Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 1 of 23 Chapter 16 Introduction to Managerial Accounting

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 2 of 23 Financial Accounting versus Managerial Accounting Financial accounting is for external reporting –Responsible to: Owners and creditors for their investment decisions Regulatory agencies, such as the Securities Exchange Commission, the Federal Trade Commission, and the Internal Revenue Service Customers and society to ensure that the company acts responsibly

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 3 of 23 Financial Accounting versus Managerial Accounting Managerial accounting is for internal planning and controlling –Responsible to: Customers for safe and defect-free products and services Creditors for repaying principal and interest Employees for a safe and productive work environment Suppliers and vendors for timely payments Owners for providing a return on the owners’ investment Others: governments and communities

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 4 of 23 Planning and Controlling Planning—choosing goals and deciding how to achieve them –Common goal—to increase operating income (profits) –Achieved by raising prices or advertising more Budget—a mathematical expression of the plan –Used to coordinate the business’s activities –Shows the expected financial impact of decisions –Helps identify the resources needed to achieve goals Controlling—implementing the plans and evaluating operations –By comparing actual results to the budget –Cost data helps managers make decisions

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 5 of 23 Management versus Financial Accounting

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 6 of 23 S16-1: MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING Managerial and financial accounting differ in many aspects. 1.For each of the following, indicate whether the statement relates to managerial accounting (MA) or financial accounting (FA): _____a. Helps investors make investment decisions. _____ b. Provides detailed reports on parts of the company. _____ c. Helps in planning and controlling operations. _____ d. Reports must follow generally accepted accounting principles (GAAP). _____ e. Reports audited annually by independent certified public accountants. FA MA FA MA

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 7 of 23 Today’s Business Trends Shift toward a service economy –Health care, communication, banking, other Global competition –Moving operations to be closer to new markets Time-based competition –Advanced information systems –E-commerce –Just-in-time management Total quality management –A philosophy –To provide customers with superior products and services while meeting organizational goals

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 8 of 23 S16-3: B USINESS TRENDS TERMINOLOGY Consider the terms and definitions that follow. Match the term with the correct definition. 1.A philosophy designed to integrate all organizational areas in order to provide customers with superior products and services, while meeting organizational objectives. Requires improving quality and eliminating defects and waste. 2.Use of the Internet for such business functions as sales and customer service. Enables companies to reach thousands of customers around the world. a.ERP c. E-commerce b.Just-in-time (JIT) d. Total quality management Total quality management E-commerce

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 9 of 23 S16-3: B USINESS TRENDS TERMINOLOGY ( CONTINUED ) Consider the terms and definitions that follow. Match the term with the correct definition. 3.Software systems that integrate all of a company’s worldwide functions, departments, and data into a single system. 4.A system in which a company produces just in time to satisfy needs. Suppliers deliver materials just in time to begin production, and finished units are completed just in time for delivery to customers. a.ERP c. E-commerce b.Just-in-time (JIT) d. Total quality management Enterprise Resource Planning (ERP) Just-in-time (JIT)

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 10 of 23 Ethical Standards Requires ethical behavior without regard to personal consequences –Doing the right thing Ethical violations –Enron –Bernie Madoff –Bank of America/Merrill Lynch

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 11 of 23 Ethical Standards Institute of Management Accountants (IMA) –Developed standards to help meet ethical challenges Require management accountants to: –Maintain their professional competence –Preserve the confidentiality of the information –Act with integrity and credibility

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 12 of 23 IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: I. Competence 1. Maintain an appropriate level of professional expertise. 2. Perform professional duties in accordance with laws, regulations, and standards. 3. Provide information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional limitations.

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 13 of 23 IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: II. Confidentiality 1. Keep information confidential except when authorized or legally required. 2. Inform relevant parties regarding appropriate use of confidential information. 3. Refrain from using confidential information to your advantage.

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 14 of 23 IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: III. Integrity 1. Mitigate actual conflicts of interest. 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3. Abstain from engaging in activity that might discredit the profession.

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 15 of 23 IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: IV. Credibility 1. Communicate information fairly and objectively. 2. Disclose all relevant information. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls.

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 16 of 23 Service Company Service companies sell their time, skills, and knowledge Seek to provide services with: –High quality –Reasonable prices –Timely delivery Simplest accounting –No inventory or products for sale All costs are period costs –Incurred and expensed in same accounting period

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 17 of 23 Income Statement of a Service Company

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 18 of 23 Income Statement of a Service Company Cost per service –Helps to set the price of each service provided Consider all operating expenses (period costs) Unit cost per service

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 19 of 23 S16-5: C ALCULATING INCOME AND UNIT COST FOR A SERVICE ORGANIZATION Duncan and Oates provides hair cutting services in the local community. In February, the business incurred the following operating costs to cut the hair of 230 clients: Hair supplies expense $ 805 Building rent expense ,150 Utilities Depreciation on equipment Duncan and Oates earned $5,200 in revenues from haircuts for the month of February. 1. What is the net operating income for the month? 2. What is the cost of one haircut? $3,015 $ 9.50

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 20 of 23 Merchandising Company Resell products purchased from suppliers Keep an inventory of products Cost of goods sold is a major expense –Product costs flow through the inventory –GAAP requires companies to record inventoriable product costs as an asset until sold

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 21 of 23 Product Costs Includes cost to purchase goods plus freight-in Beginning Inventory + Net Purchases + Freight In – Ending Inventory = Cost of Goods Sold Managerial accounting distinguishes inventoriable product costs from period costs

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 22 of 23 Product versus Period Costs Product costs Part of inventory Expensed when sold Period costs Not part of inventory Expensed when incurred

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 23 of 23 Merchandising Company: Income Statement

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 24 of 23 Unit Cost Per Product Unit cost per product—helps managers set appropriate selling prices Formula:

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 25 of 23 S16-6 : C OMPUTING COST OF GOODS SOLD The Tinted View, a retail merchandiser of auto windshields, has the following information: Web site maintenance $ 7,100 Delivery expense Freight in , 900 Purchases ,000 Ending inventory ,900 Revenues ,000 Marketing expenses ,900 Beginning inventory ,900 Compute The Tinted View’s cost of goods sold.

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 26 of 23 Manufacturing Companies Use labor, plant, supplies, and facilities to convert raw materials into finished products Three kinds of inventory Materials inventory Work in process inventory Finished goods inventory

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 27 of 23 Types of Cost Cost object: – Anything for which managers want a separate measurement of cost –Examples: A product, department, or activity Direct costs Can be directly traced to a cost object Direct materials Direct labor Indirect costs Needed to finish products Cannot be directly traced to a cost object Manufacturing overhead

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 28 of 23 Inventoriable Product Costs Direct materials –Become a physical part of the finished product Direct labor –Wages of employees who convert materials into the company’s products Manufacturing overhead –All other costs other than direct materials and labor Conversion Cost

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 29 of 23 Manufacturing Overhead Includes only indirect costs related to manufacturing –Does NOT include costs for selling, general, or administrative functions Examples: –Indirect materials Become part of finished product, but cannot be conveniently or cost-effectively traced –Indirect labor Manufacturing wages that are not easily traced to products –Plant managers & maintenance

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 30 of 23 Manufacturer’s Inventoriable Product Costs

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 31 of 23 Comparison of Product and Period Costs TypeInventoriable product costsPeriod costs (Expenses) Service company NoneSalaries, depreciation, utilities, insurance, property taxes, advertising expenses Merchandising company Purchases plus freight inSalaries, depreciation, utilities, insurance, property taxes on storage building, advertising, delivery expenses Manufacturing company Direct materials, direct labor, and manufacturing overhead (including indirect materials; indirect labor; depreciation on the manufacturing plant and equipment; plant insurance, utilities, and property taxes Delivery expense; depreciation expense, utilities, insurance, and property taxes on executive headquarters (separate from the manufacturing plant); advertising; CEO’s salary

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 32 of 23 Manufacturing Company: Income Statement

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 33 of 23 Materials Inventory Finished Goods Inventory Sales Cost of Goods Sold INCOME STATEMENT Operating Expenses = Operating Income When sales occur - - Work in Process Inventory Period Costs Purchases of materials Direct labor & manufacturing overhead

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 34 of 23 Cost of Goods Manufactured

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 35 of 23 Flow of Costs Through a Manufacturer’s Inventory Account Direct materials inventory Work in process inventory Finished goods inventory Beginning inventory + Purchases and freight- in + Direct materials used + Cost of goods manufactured = Direct materials available for use + Direct labor= Cost of goods available for sale + Manuf. overhead - Ending inventory = Direct materials used= Cost of goods manufactured = Cost of goods sold

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 36 of 23 S16-9: C OMPUTING DIRECT MATERIALS USED You are a new accounting intern at Cookie Messages. Your boss gives you the following information: Purchases of direct materials $ 6,400 Freight in Property taxes Ending inventory of direct materials ,500 Beginning inventory of direct materials ,000 Compute direct materials used.

Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson Slide 37 of 23 S16-12 : C OMPUTE COST OF GOODS MANUFACTURED All Pro Golf Company had the following inventory data for the year ended January 31, 2012: Direct materials used $ 12,000 Manufacturing overhead ,000 Work in process inventory: Beginning ,000 Ending ,000 Direct labor ,000 Finished goods inventory ,000 Compute All Pro’s cost of goods manufactured for 2012.