Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 25 Managerial Accounting Concepts and Principles

25-2 Managerial accounting provides financial and non-financial information to managers of an organization and other decision makers. Financial accounting provides general purpose financial information to those who are outside the organization. Learning Objective 1 Explain the purpose and nature of managerial accounting. Managerial Accounting vs. Financial Accounting LO1

25-3 Customer Orientation in a Global Economy Learning Objective 2 Describe the lean business model. Continuous Improvement New ways to improve operations LO2

25-4 Complete products just in time to ship to customers. Complete parts just in time for assembly into products. Receive materials just in time for production. Schedule production. Receive customer orders. Just-In-Time (JIT) Manufacturing To accomplish just-in-time manufacturing: Processes must be aligned to eliminate delays and inefficiencies. Companies must establish good relations with suppliers. LO2

25-5 A fixed cost does not change with changes in the volume of activity. A variable cost changes in proportion to changes in the volume of activity. A mixed cost refers to a combination of fixed and variable costs. Learning Objective 3 Describe accounting concepts useful in classifying costs. Cost behavior means how a cost will react to changes in the level of business activity. Direct costs Costs traceable to a single cost object. Examples: material and labor cost for a product. Indirect costs Costs that cannot be traced to a single cost object. Example: maintenance expenditures benefiting two or more departments. LO3

25-6 Sunk costs: All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Out-of-pocket costs: Cost that requires a future outlay of cash. Out-of-pocket costs should be considered in decisions. Opportunity Costs: The potential benefit lost by choosing a specific action from two or more alternatives. LO3

25-7 Period costs are expenses not attached to the product. Administrative Costs Non-manufacturing costs of staff support and administrative functions – accounting, data processing, personnel, research and development. Selling Costs Costs incurred to obtain customer orders and to deliver finished goods to customers – advertising and shipping. The Product Direct Labor Direct Material Manufacturing Overhead LO4 Learning Objective 4 Define product and period costs and explain how they impact financial statements.

25-8 Period Costs (Expenses) Product Costs (Inventory) Inventory Not Sold in 2009 Operating Expenses Cost of Goods Sold Raw Materials Goods in Process Finished Goods Cost of Goods Sold 2009 Costs Incurred 2009 Income Statement 2010 Income Statement 2009 Balance Sheet Inventory Inventory Sold in 2009 Period and Product Costs in Financial Statements LO4

25-9 Completed products for sale. Materials waiting to be processed. Can be direct or indirect. Partially complete products. Material to which some labor and/or overhead have been added. Balance Sheet of a Manufacturer Raw Materials Finished Goods Goods in Process Learning Objective 5 Explain how balance sheets and income statements for manufacturing and merchandising companies differ. Merchandisers buy goods that are already completed and make them available to customers. Manufacturers buy raw materials and convert the raw materials into completed goods for their customers. Balance Sheet of a Manufacturer: a Manufacturer: The only difference is inventory. LO5

25-10 Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Learning Objective 6 Compute cost of goods sold for a manufacturer. Manufacturer’s Income Statement LO6

25-11 Direct Materials Materials that are separately and readily traced to a particular product. Direct Materials Materials that are separately and readily traced to a particular product. Example: Steel used to manufacture the automobile. Example: Steel used to manufacture the automobile. Manufacturer’s Income Statement Direct Labor Labor costs that are separately and readily traced to finished product. Direct Labor Labor costs that are separately and readily traced to finished product. Example: Wages paid to an automobile assembly worker. Example: Wages paid to an automobile assembly worker. Factory Overhead All manufacturing costs except direct material and direct labor. Factory costs that cannot be separately or readily traced directly to products. Factory Overhead All manufacturing costs except direct material and direct labor. Factory costs that cannot be separately or readily traced directly to products. Examples: Indirect labor – maintenance Indirect material – cleaning supplies Factory utility costs Supervisory costs LO6

25-12 Finished Goods Beginning Inventory Cost of Goods Manufactured Finished Goods Ending Inventory Raw Materials Beginning Inventory Raw Materials Purchases Raw Materials Ending Inventory Cost of Goods Sold Goods in Process Beginning Inventory Direct Labor Factory Overhead Raw Materials Used Sales activityProduction activity Materials activity Learning Objective 7 Explain manufacturing activities and the flow of manufacturing costs. Goods in Process Ending Inventory LO7

25-13 Summarizes the types and amounts of costs incurred in a company’s manufacturing process. Summarizes the types and amounts of costs incurred in a company’s manufacturing process. Materials Used +Direct Labor +Factory Overhead =Total Manufacturing Costs +Beginning Work in Process – Ending Work in Process =Cost of Goods Manufactured Learning Objective 8 Prepare a manufacturing statement and explain its purpose and links to financial statements. LO8

25-14 Learning Objective 9 Compute cycle time and cycle efficiency and explain their importance to production management. Cycle time Process time Inspection time Move time Wait time = +++ Time spent producing the product. Time spent inspecting raw materials, goods in process, and finished goods. Time spent moving raw materials, goods in process, and finished goods. Time that an order sits with no production applied to it. Process time is the only value-added time. Cycle efficiency Value-added time Cycle time = LO9

25-15 End of Chapter 25