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19-2 CHAPTER19 Managerial Accounting

19-3 PreviewofCHAPTER19

19-4 Managerial accounting, a field of accounting that provides economic and financial information for managers and other internal users. Activities include: Managerial Accounting Basics 1.Explaining manufacturing and nonmanufacturing costs (Chapter 19). 2.Computing cost of providing a service or manufacturing a product (Chapters 20 and 21). 3.Determining the behavior of costs and expenses as activity levels change and analyzing cost–volume–profit relationships within a company (Chapter 22).

19-5 Managerial accounting, a field of accounting that provides economic and financial information for managers and other internal users. Activities include: Managerial Accounting Basics 4.Assisting management in profit planning and formalizing these plans in the form of budgets (Chapter 23). 5.Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard costs (Chapters 24 and 25). 6.Accumulating and presenting data for management decision making (Chapter 26).

19-6 Managerial Accounting Basics Comparing Managerial and Financial Accounting Illustration 19-1 SO 1 Explain the distinguishing features of managerial accounting.

19-7 Managerial accounting: a.Pertains to the entity as a whole and is highly aggregated. b.Places emphasis on special-purpose information. c.Is limited to cost data. d.Is governed by generally accepted accounting principles. Question SO 1 Explain the distinguishing features of managerial accounting. Managerial Accounting Basics

19-8 Managerial Accounting Basics SO 2 Identify the three broad functions of management. Management Functions Three broad functions: 1.Planning. 2.Directing. 3.Controlling. Requires managers to look ahead and to establish objectives.  maximizing short-term profits and market share,  maintaining a commitment to environmental protection, and  contributing to social programs.

19-9 Managerial Accounting Basics SO 2 Identify the three broad functions of management. Management Functions Three broad functions: 1.Planning. 2.Directing. 3.Controlling. Involves coordinating diverse activities and human resources to produce a smooth- running operation. This function relates to  implementing planned objectives,  providing necessary incentives to motivate employees,  selecting executives,  appointing managers and supervisors, and  hiring and training employees.

19-10 Managerial Accounting Basics SO 2 Identify the three broad functions of management. Management Functions Three broad functions: 1.Planning. 2.Directing. 3.Controlling. Process of keeping the company’s activities on track.  Managers determine whether planned goals are being met.  When there are deviations from targeted objectives, managers must decide what changes are needed to get back on track.

19-11 The management of an organization performs several broad functions. They are: a.Planning, directing, and selling. b. Directing, manufacturing, and controlling. c. Planning, manufacturing, and controlling. d. Planning, directing, and controlling. Managerial Accounting Basics Question SO 2 Identify the three broad functions of management.

19-12 SO 2

19-13 Managerial Accounting Basics SO 2 Organizational Structure Illustration 19-2

19-14  Business scandals caused massive investment losses and employee layoffs.  Corporate fraud has increased 13% in last 5 years.  Employee fraud – 60% of all fraud.  Intentional misstatement of financial reports. ► Enron, Global; Crossing, WorldCom. ► Most costly to companies. Business Ethics Managerial Accounting Basics SO 2 Identify the three broad functions of management.

19-15  Systems to monitor and evaluate employees may produce incentives for unethical actions.  Employees may feel that they must succeed no matter what.  Ineffective and unrealistic controls may result in declining product quality. Managerial Accounting Basics Business Ethics Creating Proper Incentives SO 2 Identify the three broad functions of management.

19-16  Sarbanes-Oxley Act of 2002 ► Clarifies management’s responsibilities. ► Certifications by CEO and CFO. ► Selection criteria for Board of Directors and Audit Committee. ► Substantially increased penalties for misconduct.  IMA Statement of Ethical Professional Practices Managerial Accounting Basics Business Ethics Code of Ethical Standards SO 2 Identify the three broad functions of management.

19-17 SO 3 Define the three classes of manufacturing costs. Managerial Cost Concepts Manufacturing Costs Activities and processes that convert raw materials into finished goods. Illustration 19-3

19-18 SO 3 Define the three classes of manufacturing costs. Manufacturing Costs Direct Materials Raw materials purchased that will be converted into finished product.  Direct materials can be physically and directly associated with the finished product.  Indirect materials: 1.Do not become part of the finished product, or 2.Cannot be traced directly to the product. 3.Part of manufacturing overhead.

19-19 SO 3 Define the three classes of manufacturing costs. Manufacturing Costs Direct Labor Direct Labor - Work of factory employees that  can be physically and directly associated with converting raw materials into finished goods. Indirect Labor - Work of factory employees that  has no physical association with the finished product or  for which it is impractical to trace to the goods produced.

19-20 SO 3 Define the three classes of manufacturing costs. Manufacturing Costs Manufacturing Overhead  Costs that are indirectly associated with manufacturing the product.  Includes all manufacturing costs except direct materials and direct labor.

19-21

19-22 Which of the following is not an element of manufacturing overhead? a.Sales manager’s salary. b. Plant manager’s salary. c. Factory repairman’s wages. d. Product inspector’s salary. Manufacturing Costs Question SO 3 Define the three classes of manufacturing costs.

19-23 SO 4 Distinguish between product and period costs. Product Costs  Components: direct material cost, direct labor cost, and manufacturing overhead.  Necessary and integral part of producing the product.  Recorded as inventory when incurred.  Not an expense until the finished goods inventory is sold, then record as cost of goods sold. Manufacturing Costs Product versus Period Costs

19-24 Period Costs  Matched with revenue of a specific time period and charged to expense as incurred.  Non-manufacturing costs.  Deducted from revenues in period incurred to determine net income.  Includes all selling and administrative expenses. Manufacturing Costs Product versus Period Costs SO 4 Distinguish between product and period costs.

19-25 Product versus Period Costs Illustration 19-4 SO 4 Distinguish between product and period costs.

19-26 SO 5 Explain the difference between a merchandising and a manufacturing income statement. Manufacturing Costs Income Statement Illustration 19-5

19-27 SO 5 Explain the difference between a merchandising and a manufacturing income statement. Manufacturing Costs Income Statement Illustration 19-6 Cost of goods sold sections of merchandising and manufacturing income statements

19-28 SO 6 Indicate how cost of goods manufactured is determined. Work in Process – partially completed units of product. Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period. Illustration 19-7 Manufacturing Costs Cost of Goods Manufactured

19-29 Manufacturing Costs SO 6 Illustration 19-8 Cost of goods manufactured schedule

19-30 SO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Manufacturing Costs Balance Sheet Illustration 19-9 Inventory accounts for a manufacturer

19-31 Manufacturing Costs Balance Sheet Illustration Current assets sections of merchandising and manufacturing balance sheets SO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

19-32  U.S. economy has shifted toward an emphasis on providing services rather than goods.  Over 50% of U.S. workers are now employed by service companies.  Trend is expected to continue in the future.  Most of the techniques learned for manufacturing firms are applicable to service companies. Manufacturing Costs Product Costing for Service Industries SO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

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19-34 SO 8 Identify trends in management accounting. All activities associated with providing a product or service. Managerial Accounting Today The Value Chain Illustration A manufacturer’s value chain

19-35 SO 8 Identify trends in management accounting. Enterprise Resource Planning (ERP) systems provide a comprehensive, centralized, integrated source of information that companies can use to manage all major business processes, from purchasing to manufacturing to human resources. Computer-Integrated Manufacturing (CIM) allows companies to manufacture products that are untouched by human hands. Business-to-Business (B2B) e-commerce on the Internet. Managerial Accounting Today Technological Change

19-36 SO 8 Identify trends in management accounting.  Goods are manufactured or purchased just in time for use. Managerial Accounting Today Just-In-Time Inventory Methods  JIT inventory system requires increased emphasis on product quality.  Companies have installed total quality management (TQM) systems to reduce defects in finished products. Quality

19-37 SO 8 Identify trends in management accounting.  Allocates overhead based on use of activities.  Results in more accurate product costing and scrutiny of all activities in the value chain. Managerial Accounting Today Activity-Based Costing  A specific approach used to identify and manage constraints in order to achieve the company’s goals. Theory of Constraints

19-38 SO 8 Identify trends in management accounting.  Evaluates operations in an integrated fashion.  Uses both financial and non-financial measures.  Links performance measures to overall company objectives. Managerial Accounting Today Balanced Scorecard

19-39 Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner? a.Just-in-time inventory. b.Total-quality management. c.Balanced scorecard. d.Activity-based costing. SO 8 Identify trends in management accounting. Managerial Accounting Today Question

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