Managerial Accounting Wild and Shaw Fourth Edition McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. 1

Managerial Accounting Concepts and Principles Chapter 1 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. 1-3

Analytical Learning Objectives A1: Assess raw materials inventory management using raw materials inventory turnover and days’ sales in raw materials inventory. 1-4

Procedural Learning Objectives P1: Compute cost of goods sold for a manufacturer. P2: Prepare a manufacturing statement and explain its purpose and links to financial statements. 1-5

Managerial and Financial Accounting 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. 1-6

Nature of Managerial Accounting 1-7

Managerial Cost Concepts Behavior Traceability Controllability Relevance Function 1-8

Classification by Behavior Cost behavior refers to a costs reaction to changes in the level of business activity. 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. 1-9

Classification by Traceability 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. 1-10

Classification by Controllability The degree of control depends on the level of management in the organization. More control More control Very little control 1-11

Classification by Relevance: All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Out-of-pocket costs require a future outlay of cash and should be considered in decisions. Opportunity costs are the potential benefits lost by choosing a specific action from two or more alternatives 1-12

Classification by Function: Product Costs Direct Material Direct Labor Manufacturing Overhead The Product 1-13

Period and Product Costs in Financial Statements 2013 Income Statement Period costs (expenses) Operating expenses Cost of goods sold 2014 Income Statement 2013 Costs incurred Inventory sold in 2013 Cost of goods sold Raw Materials Goods in Process Finished Goods 2013 Balance Sheet inventory – (3 accounts) Product costs (inventory) Inventory not sold until 2014 Inventory sold in 2014 1-14

Balance Sheet of a Manufacturer Three Inventory Accounts Goods in Process Inventory Raw Materials Inventory Finished Goods Inventory Partially complete products. Material to which some labor and/or overhead have been added. Materials waiting to be processed. Can be direct or indirect. Completed products for sale. 1-15

Income Statement of a Manufacturer Merchandiser Manufacturer Beginning Finished Goods Inventory Beginning Merchandise Inventory + + The major difference Cost of Goods Purchased Cost of Goods Manufactured _ _ Ending Merchandise Inventory Ending Finished Goods Inventory Cost of Goods Sold = = 1-16

Flow of Manufacturing Activities Production Activity Sales Activity Materials Activity Finished Goods Beginning Inventory Goods in Process Beginning Inventory Raw Materials Beginning Inventory Direct Labor Used Cost of Goods Manufactured Raw Materials Purchases Factory Overhead Used Finished Goods Ending Inventory Cost of Goods Sold Raw Materials Used Raw Materials Ending Inventory Goods in Process Ending Inventory 1-17

Manufacturing Statement P2 Manufacturing Statement 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 1-18

End of Chapter 1