual revenues are lost to fraud. All fraud is committed to provide direct or indirect benefit to the perpetrator, violates the employee’s duty to his/her employer, costs the employer money, and is carried out in secret. C1 14-8

Ethics in Accounting Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. The IMA’s Statement of Ethical Professional Practice requires management accountants to be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner. The Sarbanes-Oxley Act requires each issuer of securities to disclose whether it has adopted a code of ethics for its senior officers and the content of that code. C1 14-9

Behavior Traceability Controllability Relevance Function Managerial Cost Concepts C

Cost behavior refers to a costs reaction to changes in the level of business activity. Classification by Behavior C2 A fixed cost does not change with changes in the volume of activity. A variable cost changes in proportion to changes in the volume of activity. A mixed cost refers to a combination of fixed and variable costs

Direct costs Costs traceable to a single cost object. Examples: material and labor cost for a product. Indirect costs Costs that cannot be traced to a single cost object. Example: maintenance expenditures benefiting two or more departments. Classification by Traceability C

The degree of control depends on the level of management in the organization. More control Very little control Classification by Controllability C

All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost. Classification by Relevance: Sunk Costs C

Classification by Relevance: Out-of-Pocket Costs C2 A cost that requires a future outlay of cash. Out-of-pocket costs should be considered in decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future 14-13

The potential benefit lost by choosing a specific action from two or more alternatives Classification by Relevance: Opportunity Costs C Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.

The Product Classification by Function: Product Costs Direct Material Direct Labor Manufacturing Overhead C

Period costs (expenses) Product costs (inventory) Inventory not sold until 2014 Operating expenses Cost of goods sold Raw Materials Goods in Process Finished Goods Cost of goods sold 2013 Costs incurred 2013 Income Statement 2014 Income Statement 2013 Balance Sheet inventory – (3 accounts) Inventory sold in 2013 Period and Product Costs in Financial Statements C Inventory sold in 2014

Completed products for sale. Materials waiting to be processed. Can be direct or indirect. Partially complete products. Material to which some labor and/or overhead have been added. Balance Sheet of a Manufacturer Three Inventory Accounts Raw Materials Inventory Finished Goods Inventory Goods in Process Inventory C

Beginning Merchandise Inventory Beginning Finished Goods Inventory Cost of Goods Purchased Cost of Goods Manufactured Ending Merchandise Inventory Ending Finished Goods Inventory Cost of Goods Sold Merchandiser Manufacturer + _ + == _ The major difference Income Statement of a Manufacturer C

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Income Statement of a Manufacturer P

Direct Materials Materials that are separately and readily traced to a particular product. Direct Materials Materials that are separately and readily traced to a particular product. Cost of Goods Manufactured Includes: Direct Materials Used C Example: Steel used to manufacture the automobile. Example: Steel used to manufacture the automobile.

Direct Labor Labor costs that are separately and readily traced to finished product. Direct Labor Labor costs that are separately and readily traced to finished product. Example: Wages paid to an automobile assembly worker. Example: Wages paid to an automobile assembly worker. C Cost of Goods Manufactured Includes: Direct Labor Costs

Factory Overhead All manufacturing costs except direct material and direct labor Factory costs that cannot be separately or readily traced directly to products. Factory Overhead All manufacturing costs except direct material and direct labor Factory costs that cannot be separately or readily traced directly to products. Examples: Indirect labor – maintenance Indirect material – cleaning supplies Factory utility costs Supervisory costs C Cost of Goods Manufactured Includes: Factory Overhead Costs

Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often combined as follows: Income Statement of a Manufacturer C

Finished Goods beginning inventory Goods manufactured Balance Sheet Raw materials ending inventory Goods in process ending inventory Finished goods ending inventory Raw Materials beginning inventory Raw Materials purchases Income Statement cost of goods sold Goods in Process beginning inventory Raw materials used Direct labor used Factory overhead used Sales Activity (finished goods) Production Activity (goods in process) Materials Activity (raw materials) Flow of Manufacturing Activities C Financial reports

Summarizes the types and amounts of costs Incurred in a company’s manufacturing process. Direct Materials Used +Direct Labor +Factory Overhead =Total Manufacturing Costs +Beginning Goods in Process – Ending Goods in Process =Cost of Goods Manufactured Manufacturing Statement P

P2 Manufacturing Statement 14-28

P

Include all direct labor costs incurred during the current period. P2 Manufacturing Statement 14-30

Manufacturing Statement P

Beginning goods in process inventory is carried over from the prior period. P2 Manufacturing Statement 14-32

Ending goods in process inventory contains the cost of unfinished goods and is reported in the current assets section of the balance sheet. P2 Manufacturing Statement 14-33

Trends in Managerial Accounting Lean Practices Customer Orientation C

on Quality improvement applied to all aspects of business activities. Seek and uncover waste. Employees encouraged to try new methods to improve quality. Company emphasizes value of quality through quality awards. C Trends in Managerial Accounting Total Quality Management

Complete products just in time to ship to customers. Complete parts just in time for assembly into products. Receive materials just in time for production. Schedule production. Receive customer orders. C Trends in Managerial Accounting Just-In-Time (JIT) Manufacturing

C6 To accomplish just-in-time manufacturing: Processes must be aligned to eliminate delays and inefficiencies Companies must establish good relations with suppliers Trends in Managerial Accounting Just-In-Time (JIT) Manufacturing

Raw Materials Inventory Management A Raw materials inventory turnover Raw materials used Average raw materials = Rocky Mountain Bikes raw materials inventory turnover = $85,500 ($8,000 + $9,000)/2 = 10.06

Raw Materials Inventory Management A Days’ sales in raw materials inventory Ending raw materials inventory Raw materials used = Rocky Mountain Bikes’ days’ sales in raw materials inventory = $9,000 $85,500 X days X 365 =

End of Chapter