Intro to Management Accounting
Introduction to Management
Accounting
Chapter 18
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Management Accountability
• Responsibility to stakeholders of the company
– Owners
– Creditors
– Suppliers
– Employees
– Customers
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Objective 1
Distinguish between financial accounting and management accounting
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Management Accounting and Financial Accounting
Primary Users
Financial
• External
• Investors, Creditors,
Government authorities
Management
• Internal
• Managers of the business
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Management Accounting and
Financial Accounting
Purpose of Information
Financial
• Help investors and creditors make investment and credit decisions
Management
• Help managers plan and control business operations
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Management Accounting and
Financial Accounting
Focus and Time Dimension of the Information
Financial
• Relevance and reliability
• Focus on the past
Management
• Relevance
• Focus on future
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Management Accounting and
Financial Accounting
Type of Report
Financial
• Financial statements restricted by GAAP
• Audited by independent CPA’s
Management
• Internal reports restricted by costbenefit analysis
• Not audited by independent CPA’s
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Management Accounting and
Financial Accounting
Scope of Information
• Financial Accounting
• Summary reports primarily on the company as a whole
• On quarterly or annual basis
• Management
Accounting
• Detailed reports on parts of the company
• Often on daily or weekly basis
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Objective 2
Identify trends in the business environment and the role of management accountability
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Today’s Business Trends
• Shift toward a service economy
• Global competition
• Time-based competition
– Advanced information systems
– E-Commerce
– Just-in-Time management
• Total Quality Management
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Objective 3
Classify costs and prepare an income statement for a service company
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Service Company
• Simplest accounting
• All costs are period costs - costs that are incurred and expensed in the same accounting period
• Operating income =
Service revenue – operating expenses
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E18-16
Fido Grooming
Income Statement
For the Month Ended July 31, 2007
Service revenue
Operating expenses:
Wages
Grooming supplies
Building rent
Utilities
Depreciation, equipment
Operating income
$4,800
1,200
1,000
250
100
$15,000
7,350
$7,650
Cost to groom one dog = $7,350/600 dogs = $12.25
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Objective 4
Classify costs and prepare an income statement for a merchandising company
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Merchandising Company
• Purchase inventory from suppliers and resell to customers
• Has both period costs and inventoriable product costs
• Product costs – become a part of the cost of asset, inventory
– Invoice price, freight in
– Reported as an asset until sold
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Merchandising Company –
Income Statement
Sales
- Cost of goods sold
Gross profit
- Operating expenses
Operating income
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Merchandising Company –
Income Statement
Cost of goods sold:
Beginning inventory
In a periodic inventory system, cost of goods sold must be computed
+ Purchases
+ Freight-in
Cost of goods available for sale
- Ending inventory
Cost of goods sold
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E18-18
Kingston Brush Company
Income Statement
For Year Ended December 31, 2009
Service revenue
Cost of goods sold:
Inventory, January 1, 2009
Purchases
Goods available for sale
Inventory, December 31, 2009
$7,000
63,000
$70,000
(5,000)
$125,000
Cost of goods sold
Gross profit
Selling and administrative expenses
Operating income
65,000
$60,000
45,000
$15,000
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E18-18
Unit cost for one brush:
Cost of goods sold
Selling and administrative expenses
Total cost
$110,000 / 5,800 brushes = $18.97
$65,000
45,000
$110,000
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Objective 5
Classify costs and prepare an income statement for a manufacturing company
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Manufacturing Companies
• Use labor, plant, and equipment to convert raw materials into finished products
– Materials inventory
– Work in process inventory
– Finished goods inventory
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Product Costs
• Direct materials - those that become a physical part of a finished product and whose costs are separately and conveniently traceable to the finished product
• Direct labor - those that become a physical part of a finished product and who costs are separately and conveniently traceable to the finished product
• Manufacturing overhead - all other manufacturing costs other than direct materials and direct labor
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Product Costs
• Direct materials
• Direct labor
Direct Costs
• Manufacturing overhead Indirect Costs
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Cost Object
• Anything for which managers want a separate measurement of cost
• Direct cost – can be directly traced to cost object
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Manufacturing Overhead
• Indirect costs related to manufacturing operations
– Generally all manufacturing costs that are not direct costs
– Indirect materials
– Indirect labor
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Manufacturing Companies –
Income Statement
Sales
- Cost of goods sold
Gross profit
- Operating expenses
Operating income
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Manufacturing Company –
Income Statement
Cost of goods sold:
Beginning finished goods inventory
+ Cost of goods manufactured
Cost of goods available for sale
- Ending finished goods inventory
Cost of goods sold
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Manufacturing Company –
Income Statement
Cost of goods manufactured:
Beginning work in process inventory
+ Direct materials used
+ Direct labor
+ Manufacturing overhead
Total manufacturing costs to account for
- Ending work in process inventory
Cost of goods manufactured
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Manufacturing Company –
Income Statement
Direct materials used:
Beginning materials inventory
+ Purchases of direct materials
+ Freight in
Materials available for use
- Ending materials inventory
Direct materials used
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Manufacturing Companies
Product & Period Costs
INCOME STATEMENT BALANCE SHEET
Inventoriable
Product Costs
Materials
Inventory
Finished
Goods
Inventory when sales occur
Sales
-
Cost of
Goods Sold
-
Work in
Process
Inventory
Period
Operating
Costs Expenses
=
Operating Income
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Manufacturing Companies
Inventory Accounts
Materials Inventory
Beginning inventory Materials used
Purchases & freight
Ending inventory
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Manufacturing Companies
Inventory Accounts
Materials used
Work in Process
Inventory
Beginning inventory
Cost of goods manufactured
Direct labor
Manufacturing overhead
Ending inventory
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Manufacturing Companies
Inventory Accounts
Finished Goods
Inventory
Beginning inventory Cost of goods sold
Cost of goods manufactured
Ending inventory
Income Statement
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E18-22
Snyder Company
Statement of Cost of Goods Manufactured
For Year Ended December 31, 2008
Beginning work in process inventory
Direct materials used:
$100,000
Beginning materials inventory
Purchases of direct materials
Materials available for use
Ending materials inventory
Direct labor
Manufacturing overhead (see schedule)
Total manufacturing costs to account for
Ending work in process inventory
Cost of goods manufactured
$50,000
155,000
$205,000
(25,000) 180,000
120,000
70,000
$470,000
(65,000)
$405,000
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E18-22
Schedule of manufacturing overhead costs
Depreciation, plant building and equipment
Insurance on plant
Repairs and maintenance, plant
Indirect labor
Total manufacturing overhead
$15,000
20,000
5,000
30,000
$70,000
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E18-22
2. $405,000 / 3,000 lamps = $135
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Statement of Cost of Goods
Manufactured
• This is a summary of the costs that flow through work in process during the period.
Total manufacturing costs to account for
Work in Process
Inventory
Beginning inventory
Direct materials
Cost of goods manufactured
Direct labor
Manufacturing overhead
Ending inventory
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Objective 6
Use reasonable standards to make ethical judgments
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Ethical Standards
• Institute of Management Accountants
(IMA)
• Standards of Ethical Conduct for
Management Accountants
– Competence
– Confidentiality
– Integrity
– Objectivity
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End of Chapter 18
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