©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Introduction to Management Accounting Chapter 19

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber PlanningActing Feedback Controlling The Functions of Management

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Distinguish between financial accounting and management accounting. Objective 1

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting and Financial Accounting Internal managers of the business Investors, Creditors, Government authorities (IRS, SEC, etc.) Investors, Creditors, Government authorities (IRS, SEC, etc.) Primary Users

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting and Financial Accounting Help managers plan and control business operations Help managers plan and control business operations Help investors, creditors, and others make investment, credit, and other decisions Help investors, creditors, and others make investment, credit, and other decisions Purpose of Information

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting and Financial Accounting Relevance Reliability, objectivity, and focus on the past Focus and Time Dimension

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting and Financial Accounting Internal reports not restricted by GAAP Financial statements restricted by GAAP Type of Report

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting and Financial Accounting No independent audit Annual independent audit by CPAs Verification

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting and Financial Accounting Detailed reports on parts of the company Detailed reports on parts of the company Summary reports primarily on the company as a whole Summary reports primarily on the company as a whole Scope of Information

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting and Financial Accounting Concern about how reports will affect employees behavior Concern about how reports will affect employees behavior Concern about adequacy of disclosure Behavioral Implications

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Service, Merchandising, and Manufacturing Companies Service Company: provides intangible services, rather than tangible products Service Company: provides intangible services, rather than tangible products Merchandising Company: resells products previously bought from suppliers Merchandising Company: resells products previously bought from suppliers

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Service, Merchandising, and Manufacturing Companies Manufacturing Company: uses labor, plant, and equipment to convert raw materials into finished products Manufacturing Company: uses labor, plant, and equipment to convert raw materials into finished products Materials inventory Work in process inventory Finished goods inventory Materials inventory Work in process inventory Finished goods inventory

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Describe the value chain and classify costs by value-chain functions. Objective 2

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Value Chain Research and Development Design Production or Purchases MarketingDistribution Customer Services

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Distinguish direct costs from indirect costs. Objective 3

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Cost Objects, Direct Costs, and Indirect Costs n Cost objects are anything for which a separate measurement of costs is desired. n Cost drivers are any factors that affect cost.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Cost Objects, Direct Costs, and Indirect Costs n What are examples of cost objects? – individual products – alternative marketing strategies – geographic segments of the business – departments

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Cost Objects, Direct Costs, and Indirect Costs n What are direct costs? n Direct costs are those costs that can be specifically traced to the cost object. n What are indirect costs? n Indirect costs are costs that cannot be specifically traced to the cost object.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Distinguish among full product costs, inventoriable product costs, and period costs. Objective 4

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Inventoriable product costs Inventoriable product costs Full product costs Full product costs Product Costs n What are product costs? n They are the costs to produce (or purchase) tangible products intended for sale. n There are two types of product costs:

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber External Reporting Inventoriable product costs Inventoriable product costs Period costs Period costs

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Inventoriable Product Costs n For external reporting, merchandisers’ inventoriable product costs include only costs that are incurred in the purchase of goods. n Inventoriable costs are an asset. n Period costs flow as expenses directly to the income statement.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Inventoriable Product Costs n For external reporting, manufacturers’ inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process. n Inventoriable product costs are incurred only in the third element of the value chain. n Costs incurred in other elements of the value chain are period costs.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Direct Materials Direct Labor Indirect Labor Indirect Materials Other Manufacturing Overhead Inventoriable Product Costs

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Inventoriable Product Costs Direct Materials Direct Labor Prime Costs = Direct Materials + Direct Labor

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Inventoriable Product Costs Conversion Costs = Direct Labor + Manufacturing Overhead Direct Labor Indirect Labor Indirect Materials Other

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Prepare the financial statements of a manufacturing company. Objective 5

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Revenues – Expenses = Operating income Financial Statements for Service Companies n There is no inventory and thus no inventoriable costs. n The income statement does not include cost of goods sold.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Financial Statements for Merchandising Companies Purchases of Inventory plus Freight-In Inventory Sales Revenue Cost of Goods Sold INCOME STATEMENT Operating Expenses Inventoriable Costs BALANCE SHEET equals Operating Income when sales occur deduct equals Gross Margin deduct Period Costs

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Financial Statements for Manufacturing Companies Materials Inventory Finished Goods Inventory Sales Revenue Cost of Goods Sold INCOME STATEMENT Operating Expenses Inventoriable Costs BALANCE SHEET equals Operating Income when sales occur deduct equals Gross Margin deduct Work in Process Inventory Period Costs

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Company Example n Kendall Manufacturing Company: n Beginning and ending work-in-process inventories were $20,000 and $18,000. n Direct materials used were $70,000. n Direct labor was $100,000. n Manufacturing overhead incurred was $150,000.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Company Example n What is the cost of goods manufactured? 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

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Company Example n Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000. n How much is the cost of goods sold?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Company Example 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

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Company Example n Kendall Manufacturing Company had sales of $627,000 for the period. n How much is the gross margin? Sales$627,000 – Cost of goods sold 327,000 = Gross margin$300,000

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Company Example n Kendall Manufacturing Company had operating expenses as follows: n Sales salaries and commissions$ 80,000 Delivery expense 10,000 Administrative expenses 30,000 Total$120,000 n What is Kendall’s operating income?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Company Example Gross margin$300,000 – Operating expenses 120,000 = Operating income$180,000

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Flow of Costs through a Manufacturer’s Accounts n Direct Materials Inventory n Beginning inventory +Purchases and freight-in =Direct materials available for use –Ending inventory =Direct materials used n Work in Process Inventory n Beginning inventory +Direct materials used +Direct labor +Manufacturing overhead =Total manufacturing costs to account for –Ending inventory =Cost of goods manufactured

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Flow of Costs through a Manufacturer’s Accounts n Finished Goods Inventory n Beginning inventory +Cost of goods manufactured =Cost of goods available for sale –Ending inventory =Cost of goods sold

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Identify major trends in the business environment, and use cost-benefit analysis to make business decisions. Objective 6

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Shift to a Service Economy In the U.S., 55% of the workforce is employed in service companies.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Competing in the Global Marketplace Foreign operations account for over 30% of GE’s revenues.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Just-in-Time n JIT philosophy means that the company schedules production just in time to satisfy needs. n Speeding up of the production process reduces throughput time. n Throughput time is the time between buying raw materials and selling the finished products.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Total Quality Management n The goal of total quality management (TQM) is to please customers by providing them with superior products and services. n TQM emphasizes educating, training, and cross-training employees. n Quality improvement programs cost money today. n The benefits usually do not occur until later.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Total Quality Management Initial benefits and costs$170 million$200 million Additional expected benefits 68 million Total$238 million$200 million Total Benefits Total Cost

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Use reasonable standards to make ethical judgments. Objective 7

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Professional Ethics for Management Accountants n In many situations the ethical path is not so clear. n The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Standards of Ethical Conduct for Management Accountants Confidentiality Integrity Objectivity Competence

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 19