Management Accounting

Financial Accounting Provides info used primarily by investors, creditors, and others outside a business Example – Balance Sheet & Income Statement Characterized by objectivity, reliability, and historical nature

Managerial Accounting Provides info used primarily by executives, managers, and employees who work inside the business Internal users need info to plan, direct and control business operations. Example – Budget Characterized by relevance and timeliness

Insert Exhibit 1-2 Here

Product Costing This is a major focus of the course As managers, we want to know how much the product cost I wonder how much it cost to make this pencil?

Product Costs Products are made up of 3 “kinds” of costs: Direct Materials Direct Labor Manufacturing Overhead

Knowing Cost Is Important… for companies making tangible products Materials $390 Labor $470 Overhead $140

Insert Exhibit 1-3 Here What is the average cost per table?

Average Cost per Unit Total Product Cost Number of Units Produced = Average Cost per Unit = $250 $1,000 4 Tabor Example Average Cost Per Unit

Costs Can Be Assets or Expenses Period Cost ExpenseCOGSAsset Product Cost

Asset or Expense? Product Costs are assets When a product cost is incurred, is recorded in the inventory account Product costs are expensed when the product is sold All other costs (period costs) are expensed when incurred

Cost Classifications PeriodCostsPeriodCosts Selling Expenses Selling Expenses Administrative Expenses Administrative Expenses Direct (Raw) Materials Direct (Raw) Materials Factory Overhead Factory Overhead Direct Labor Direct Labor ProductCostsProductCosts

Raw Materials

Labor Costs Wages paid to production workers i.e. People working on the products directly

Manufacturing Overhead Costs that cannon be traced to products and services directly – INDIRECT COSTS INDIRECT MATERIALS INDIRECT LABOR FACTORY UTILITIES RENT ON FACTORY DEPRECIATION ON MANUFACTUTING ASSETS

Which of the following is classified as factory overhead? 1.Salary of maintenance workers 2.Glue, Nails, Etc. 3.Electric bill 4.Rent on factory 5.All of the above

Manufacturing Costs 1. Enters directly into the product. 2.Is significant amount of total product cost. 1.Enters directly into manufacturing the product. 2.Is significant amount of total product cost. Cost other than direct materials cost and direct labor cost incurred in the manufacturing of product. Direct Materials: Direct Materials: Direct Labor: Direct Labor: Factory Overhead: Factory Overhead:

General, Selling & Admin Costs Expensed in the period in which they are incurred.

Patillo Manufacturing Company Transactions

What happens if costs are misclassified?

Marion Manufacturing Company Marion Manufacturing Company (MMC) had the following transactions: 1.MMC was started when it acquired $12,000 from issuing common stock. 2.MMC incurred specifically identifiable product costs of $8, MMC incurred $4,000 of costs to design its product and plan the manufacturing process. 4.MMC made 1,000 units of product and sold 700 of the units for $18 each. Let’s look at two scenarios for MMC.

Marion Manufacturing Company Scenario 1 The $4,000 of design and planning costs are classified as selling and general and administrative. Scenario 2 The $4,000 of design and planning costs are classified as product costs, meaning they are first accumulated in the inventory account and then expensed when the goods are sold.

Upstream Costs Costs that occur before the manufacturing process begins. Example: Research & Development

Downstream Costs Costs that occur after the manufacturing process is complete Examples: Transportation, Advertising, Sales Commissions, and Bad Debts

Emerging Trends in Managerial Accounting Benchmarking Best Practices Total Quality Management Activity-Based Management Value-Added Assessment Just-in-Time Inventory

Total Quality Management (TQM) Continuous Improvement Problem- Solving Philosophy Customer Satisfaction to achieve

Activity-Based Management and Value-Added Assessment An organization cannot manage costs. Instead, it manages the activities that cause costs to be incurred. Activities represent the measures an organization takes to accomplish its goals.

Just-in-Time Inventory Inventory Holding Costs Nonvalue- Added Activity Many business have been able to simultaneously reduce their inventory holding costs and increase customer satisfaction by making products available just in time (JIT) for customer consumption.

End of Chapter One