2. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Chapter 18 Managerial Accounting Concepts and Principles

3. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Conceptual Learning Objectives C1: Explain the purpose and nature of managerial accounting C2: Describe the lean business model C3: Describe accounting concepts useful in classifying costs C4: Define product and period costs and explain how they impact financial statements C5: Explain how the balance sheets for manufacturing and merchandising companies differ C6: Explain manufacturing activities and the flow of manufacturing costs.

4. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin A1: Compute cycle time and cycle efficiency, and explain their importance to production management P1: Compute cost of goods sold for a manufacturer P2: Prepare a manufacturing statement and explain its purpose and links to financial statements. Analytical Learning Objectives

5. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Managerial and Financial Accounting C 1 Managerial accounting provides financial and non-financial information for managers of an organization and other decision makers Financial accounting provides general purpose financial information to those who are outside the organization.

6. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Planning and Control C 1

7. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Nature of Managerial Accounting Exh. 18-2 C 1

8. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Lean Business Model Customer Orientation Global Economy Lean Business Model Elimination of Waste Satisfy the Customer Positive Return C 2

9. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin on Quality improvement applied to all aspects of business activities. Seek and uncover waste. Employees encouraged to try new methods to improve quality. Company emphasizes value of quality through quality awards. Total Quality Management C 2

10. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 C 2

11. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Just-In-Time (JIT) Manufacturing C 2 To accomplish just-in-time manufacturing: Processes must be aligned to eliminate delays and inefficiencies Companies must establish good relations with suppliers

12. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Implications of Lean Manufacturing C 2 Understand the nature and sources of cost Measure value provided to customers Determine price customers pay

13. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Behavior Traceability Controllability Relevance Function Cost Accounting Concepts C 3

14. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Cost behavior means how a cost will react to changes in the level of business activity. Classification by Behavior C 3 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

15. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Rent Cost Tires Cost Classification by Behavior Cost behavior means 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. C 3

16. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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. Classification by Traceability C 3

17. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The degree of control depends on the level of management in the organization. More Control Very little control Classification by Controllability C 3

18. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost. Classification by Relevance: Sunk Costs C 3

19. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Classification by Relevance: Out-of-Pocket Costs C 3 A cost that requires a future outlay 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 the $25,000 or not in the future

20. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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. Classification by Relevance: Opportunity Costs C 3

21. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The Product Classification by Function: Product Costs Direct Labor Direct Material Manufacturing Overhead C 4

22. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Period costs are expenses not attached to the product. Classification by Function: Period Costs 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. C 4

23. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Period Costs (Expenses) Product Costs (Inventory) Inventory Not Sold in 2008 Operating Expenses Cost of Goods Sold Raw Materials Goods in Process Finished Goods Cost of Goods Sold 2008 Costs Incurred 2008 Income Statement 2009 Income Statement 2008 Balance Sheet Inventory Inventory Sold in 2008 Period and Product Costs in Financial Statements Exh. 18-8 C 4

24. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Potential Multiple Cost Classifications Exh. 18-9 C 4

25. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Merchandisers...  Buy finished goods.  Sell finished goods. SaleMart Manufacturers...  Buy raw materials.  Produce and sell finished goods. Reporting Manufacturing Activities C 5

26. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Manufacturing Inventory Classifications Balance Sheet of a Manufacturer Raw Materials Finished Goods Goods in Process C 5

27. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 C 5

28. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin MERCHANDISER Current Assets  Cash  Receivables  Merchandise Inventory MANUFACTURER Current Assets  Cash  Receivables  Inventories Raw Materials Goods in Process Finished Goods The only difference is inventory. Balance Sheet of a Manufacturer C 5

29. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Beginning Merchandise Inventory Beginning Finished Goods Inventory Cost of Goods Purchased Cost of Goods Manufactured Ending Merchandise Inventory Ending Finished Goods Inventory Cost of Goods Sold MerchandiserManufacturer + _ + == _ The major difference Income Statement of a Manufacturer Exh. 18-11 P1

30. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Income Statement of a Manufacturer Exh. 18-12 P1

31. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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. Income Statement of a Manufacturer P1

32. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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. Income Statement of a Manufacturer P1

33. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 Income Statement of a Manufacturer P1

34. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often combined as follows: Income Statement of a Manufacturer P1

35. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 Flow of Manufacturing Activities Goods in Process Ending Inventory Exh. 18-15 C 6

36. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Summarizes the types and amounts of costs Incurred in a company’s manufacturing process. Direct Materials Used +Direct Labor +Factory Overhead =Total Manufacturing Costs +Beginning Work in Process – Ending Work in Process =Cost of Goods Manufactured Manufacturing Statement P2

37. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Exh. 18-16 P2 Manufacturing Statement

38. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Exh. 18-16 P2

39. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Include all direct labor costs incurred during the current period. Exh. 18-16 P2 Manufacturing Statement

40. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Manufacturing Statement Exh. 18-16 P2

41. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Beginning work in process inventory is carried over from the prior period. Exh. 18-16 P2 Manufacturing Statement

42. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Ending work in process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet. Exh. 18-16 P2 Manufacturing Statement

43. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin End of Chapter 18