Managerial Accounting Introduction to Management Accounting Chapter 19

Managerial Accounting Dell Computer ä Dell’s first quarter 1997 net income soared to $198 million, more than double the income in the first quarter of ä How did Michael Dell turn his company from a $40 million loss in 1994 to this net income?

Managerial Accounting Dell Computer ä Michael Dell knew that cost control would drive the computer business. ä Why? ä Most customers want a good price more than a specific brand name. ä Dell executives also had to market and distribute the computers.

Managerial Accounting Dell Computer ä Accounting information helps executives such as Dell make business decisions.

Managerial Accounting Dell Computer ä The accounting system provides managers with cost and profit information broken down by: – Type of product – Marketing strategy – Geographic business units

Managerial Accounting Chapter Objectives 1 Distinguish between financial accounting and management accounting, and use management accounting information for decision making. 2 Describe the value chain and classify costs by value chain functions.

Managerial Accounting Chapter Objectives 3 Distinguish direct costs from indirect costs. 4 Distinguish among full product costs, inventoriable product costs and period costs. 5 Prepare the financial statements of a manufacturing company.

Managerial Accounting Chapter Objectives 6 Identify major trends in the business environment and use cost-benefit analysis to make business decisions. 7 Use reasonable standards to make ethical judgments.

Managerial Accounting The Functions of Management ä Planning - choosing goals and deciding how to achieve those goals. ä Controlling - taking action to implement the plans and then evaluating results.

Managerial Accounting The Functions of Management ä Budget - a tool that helps management implement plans.

Managerial Accounting Objective 1 Distinguish between financial accounting and management accounting, and use management accounting information for decision making.

Managerial Accounting Primary Users - Financial Accounting – Investors – Creditors – Government authorities (IRS, SEC, etc.) ä Financial accounting reports information to outsiders based on past performance.

Managerial Accounting Primary Users - Management Accounting – Internal managers of the business ä Management accounting presents information for insiders to use in planning the future of the business.

Managerial Accounting Focus ä An important characteristic of management accounting information is relevance. ä Characteristics of financial accounting information include reliability and objectivity.

Managerial Accounting Reports and Scope of Information ä Management accounting has no GAAP-type standards. ä Managers tailor the company’s management accounting system to provide detailed reports on parts of the company.

Managerial Accounting Reports and Scope of Information ä Financial accounting is restricted by GAAP. ä Reports present summarized information on the company as a whole. ä These reports are usually on a quarterly or annual basis.

Managerial Accounting Behavioral Implications ä Management accounting concern is about how reports will affect the behavior of employees. ä Financial accounting concern is about adequacy of disclosure.

Managerial Accounting Management’s Use of Accounting Information – Three purposes: 1 To determine the cost of products and services. 2 To plan and control business operations. 3 To report the company’s financial position and results of operations to external parties.

Managerial Accounting Manufacturing Firms ä A manufacturing business uses labor, plant and equipment to convert materials into new finish products. ä Manufacturers have three kinds of inventory: 1 Materials inventory 2 Work in process inventory 3 Finished goods inventory

Managerial Accounting Manufacturing Firms ä Materials inventory - materials for use in the manufacturing process. ä For example, a glass container factory’s raw material inventory includes sand, soda ash and limestone.

Managerial Accounting Manufacturing Firms ä Work in process inventory - goods that are partially completed. ä Finished goods inventory - completed goods that have not yet been sold. ä Finished goods are what the manufacturer sells to a merchandising business, another manufacturer or the ultimate consumer.

Managerial Accounting Objective 2 Describe the value chain and classify costs by value chain functions.

Managerial Accounting Value Chain ä Research and development (R&D) - conducted to determine what new or improved products are to be introduced to the market. ä Design - the detailed engineering of products and services, or the process for producing them.

Managerial Accounting Value Chain ä Production of products and services or purchases of merchandise inventory - the use of resources to produce the product or service or to purchase merchandise inventory. ä Marketing - the promotion of the product or service.

Managerial Accounting Value Chain ä Distribution - the delivery of the product or service to the customer. ä Customer service - the support provided for customers after the sale.

Managerial Accounting Value Chain ä Upstream costs (research and development) occur before manufacturing. ä Downstream costs (marketing and distribution) occur after manufacturing.

Managerial Accounting Objective 3 Distinguish direct costs from indirect costs.

Managerial Accounting Cost Objects, Direct Costs and Indirect Costs ä Cost objects are anything for which a separate measurement of costs is desired. ä Cost drivers are any factors that affect cost.

Managerial Accounting Cost Objects, Direct Costs and Indirect Costs ä Cost objects may include... – individual products (laptop computers, desktop models). – alternative marketing strategies (telephone sales, sales to retailers). – geographic segments of the business (U.S., Europe). – departments (personnel, accounting).

Managerial Accounting Cost Objects, Direct Costs and Indirect Costs ä Direct costs are those costs that can be specifically traced to the cost object. ä Indirect costs are costs that cannot be specifically traced to the cost object.

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

Managerial Accounting Product Costs... – are the costs to produce (or purchase) tangible products intended for sale. ä There are two types of product costs: 1 Full product costs 2 Inventoriable product costs

Managerial Accounting Product Costs ä Full product costs include all resources used from designing a product to delivering it to a customer. ä Full product costs are the costs of all resources used throughout the value chain.

Managerial Accounting Inventoriable Product Costs Versus Period Costs ä Inventoriable product costs are used for external reporting. ä They do not include costs from all elements of the value chain. ä They are narrower in scope than full product costs. ä Inventoriable product costs must conform to GAAP.

Managerial Accounting Inventoriable Product Costs Versus Period Costs ä For external reporting, merchandisers’ inventoriable product costs include only costs that are incurred in the purchase of goods. ä These costs are included in the third element of the value chain. ä Costs incurred in other elements of the value chain are period costs.

Managerial Accounting Inventoriable Product Costs Versus Period Costs ä Inventoriable costs are an asset. ä They become an expense when the items are sold. ä Period costs flow as expenses directly to the income statement.

Managerial Accounting Inventoriable Product Costs Versus Period Costs ä For external reporting, manufacturer’s inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process. ä Inventoriable product costs are incurred only in the third element of the value chain. ä Costs incurred in other elements of the value chain are period costs.

Managerial Accounting Major Categories of Inventoriable Product Costs – Direct materials – Direct labor – Manufacturing overhead

Managerial Accounting Major Categories of Inventoriable Product Costs ä Direct materials must meet two requirements: ä They must become a physical part of the finished product. ä Their costs must be separately and conveniently traced to the finished product.

Managerial Accounting Major Categories of Inventoriable Product Costs ä Direct labor is the compensation of employees who physically convert materials into the company’s products.

Managerial Accounting Major Categories of Inventoriable Product Costs ä Manufacturing overhead includes all manufacturing costs other than direct materials and direct labor. – Indirect materials – Indirect labor – Factory utilities, rent, insurance – Depreciation

Managerial Accounting Manufacturing Overhead Includes: – Indirect materials. ä These cannot be conveniently or economically traced to a particular finished product. ä Indirect materials are part of the manufacturing overhead cost. – Glue, nails – Thread, buttons – Bolts, squirt of oil

Managerial Accounting – Indirect labor. ä This is a cost difficult to trace to a specific product. – Forklift operators – Janitors – Plant managers – Supervisors – Machine helpers Manufacturing Overhead Includes:

Managerial Accounting Prime Cost and Conversion Costs ä Prime costs are the direct costs incurred in the manufacturing process (direct materials plus direct labor). ä Conversion costs are the costs of converting direct materials into finished products (direct labor plus manufacturing overhead).

Managerial Accounting Objective 5 Prepare financial statements of a manufacturing company.

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

Managerial Accounting Financial Statements for Merchandising Companies ä A merchandising company buys goods that are ready for immediate resale. ä Inventoriable costs are for the purchase of these goods plus freight-in.

Managerial Accounting Financial Statements for Merchandising Companies ä Beginning inventory + Purchases and Freight-in = Cost of goods available for sale – Ending inventory = Cost of goods sold

Managerial Accounting Financial Statements for Merchandising Companies ä When sales occur, Inventory decreases and Cost of Goods Sold increases. ä On the income statement, cost of goods sold is deducted from sales revenue to obtain the gross margin.

Managerial Accounting Financial Statements for Manufacturing Companies ä Manufacturing firms have the most complicated accounting with three types of inventory accounts. 1 Materials 2 Work in process 3 Finished goods

Managerial Accounting Financial Statements for Manufacturing Companies ä Materials inventory is the cost of materials on hand intended for use in manufacturing. ä Work in process inventory is the cost of goods that are in the manufacturing process but not yet complete. ä Finish goods inventory is the cost of the completed goods that are not yet sold.

Managerial Accounting Financial Statements for Manufacturing Companies ä Hickory, Inc., is a small furniture manufacturing company. ä Beginning and ending work in process inventories were $20,000 and $18,000. ä Direct materials used were $70,000. ä Direct labor was $100,000. ä Manufacturing overhead incurred was $150,000.

Managerial Accounting Financial Statements for Manufacturing Companies ä What is the cost of goods manufactured? ä 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

Managerial Accounting Financial Statements for Manufacturing Companies ä Hickory, Inc.’s, beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.

Managerial Accounting Financial Statements for Manufacturing Companies ä How much is the cost of goods sold? ä 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

Managerial Accounting Financial Statements for Manufacturing Companies ä Hickory, Inc., had sales of $627,000 for the period. ä How much is the gross margin? ä Sales$627,000 –Cost of goods sold 327,000 =Gross margin$300,000

Managerial Accounting Financial Statements for Manufacturing Companies ä Hickory, Inc., had operating expenses as follows: ä Sales salaries and commissions $ 80,000 ä Delivery expense 10,000 ä Administrative expenses 60,000 ä Total $150,000 ä What is Hickory’s operating income?

Managerial Accounting Financial Statements for Manufacturing Companies ä Gross margin$300,000 –Operating expenses 150,000 =Operating income$150,000

Managerial Accounting Flow of Costs through a Manufacture’s Accounts ä Beginning direct material inventory +Purchases =Direct materials available for use –Ending inventory =Direct materials used

Managerial Accounting Flow of Costs through a Manufacture’s Accounts Work in Material Process Beg. Inv used Beg. Inv. 80 Purchases 50 Material 40 End. Inv. 20 Direct Lab. 90 Overhead finished End. Inv. 100

Managerial Accounting Flow of Costs through a Manufacture’s Accounts Finished Goods Inventory Cost of Goods Sold Beg. Inv. 50 Finished Sold 210 End. Inv. 40

Managerial Accounting Objective 6 Identify major trends in the business environment and use cost-benefit analysis to make business decisions.

Managerial Accounting Just-in-Time ä JIT philosophy means that the company schedules production just in time to satisfy needs. ä Materials are purchased and finished goods are completed only as needed to satisfy customer demand.

Managerial Accounting Just-in-Time ä Firms adopting JIT report sharp reductions in inventory. ä Speeding up of the production process reduces throughput time. ä Throughput time is the time between buying raw materials and selling the finished products.

Managerial Accounting Quality ä The goal of total quality management (TQM) is to please customers by providing them with superior products and services. ä Each business function examines its own activities and works to improve by setting higher and higher goals.

Managerial Accounting Quality ä TQM emphasizes educating, training and cross-training employees to do multiple tasks. ä Quality improvement programs cost money today. ä The benefits usually do not occur until later.

Managerial Accounting Quality ä Total Benefits Total Cost ä Initial benefits and costs $170 million $200 million ä Additional expected benefits 68 million ä Total $238 million $200 million

Managerial Accounting Objective 6 Use reasonable standards to make ethical judgments.

Managerial Accounting Professional Ethics for Management Accountants ä In many situations the ethical path is not so clear. ä The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.

Managerial Accounting Professional Ethics for Management Accountants ä These standards require management accountants to: – maintain their professional competence. – preserve the confidentially of the information they handle. – act with integrity and objectivity.

Managerial Accounting Professional Ethics for Management Accountants ä Management accountants have an obligation to the organizations they serve, their profession, the public and themselves to maintain the highest standards of ethical conduct.