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© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Chapter 1
Managerial Accounting
Concepts and Principles
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Conceptual Learning Objectives
C1: Explain the purpose and nature of
managerial accounting
C2: Describe the lean business model
C3: Describe accounting concepts useful in
classifying costs
C4: Define product and period costs and
explain how they impact financial
statements
C5: Explain how the balance sheets for
manufacturing and merchandising
companies differ
C6: Explain manufacturing activities and the
flow of manufacturing costs.
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
A1: Compute cycle time and cycle
efficiency, and explain their importance
to production management
Analytical Learning Objectives
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
P1: Compute cost of goods sold for a
manufacturer
P2: Prepare a manufacturing statement
and explain its purpose and links to
financial statements.
Procedural Learning Objectives
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Managerial accounting
provides financial and
non-financial information
for managers of an
organization and other
decision makers
Financial accounting
provides general
purpose financial
information to those
who are outside
the organization.
Managerial and Financial
Accounting
C 1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Planning and Control
C 1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Financial Accounting Managerial Accounting
1. Users and Investors, creditors and Managers, employees and
decision makers other external users other internal users
2. Purpose of Making investment, credit Planning and
information and other decisions control decisions
3. Flexibility Structured and often Relatively flexible
of practice controlled by GAAP (no GAAP)
4. Timeliness of Often available only Available quickly without
information after audit is complete need to wait for audit
5. Time dimension Historical information Many projections
with some predictions and estimates
6. Focus of Emphasis on Projects, processes and
information whole organization segments of an organization
7. Nature of Monetary Monetary and
information information nonmonetary information
Nature of Managerial
Accounting Exh.
18-2
C 1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Lean Business Model
Customer
Orientation
Global
Economy
Lean
Business
Model
Elimination
of Waste
Satisfy the
Customer
Positive
Return
C 2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Lean Practices
Customer
Orientation
in a Global
Economy
C 2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
New ways to
improve
operations
Continuous Improvement
C 2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
on
Quality improvement
applied to all aspects of
business activities.
Seek and uncover
waste.
Employees encouraged
to try new methods
to improve quality.
Company emphasizes
value of quality through
quality awards.
Total Quality Management
C 2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Complete products
just in time to
ship to customers.
Complete parts
just in time for
assembly into products.
Receive materials
just in time for
production.
Schedule
production.
Receive
customer
orders.
Just-In-Time (JIT)
Manufacturing
C 2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Just-In-Time (JIT)
Manufacturing
C 2
To accomplish just-in-time
manufacturing:
Processes must be
aligned to eliminate
delays and
inefficiencies
Companies must
establish good
relations with
suppliers
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Implications of Lean
Manufacturing
C 2
Understand
the nature and
sources of
cost
Measure
value provided
to customers
Determine
price
customers
pay
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Behavior
Traceability
Controllability
Relevance
Function
Cost Accounting Concepts
C 3
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Cost behavior means how a cost will
react to changes in the level of
business activity.
Classification by Behavior
C 3
A fixed cost does not change with
changes in the volume of activity
A variable cost changes in
proportion to changes in the volume
of activity
A mixed cost refers to a combination of
fixed and variable
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Rent
Cost
Tires
Cost Classification by Behavior
Cost behavior means
how a cost will react to
changes in the level of
business activity.
 Total fixed costs do
not change when
activity changes.
 Total variable costs
change in proportion
to activity changes.
C 3
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Direct costs
 Costs traceable to a
single cost object.
 Examples: material
and labor cost for a
product.
Indirect costs
 Costs that cannot be
traced to a single cost
object.
 Example:
maintenance
expenditures
benefiting two or more
departments.
Classification by Traceability
C 3
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
The degree of control depends on the
level of management in the organization.
Very little control
Classification by Controllability
C 3
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
All costs incurred in the past that cannot be avoided
or changed.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost
$15,000 two years ago. The $15,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $15,000
cost.
Classification by Relevance:
Sunk Costs
C 3
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Classification by Relevance:
Out-of-Pocket Costs
C 3
A cost that requires a future outlay of cash.
Out-of-pocket costs should be considered in
decisions.
Example: You plan on buying a new car for
$25,000 next month. The cost of the new car is
an out-of-pocket cost because you can choose
to spend the $25,000 or not in the future
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
The potential benefit lost by choosing a
specific action from two or more alternatives
Example: If you were not attending
college, you could be earning $20,000 per
year. Your opportunity cost of attending
college for one year is $20,000.
Classification by Relevance:
Opportunity Costs
C 3
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
The
Product
Classification by Function:
Product Costs
Direct
Labor
Direct
Material
Manufacturing
Overhead
C 4
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Period costs are expenses
not attached to the product.
Classification by Function:
Period Costs
Administrative Costs
Non-manufacturing costs
of staff support and
administrative functions –
accounting, data processing,
personnel, research
and development.
Selling Costs
Costs incurred to obtain
customer orders and to
deliver finished goods
to customers –
advertising and shipping.
C 4
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Period Costs
(Expenses)
Product Costs
(Inventory)
Inventory Not
Sold in 2008
Operating
Expenses
Cost of
Goods Sold
Raw Materials
Goods in Process
Finished Goods
Cost of
Goods Sold
2008 Costs
Incurred
2008 Income
Statement
2009 Income
Statement
2008 Balance
Sheet Inventory
Inventory
Sold in 2008
Period and Product Costs
in Financial Statements Exh.
18-8
C 4
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Cost Item Behavior Traceability Function
Materials Variable Direct Product
Assembly Wages Variable Direct Product
Advertising Fixed Indirect Period
Production Manager's Salary Fixed Indirect Product
Office Depreciation Fixed Indirect Period
Potential Multiple Cost
Classifications Exh.
18-9
C 4
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
I suppose these same
cost concepts apply to
service companies.
Cost Concepts for Service
Companies
C 4
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Merchandisers . . .
 Buy finished goods.
 Sell finished goods.
SaleMart
Manufacturers . . .
 Buy raw materials.
 Produce and sell
finished goods.
Reporting Manufacturing
Activities
C 5
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Manufacturing
Inventory
Classifications
Balance Sheet of a
Manufacturer
Raw
Materials
Finished
Goods
Goods in
Process
C 5
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Completed
products
for sale.
Materials
waiting to be
processed.
Can be direct
or indirect.
Partially complete
products.
Material to which
some labor and/or
overhead have
been added.
Balance Sheet of a
Manufacturer
Raw
Materials
Finished
Goods
Goods in
Process
C 5
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
MERCHANDISER
Current Assets
 Cash
 Receivables
 Merchandise
Inventory
MANUFACTURER
Current Assets
 Cash
 Receivables
 Inventories
Raw Materials
Goods in Process
Finished Goods
The only difference is inventory.
Balance Sheet of a
Manufacturer
C 5
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Beginning
Merchandise
Inventory
Beginning
Finished Goods
Inventory
Cost of Goods
Purchased
Cost of Goods
Manufactured
Ending
Merchandise
Inventory
Ending
Finished Goods
Inventory
Cost of Goods
Sold
Merchandiser Manufacturer
+
_
+
=
=
_
The major
difference
Income Statement of a
Manufacturer Exh.
18-11
P1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv. 14,200
$
+ Cost of goods
manufactured 234,150
= Goods available
for sale 248,350
$
- Ending
finished goods
inventory (12,100)
= Cost of goods
sold 236,250
$
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory 14,200
$
+ Purchases 234,150
= Goods available
for sale 248,350
$
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold 236,250
$
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for
merchandisers.
Income Statement of a
Manufacturer Exh.
18-12
P1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Direct Materials
Materials that are separately and readily
traced to a particular product.
Example:
Steel used to
manufacture
the automobile.
Income Statement of a
Manufacturer
P1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Direct Labor
Labor costs that are separately and
readily traced to finished product.
Example:
Wages paid to an
automobile assembly
worker.
Income Statement of a
Manufacturer
P1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Factory Overhead
All manufacturing costs except
direct material and direct labor
Factory costs that cannot be
separately or readily traced directly to
products.
Examples:
Indirect labor – maintenance
Indirect material – cleaning supplies
Factory utility costs
Supervisory costs
Income Statement of a
Manufacturer
P1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
Manufacturing costs are often
combined as follows:
Income Statement of a
Manufacturer
P1
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Question
What type of account is the goods in
process account?
a. Income statement expense account.
b. Balance sheet inventory account.
c. Temporary clearing account for direct
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
C 5
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
What type of account is the goods in
process account?
a. Income statement expense account.
b. Balance sheet inventory account.
c. Temporary clearing account for direct
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
Question
C 5
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Question
The primary distinction between product
and period costs is . . .
a. Product costs are expensed in the period
incurred.
b. Product costs are directly traceable to
product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
C 4
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
The primary distinction between product
and period costs is . . .
a. Product costs are expensed in the period
incurred.
b. Product costs are directly traceable to
product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
Question
C 4
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Finished Goods
Beginning Inventory
Cost of Goods
Manufactured
Finished
Goods
Ending
Inventory
Raw
Materials
Beginning
Inventory
Raw
Materials
Purchases
Raw Materials
Ending Inventory
Cost
of
Goods
Sold
Goods in Process
Beginning Inventory
Direct Labor
Factory
Overhead
Raw Materials
Used
Sales activity
Production activity
Materials
activity
Flow of Manufacturing
Activities
Goods in Process
Ending Inventory
Exh.
18-15
C 6
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Summarizes the types and amounts of costs
Incurred in a company’s manufacturing process.
Direct Materials Used
+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Work in Process
– Ending Work in Process
= Cost of Goods Manufactured
Manufacturing Statement
P2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Let’s take a look
at Rocky
Mountain Bikes’
Manufacturing
Statement.
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Computation of Cost of Direct Material Used
Beginning raw materials inventory 8,000
$
Add: Purchases of raw materials 86,500
Cost of raw materials available for use 94,500
$
Deduct: Ending raw materials inventory 9,000
Cost of direct materials used in production 85,500
$
P2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Include all direct labor
costs incurred during the
current period.
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Manufacturing Statement
Computation of Total Manufacturing Overhead
Indirect labor 9,000
$
Factory supervision 6,000
Factory utilities 2,600
Property taxes, factory building 1,900
Factory supplies used 600
Factory insurance expired 1,100
Depreciation, building and equipment 5,300
Other factory overhead 3,500
Total factory overhead costs 30,000
$
P2
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Beginning work in
process inventory is
carried over from the
prior period.
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Ending work in process inventory
contains the cost of unfinished goods,
and is reported in the current assets
section of the balance sheet.
P2
Manufacturing Statement
© The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
End of Chapter 1

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were

  • 1. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Chapter 1 Managerial Accounting Concepts and Principles
  • 2. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Conceptual Learning Objectives C1: Explain the purpose and nature of managerial accounting C2: Describe the lean business model C3: Describe accounting concepts useful in classifying costs C4: Define product and period costs and explain how they impact financial statements C5: Explain how the balance sheets for manufacturing and merchandising companies differ C6: Explain manufacturing activities and the flow of manufacturing costs.
  • 3. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin A1: Compute cycle time and cycle efficiency, and explain their importance to production management Analytical Learning Objectives
  • 4. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P1: Compute cost of goods sold for a manufacturer P2: Prepare a manufacturing statement and explain its purpose and links to financial statements. Procedural Learning Objectives
  • 5. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Managerial accounting provides financial and non-financial information for managers of an organization and other decision makers Financial accounting provides general purpose financial information to those who are outside the organization. Managerial and Financial Accounting C 1
  • 6. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Planning and Control C 1
  • 7. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Financial Accounting Managerial Accounting 1. Users and Investors, creditors and Managers, employees and decision makers other external users other internal users 2. Purpose of Making investment, credit Planning and information and other decisions control decisions 3. Flexibility Structured and often Relatively flexible of practice controlled by GAAP (no GAAP) 4. Timeliness of Often available only Available quickly without information after audit is complete need to wait for audit 5. Time dimension Historical information Many projections with some predictions and estimates 6. Focus of Emphasis on Projects, processes and information whole organization segments of an organization 7. Nature of Monetary Monetary and information information nonmonetary information Nature of Managerial Accounting Exh. 18-2 C 1
  • 8. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Lean Business Model Customer Orientation Global Economy Lean Business Model Elimination of Waste Satisfy the Customer Positive Return C 2
  • 9. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Lean Practices Customer Orientation in a Global Economy C 2
  • 10. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin New ways to improve operations Continuous Improvement C 2
  • 11. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin on Quality improvement applied to all aspects of business activities. Seek and uncover waste. Employees encouraged to try new methods to improve quality. Company emphasizes value of quality through quality awards. Total Quality Management C 2
  • 12. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Complete products just in time to ship to customers. Complete parts just in time for assembly into products. Receive materials just in time for production. Schedule production. Receive customer orders. Just-In-Time (JIT) Manufacturing C 2
  • 13. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Just-In-Time (JIT) Manufacturing C 2 To accomplish just-in-time manufacturing: Processes must be aligned to eliminate delays and inefficiencies Companies must establish good relations with suppliers
  • 14. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Implications of Lean Manufacturing C 2 Understand the nature and sources of cost Measure value provided to customers Determine price customers pay
  • 15. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Behavior Traceability Controllability Relevance Function Cost Accounting Concepts C 3
  • 16. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Cost behavior means how a cost will react to changes in the level of business activity. Classification by Behavior C 3 A fixed cost does not change with changes in the volume of activity A variable cost changes in proportion to changes in the volume of activity A mixed cost refers to a combination of fixed and variable
  • 17. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Rent Cost Tires Cost Classification by Behavior Cost behavior means how a cost will react to changes in the level of business activity.  Total fixed costs do not change when activity changes.  Total variable costs change in proportion to activity changes. C 3
  • 18. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Direct costs  Costs traceable to a single cost object.  Examples: material and labor cost for a product. Indirect costs  Costs that cannot be traced to a single cost object.  Example: maintenance expenditures benefiting two or more departments. Classification by Traceability C 3
  • 19. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The degree of control depends on the level of management in the organization. Very little control Classification by Controllability C 3
  • 20. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost. Classification by Relevance: Sunk Costs C 3
  • 21. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Classification by Relevance: Out-of-Pocket Costs C 3 A cost that requires a future outlay of cash. Out-of-pocket costs should be considered in decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future
  • 22. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The potential benefit lost by choosing a specific action from two or more alternatives Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000. Classification by Relevance: Opportunity Costs C 3
  • 23. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The Product Classification by Function: Product Costs Direct Labor Direct Material Manufacturing Overhead C 4
  • 24. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Period costs are expenses not attached to the product. Classification by Function: Period Costs Administrative Costs Non-manufacturing costs of staff support and administrative functions – accounting, data processing, personnel, research and development. Selling Costs Costs incurred to obtain customer orders and to deliver finished goods to customers – advertising and shipping. C 4
  • 25. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Period Costs (Expenses) Product Costs (Inventory) Inventory Not Sold in 2008 Operating Expenses Cost of Goods Sold Raw Materials Goods in Process Finished Goods Cost of Goods Sold 2008 Costs Incurred 2008 Income Statement 2009 Income Statement 2008 Balance Sheet Inventory Inventory Sold in 2008 Period and Product Costs in Financial Statements Exh. 18-8 C 4
  • 26. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Cost Item Behavior Traceability Function Materials Variable Direct Product Assembly Wages Variable Direct Product Advertising Fixed Indirect Period Production Manager's Salary Fixed Indirect Product Office Depreciation Fixed Indirect Period Potential Multiple Cost Classifications Exh. 18-9 C 4
  • 27. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin I suppose these same cost concepts apply to service companies. Cost Concepts for Service Companies C 4
  • 28. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Merchandisers . . .  Buy finished goods.  Sell finished goods. SaleMart Manufacturers . . .  Buy raw materials.  Produce and sell finished goods. Reporting Manufacturing Activities C 5
  • 29. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Manufacturing Inventory Classifications Balance Sheet of a Manufacturer Raw Materials Finished Goods Goods in Process C 5
  • 30. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Completed products for sale. Materials waiting to be processed. Can be direct or indirect. Partially complete products. Material to which some labor and/or overhead have been added. Balance Sheet of a Manufacturer Raw Materials Finished Goods Goods in Process C 5
  • 31. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin MERCHANDISER Current Assets  Cash  Receivables  Merchandise Inventory MANUFACTURER Current Assets  Cash  Receivables  Inventories Raw Materials Goods in Process Finished Goods The only difference is inventory. Balance Sheet of a Manufacturer C 5
  • 32. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Beginning Merchandise Inventory Beginning Finished Goods Inventory Cost of Goods Purchased Cost of Goods Manufactured Ending Merchandise Inventory Ending Finished Goods Inventory Cost of Goods Sold Merchandiser Manufacturer + _ + = = _ The major difference Income Statement of a Manufacturer Exh. 18-11 P1
  • 33. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Manufacturing Company Cost of goods sold: Beg. finished goods inv. 14,200 $ + Cost of goods manufactured 234,150 = Goods available for sale 248,350 $ - Ending finished goods inventory (12,100) = Cost of goods sold 236,250 $ Merchandising Company Cost of goods sold: Beg. merchandise inventory 14,200 $ + Purchases 234,150 = Goods available for sale 248,350 $ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250 $ Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Income Statement of a Manufacturer Exh. 18-12 P1
  • 34. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Direct Materials Materials that are separately and readily traced to a particular product. Example: Steel used to manufacture the automobile. Income Statement of a Manufacturer P1
  • 35. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Direct Labor Labor costs that are separately and readily traced to finished product. Example: Wages paid to an automobile assembly worker. Income Statement of a Manufacturer P1
  • 36. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Factory Overhead All manufacturing costs except direct material and direct labor Factory costs that cannot be separately or readily traced directly to products. Examples: Indirect labor – maintenance Indirect material – cleaning supplies Factory utility costs Supervisory costs Income Statement of a Manufacturer P1
  • 37. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often combined as follows: Income Statement of a Manufacturer P1
  • 38. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Question What type of account is the goods in process account? a. Income statement expense account. b. Balance sheet inventory account. c. Temporary clearing account for direct material and direct labor. d. Holding account for manufacturing overhead and direct labor. C 5
  • 39. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin What type of account is the goods in process account? a. Income statement expense account. b. Balance sheet inventory account. c. Temporary clearing account for direct material and direct labor. d. Holding account for manufacturing overhead and direct labor. Question C 5
  • 40. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Question The primary distinction between product and period costs is . . . a. Product costs are expensed in the period incurred. b. Product costs are directly traceable to product units. c. Product costs are inventoriable. d. Period costs are inventoriable. C 4
  • 41. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The primary distinction between product and period costs is . . . a. Product costs are expensed in the period incurred. b. Product costs are directly traceable to product units. c. Product costs are inventoriable. d. Period costs are inventoriable. Question C 4
  • 42. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Finished Goods Beginning Inventory Cost of Goods Manufactured Finished Goods Ending Inventory Raw Materials Beginning Inventory Raw Materials Purchases Raw Materials Ending Inventory Cost of Goods Sold Goods in Process Beginning Inventory Direct Labor Factory Overhead Raw Materials Used Sales activity Production activity Materials activity Flow of Manufacturing Activities Goods in Process Ending Inventory Exh. 18-15 C 6
  • 43. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Summarizes the types and amounts of costs Incurred in a company’s manufacturing process. Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured Manufacturing Statement P2
  • 44. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Let’s take a look at Rocky Mountain Bikes’ Manufacturing Statement. P2 Manufacturing Statement
  • 45. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2008 Direct materials used in production 85,500 $ Direct labor 60,000 Total factory overhead costs 30,000 Total manufacturing costs for the period 175,500 $ Add: Beginning goods in process inventory 2,500 Total cost of goods in process 178,000 $ Deduct: Ending goods in process inventory 7,500 Cost of goods manufactured 170,500 $ P2 Manufacturing Statement
  • 46. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2008 Direct materials used in production 85,500 $ Direct labor 60,000 Total factory overhead costs 30,000 Total manufacturing costs for the period 175,500 $ Add: Beginning goods in process inventory 2,500 Total cost of goods in process 178,000 $ Deduct: Ending goods in process inventory 7,500 Cost of goods manufactured 170,500 $ Computation of Cost of Direct Material Used Beginning raw materials inventory 8,000 $ Add: Purchases of raw materials 86,500 Cost of raw materials available for use 94,500 $ Deduct: Ending raw materials inventory 9,000 Cost of direct materials used in production 85,500 $ P2
  • 47. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2008 Direct materials used in production 85,500 $ Direct labor 60,000 Total factory overhead costs 30,000 Total manufacturing costs for the period 175,500 $ Add: Beginning goods in process inventory 2,500 Total cost of goods in process 178,000 $ Deduct: Ending goods in process inventory 7,500 Cost of goods manufactured 170,500 $ Include all direct labor costs incurred during the current period. P2 Manufacturing Statement
  • 48. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2008 Direct materials used in production 85,500 $ Direct labor 60,000 Total factory overhead costs 30,000 Total manufacturing costs for the period 175,500 $ Add: Beginning goods in process inventory 2,500 Total cost of goods in process 178,000 $ Deduct: Ending goods in process inventory 7,500 Cost of goods manufactured 170,500 $ Manufacturing Statement Computation of Total Manufacturing Overhead Indirect labor 9,000 $ Factory supervision 6,000 Factory utilities 2,600 Property taxes, factory building 1,900 Factory supplies used 600 Factory insurance expired 1,100 Depreciation, building and equipment 5,300 Other factory overhead 3,500 Total factory overhead costs 30,000 $ P2
  • 49. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2008 Direct materials used in production 85,500 $ Direct labor 60,000 Total factory overhead costs 30,000 Total manufacturing costs for the period 175,500 $ Add: Beginning goods in process inventory 2,500 Total cost of goods in process 178,000 $ Deduct: Ending goods in process inventory 7,500 Cost of goods manufactured 170,500 $ Beginning work in process inventory is carried over from the prior period. P2 Manufacturing Statement
  • 50. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2008 Direct materials used in production 85,500 $ Direct labor 60,000 Total factory overhead costs 30,000 Total manufacturing costs for the period 175,500 $ Add: Beginning goods in process inventory 2,500 Total cost of goods in process 178,000 $ Deduct: Ending goods in process inventory 7,500 Cost of goods manufactured 170,500 $ Ending work in process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet. P2 Manufacturing Statement
  • 51. © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin End of Chapter 1

Hinweis der Redaktion

  1. Previous chapters focused on the financial accounting system, whose main purpose is to prepare general-purpose financial statements. However, this information is incomplete for internal decision makers who manage organizations. This chapter discusses the purpose of managerial accounting, cost concepts, and reporting of manufacturing activities. We also look at how these concepts help managers gather, organize, and use this information.
  2. The purpose of both managerial and financial accounting is providing useful information to decision makers. Both areas of accounting report monetary information, although managerial accounting includes the practice of reporting non-monetary information. The focus of managerial and financial accounting are different, however.
  3. Planning is the process of setting goals and making plans to achieve them. Strategic plans usually set a firm’s long-term direction by developing a road map based on opportunities such as new products, new markets, and capital investments. Medium- and short-term plans are more operational in nature. They translate the strategic plans into actions. A short-term plan often covers a one-year period that, then translated into monetary terms is knows as a budget. Control is the process of monitoring planning decisions and evaluating an organization’s activities and employees. It includes the measurement and evaluation of actions, processes, and outcomes. Feedback provided by the control system allows managers to revise their plans and take corrective actions to avoid undesirable outcomes.
  4. Here we see a detailed comparison of financial accounting and managerial accounting. In addition to the focus on internal decisions, note particularly that managerial accounting information may follow a flexible format, involves frequent, timely reports, and may contain more estimates and projections than financial accounting.
  5. By meeting customer needs in an efficient manner, a lean business model provides a positive return to its owners. Today’s customers have many choices, both domestic and foreign. To be successful, a business must deliver quality products and services to customers in a cost efficient manner.
  6. Lean business practices include total quality management and just-in-time manufacturing. The central focus is always on the customer.
  7. Continuous improvement rejects the notion of “good enough” or “acceptable” and challenges employees and managers to continuously experiment with new and improved business practices. This has led to adopting practices such as total quality management and just-in-time manufacturing.
  8. Total quality management focuses on quality improvement and applies this standard to all aspects of business activities. Awards such as the Malcolm Baldrige National Quality Awards encourage an emphasis on quality.
  9. A just-in-time manufacturer acquires inventories and produces goods only when needed. Companies manufacture products only after they receive an order (a demand-pull system) and then deliver the customer’s requirements on time.
  10. Managerial accounting has an important role to play by providing accurate cost and performance information. Companies must understand the nature and sources of cost and develop systems that capture costs accurately. Developing such a system is important to measuring the “value” provided to customers. The price that customers pay is an important determinant of value. In turn, the costs a company incurs are key determinants of price. All else being equal, the better a company is at controlling its costs, the better its performance.
  11. Managers often need different cost classifications for different decisions. We will discuss each of these types of cost classifications individually.
  12. Classification of costs by behavior is helpful in cost-volume-profit analyses and short-term decision making. These are discussed in future chapters.
  13. The upper chart shows that a fixed cost does not change when an activity changes. For example, rent for Rocky Mountain Bikes’ building is $22,000 and doesn’t change with the number of bikes produced. The lower chart shows that variable costs increase as activity increases. For example, the cost of bicycle tires is variable with the number of bikes produced
  14. Cost objects may be products, services, departments, or customers to which costs are assigned
  15. Managers at higher levels in the organization have a greater degree of control over costs than do managers at lower levels in the organization. Classifying costs by controllability is an important part of assigning cost, responsibility, and evaluating a manager’s cost control performance.
  16. Costs can be classified by relevance by identifying it as a sunk cost or an out-of-pocket cost
  17. Opportunity costs are always relevant to a selection decision.
  18. Product costs are incurred to manufacture a product. Product costs are not expensed as they are incurred. Instead, they are assigned to inventory and do not become expenses until the product is sold. Inventory is reported at cost as an asset on the balance sheet.
  19. Period costs are expensed in the period incurred. They are non-manufacturing costs usually grouped into two broad categories: selling and administrative.
  20. Starting on the left side of this flow chart of costs, we see that costs incurred are categorized as either period costs or product costs. Period costs flow directly to the current year’s income statement as they are expensed in the period incurred. Product costs are first assigned to the inventory account. Later, when the inventory is sold, product costs flow from the inventory account to cost of goods sold on the income statement for the year in which the products are sold.
  21. Here we see examples of costs classified according to three of the means that we have discussed: behavior, traceability, and function.
  22. While our primary focus has been on manufacturing companies, we should realize that the same cost concepts also apply to service companies such as airlines and hotels.
  23. Merchandisers buy goods that are already completed and make them available to customers. Manufacturers buy raw materials and convert the raw materials into completed goods for their customers.
  24. Manufacturers have three major inventory categories: raw materials, goods in process, and finished goods.
  25. Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials.
  26. Inventory is a current asset on the balance sheet. Manufacturers have three major categories of inventory: raw materials, goods in process, and finished goods.
  27. The finished goods inventory of a manufacturer is the equivalent of a merchandiser’s merchandise inventory account. Items in this inventory account are complete and awaiting sale. The major difference is that the manufacturer manufactures the items in the finished goods account, while the merchandiser buys the items in the merchandise inventory account. When items are sold from these inventory accounts, the cost of inventory, whether purchased or manufactured, becomes cost of goods sold on the income statement.
  28. The inventory cost flows are similar for both merchandisers and manufacturers. Beginning inventory plus additions equals goods available for sale. Subtracting ending inventory from goods available for sale results in cost of goods sold.
  29. Direct materials can be separately and readily traced to the individual units of product being manufactured. Direct materials are sufficiently significant in amount to justify the separate tracing.
  30. Direct labor is the effort of employees who actually convert materials into a finished product. Direct labor costs are the wages of direct labor employees. Direct labor costs can be separately and readily traced to the individual units of product being manufactured.
  31. Factory overhead is all manufacturing costs other than direct material and direct labor. Factory overhead costs are indirect manufacturing costs that support the major manufacturing activities. As indirect costs, they cannot be separately and readily traced to the individual units of product.
  32. Direct labor and direct material are called the prime costs of manufacturing. Direct labor and manufacturing overhead are called conversion costs.
  33. Take a minute and answer the next two questions before we proceed.
  34. Goods in process is one of the three manufacturing inventory accounts. Inventory is a current asset on the balance sheet.
  35. Here is your second question.
  36. Product costs are assigned to inventory until the products are sold. Choice b is tempting, but remember that factory overhead is an indirect product cost.
  37. Starting on the left side of this flow chart, we see that material purchases are combined with the materials beginning inventory. Materials are then either used or they remain in inventory. In the center portion of the flow chart, we see the materials being used are combined with labor, overhead, and the goods in process beginning balance. As goods are finished, they are transferred out of the goods in process inventory account into the finished goods inventory account. The cost of the goods finished in the period is called cost of goods manufactured. Finished goods are either sold, called cost of goods sold, or they remain in the finished goods inventory account.
  38. The production activities in the center portion of the preceding flow chart can be summarized in a manufacturing statement. The three product costs are totaled and added to the beginning balance of the goods in process inventory account. Subtracting the ending balance of the goods in process account from this total results in the cost of goods manufactured for the period.
  39. The information for Rocky Mountain Bikes is taken from your textbook.
  40. Here you see the manufacturing statement for Rocky Mountain bikes in a highly summarized form. We will build each of the major parts of the statement starting with materials.
  41. Material purchases for the current year are added to the beginning balance of materials inventory. The beginning balance of materials inventory for the current year is the ending balance of materials inventory from last year. Materials are either used or they remain in inventory. Subtracting the amount of materials on hand in inventory at the end of the year results in the cost of materials used for the current year.
  42. Direct labor costs are the wages of direct labor employees who actually convert materials into a finished bike.
  43. Factory overhead costs are indirect manufacturing costs that support the manufacturing activities. The eight factory overhead items in this example, totaling thirty thousand dollars, are commonly encountered in many manufacturing companies.
  44. Total manufacturing costs for the current period are added to the beginning balance of goods in process. The beginning balance of goods in process for the current year is the ending balance of goods in process from last year.
  45. Subtracting the ending balance of the goods in process account from the total cost of goods in process results in the cost of goods manufactured for the current year. Cost of goods manufactured is cost of goods completed and transferred to finished goods for the current year.
  46. Now that we have mastered some of the basic concepts and principles of managerial accounting, we are ready to put this knowledge to work.