Introduction to Managerial Accounting: Tools for Decision Making

1. May 7, 2009 An Introduction to Managerial Accounting

2. What is Managerial Accounting? About me and why I’m here About you and why you are here Course outline and process Get started Today’s Agenda

3. The capture and analysis of information (financial and operational) that can be used to support the planning, executing and controlling of an organization Its audience is internal to the organization, as opposed to financial accounting, which addresses external audiences Managerial accountants provide the reports and analysis to help business leaders make decisions to maximize value over time What is Managerial Accounting?

4. Education BA in Economics, Dalhousie University, Halifax, Canada MBA in Finance and Accounting, University of Toronto, Canada Profession Principal in a Corporate Development partnership Mergers & Acquisitions, Financings, Restructurings ….. Experience CIBC, Ernst & Young, Celestica, Spar, independent clients Importance of Managerial Accounting to my role Critical to understanding the financial state of a business Provides a framework for forecasting A tool for optimizing a business (together with market analysis) Assess value of the business About Your Lecturer

5. This is a tremendous time for China … …. and as its future business leaders, a tremendous opportunity for you As participants in the global economy, my clients are very interested in doing business with China It’s a great opportunity for me to be here with you and share my experiences. I look forward to also learning from you Why I am Here

6. Why Are You Here? • It is helpful for me to understand your motivations in order to best tailor the course to your needs. • Educational objectives? • Career objectives?

7. Objective: To provide a core understanding of managerial accounting, its techniques, calculations and analysis Text: Brewer Major subjects: Costs – types and behaviour Accounting Systems – types and circumstances Financial Forecasts/Budgeting Analysis for Superior Decision Making Lectures, Tutorials, Self & Group Study Assessment Participation – 10% Mid-Term Exam – 20% Group Project – 20% Final Exam – 50% Course Outline

8. Attendance Answering questions in class and tutorials Asking questions in class and tutorials Homework completion Participation – 10%

9. Subject matter: Brewer Chapters 1 to 7 Materials covered in class and tutorials Short answers and problem solving Emphasis on ability to apply judgment Friday - May 22, 2009 1 hour Mid-Term Exam – 20%

10. You will be divided into groups of four this week Select a public company of your choice and submit financial statements Describe the company and explain why the company was selected Present (5-10 minutes) during tutorial - Wednesday, May 13 Describe what type of managerial accounting systems the company might use and why Submit project and present (10 min) during tutorial – Monday, May 18 Make your own assumptions and forecast/budget (I/S, B/S, C/F) for three years Submit first draft at tutorial, Monday, May 25 Conduct ratio analysis and draw conclusions about the company Submit Final project Tuesday, June 2 Each individual is to select a role (CEO, CFO, Sales, Production Manager, etc) and present 5 - 10 minutes of observations – June 2 and June 3 Group Project - 20%

11. Subject matter: Brewer Chapters 1 to 14 Materials covered in class and tutorials Short answers Eg, definitions and/or fill in the blank Problem solving Applying knowledge to specific challenges Short essay Demonstrating an ability to apply judgment Friday - June 5, 2009 2 hours Fixed-Variable - a managerial accounting concept! Final exam marks which are higher than average to date will bring up overall mark by 50% Final Exam – 50%

12. Let’s Get Started • Objectives and Relevance of Managerial Accounting • Differences from Financial Accounting • Types of Costs • Setting up the Relevant Accounts

13. Planning Directing and Motivating Controlling Managerial Accounting Supports the Management Functions • Forecasting • Budgeting • Ordering • Hiring • Allocating resources • Compensation structures • Tracking to budget/ • Cost control • Exception reporting • Revisiting budgets

14. Comparison of Financial and Managerial Accounting

15. Classifying Costs • A good Managerial Accountant thinks and uses judgment to arrive at or develop the best approach to support decision making • This requires a deep understanding of costs and when to use the many classifications there are: • Differential Costs and Differential Revenues • Period versus Product • Prime versus Conversion • Fixed versus Variable • Direct versus Indirect • Sunk Costs • Opportunity Costs • Of course any cost item can fit into a number of these categories

16. 1. Manufacturing Costs • Manufacturing Costs are Product Costs (flow through balance sheet) • Direct Materials • Raw materials that become an integral part of the product and that can be conveniently traced directly to it • Direct Labour • Those labor costs that can be easily traced to individual units of product • Manufacturing Overhead • Manufacturing costs cannot be traced directly to specific units produced. • Indirect materials, indirect labour, other indirect costs related to manufacture • What are examples of each type of cost?

17. Manufacturing costs cannot be traced directly to specific units produced. Materials used to support the production process. Examples: Lubricants and cleaning supplies used in the automobile assembly plant. Wages paid to employees who are not directly involved in production work. Examples: Maintenance workers, janitors and security guards. Manufacturing Overhead Examples:Indirect materials and indirect labor

18. 2. Non-Manufacturing Costs • Non Manufacturing Costs are Period Costs (through I/S) • Selling Costs • All costs associated with selling • Administrative Costs • All other costs which cannot be attributed to production or selling • What are examples of each type of cost?

19. 2. Non-Manufacturing Costs • Non Manufacturing Costs are Period Costs (through I/S) • Selling Costs • All costs associated with selling • Marketing • Selling • Delivering • Customer satisfaction • Administrative Costs • All other costs which cannot be attributed to production or selling • Executive salaries • Clerical support • What are examples of each type of cost?

20. Costs for a Manufacturing Company – An Example • Pick a manufacturing company • Cost • Direct Labour • Direct Materials • Manufacturing Overhead • Selling • Administration Examples

21. Cost of Goods Sold Inventory Expense Sale BalanceSheet IncomeStatement IncomeStatement Product Costs Versus Period Costs Product costsinclude direct materials, direct labor, and manufacturing overhead. Period costsare not included in product costs. They are expensed on the income statement.

22. Classifying Costs – an Exercise • Cost • Depreciation of machinery • A product assembler • Electricity • Property tax • Commission on sale • Electronic components • Receptionist • Depreciation on CEOs car Period or Product? Type of Product?

23. Prime Cost and Conversion Cost • Manufacturing costs can be further broken down into Prime Costs and Conversion Costs • Prime costs include costs for items which have yet to be “changed” towards a finished product • Raw Materials • Direct labour associated with receiving raw materials • Conversion costs include costs associated with “changing” or “converting” or manufacturing a product • Direct labourer on the manufacturing line • Manufacturing overhead • Some classifications can be subject to judgment and can vary from company to company

24. Setting up the Relevant Accounts • Which accounts to set up depends on the type of company • Merchandiser – buys finished goods then sells them • Manufacturer • Initially, we will focus on building up Product Costs • In selecting accounts, we want to ensure we can monitor: • Inventory – so we can order appropriate amounts and meet delivery • Cash – so we can manage financing • Accounts receivable and pre-paid expenses • Note these are all balance sheet accounts • These will in turn flow through the Income Statement when goods are sold

25. Material Purchases Raw Materials Direct Labor Work in Process ManufacturingOverhead Cost of GoodsSold FinishedGoods Period Costs Selling andAdministrative Manufacturing Cost Flows Balance Sheet Costs Inventories Income StatementExpenses Selling andAdministrative

26. Setting up the Relevant Accounts • Cost of Manufacturing in order to establish Costs of Goods Sold • A service company will not have physical inventory • It may have work in process if there are timing differences between work and billing periods • Manufacturer • Cash • Receivables • Prepaid expenses • Inventory • Raw Materials • Work in Process • Finished Goods • Merchandiser • Cash • Receivables • Prepaid expenses • Merchandise inventory

27. Review • Objectives and Relevance of Managerial Accounting • Differences from Financial Accounting • Types of Costs • Product Costs – • apply directly to the manufacture of a product • can be further delineated into prime and conversion costs • flow first through the balance sheet, • then through the income statement as inventory is sold • Period Costs – • Cannot be applied specifically to a product • Flow directly through the income statement • Setting up the Relevant Accounts – relating costs to business flows and starting to set up accounts

28. Tutorial • Assignment • Study Review Problem 1 • Complete Alternative Question 1-17-B • Getting started: • Factory Supervision $28,000? • Property Tax, Factory Building $2,000? • Sales Commission $97,000?