2. Differences Between Managerial & Financial Accounting

3. Management Functions Planning Directing Controlling
Maximize short-term profit and market share.
Commit to environmental and social programs.
Add value to the business.
Coordinate diverse activities and human resources.
Implement planned objectives.
Provide incentives to motivate employees
Hire and train employees.
Produce a smooth-running operation.
Keeping activities on track.
Determine whether goals are met.
Decide changes needed to get back on track.
May use an informal or formal system of evaluations.

4. Organizational Structure
Organization charts show the interrelationships of activities and delegation of authority and responsibility.

6. Notice the number of people in the factory.
The next slide has a video of a factory from Please watch a few minutes of it. (It provides a needed reference point for the next few chapters dealing with cost accounting).
Notice the number of people in the factory.
Remember that “labor” includes wages as well as benefits – typically about 40% OVER the salary.
If I pay a worker $50,000 per year, my actual cost is closer to $70,000. (Plus workers want things like time off, vacations, 8 hour shifts, safe working conditions etc. – I mean how unreasonable can they get).

7. Next is a modern factory. Again, please watch a few minutes of it.
Notice that the number of machines has increased (factory overhead) … while there are fewer people making product (direct labor).
This is the trend in manufacturing worldwide – even in China.

9. Factory “tracks” costs – using labels (red circle).
(BTW - How did Honda know which specific models had the defective Takata airbags – labels. Remember the airplane part that people thought was from the missing

10. During manufacturing, parts going into a plane are identified for cost purposes … or, sadly, for other purposes (see below)

11. Ya gotta watch this short video about Apple
Foxconn (this factory in China) makes the iPhone and iPad
Not part of the course but interesting as all hell … and we do compete for jobs.

13. 2 Managers should ask questions such as the following.
Describe the classes of manufacturing costs
and the differences between product and
period costs.
LEARNING
OBJECTIVE 2
Managers should ask questions such as the following.
What costs are involved in making a product or performing a service?
If we decrease production volume, will costs decrease?
What impact will automation have on total costs?
How can we best control costs?

14. Manufacturing Costs
Manufacturing consists of activities and processes that convert raw materials into finished goods.

15. Direct Materials (are a “product” cost)
Manufacturing (Factory) Costs include Raw Materials
Raw Materials are further classified as either:
Direct Materials or Indirect Materials
Direct Materials (are a “product” cost)
Raw materials that can be physically and directly associated with the finished product during the manufacturing process.
A bakery making donuts has Flour, Eggs,Yeast etc as direct costs.
(If you making iPhones, the plastic cases, camera and glass screens (component parts) would be considered your direct materials).

16. Indirect Materials (are a “product” cost)
Manufacturing (Factory) Costs include Raw Materials
Indirect Materials (are a “product” cost)
Not physically part of the product or costs that are impractical, or too time consuming, or expensive, to trace to the product.
A bakery might add “powdered sugar” to some donuts. While it is physically part of the finished product - management may decide that the small cost of the powdered sugar does not justify tracking it separately - hence it may be classified as “indirect”.
The bakery may use bleach to clean all of it’s mixing machines each night. The bleach, used in the factory, is an “indirect” costs since it directly “supports” the making of the donuts (a clean factory required to make the donuts).

17. Manufacturing (Factory) Costs include Raw Materials
Raw Materials are further classified as either:
Direct Materials or Indirect Materials
If a material is used in mfg (manufacturing) it is a product cost.
(FYI: mfg costs are also called “factory costs” – they mean the same thing).
To avoid (or add to) confusion, note that one company may consider a material as “direct” while a competitor company may classify the same material as “indirect”. Since these classifications are for internal use only - and they ONLY affect the internal analysis and management operations of each separate company … BOTH are correct.

18. Direct Labor (is a “product” cost)
Manufacturing Costs include Factory Labor
Factory Labor is further classified as either:
Direct Labor or Indirect Labor
Direct Labor (is a “product” cost)
Work of factory employees that can be directly associated with converting materials (or assembling components) into finished goods.
A bakery making donuts has machine operators who run mixing machines or control the ovens – they are direct labor.
(When making iPhones, the person who puts the camera into the case and screws it in place would be considered direct labor).

19. Indirect Labor (is a “product” cost)
Manufacturing Costs include Factory Labor
Indirect Labor (is a “product” cost)
Work of factory employees that has no physical or direct association with the finished product or that are impractical, time consuming or too expensive to trace to the goods produced.
A bakery has janitors who clean up around the factory. There work “supports” the production of donuts hence they are considered as “indirect labor”.
The same bakery has one security guard for the “factory” and one security guard for the separate “corporate” office building. The “factory” guard is “indirect cost” while the “corporate” guard is not even a product costs since he is NOT Factory (or plant or mfg) related. (The corporate guard is considered to be a period cost)

20. Manufacturing Costs include “Factory Labor”
Factory Labor is further classified as either:
Direct Labor or Indirect Labor
If the labor is used in mfg (manufacturing) it is a product cost.
(FYI: mfg costs are also called “factory costs” – they mean the same thing).
To avoid (or add to) confusion, note that if a textbook description talks about any “factory employee” that individual is a Product Cost.
If the text description talks about an “office” or “corporate” employee they would be considered a Period Cost.
So, if the employee is a “factory managers secretary” or a “factory production office worker” then what … for our purposes the word FACTORY trumps all – both workers are factory – hence they would be classified (by the text) as a “Product” cost.

21. Manufacturing Costs If the cost is “factory” (or mfg) related
AND
The cost is NOT direct materials
The cost is NOT direct labor
THEN
The cost is Manufacturing Overhead (also called Factory Overhead or Plant Overhead)
ALL Manufacturing Overhead is a Product cost.

22. Manufacturing Costs
Manufacturing consists of activities and processes that convert raw materials into finished goods.

23. Wake Up !

24. (gotta be one or the other)
Product vs Period Costs
(gotta be one or the other)
Product Cost (example) … a factory worker is paid $1,000 to produce a product. The completed product then becomes part of “Inventory” (available for sale). Is the $1,000 an “expense” or is it part of inventory?
The $1,000 cost is accumulated as part of the “Product” and winds up in “inventory” (an asset). When sold, the $1,000 cost is “expensed”.
In financial accounting, Ch05, when you sold an item you did TWO entries:
Date
Accounts Name
Debit $
Credit $
# 1
CASH
xxx
SALES REVENUE
# 2
COST of GOODS SOLD (COGS)
INVENTORY
Recognizes sale to customer and receipt of cash.
Recognizes expense (COGS) and a reduction of Inventory.

25. Product vs Period Costs (gotta be one or the other)
Period Cost (example) … a marketing VP is paid $10,000 per month to sell products. A period costs cannot be directly linked to the production of end-products. (“Office, corporate, administrative” costs are always “period” costs).
Period costs are always an expense on the income statement during the month (the period) in which they are incurred.
Recognizes salary expense for NON-Factory employees

26. (gotta be one or the other)
Product vs Period Costs
If the description says “factory, “plant” or “manufacturing” – it is a PRODUCT cost (period – no pun intended)

27. Cost of Goods Manufactured
Total Manufacturing Costs = Direct material costs + Direct labor costs + Manufacturing overhead in the current year.
Total Work in Process = (1) cost of beginning work in process PLUS (2) total manufacturing costs for the current period.

28. Illustration 15-9
Cost of goods manufactured schedule

29. Manufacturers’ Inventory accounts
ASSET
ASSET
ASSET
Note that a merchandising company like BestBuy or Amazon, has just one category of “merchandise” inventory (an asset).

30. Balance Sheet Current assets sections for:
Merchandising company .……. Manufacturing company

31. Service Industries 4 Discuss trends in managerial accounting.
LEARNING
OBJECTIVE
Discuss trends in managerial accounting. 4
Service Industries
Much of the U.S. economy has shifted toward an emphasis on providing services rather than goods.
Over 50% of U.S. workers are now employed by service companies.
Most of the techniques learned for manufacturing firms are applicable to service companies.

32. Wake Up !
(again)

33. Focus on the Value Chain
All business processes associated with providing a product or service.
For a manufacturing firm these include the following:

34. Focus on the Value Chain
Just-In-Time (JIT) Inventory Methods
Inventory system in which goods are manufactured or purchased just in time for sale.
Total Quality Management (TQM)
Reduce defects in finished products, with the goal of zero defects.

35. Focus on the Value Chain
Theory of Constraints
Constraints (“bottlenecks” ) limit the company’s potential profitability.
A specific approach to identify and manage these constraints in order to achieve company goals.
Enterprise Resource Planning (ERP)
Software programs designed to manage all major business processes.

36. Focus on the Value Chain
Activity-Based Costing (ABC)
Allocates overhead based on use of activities.
Results in more accurate product costing and scrutiny of all activities in the value chain.

37. Balanced Scorecard Evaluates operations in an integrated fashion.
Uses both financial and non-financial measures.
Links performance to overall company objectives.

38. Business Ethics All employees are expected to act ethically.
Many organizations have codes of business ethics.
Past financial frauds:
Enron,
Global Crossing,
WorldCom

39. Sarbanes-Oxley Act (SOX)
CODE OF ETHICAL STANDARDS
Sarbanes-Oxley Act (SOX)
Law that clarifies management’s responsibilities.
Requires certifications by CEO and CFO.
Selection criteria for Board of Directors.
Substantially increased penalties for misconduct.

40. Corporate Social Responsibility
Considers a company’s efforts to employ sustainable business practices with regard to its employees, society, and the environment.
Is sometimes referred to as the triple bottom line because it evaluates a company’s performance with regard to people, planet, and profit.
Recent reports indicate that over 50% of the 500 largest U.S. companies provide sustainability reports.

41. (essential in this course).
The next 2 slides are an optional brief “self-test” to see how you do classifying costs
(essential in this course).
When you want to see the answer for each item just press “enter” on your keyboard.

42. Product Vs Period Costs
Illustration: Suppose you started your own snowboard factory, KRT Boards. Here are some of the costs that your snowboard factory would incur. Assign the following costs:

43. Product Vs Period Costs

44. Wake Up !
(again)

45. Product Versus Period Costs
Illustration: Suppose you started your own snowboard factory, KRT Boards. Here are some of the costs that your snowboard factory would incur. Assign the following costs:
Illustration 15-4
Assignment of costs to cost categories
LO 2

46. Product Versus Period Costs
Illustration 15-4
Assignment of costs to cost categories
LO 2

47. Product Versus Period Costs
If KRT Boards produces 10,000 snowboards the first year, what would be the total manufacturing costs?
Illustration 15-5
Computation of total
manufacturing costs
LO 2

48. Advertising expenditures and salary of accountant are period costs.2
Managerial Cost Concepts
A bicycle company has these costs: tires, salaries of employees who
put tires on the wheels, factory depreciation, advertising expenditures, lubricants, spokes, salary of factory manager, salary of accountant, handlebars, and salaries of factory maintenance employees. Classify each cost as direct materials, direct labor, overhead, or a period cost.
Direct Materials
Direct Labor
Overhead
Tires.
Spokes.
Handlebars.
Salaries of employees who put tires on the wheels.
Factory depreciation.
Lubricants
Factory manager salary.
Factory maintenance employees salary.
Advertising expenditures and salary of accountant are period costs.
LO 2

49. “COGS” Income Statement 3
LEARNING
OBJECTIVE
Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer. 3
Income Statement
Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
“COGS”
LO 3

50. Income Statement LO 3 Helpful Hint Assume a periodic
inventory system in this illustration.
Illustration 15-6
Cost of goods sold components
LO 3

51. Income Statement
Cost of goods sold sections of merchandising and manufacturing income statements
Illustration 15-7
Cost of goods sold sections of
merchandising and manufacturing
Income statements
LO 3

52. Cost of Goods Manufactured
Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead in the current year.
Total Work in Process – (1) cost of beginning work in process and (2) total manufacturing costs for the current period.
Illustration 15-8
Cost of goods manufactured formula
LO 3

53. Illustration 15-9
Cost of goods manufactured schedule
LO 3

54. Balance Sheet Inventory accounts for a manufacturer
Illustration 15-10
The balance sheet for a merchandising company shows just one category of inventory.
LO 3

55. Balance Sheet
Current assets sections of merchandising and manufacturing balance sheets
Illustration 15-11
Current assets sections of merchandising and manufacturing
balance sheets
LO 3

56. 3
Cost of Goods Manufactured
LO 3

57. 3
Cost of Goods Manufactured
LO 3