1. Managerial Accounting Concepts and Principles
Chapter 18
Chapter 18: Managerial Accounting Concepts and Principles

2. Purpose of Managerial Accounting
Planning is the process of setting goals and making plans to achieve them. Strategic plans usually set a firm’s long-term direction by developing a road map based on opportunities such as new products, new markets, and capital investments. Medium- and short-term plans are more operational in nature. They translate the strategic plans into actions. A short-term plan often covers a one-year period that, then translated into monetary terms is knows as a budget.
Control is the process of monitoring planning decisions and evaluating an organization’s activities and employees. It includes the measurement and evaluation of actions, processes, and outcomes. Feedback provided by the control system allows managers to revise their plans and take corrective actions to avoid undesirable outcomes.

3. Nature of Managerial Accounting
Exh.
18-2
Here we see a detailed comparison of financial accounting and managerial accounting. In addition to the focus on internal decisions, note particularly that managerial accounting information may follow a flexible format, involves frequent, timely reports, and may contain more estimates and projections than financial accounting.

4. Managerial Accounting in Business
Lean Business Model
Customer Orientation
Global
Economy
Lean Business Model
By meeting customer needs in an efficient manner, a lean business model provides a positive return to its owners. Today’s customers have many choices, both domestic and foreign. To be successful, a business must deliver quality products and services to customers in a cost efficient manner. Adopting the lean business model can be challenging because to foster its implementation, all systems and procedures that a company follows must be realigned. Managerial accounting has an important role to play by providing accurate cost and performance information.
Elimination of Waste
Satisfy the Customer
Positive Return

5. Customer Orientation in a Global Economy
Lean Practices
C 2
Customer Orientation in a Global Economy
Lean business practices include total quality management and just-in-time manufacturing. The central focus is always on the customer. Continuous improvement rejects the notion of “good enough” or “acceptable” and challenges employees and managers to continuously experiment with new and improved business practices. This has led to adopting practices such as total quality management and just-in-time manufacturing.

6. Fraud and Ethics in Managerial Accounting
Fraud involves the use of one’s job for personal gain through the deliberate misuse of the employer’s assets. There are many types of fraud, but common characteristics of all fraud are that it:
Is done to provide direct or indirect benefit to the employee.
Violates the employees’ duties to his employer.
Costs the employer money.
Is secret.
Fraud increases business costs. Management relies on internal control systems to monitor business activities and on accounting systems to track costs and identify unexpected amounts.
Part I.
Fraud involves the use of one’s job for personal gain through the deliberate misuse of the employer’s assets. There are many types of fraud, but common characteristics of all fraud are that it:
Is done to provide direct or indirect benefit to the employee.
Violates the employees’ duties to his employer.
Costs the employer money.
Is secret.
Part II.
Fraud increases business costs. Management relies on internal control systems to monitor business activities and on accounting systems to track costs and identify unexpected amounts.
Part III.
Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. The Institute of Management Accountants has issued a code of ethics to help accountants involved in solving ethical dilemmas.
Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. The Institute of Management Accountants has issued a code of ethics to help accountants involved in solving ethical dilemmas.

7. Types of Cost Classifications Classification by Behavior
Activity
Cost
Cost behavior refers to how a cost will react to changes in the level of business activity.
Total fixed costs do not change when activity changes.
Total variable costs change in proportion to activity changes.
Mixed costs are combinations of fixed and variable costs.
Activity
Cost
Cost behavior refers to how a cost will react to changes in the level of business activity. Total fixed costs do not change when activity changes. Total variable costs
change in proportion to activity changes. Mixed costs are combinations of fixed and variable costs. Classification of costs by behavior is helpful in cost-volume-profit analyses and short-term decision making. These are discussed in future chapters.
Activity
Cost

8. Types of Cost Classifications Classification by Traceability
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: A maintenance expenditure benefiting two or more departments.
Cost objects may be products, services, departments, or customers to which costs are assigned. Direct Costs can be traced to a single cost object. Examples of direct costs are material and labor costs for a product. Indirect costs cannot be traced to a single cost object. An example of an indirect cost is a maintenance expenditure that benefits two or more departments.

9. Types of Cost Classifications Classification by Relevance
Sunk costs have already been incurred and cannot be avoided or changed. Sunk costs should not be considered in decisions.
Example: An automobile purchased two years ago cost $15,000. The $15,000 cost is sunk because whether the car is driven, sold, traded, or abandoned, the cost will not change.
Out-of-pocket costs require future outlays of cash. Out-of-pocket costs should be considered in decisions.
Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend or not to spend the $25,000 next month.
Part I.
Sunk costs have already been incurred and cannot be avoided or changed. Sunk costs are never relevant to current and future decisions. Example: An automobile purchased two years ago cost $15,000. The $15,000 cost is sunk because whether the car is driven, sold, traded, or abandoned, the cost will not change.
Part II.
Out-of-pocket costs require future outlays of cash. Out-of-pocket costs are always relevant to current and future decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend or not to spend the $25,000 next month.

10. Types of Cost Classifications Classification by Relevance
An opportunity cost is the potential benefit lost by choosing a specific action from two or more alternatives
Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.
An opportunity cost is the potential benefit lost by choosing a specific action from two or more alternatives. Opportunity costs are always relevant to a selection decision. Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.

11. Types of Cost Classifications Classification by Function
Direct Labor
Direct Material
Manufacturing Overhead
Product
Period costs are expenses not attached to the product.
Administrative costs are non-manufacturing costs of staff support and administrative functions.
Selling costs are incurred to obtain orders and to deliver finished goods to customers.
Part I.
Product costs are incurred to manufacture a product. Product costs are not expensed as they are incurred. Instead, they are assigned to inventory and do not become expenses until the product is sold. Inventory is reported at cost as an asset on the balance sheet.
Part II.
Period costs are expensed in the period incurred. Period costs are not assigned to inventory with the product. They are non-manufacturing costs usually grouped into two broad categories: selling and administrative. Selling costs are incurred to obtain customer orders and to deliver finished goods to customers. Examples are advertising and shipping costs. Administrative costs are non-manufacturing costs of staff support and administrative functions. Examples are accounting, data processing, personnel, research and development.

12. Period and Product Costs in Financial Statements
Exh.
18-8
2009 Income
Statement
Period Costs (Expenses)
Operating
Expenses
2009 Costs Incurred
Cost of
Goods Sold
Inventory Sold in 2009
Starting on the left side of this flow chart of costs, we see that costs incurred are categorized as either period costs or product costs. Period costs flow directly to the current year’s income statement as they are expensed in the period incurred. Product costs are first assigned to the inventory account. Later, when the inventory is sold, product costs flow from the inventory account to cost of goods sold on the income statement for the year in which the products are sold.
Product Costs (Inventory)
2010 Balance
Sheet Inventory
2010 Income
Statement
Raw Materials
Goods in Process
Finished Goods
Inventory Not Sold in 2009
Cost of
Goods Sold

13. Manufacturer’s Balance Sheet
Raw Materials
Goods in Process
Finished Goods
Partially complete products.
Material to which some labor and/or overhead have been added.
Completed products for sale.
Materials waiting to be processed.
Can be direct
or indirect.
Manufacturers have three major inventory categories: raw materials, goods in process, and finished goods.
Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials. Goods in process are partially complete products to which some material, labor and/or overhead have been added. Finished goods are completed products awaiting sale.

14. Manufacturer’s Income Statement
Exh.
18-11
Merchandiser
Manufacturer
Beginning Merchandise Inventory
Beginning Finished Goods Inventory + +
The major difference
Cost of Goods Purchased
Cost of Goods
Manufactured _ _
The finished goods inventory of a manufacturer is the equivalent of a merchandiser’s merchandise inventory account. Items in this inventory account are complete and awaiting sale. The major difference is that the manufacturer manufactures the items in the finished goods account, while the merchandiser purchases the items in the merchandise inventory account. When items are sold from these inventory accounts, the cost of inventory, whether purchased or manufactured, becomes cost of goods sold on the income statement.
Ending Merchandise Inventory
Ending
Finished Goods Inventory
Cost of Goods Sold = =

15. Activities and Cost Flows in Manufacturing
Exh.
18-15
Production activity
Sales activity
Materials activity
Finished Goods Beginning Inventory
Goods in Process Beginning Inventory
Raw Materials
Beginning Inventory
Direct Labor
Cost of Goods Manufactured
Raw Materials Purchases
Factory Overhead
Finished Goods Ending Inventory
Cost of Goods Sold
Starting on the left side of this flow chart, we see that material purchases are combined with the materials beginning inventory. Materials are then either used or they remain in inventory. In the center portion of the flow chart, we see the materials being used are combined with labor, overhead, and the goods in process beginning balance. As goods are finished, they are transferred out of the goods in process inventory account into the finished goods inventory account. The cost of the goods finished in the period is called cost of goods manufactured. Finished goods are either sold, called cost of goods sold, or they remain in the finished goods inventory account.
Raw Materials Used
Raw Materials Ending Inventory
Goods in Process Ending Inventory

16. Cycle Time and Cycle Efficiency
10-16
Cycle Time and Cycle Efficiency
A 1
Order Received
Production Started
Goods Shipped
Process Time + Inspection Time + Move Time + Queue Time
Wait Time
Manufacturing Cycle Time
Manufacturing cycle efficiency (MCE) is computed by dividing value-added time by manufacturing cycle (throughput) time. An MCE less than one indicates that non-value-added time is present in the production process.
Total Cycle Time
Manufacturing
Cycle
Efficiency
Value-added time Manufacturing cycle time =

17. End of Chapter 18
End of Chapter 18.