© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Financial & Managerial Accounting The Basis for Business Decisions FOURTEENTH EDITION Williams Haka Bettner Carcello

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin MANAGEMENT ACCOUNTING A BUSINESS PARTNER Chapter 16

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 To explain the three principles guiding the design of management accounting systems.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Management Accounting: Basic Framework

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Management Accounting System Framework Budget Plans: Future Top Management Assign Decision Making Actual Results: Current Support Decision Making Performance Evaluation: Past Evaluate Decision Making

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Comparing Financial Accounting and Management Accounting

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 To describe the three basic types of manufacturing costs.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The cost to produce a unit of product includes: Direct material Direct labor Manufacturing overhead The cost to produce a unit of product includes: Direct material Direct labor Manufacturing overhead Accounting for Manufacturing Operations

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Raw materials & component parts that become an integral part of finished products. Can be traced directly and conveniently to products. Direct Materials If materials cannot be traced directly to products, the materials are considered indirect and are part of manufacturing overhead.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Includes the payroll cost of direct workers. Direct Labor Those employees who work directly on the goods being manufactured. The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin All manufacturing costs other than direct materials and direct labor. Includes: Indirect materials. Indirect labor. Machinery and equipment costs. Cost of regulatory compliance. Includes: Indirect materials. Indirect labor. Machinery and equipment costs. Cost of regulatory compliance. Manufacturing Overhead Does not include selling or general and administrative expenses.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Direct Materials Purchased Direct Materials Used Direct Labor Manufacturing Overhead Finished Goods Goods Sold MegaLoMart Flow of Physical Goods in Production

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Direct Materials Direct Labor Prime Cost Conversion Cost Manufacturing costs are often combined as follows: Manufacturing Overhead Accounting for Manufacturing Operations

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 To distinguish between product and period costs.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Balance Sheet Current assets and finished goods inventory Product Costs (manufacturing costs) Income Statement Revenue COGS Gross margin Period expenses Operating profit Revenue COGS Gross margin Period expenses Operating profit When goods are sold as incurred Period Costs (operating expenses and income taxes) as incurred Product Costs versus Period Costs

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ethics, Fraud, and Corporate Governance Product costs are capitalized as part of inventory and only charged to expense when the inventory is sold. Income will be artificially inflated if period costs are capitalized. Period costs are charged to expense as incurred.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 To describe how manufacturing costs flow through perpetual inventory accounts.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Raw materials - inventory on hand and available for use. Work in process - partially completed goods. Finished goods- completed goods awaiting sale. Inventories of a Manufacturing Business

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Direct materials purchased Materials Inventory $$$ Flow of Costs Associated With Production Direct materials used Work in Process Inventory $$$ Direct labor & Manufacturing Overhead Cost of Goods Sold $$$ Cost of goods manufactured Finished Goods Inventory $$$

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Pure-Ice Inc. had $52,000 of inventory in direct materials inventory on January 1, of this year. During the year, Pure-Ice purchased $586,000 of additional direct materials. At December 31 of this year $78,000 of the direct materials were still on hand. How much direct material was placed into production during the year? Pure-Ice Inc. had $52,000 of inventory in direct materials inventory on January 1, of this year. During the year, Pure-Ice purchased $586,000 of additional direct materials. At December 31 of this year $78,000 of the direct materials were still on hand. How much direct material was placed into production during the year? Flow of Costs Associated With Production

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin ? Flow of Costs Associated With Production

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin ! Flow of Costs Associated With Production

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin In addition to the direct materials, Pure- Ice incurred $306,000 of direct labor cost during the year. Manufacturing overhead for the year was $724,000. Pure-Ice started the year with $132,000 in work in process. During the year, units costing $1,480,000 were transferred to finished goods inventory. What is the balance in work in process at the end of the year? In addition to the direct materials, Pure- Ice incurred $306,000 of direct labor cost during the year. Manufacturing overhead for the year was $724,000. Pure-Ice started the year with $132,000 in work in process. During the year, units costing $1,480,000 were transferred to finished goods inventory. What is the balance in work in process at the end of the year? Flow of Costs Associated With Production

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Flow of Costs Associated With Production

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin ! Flow of Costs Associated With Production

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To distinguish between direct and indirect costs.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Direct Costs and Indirect Costs Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost objective. Examples: direct material and direct labor Indirect costs Costs cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To prepare a schedule of the cost of finished goods manufactured.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin A schedule of the cost of finished goods manufactured is prepared to provide managers with an overview of manufacturing activities during a period. Determining the Cost of Finished Goods Manufactured

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The cost of goods completed during the period is used to compute COGS for the period.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The income statement is prepared using established financial accounting procedures.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Manufacturers have three inventory accounts.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 16