Management Accounting: A Business Partner

1. Chapter16 Management Accounting:A Business Partner

2. Management Accounting:Basic Framework

3. Comparing Financial Accounting and Management Accounting

4. Convert raw materials into finished goods. Sell finished goods. Direct materials costs. Direct labor and manufacturing overhead costs. Cost of goods sold. Accounting for Manufacturing Operations Steps in the Manufacturing Process: Buy raw materials.

5. Direct Materials Raw materials & component parts that become an integral part of finished products. Can be traced directly and conveniently to products. If materials cannot be traced directly to products, the materials are considered indirect and are part of manufacturing overhead.

6. Direct Labor Includes the payroll cost of direct workers. Those employees who work directly on the goods being manufactured.

7. Direct Labor Includes the payroll cost of direct workers. The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead. Those employees who work directly on the goods being manufactured.

8. Includes: Indirect materials. Indirect labor. Machinery and equipment costs. Cost of regulatory compliance. Manufacturing Overhead All manufacturing costs other than direct materials and direct labor.

9. Manufacturing Overhead All manufacturing costs other than direct materials and direct labor. Includes: • Indirect materials. • Indirect labor. • Machinery and equipment costs. • Cost of regulatory compliance. Does not include selling or general and administrative expenses.

10. Manufacturing Overhead • The cost to produce a unit of product includes: • Direct material • Direct labor • Manufacturing overhead

11. Manufacturing Overhead • The cost to produce a unit of product includes: • Direct material • Direct labor • Manufacturing overhead Manufacturing overhead must be mathematically allocated to each unit of product using a predetermined overhead application rate. (This will be discussed later in this chapter.)

12. When goods are sold. Income Statement Revenue COGS Gross profit Expenses Net income. Period Costs (operating expenses and income taxes.) as incurred Product Costs Versus Period Costs Balance Sheet Product Costs (manufacturing costs) Current assets and inventory as incurred

13. Finished goods- completed goods awaiting sale. Work in process - partially completed goods. Inventories of a Manufacturing Business Raw materials - inventory on hand and available for use.

14. Factory Direct materials used Direct labor &Manufacturing overhead Finished goods Finished goods Warehouse Goods sold The Flow of Physical Goods Materials Warehouse Direct materials purchased

15. Materials Inventory Work in Process Inventory $$$ $$$ $$$ $$$ Cost of Goods Sold Finished Goods Inventory $$$ $$$ $$$ The Flow of Manufacturing Costs Direct materials purchased Direct materials used Direct labor &Manufacturing overhead Cost of goods manufactured

16. The Flow of Manufacturing Costs Example Pure-Ice Inc. had $52,000 of inventory in direct materials inventory on January 1, 2002. During the year, Pure-Ice purchased $586,000 of additional direct materials. At December 31, 2002, $78,000 of the direct materials were still on hand. How much direct material was placed into production during 2002?

17. The Flow of Manufacturing Costs Example ?

18. The Flow of Manufacturing Costs Example !

19. The Flow of Manufacturing Costs Example In addition to the direct materials, Pure-Ice incurred $306,000 of direct labor cost during 2002. Manufacturing overhead for 2002 was $724,000. Pure-Ice started 2002 with $132,000 in work in process. During 2002, units costing $1,480,000 were transfered to finished goods inventory. What is the ending balance in work in process at December 31, 2002?

20. The Flow of Manufacturing Costs Example

21. The Flow of Manufacturing Costs Example !

22. Overhead Application Rates The overhead application rate expresses an expected relationship between manufacturing overhead costs and some activity base related to the production process.

23. Overhead Application Rates Overhead costs are estimated based on budgets and using mathematical estimation techniques.

24. Overhead Application Rates The base is the activitiy that “drives” the cost, called the cost driver. Direct labor hours and machine hours are commonly used cost drivers.

25. Overhead Application Rates Example Big “T” Company produces engines for big trucks. Total overhead for 2002 is estimated to be $2,600,000. Big “T” applies overhead based on machine hours. Big “T” estimates machine hours for 2002 to be 162,500 hours. Compute Big “T’s” predetermined overhead rate for 2002.

26. Overhead Application Rates Example

27. Overhead Application Rates Example

28. Overhead Application Rates Some companies use different cost drivers for different manufacturing activities, a process called ACTIVITY BASED COSTING.

29. Determining the Cost of Finished Goods Manufactured A schedule of the cost of finished goods manufactured is prepared to assist managers in understanding and evaluating the overall cost of manufacturing products.

31. The cost of goods completed during the period is used to compute COGS for the period.

32. The income statement is prepared using established financial accounting procedures.

33. End of Chapter 16 This is a great job, but the overhead is killing my profit margin!