Managerial Accounting Weygandt • Kieso • Kimmel Managerial Accounting Tool for Business Decision Making Third Edition Prepared by Dan R. Ward Suzanne P. Ward University of Louisiana at Lafayette John Wiley & Sons, Inc. © 2005 CHAPTER 1 MANAGERIAL ACCOUNTING Study Objectives Explain the distinguishing features of managerial accounting. Identify the 3 broad functions of management. Define the 3 classes of manufacturing costs. Distinguish between product and period costs. Study Objectives: Continued Explain the difference between a merchandising and a manufacturing income statement. Indicate how cost of goods manufactured is determined. Explain the difference between a merchandising and a manufacturing balance sheet. Identify trends in managerial accounting. MANAGERIAL ACCOUNTING BASICS Definition of Managerial Accounting A field of accounting that provides economic and financial information for managers and other internal users Also called Management Accounting MANAGERIAL ACCOUNTING BASICS Managerial Activities Explain manufacturing and nonmanufacturing costs and how they are reported (Chapter 1). Compute cost of providing a service or manufacturing a product (Chapters 2, 3, and 4). Determine behavior of costs and expenses as activity changes (Chapter 5). MANAGERIAL ACCOUNTING BASICS Managerial Activities: Continued Gather and present relevant data for management decision making (Chapter 6). Evaluate effect of alternative ways to cost inventory (Chapter 7). Determine prices for external and internal transactions (Chapter 8). MANAGERIAL ACCOUNTING BASICS Managerial Activities: Continued Assist in profit planning and formalizing plans in the form of budgets (Chapter 9). Help to control costs by comparing actual results with planned objectives and standard costs (Chapters 10 and 11). Collect and present data for capital expenditure decisions (Chapter 12). MANAGERIAL ACCOUNTING BASICS Distinguishing Features Applies to all types of businesses – service, merchandising, and manufacturing Applies to all forms of businesses – proprietorships, partnerships, and corporations Applies to not-for-profit and profit-oriented companies MANAGERIAL ACCOUNTING BASICS Distinguishing Features: Continued More responsible for strategic cost management. Team includes members from production, marketing, engineering, etc. Aid in making critical decisions. COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING Study Objective 1 Similarities Both deal with economic events of a business. Both require that economic events be quantified and communicated to interested parties. COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING Differences MANAGEMENT FUNCTIONS Study Objective 2 Management’s activities and responsibilities can be classified into the following three broad functions: Planning Directing Controlling MANAGEMENT FUNCTIONS Planning Look ahead Establish objectives such as Maximize short-term profit Commit to environmental protection Key Objective: Add value to the business Value measured by trading price of stock and by potential selling price of the company MANAGEMENT FUNCTIONS Directing Coordinate diverse activities and human resources Implement planned objectives Provide incentives to motivate employees Hire and train employees including executives, managers, and supervisors MANAGEMENT FUNCTIONS Controlling Keep activities on track Determine whether goals are met Decide changes needed to get back on track May use an informal or a formal system of evaluation Good decision making is the outcome of good judgment in planning, directing, and controlling. ORGANIZATIONAL STRUCTURE Organizational Chart Assists in carrying out management’s functions Prepared by most companies Organizational charts show: The interrelationships of activities The delegation of authority The delegation of responsibility A TYPICAL COMPANY’S ORGANIZATIONAL CHART GOOD ETHICS - GOOD BUSINESS Business Ethics Business scandals caused massive investment losses and employee layoffs. Corporate fraud has increased 13 percent in last five years. Employee fraud - 60% of all fraud expense account abuse, theft of assets, etc. Intentional misstatement of financial reports, or financial reporting fraud, - most costly to companies. GOOD ETHICS - GOOD BUSINESS Creating Proper Incentives Monitoring and evaluating employees may produce incentives to act unethically For example, overly ambitious budgets may produce unethical management actions to meet targets Employees may feel that they must succeed no matter what Ineffective and unrealistic controls may result in declining quality of product GOOD ETHICS - GOOD BUSINESS New Legislation – Sarbanes Oxley Act of 2002 Clarifies management’s responsibilities CEO and CFO must certify fairness of financial statements and adequacy of internal control Board of Directors, especially the Audit Committee, must meet certain criteria Penalties for misconduct are substantially increased Codes of Ethics are now required MANAGERIAL COST CONCEPTS Manufacturing Costs Study Objective 3 Manufacturing consists of activities to convert raw materials into finished goods. In contrast, a merchandising firm sells goods in the form in which they were bought. Typical Classification of Manufacturing Costs MANAGERIAL COST CONCEPTS Manufacturing Costs - Materials Direct Materials Raw materials - basic materials used in manufacturing. Raw materials that can be physically and directly associated with the finished product are called direct materials. Examples include Flour in the baking of bread Syrup in the bottling of soft drinks Steel used in making automobiles MANAGERIAL COST CONCEPTS Manufacturing Costs- Materials Indirect Materials Raw materials that cannot be easily associated with the finished product are called indirect materials. Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost Considered part of manufacturing overhead MANAGERIAL COST CONCEPTS Manufacturing Costs - Labor Direct Labor Work of factory employees that can be physically and directly associated with converting raw materials into finished goods Examples include Bottlers at Coca-Cola Bakers at Sara Lee Typesetters at a newspaper MANAGERIAL COST CONCEPTS Manufacturing Costs - Labor Indirect Labor Work of factory workers that have no physical association with the finished product or for which it is impractical to trace to the goods produced Examples include Wages of maintenance workers Supervisors Time-Keepers MANAGERIAL COST CONCEPTS Manufacturing Costs – Manufacturing Overhead Costs that are indirectly associated with manufacturing the product Examples include Indirect materials Indirect labor Depreciation on factory buildings Insurance, taxes, maintenance on factory facilities Basically manufacturing overhead includes all manufacturing costs except direct materials and direct labor. PRODUCT VERSUS PERIOD COSTS Study Objective 4 Product Costs Consist of the direct material cost, the direct labor cost, and the manufacturing overhead cost A necessary and integral part of producing the product Recorded as inventory when incurred Do not become expenses until the finished goods inventory is sold PRODUCT VERSUS PERIOD COSTS Period Costs Matched with revenue of a specific time period and charged to expense as incurred. Non-manufacturing costs Deducted from revenues in period incurred to determine net income Include all Selling expenses General and Administrative expenses FOR RENT PRODUCT VERSUS PERIOD COSTS MANUFACTURING COSTS IN FINANCIAL STATEMENTS Study Objective 5 Income Statement The income statement for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section. MANUFACTURING COSTS IN FINANCIAL STATEMENTS Cost of Goods Sold Components Merchandiser versus Manufacturer MANUFACTURING COSTS IN FINANCIAL STATEMENTS Cost of Goods Sold Section of the Income Statement DETERMINING THE COST OF GOODS MANUFACTURED Study Objective 6 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 year COST OF GOODS MANUFACTURED SCHEDULE BALANCE SHEET - Inventories Study Objective 7 Merchandising Company One category of inventory: Merchandise Inventory Manufacturing Company May have three inventory accounts: Raw Materials Work in Process Finished Goods BALANCE SHEET - Inventories Let’s Review Direct Materials are a: Product Cost Manufacturing Overhead Period Cost a. Yes Yes No b. Yes No No c. Yes Yes Yes d. No No No Let’s Review Direct Materials are a: Product Cost Manufacturing Overhead Period Cost a. Yes Yes No b. Yes No No c. Yes Yes Yes d. No No No MANAGERIAL ACCOUNTING TODAY Study Objective 8 Service Industry Trends U.S economy in general has shifted toward an emphasis on providing services Today over 50 percent of U.S. workers are employed by service companies Trend is expected to continue in future Most of the techniques learned for manufacturing firms are applicable to service companies MANAGERIAL ACCOUNTING TODAY Managerial Accounting Practices Value Chain Refers to all activities associated with providing a product or service. For a manufacturing firm, these include the following: MANAGERIAL ACCOUNTING TODAY Managerial Accounting Practices Technological Change Computerization and automation Enterprise resource planning (ERP) - software systems that manage the value chain In large companies an ERP system might replace as many as 200 individual software packages Computer-integrated manufacturing (CIM) - make products untouched by human hands Internet and business-to-business (B2B) e-commerce MANAGERIAL ACCOUNTING TODAY Managerial Accounting Practices Just-In-Time (JIT) Inventory Methods Inventory system in which goods are manufactured or purchased just in time for use Quality Increased emphasis on product quality because goods are produced only as needed Total Quality Management (TQM) - a philosophy of zero defects Activity-Based Costing (ABC) Allocates overhead based on use of specific activities or functions of the company (number of orders or number of machine set ups) Results in more accurate product costing and scrutiny of all activities in the value chain MANAGERIAL ACCOUNTING TODAY Managerial Accounting Practices Theory of Constraints Used to identify and manage constraints or “bottlenecks” Helps achieve overall goals of the company, particularly profits Balanced Scorecard A performance-measurement approach to evaluate operations in an integrated fashion Uses both financial and non-financial measures Links performance measures to overall company objectives Summary of Study Objectives Explain the distinguishing features of managerial accounting The primary users of reports are internal users such as officers, department heads in the company The internal reports are issued as needed Special-purpose reports Provide information for a particular user for a particular decision Pertain to subunits of the business May be very detailed and extend beyond the double-entry accounting system The reporting standard is the relevance of the information to the decision being made Summary of Study Objectives Identify the three broad functions of management Planning Directing Controlling Define the three classes of manufacturing costs Direct Materials Direct Labor Manufacturing Overhead Distinguish between product and period costs Product costs are an integral part of producing the product also called inventoriable costs do not become expenses until the product is sold. Period costs are identified with a specific time period rather than a product selling and administrative expenses. Summary of Study Objectives Explain the difference between a merchandising and a manufacturing income statement Income statements are similar except for the cost of goods sold section. CGS section shows beginning and ending finished goods inventories and the cost of goods manufactured Indicate how cost of goods manufactured is determined Beginning work-in-process + total manufacturing costs for the period – ending work-in-process = cost of goods manufactured Explain the difference between a merchandising and a manufacturing balance sheet The difference is in the current asset section Manufacturing firm - three inventories: finished goods, work-in-process, and raw materials Merchandising firm - only one inventory account: merchandise inventory Summary of Study Objectives Identify trends in managerial accounting Shift toward the addressing the needs of service companies Improving practices to better meet the needs of managers Managing the value chain Just-in-time inventory (JIT) Enterprise resource planning (ERP) Theory of Constraints Activity based costing (ABC) The balanced scorecard for a comprehensive view of operations Let’s Review Which of the following is not an element of manufacturing overhead? a. Plant manager’s salary b. Sales manager’s salary c. Factory repairman’s wages d. Product inspector’s salary Let’s Review Which of the following is not an element of manufacturing overhead? a. Plant manager’s salary b. Sales manager’s salary c. Factory repairman’s wages d. Product inspector’s salary Appendix Accounting Cycle for a Manufacturing Company Accounting cycle for a manufacturer is the same as for a merchandiser when a periodic inventory system is used. Journalizing and posting transactions are the same with the manufacturer having additional manufacturing inventories and manufacturing cost accounts. Preparation of a trial balance and adjusting entries are also the same for both types of companies. Appendix Accounting Cycle for a Manufacturing Company Changes occur in the use of a work sheet and in preparation of closing entries. Worksheet has an additional set of columns between those for the adjusted trial balance and the income statement; these columns are for the Cost of Goods Manufactured. In closing, a Manufacturing Summary account is used to close all accounts that appear in the cost of good manufactured schedule. The balance of the Manufacturing Summary account is then closed to Income Summary. Closing Entries Closing Entries Closing Entries After posting the summary accounts will show the following: COPYRIGHT Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. 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