Management Accounting
Financial Accounting
• Provides info used primarily by investors,
creditors, and others outside a business
• Example – Balance Sheet & Income
Statement
• Characterized by objectivity, reliability, and
historical nature
Managerial Accounting
• Provides info used primarily by executives,
managers, and employees who work
inside the business
• Internal users need info to plan, direct and
control business operations.
• Example – Budget
• Characterized by relevance and timeliness
Insert Exhibit 1-2
Here
Product Costing
• This is a major focus of the course
• As managers, we want to
I wonder how
much it cost to
know how much the product
make this
pencil?
cost
Product Costs
Products are made up of 3 “kinds” of costs:
Direct Materials
Direct Labor
Manufacturing Overhead
Knowing Cost Is Important…
for companies making tangible products
Materials
$390
Labor
$470
Overhead
$140
Insert Exhibit 1-3
Here
What is the average cost per table?
Average Cost per Unit
Total Product Cost
= Average Cost per Unit
Number of Units Produced
Tabor Example Average Cost Per Unit
$1,000
= $250
4
Costs Can Be Assets or
Expenses
Product
Cost
Period
Cost
Asset
COGS
Expense
Asset or Expense?
• Product Costs are assets
• When a product cost is incurred, is
recorded in the inventory account
• Product costs are expensed when the
product is sold
• All other costs (period costs) are expensed
when incurred
Cost Classifications
Direct (Raw)
Materials
Product
Costs
Direct
Labor
Factory
Overhead
Period
Costs
Selling
Expenses
Administrative
Expenses
Raw Materials
Labor Costs
Wages paid to production workers
i.e. People working on the products
directly
Manufacturing Overhead
Costs that cannon be traced to products and
services directly – INDIRECT COSTS
INDIRECT MATERIALS
INDIRECT LABOR
FACTORY UTILITIES
RENT ON FACTORY
DEPRECIATION ON
MANUFACTUTING ASSETS
Which of the following is classified
as factory overhead?
1.
2.
3.
4.
5.
Salary of maintenance workers
Glue, Nails, Etc.
Electric bill
Rent on factory
All of the above
Manufacturing Costs
Direct Materials:
1. Enters directly into the product.
2. Is significant amount of total product cost.
Direct Labor:
1. Enters directly into manufacturing the product.
2. Is significant amount of total product cost.
Factory Overhead:
Cost other than direct materials cost and direct labor
cost incurred in the manufacturing of product.
General, Selling & Admin Costs
• Expensed in the period in which they are
incurred.
Patillo Manufacturing Company
Transactions
Patillo Manufacturing Company experienced the following transactions:
Event 1
Event 2
Event 3
Event 4
Event 5
Event 6
Event 7
Event 8
Event 9
Event 10
Acquired additional $15,000 cash by issuing common stock.
Paid $2,000 for the materials that were used to make its products. All
products started were completed during the period.
Paid $1,200 for salaries of selling and administrative employees.
Paid $1,300 for wages of production workers.
Paid $2,800 for furniture used in selling and administrative offices.
Recognized depreciation expense on office furniture purchased in Event 5.
The furniture acquired on January 1 had a $400 estimated salvage value
and a four-year useful life. The annual depreciation charge is $600
[($2,800 - $400)/4].
Paid $4,500 for manufacturing equipment.
Recognized depreciation expense on equipment purchased in Event 7.
The equipment acquired on January 1 had a $1,500 estimated salvage value
and a three-year useful life. The annual depreciation charge is $1,000
[($4,500 - $1,500)/3].
Sold inventory to customers for $7,500 cash.
The inventory sold in Event 9 cost $4,000 to make.
What happens if costs are
misclassified?
Marion Manufacturing Company
Marion Manufacturing Company (MMC) had the
following transactions:
1. MMC was started when it acquired $12,000 from
issuing common stock.
2. MMC incurred specifically identifiable product
costs of $8,000.
3. MMC incurred $4,000 of costs to design its
product and plan the manufacturing process.
4. MMC made 1,000 units of product and sold 700 of
the units for $18 each.
Let’s look at two scenarios for MMC.
Marion Manufacturing Company
Scenario 1
Scenario 2
The $4,000 of design
and planning costs are
classified as selling
and general and
administrative.
The $4,000 of design
and planning costs are
classified as product
costs, meaning they
are first accumulated
in the inventory
account and then
expensed when the
goods are sold.
Upstream Costs
• Costs that occur before the manufacturing
process begins.
• Example: Research & Development
Downstream Costs
• Costs that occur after the manufacturing
process is complete
• Examples: Transportation, Advertising,
Sales Commissions, and Bad Debts
Emerging Trends in Managerial
Accounting
Benchmarking
Total Quality
Management
Best Practices
Activity-Based
Management
Value-Added
Assessment
Just-in-Time
Inventory
Total Quality Management
(TQM)
ProblemSolving
Philosophy
to
achieve
Continuous
Improvement
Customer
Satisfaction
Activity-Based Management
and Value-Added Assessment
An organization cannot manage costs. Instead, it
manages the activities that cause costs to be
incurred. Activities represent the measures an
organization takes to accomplish its goals.
Just-in-Time Inventory
Inventory
Holding Costs
NonvalueAdded Activity
Many business have been able to
simultaneously reduce their inventory
holding costs and increase customer
satisfaction by making products available
just in time (JIT) for customer consumption.
End of Chapter One