Introduction to Management Accounting

1. Introduction to Management Accounting Chapter 18

2. Management Accountability • Responsibility to stakeholders of the company • Owners • Creditors • Suppliers • Employees • Customers

3. Objective 1 Distinguish between financial accounting and management accounting

4. Financial External Investors, Creditors, Government authorities Management Internal Managers of the business Management Accounting and Financial Accounting Primary Users

5. Financial Help investors and creditors make investment and credit decisions Management Help managers plan and control business operations Management Accounting and Financial Accounting Purpose of Information

6. Financial Relevance and reliability Focus on the past Management Relevance Focus on future Management Accounting and Financial Accounting Focus and Time Dimension of the Information

7. Financial Financial statements restricted by GAAP Audited by independent CPA’s Management Internal reports restricted by cost-benefit analysis Not audited by independent CPA’s Management Accounting and Financial Accounting Type of Report

8. Financial Accounting Summary reports primarily on the company as a whole On quarterly or annual basis Management Accounting Detailed reports on parts of the company Often on daily or weekly basis Management Accounting and Financial Accounting Scope of Information

9. Objective 2 Identify trends in the business environment and the role of management accountability

10. Today’s Business Trends • Shift toward a service economy • Global competition • Time-based competition • Advanced information systems • E-Commerce • Just-in-Time management • Total Quality Management

11. Objective 3 Classify costs and prepare an income statement for a service company

12. Service Company • Simplest accounting • All costs are period costs • Operating income = Service revenue – operating expenses

13. Fido Grooming Income Statement For the Month Ended July 31, 2007 Service revenue $15,000 Operating expenses: Wages $4,800 Grooming supplies 1,200 Building rent 1,000 Utilities 250 Depreciation, equipment 100 7,350 Operating income $7,650 Cost to groom one dog = $7,350/600 dogs = $12.25 E18-16

14. Objective 4 Classify costs and prepare an income statement for a merchandising company

15. Merchandising Company • Purchase inventory from suppliers and resell to customers • Has both period costs and inventoriable product costs

16. Merchandising Company – Income Statement Sales - Cost of goods sold Gross profit - Operating expenses Operating income

17. Merchandising Company – Income Statement Cost of goods sold: Beginning inventory + Purchases + Freight-in Cost of goods available for sale - Ending inventory Cost of goods sold

18. E18-18 Kingston Brush Company Income Statement For Year Ended December 31, 2009 Service revenue $125,000 Cost of goods sold: Inventory, January 1, 2009 $7,000 Purchases 63,000 Goods available for sale $70,000 Inventory, December 31, 2009 (5,000) Cost of goods sold 65,000 Gross profit $60,000 Selling and administrative expenses 45,000 Operating income $15,000

19. E18-18 Unit cost for one brush: Cost of goods sold $65,000 Selling and administrative expenses 45,000 Total cost $110,000 $110,000 / 5,800 brushes = $18.97

20. Objective 5 Classify costs and prepare an income statement for a manufacturing company

21. Manufacturing Companies • Use labor, plant, and equipment to convert raw materials into finished products • Materials inventory • Work in process inventory • Finished goods inventory

22. Product Costs • Direct materials • Direct labor • Manufacturing overhead Direct Costs Indirect Costs

23. Cost Object • Anything for which managers want a separate measurement of cost • Direct cost – can be directly traced to cost object

24. Manufacturing Overhead • Indirect costs related to manufacturing operations • Generally all manufacturing costs that are not direct costs • Indirect materials • Indirect labor

25. Manufacturing Companies – Income Statement Sales - Cost of goods sold Gross profit - Operating expenses Operating income

26. Manufacturing Company – Income Statement Cost of goods sold: Beginning finished goods inventory + Cost of goods manufactured Cost of goods available for sale - Ending finished goods inventory Cost of goods sold

27. Manufacturing Company – Income Statement Cost of goods manufactured: Beginning work in process inventory + Direct materials used + Direct labor + Manufacturing overhead Total manufacturing costs to account for - Ending work in process inventory Cost of goods manufactured

28. Manufacturing Company – Income Statement Direct materials used: Beginning materials inventory + Purchases of direct materials + Freight in Materials available for use - Ending materials inventory Direct materials used

29. Manufacturing CompaniesProduct & Period Costs INCOME STATEMENT BALANCE SHEET Inventoriable Product Costs Sales when sales occur Materials Inventory Finished Goods Inventory - Cost of Goods Sold - Work in Process Inventory Operating Expenses Period Costs = Operating Income

30. Manufacturing CompaniesInventory Accounts Materials Inventory Beginning inventory Materials used Purchases & freight Ending inventory

31. Manufacturing CompaniesInventory Accounts Work in Process Inventory Beginning inventory Cost of goods manufactured Materials used Direct labor Manufacturing overhead Ending inventory

32. Manufacturing CompaniesInventory Accounts Finished Goods Inventory Income Statement Beginning inventory Cost of goods sold Cost of goods manufactured Ending inventory

33. E18-22 Snyder Company Statement of Cost of Goods Manufactured For Year Ended December 31, 2008 Beginning work in process inventory $100,000 Direct materials used: Beginning materials inventory $50,000 Purchases of direct materials 155,000 Materials available for use $205,000 Ending materials inventory (25,000) 180,000 Direct labor 120,000 Manufacturing overhead (see schedule) 70,000 Total manufacturing costs to account for $470,000 Ending work in process inventory (65,000) Cost of goods manufactured $405,000

34. E18-22 Schedule of manufacturing overhead costs Depreciation, plant building and equipment $15,000 Insurance on plant 20,000 Repairs and maintenance, plant 5,000 Indirect labor 30,000 Total manufacturing overhead $70,000

35. E18-22 2. $405,000 / 3,000 lamps = $135

36. Objective 6 Use reasonable standards to make ethical judgments

37. Ethical Standards • Institute of Management Accountants (IMA) • Standards of Ethical Conduct for Management Accountants • Competence • Confidentiality • Integrity • Objectivity

38. End of Chapter 18