Managerial Accounting
Dr. Baldwin
University of Arkansas – Fort Smith
Fall 2010
CHAPTER 14
Managerial Accounting Concepts &
Principles
C1
Managerial & Financial Accounting
___________ accounting provides
financial and non-financial information
for managers of an organization and
other internal decision makers
_________ accounting
provides general purpose
financial information to
those who are outside the
organization.
Activities of a Managerial Accountant
• Determining costs of products
–
–
–
–
Predicting Future Costs
Product Pricing
Profitability Analysis
Make or Buy Decisions
• Planning
– Strategic Plans – long term
– Budgeting - Short Terms Plans
• Controlling costs
• Applying Cost-Volume-Profit techniques
• Standard costing and variance analysis
C1
Nature of Managerial Accounting
Financial Accounting
Managerial Accounting
Investors, creditors and
other external users
Managers, employees and
other internal users
2. Purpose of
information
Making investment, credit
Planning and
and other decisions
control decisions
3. Flexibility
of practice
Structured and often
Relatively flexible
controlled by GAAP
(no GAAP)
4. Timeliness of
information
Often available only
Available quickly without
after audit is complete
need to wait for audit
Historical information
with some predictions
Many projections
and estimates
Emphasis on
Projects, processes and
whole organization
segments of an organization
Monetary
Monetary and
information
nonmonetary information
1. Users and
decision makers
5. Time dimension
6. Focus of
information
7. Nature of
information
Internal Reporting
• Management functions include the following:
–
–
–
–
Planning – set goals, budgets
Executing – carrying out plans
Reviewing – monitoring progress towards goals.
Reporting – to outside parties
• Management accountants provide information to
facilitate these processes.
Goal of Lean Business?
Provide high
product at low
.
Implementing a lean business model allows
companies to focus on their core
competencies (what they do best) which will
help them achieve these two goals.
C2
Lean Business Model
Customer
Orientation
Global
Economy
Lean
Business
Model
Quality while
eliminating
Waste
Satisfy the
Customer
Positive
Return
Continuous Improvement
• The following ideas have emerged
to deal with increasing competition
and the need to continually
improve business practices.
– Just-in-time Operations
– Total Quality Management
– Activity-based Management
(and costing)
Just-in-Time…
• JIT involves the reduction of inventories
and the purchase and production of
merchandise only when needed. (Demand –
pull system)
• Operations become much
more _________ and waste
is virtually eliminated.
• Quality of the products
typically improves as well.
Total Quality Management
• In an effort to drive down the cost of
poor quality, firms have decided to build
quality into their products.
– They have been able to reduce total costs
and improve their products at the same time.
• This same approach can be applied
to all business functions and settings.
Activity Based Management
• This approach requires that management identify
value-added and non-value-added activities.
• The goal is to reduce or eliminate non-valueadded costs and activities.
• In doing so, the company becomes more
efficient and can devote more time and energy
to value-added activities.
Understanding Costs
• Common Questions to consider:
–
–
–
–
What costs are incurred in making our product?
How do these costs behave?
What factors affect these costs?
How can we control costs, without our quality
suffering?
What Next?
• Once we understand our costs, we can use
that information to determine
–
–
–
–
–
Budgets
Setting prices
Value of inventory
Performance evaluation
What products to make
C3
Classification of Costs
Many ways to classify costs in order to
understand them…
• Direct versus ______ costs
• Variable versus _____ costs
• Product versus _____ costs
• Controllable versus ___________ costs.
• ______ versus out-of-pocket costs versus
___________ costs.
Classification by Behavior
In planning, we must understand how costs behave. For
example, do costs change as production activity
changes or do they stay the same?
• Variable cost – costs that ______ as production
activity increases (direct materials, direct labor)
• Fixed cost – costs that ____________ over a
range of activity levels (depreciation, rent)
• Mixed cost – costs that have ____ a fixed and
variable component
Classification by Traceability
• We need to be able to associate costs with
particular cost objects (units of product or
department).
• Costs can either be considered:
– ____ costs can be easily traced to an object (some
materials or labor).
– ______ costs are allocated to objects because they
cannot be easily traced (plant depreciation, rent of
equipment).
Classification by Relevance
• ______Costs – already incurred and can not be
avoided or changed
– always irrelevant to short term decision analysis
• Out-of-pocket costs – require future outlay of cash
– possibly relevant to short term decision making
• ____________costs – benefit or revenue lost when
choosing one alternative over another
– relevant to short term decision analysis
C4
Classification by Function
Product costs
• include all costs associated with making or
buying a product for resale (COGS)
– Direct Materials (DM)
– Direct Labor (DL)
– Manufacturing or Factory Overhead (FOH)
• Costs attach to _________ and are expensed
only when items are _____.
Classification by Function
Period Costs
• Selling Costs
– Costs incurred to obtain customer orders and to
deliver finished goods to customers
• General & Administrative Expenses
– Non-manufacturing costs of staff support and administrative
functions – accounting, data processing, personnel, research
and development.
• These costs _____attach to inventory.
• They are expensed in the ________ in which they are
incurred or used up.
– Advertising, insurance, interest etc.
Manufacturing Costs
Three categories of product costs for
manufacturing companies:
• Direct ________
– the cost of specific parts or materials that can be
directly traced to a product (raw materials)
• Direct ________
– the labor costs that can be directly traced to
individual units or batches of products
• _________  
Manufacturing Costs…
Manufacturing overhead costs: all other costs of
production which cannot be directly traced to
individual units or batches of products
• Indirect _______ – supervisory salaries
• Indirect _______ – grease,
nails, etc.
• Other – depreciation,
insurance,
maintenance
Other Cost Terminology
prime costs versus conversion costs
• ________ costs include the direct costs of production.
– Material and Labor
• ________ costs include
– Labor and Overhead.
• Obviously these categories are not mutually exclusive.
Mfg. Cost Flow & Classifications
Costs
Product Costs
Materials
Purchases
Direct
Labor
Factory
Overhead
Period Costs
Selling and
Administrative
Balance Sheet
Raw
Materials
Inventory
Work in
Process
Inventory
C5
P1
Period costs flow
directly to the
income statement
Income Statement
Finished
Goods
Inventory
Cost of
Goods Sold
Selling and
Administrative
P2
Cost of Materials Used…
• Some of the key relationships need to be
defined.
• Cost of Materials Used =
– Beg RM inventory + Materials purchased during the
period – End RM inventory
• Manufacturing Costs Incurred =
– Direct materials used + direct labor for the period +
Overhead Applied to products
• NOTE: all three types of product costs here!
Cost of Goods Manufactured
• Cost of Goods ____________ =
– Beg WIP inventory + Manufacturing Costs Incurred
– End WIP inventory
• Cost of Goods ____________ =
– beg FG inventory
– + cost of goods manufactured
– - ending FG inventory
Flow of Costs in Perpetual Inventory Accounts
Materials
Materials
Purchased
Work in Process
DM
DM
IM
DL
COGM
Finished Goods
COGM
SOLD
FOHA
Cost of Goods Sold
Wages Payable
Total
Wages
Factory Overhead
DL
IM
IL
IL
SOLD
FOHA
Based on
predetermined
overhead rate
OFOH
Summary of cost flows
FOHA = Factory Overhead Applied
COGM = Cost of Goods Manf.
P2
Manufacturing Statement
Let’s take a look at
Rocky Mountain Bikes’
Manufacturing Statement.
P2
Manufacturing Statement
Exh.
18-16
ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production
$
Direct labor
Total factory overhead costs
85,500
60,000
30,000
Total manufacturing costs for the period
Add: Beginning goods in process inventory
$
175,500
2,500
Total cost of goods in process
Deduct: Ending goods in process inventory
$
178,000
7,500
Cost of goods manufactured
$
170,500
P2
Computation of Cost of Direct Material Used
Beginning raw materials inventory
Add: Purchases of raw materials
$
8,000
86,500
Cost of raw materials available for use
Deduct: Ending raw materials inventory
$ 94,500
9,000
ROCKY
MOUNTAIN
BIKES
Cost of direct materials
used
in production
$ 85,500
Exh.
18-16
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production
$
Direct labor
Total factory overhead costs
85,500
60,000
30,000
Total manufacturing costs for the period
Add: Beginning goods in process inventory
$
175,500
2,500
Total cost of goods in process
Deduct: Ending goods in process inventory
$
178,000
7,500
Cost of goods manufactured
$
170,500
P2
Manufacturing Statement
Exh.
18-16
Include all direct labor
costs
incurred
during
the
ROCKY
MOUNTAIN
BIKES
current period.
Manufacturing
Statement
For Year Ended December 31, 2008
Direct materials used in production
$
Direct labor
Total factory overhead costs
85,500
60,000
30,000
Total manufacturing costs for the period
Add: Beginning goods in process inventory
$
175,500
2,500
Total cost of goods in process
Deduct: Ending goods in process inventory
$
178,000
7,500
Cost of goods manufactured
$
170,500
P2
Computation of Total Manufacturing Overhead
Manufacturing Statement
Indirect labor
$
9,000
Factory supervision
6,000
Factory utilities
2,600
Property taxes, factory building
1,900
Exh.
18-16
Factory supplies usedROCKY MOUNTAIN BIKES 600
Factory insurance expired
1,100
Manufacturing Statement
Depreciation, building and equipment
5,300
For Year Ended December 31, 2008
Other factory overhead
3,500
Total factory
overhead
Direct
materials
usedcosts
in production
$
30,000
$
Direct labor
Total factory overhead costs
85,500
60,000
30,000
Total manufacturing costs for the period
Add: Beginning goods in process inventory
$
175,500
2,500
Total cost of goods in process
Deduct: Ending goods in process inventory
$
178,000
7,500
Cost of goods manufactured
$
170,500
P2
Manufacturing Statement
Exh.
18-16
Beginning work in
process inventory is
ROCKY MOUNTAIN BIKES
carried over from the
Manufacturing Statement
prior period.
For Year Ended December 31, 2008
Direct materials used in production
$
Direct labor
Total factory overhead costs
85,500
60,000
30,000
Total manufacturing costs for the period
Add: Beginning goods in process inventory
$
175,500
2,500
Total cost of goods in process
Deduct: Ending goods in process inventory
$
178,000
7,500
Cost of goods manufactured
$
170,500
P2
Manufacturing Statement
Exh.
18-16
Ending work in process inventory
contains
the cost ofBIKES
unfinished goods,
ROCKY MOUNTAIN
and
is reportedStatement
in the current assets
Manufacturing
section
of the balance
sheet.
For Year
Ended December
31, 2008
Direct materials used in production
$
Direct labor
Total factory overhead costs
85,500
60,000
30,000
Total manufacturing costs for the period
Add: Beginning goods in process inventory
$
175,500
2,500
Total cost of goods in process
Deduct: Ending goods in process inventory
$
178,000
7,500
Cost of goods manufactured
$
170,500