Managerial Accounting Concepts and Principles

1. 16 Managerial Accounting Concepts and Principles

2. Describe managerial accounting and the role of managerial accounting in a business. 1 Describe and illustrate the following costs: 1. direct and indirect costs 2. direct materials, direct labor, and factory overhead costs 3. product and period costs. 2 Learning Objective 1 Learning Objective 1 Managerial Accounting Concepts and Principles 3-1 3-1 After studying this chapter, you should be able to: Insert Chapter Objectives Describe the nature of the adjusting process. Describe the nature of the adjusting process. 16-2

3. 4 Describe the uses of managerial accounting information. Describe and illustrate the following statements for a manufacturing business: 1. balance sheet 2. statement of cost of goods manufactured 3. income statement. 3 Managerial Accounting Concepts and Principles (continued) 16-3

4. 1 Describe managerial accounting and the role of managerial accounting in a business. 16-4

5. Exhibit 1 1 Financial Accounting and Managerial Accounting

6. 1 The Difference Between Managerial and Financial Accounting Financial accounting information is reported at fixed intervals in general-purpose financial statements. These financial statements are prepared according to GAAP.

7. 1 External Users of Financial Statements • Shareholders • Creditors • Government agencies • The general public

8. 1 Managerial Accounting Managerial accounting information is designed to meet the specific needs of a company’s management, such as historical data and subjective estimates about future decisions.

9. Exhibit 2 1 Partial Organizational Chart for Callaway Golf Company

10. 1 Line and Staff A line department is directly involved in providing goods or services to the customers of the company. A staff department provides services, assistance, and advice to the departments with line or other staff responsibilities. The chief financial officer (CFO) and the chief management accountant, the controller, occupy staff positions.

11. 1 Exhibit 3 The Management Process

12. 1 Planning Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action.

13. 1 Strategic Planning Strategic planning is developing long-range actions to achieve the company’s objectives. Long-range courses of action, called strategies, can often involve periods ranging from five to ten years.

14. 1 Operational planning develops short-term actions for managing the day-to-day operations of the company.

15. 1 Directing The process by which managers run day-to-day operations is called directing.

16. 1 Controlling Monitoring operating results and comparing actual results with the expected results is controlling. This feedback allows management to isolate areas for further investigation and possible remedial action.

17. 1 Improving Continuous process improvement is the philosophy of continually improving employees, business processes, and products.

18. 1 Decision Making Inherent in each of the preceding management processes is decision making. Management must continually decide among alternative actions.

19. 1 Example Exercise 16-1 Manufacturing Process Three phases of the management process are planning, controlling, and improving. Match the following description to the proper phase: Phase of management process Description ___Planning a. Monitoring the operating ___Controlling results of implemented plans ___Improving and comparing the actual results with expected results. (continued) 16-19

20. Phase of management process: Planning (c) Controlling (a) Improving (b) Follow My Example 16-1 For Practice: PE 16-1A, PE 16-1B 1 Example Exercise 16-1 (continued) Phase of management process Description b. Rejects solving individual problems with temporary solutions that fail to address the root cause of the problem. c. Used by management to develop the company’s objectives. 16-20

21. 2 Describe and illustrate the following costs: 1. direct and indirect costs; 2. direct materials, direct labor, and factory overhead costs; 3. product and period costs. 16-21

22. Exhibit 4 2 Guitar Making Operations of Legend Guitars

23. 2 Direct and Indirect Costs Costs are often classified in terms of how they relate to an object or segment of operations, called a cost object. It may be a product, a sales territory, a department, or some activity. Direct costs are identified with and can be traced to a cost object. Indirect costs cannot be identified with or traced to a cost object.

24. 2 The cost of wood (materials) used by Legend Guitars in manufacturing a guitar is a direct cost of the guitar.

25. 2 A production supervisor’s salary is an indirect cost because it cannot be traced to any individual guitar.

26. Exhibit 5 2 Classifying Direct and Indirect Costs

27. 2 Direct Materials Cost To be classified as a direct materials cost, the cost must be both of the following: • An integral part of the finished product • A significant portion of the total cost of the product

28. 2 Direct Labor Cost The cost of employee wages that is an integral part of the finished product is classified as direct labor cost. A direct labor cost must be both of the following: • An integral part of the finished product • A significant portion of the total cost of the product

29. 2 Factory Overhead Cost Costs, other than direct materials cost and direct labor cost, that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes also called manufacturing overhead or factory burden).

30. 2 Examples of Factory Overhead Cost • Heating and lighting the factory • Repairing and maintaining factory equipment • Property taxes • Insurance • Depreciation of factory plant and equipment

31. Follow My Example 16-2 For Practice: PE 16-2A, PE 16-2B 2 Example Exercise 16-2 Example Exercise 18-2 Direct Materials, Direct Labor, and Factory Overhead Identify the following costs as (a) direct materials, (b) direct labor, or (c) factory overhead for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Coolants for machines that sew baseball gloves • _______________ Wages of assembly line employees • _______________ Ink used to print a player’s autograph on the baseball glove (a) Direct materials (c) Factory overhead (b) Direct labor (c) Factory overhead Left-click the mouse to reveal the answers. 16-31

32. 2 Prime Costs and Conversion Costs Prime costs consist of direct materials and direct labor costs. Conversion costs consist of direct labor and factory overhead. Conversion costs are the costs of converting the materials into a finish product.

33. Exhibit 6 2 Prime Costs and Conversion Costs

34. Follow My Example 16-3 For Practice: PE 16-3A, PE 16-3B 2 2 Example Exercise 16-3 Example Exercise 18-2 Prime and Conversion Costs Identify the following costs as a prime cost (P), conversion cost (C), or both (B) for a baseball glove manufacturer. • ___Leather used to make a baseball glove • ___Coolants for machines that sew baseball gloves • ___Wages of assembly line employees • ___Ink used to print a player’s autograph on the baseball glove P C B C Left-click the mouse to reveal the answers. 16-34

35. 2 Product Costs Product costs consist of the three elements of manufacturing cost: direct materials, direct labor, and factory overhead.

36. 2 Period Costs Period costs are generally classified into two categories: 1.Selling expenses are incurred in marketing the product and delivering the sold product to the customer. 2.Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions.

37. Exhibit 7 2 Examples of Product Costs and Period Costs—Legend Guitars (continued)

38. Exhibit 7 2 Examples of Product Costs and Period Costs—Legend Guitars (continued)

39. Exhibit 8 2 Product Costs, Period Costs, and the Financial Statements

40. Follow My Example 16-4 For Practice: PE 16-4A, PE 16-4B 2 2 Example Exercise 16-4 Example Exercise 18-2 Product and Period Costs Identify the following costs as product cost or a period cost for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Cost of endorsement from a professional baseball player • _______________ Office supplies used at the company headquarters • _______________ Ink used to print a player’s autograph on the baseball glove Product cost Period cost Period cost Product cost Left-click the mouse to reveal the answers. 16-40

41. 3 Describe and illustrate the following statements for a manufacturing business: • balance sheet • statement of cost of goods manufactured • income statement. 16-41

42. 3 A Manufacturing Firm’s Inventories Materials inventory: • Sometimes called raw materials inventory • Consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process

43. 3 A Manufacturing Firm’s Inventories Work in process inventory: • Consists of the direct materials costs, the direct labor costs, and the factory overhead costs that have entered the manufacturing process but are associated with products that have not been completed.

44. 3 A Manufacturing Firm’s Inventories Finished goods inventory: • Consists of completed (or finished) products that have not been sold.

45. Exhibit 9 3 Balance Sheet Presentation of Inventory in Manufacturing and Merchandising Companies Current assets: (continued)

46. Exhibit 9 3 Balance Sheet Presentation of Inventory in Manufacturing and Merchandising Companies (continued) Current assets:

47. 3 Income Statement for a Manufacturing Company Income statements for a merchandising and manufacturing business differ primary in the reporting of the cost of merchandise (goods) available for sale and sold during the period.

48. 3 Merchandising Business Sales $XXX Beginning merchandise inventory $XXX Plus net purchases XXX Merchandise available for sale $XXX Less ending merchandise inventory XXX Cost of merchandise sold XXX Gross profit $XXX Manufacturing Business Sales $XXX Beginning finished goods inventory $XXX Plus cost of goods manufactured XXX Cost of finished goods available for sale$XXX Less ending finished goods inventory XXX Cost of goods sold XXX Gross profit $XXX

49. to total manufacturing cost 3 Determining the Cost of Goods Manufactured (Legend Guitar) STEP 1: Materials inventory, January 1, 2010 $ 65,000 Add: Materials purchased during December 100,000 Cost of materials available for use $165,000 Less: Materials inventory, Dec. 31, 2010 35,000 Cost of direct materials used $130,000

50. 3 Determining the Cost of Goods Manufactured (Legend Guitar) STEP 2: Cost of direct materials used $130,000 from Step 1