Introduction to Managerial Accounting

1. Introduction to Managerial Accounting Chapter 16

2. Financial Accounting versus Managerial Accounting • Financial accounting is for external reporting • Managerial accounting is for internal planning and controlling

3. Planning and Controlling • Planning—choosing goals and deciding how to achieve them • Common goal—to increase operating income (profits) • Achieved by raising prices or advertising more • Budget—a mathematical expression of the plan • Used to coordinate the business’s activities • Shows the expected financial impact of decisions • Helps identify the resources needed to achieve goals • Controlling—implementing the plans and evaluating operations • By comparing actual results to the budget • Cost data helps managers make decisions

4. Management versus Financial Accounting

5. S16-1: managerial accounting vs. financial accounting Managerial and financial accounting differ in many aspects. • For each of the following, indicate whether the statement relates to managerialaccounting (MA) or financial accounting (FA): _____a. Helps investors make investment decisions. _____ b. Provides detailed reports on parts of the company. _____ c. Helps in planning and controlling operations. _____ d. Reports must follow generally accepted accounting principles (GAAP). _____ e. Reports audited annually by independent certified public accountants. FA MA MA FA FA

6. Ethical Standards • Requires ethical behavior without regard to personal consequences • Doing the right thing • Ethical violations • Enron • Bernie Madoff • World Com

7. Ethical Standards • Institute of Management Accountants (IMA) • Developed standards to help meet ethical challenges • Require management accountants to: • Maintain their professional competence • Preserve the confidentiality of the information • Act with integrity and credibility

8. IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: I. Competence 1. Maintain an appropriate level of professional expertise. 2. Perform professional duties in accordance with laws, regulations, and standards. 3. Provide information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional limitations.

9. IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: II. Confidentiality 1. Keep information confidential except when authorized or legally required. 2. Inform relevant parties regarding appropriate use of confidential information. 3. Refrain from using confidential information to your advantage.

10. IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: III. Integrity 1. Mitigate actual conflicts of interest. 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3. Abstain from engaging in activity that might discredit the profession.

11. IMA Statement of Ethical Professional Practice The standards of ethical practice include the following: IV. Credibility 1. Communicate information fairly and objectively. 2. Disclose all relevant information. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls.

12. Managerial Accounting Basics Managerial Accounting Activities Explain manufacturing and nonmanufacturing costs and how they are reported Compute cost of providing a service or manufacturing a product. Determine behavior of costs and expenses as activity changes.

13. Managerial Accounting Basics Managerial Activities: Continued Assist management in profit planning and formalizing these plans in the form of budgets. Help to control costs by comparing actual results with planned objectives and standard costs. Accumulate and present data for making decisions.

14. Managerial Accounting Basics Distinguishing Features Applies to all types of business - Service, Merchandising, and Manufacturing Applies to all forms of businesses – Proprietorships, Partnerships, and Corporations Applies to not-for-profit and profit oriented companies

15. Managerial Accounting Basics Distinguishing Features: Continued More responsible for strategic cost management Teams with people from production, marketing, engineering, etc. Aid in making critical decisions

16. 4 Classify costs and prepare an income statement for a service company

17. Service Company • Service companies sell their time, skills, and knowledge • Seek to provide services with: • High quality • Reasonable prices • Timely delivery • Simplest accounting • No inventory or products for sale • All costs are period costs • Incurred and expensed in same accounting period

18. Income Statement of a Service Company

19. Income Statement of a Service Company • Cost per service • Helps to set the price of each service provided • Consider all operating expenses (period costs) • Unit cost per service

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

21. Merchandising Company • Resell products purchased from suppliers • Keep an inventory of products • Cost of goods sold is a major expense • Product costs flow through the inventory • GAAP requires companies to record inventoriable product costs as an asset until sold

22. Product Costs • Includes cost to purchase goods plus freight-in Beginning Inventory + Net Purchases + Freight In – Ending Inventory = Cost of Goods Sold(Cost of Sales) • Managerial accounting distinguishes inventoriable product costs from period costs

23. Product versus Period Costs

24. Inventoriable Product Costs and Period Costs INCOME STATEMENT Sales Merchandise Inventory When sales occur - Purchases of inventory + freight in Cost of Goods Sold - Operating Expenses Period Costs = Operating Income

25. Wal-Mart

26. Wal-Mart

27. Merchandising Company: Income Statement

28. S16-6 : Computing cost of goods sold The Tinted View, a retail merchandiser of auto windshields, has the following information: Web site maintenance . . . . . . . $ 7,100 Delivery expense . . . . . . . . . . 900 Freight in . . . . . . . . . . . . . . . . 2, 900 Purchases . . . . . . . . . . . . . . . . 39,000 Ending inventory . . . . . . . . . . 4,900 Revenues . . . . . . . . . . . . . . . . 57,000 Marketing expenses . . . . . . . . 9,900 Beginning inventory . . . . . . . . 7,900 Compute The Tinted View’s cost of goods sold.

30. 6 Classify costs and prepare an income statement and statement of cost of goods manufactured for a manufacturing company

31. Manufacturing Companies • Use labor, plant, supplies, and facilities to convert raw materials into finished products • Three kinds of inventory Finished goods inventory Work in process inventory Materials inventory

32. Inventory detail typically disclosed in footnotes

33. Eastman inventory footnote

34. Types of Cost • Cost object: • Anything for which managers want a separate measurement of cost • Examples: • A product, department, or activity • Direct costs • Can be directly traced to a cost object • Direct materials • Direct labor • Indirect costs • Needed to finish products • Cannot be directly traced to a cost object • Manufacturing overhead

35. Product Versus Period Costs • Product Costs • Components: direct material cost, direct labor cost, and manufacturing overhead • A necessary and integral part of producing the product • Recorded as inventory when incurred • Not an expense until the finished goods inventory is sold then cost of goods sold

36. Inventoriable Product Costs • Direct materials • Become a physical part of the finished product • Direct labor • Wages of employees who convert materials into the company’s products • Manufacturing overhead • All other costs other than direct materials and labor Conversion Cost

37. Manufacturing Overhead • Includes only indirect costs related to manufacturing • Does NOT include costs for selling, general, or administrative functions • Examples: • Indirect materials • Become part of finished product, but cannot be conveniently or cost-effectively traced • Indirect labor • Manufacturing wages that are not easily traced to products • Plant managers & maintenance

38. Manufacturer’s Inventoriable Product Costs

39. Comparison of Product and Period Costs

40. Manufacturing Company: Income Statement

41. Inventoriable Product Costs and Period Costs Purchases of materials Materials Inventory INCOME STATEMENT Sales Direct labor & manufacturing overhead Work in Process Inventory - When sales occur Cost of Goods Sold - Finished Goods Inventory Operating Expenses Period Costs = Operating Income

42. Cost of Goods Manufactured

43. Flow of Costs Through a Manufacturer’s Inventory Account

44. S16-9: Computing direct materials used You are a new accounting intern at Cookie Messages. Your boss gives you the following information: Purchases of direct materials . . . . . . . . . . . . . $ 6,400 Freight in . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Property taxes . . . . . . . . . . . . . . . . . . . . . . . . 900 Ending inventory of direct materials . . . . . . . 1,500 Beginning inventory of direct materials . . . . . 4,000 Compute direct materials used.

46. S16-12 : Compute cost of goods manufactured All Pro Golf Company had the following inventory data for the year ended January 31, 2012: Direct materials used . . . . . . . . $ 12,000 Manufacturing overhead . . . . . 20,000 Work in process inventory: Beginning . . . . . . . . . . . . 7,000 Ending . . . . . . . . . . . . . . 5,000 Direct labor . . . . . . . . . . . . . . . 11,000 Finished goods inventory . . . . . 9,000 Compute All Pro’s cost of goods manufactured for 2012.

48. Costs in Financial Statements Cost of Goods Sold Components Merchandiser versus Manufacturer

49. Manufacturing Costs in Financial Statements Determining the Cost of Goods Manufactured Work in Process– partially completed units of product Total Manufacturing Costs– sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period

50. Costs in Financial Statements Balance Sheet - Inventories • Manufacturing Company • May have three inventories: • Raw Materials • Work in Process • Finished Goods • Merchandising Company • One category of inventory: • Merchandise Inventory