Managerial Accounting - 7.1 Introduction to Management Accounting Chapter 19

Managerial Accounting - 7.1

Introduction toManagement Accounting

Chapter 19


Dell Computer

Dell’s first quarter 1997 net income soared to $198 million, more than double the income in the first quarter of 1996.

How did Michael Dell turn his company from a $40 million loss in 1994 to this net income?


Dell Computer

Michael Dell knew that cost control would drive the computer business.

Why? Most customers want a good price more

than a specific brand name. Dell executives also had to market and

distribute the computers.


Dell Computer

Accounting information helps executives such as Dell make business decisions.


Dell Computer

The accounting system provides managers with cost and profit information broken down by:

– Type of product– Marketing strategy– Geographic business units


Chapter Objectives

1 Distinguish between financial accounting and management accounting, and use management accounting information for decision making.

2 Describe the value chain and classify costs by value chain functions.


Chapter Objectives

3 Distinguish direct costs from indirect costs.4 Distinguish among full product costs,

inventoriable product costs and period costs.

5 Prepare the financial statements of a manufacturing company.


Chapter Objectives

6 Identify major trends in the business environment and use cost-benefit analysis to make business decisions.

7 Use reasonable standards to make ethical judgments.


The Functions of Management

Planning - choosing goals and deciding how to achieve those goals.

Controlling - taking action to implement the plans and then evaluating results.


The Functions of Management

Budget - a tool that helps management implement plans.


Objective 1

Distinguish between financial accounting and management

accounting, and use management accounting information for decision

making.


Primary Users -Financial Accounting

– Investors– Creditors– Government authorities (IRS, SEC, etc.) Financial accounting reports information to

outsiders based on past performance.


Primary Users -Management Accounting

– Internal managers of the business Management accounting presents

information for insiders to use in planning the future of the business.


Focus

An important characteristic of management accounting information is relevance.

Characteristics of financial accounting information include reliability and objectivity.


Reports and Scopeof Information

Management accounting has no GAAP-type standards.

Managers tailor the company’s management accounting system to provide detailed reports on parts of the company.


Reports and Scopeof Information

Financial accounting is restricted by GAAP. Reports present summarized information on

the company as a whole. These reports are usually on a quarterly or

annual basis.


Behavioral Implications

Management accounting concern is about how reports will affect the behavior of employees.

Financial accounting concern is about adequacy of disclosure.


Management’s Use of Accounting Information

– Three purposes:1 To determine the cost of products and

services.2 To plan and control business operations.3 To report the company’s financial position

and results of operations to external parties.


Manufacturing Firms

A manufacturing business uses labor, plant and equipment to convert materials into new finish products.

Manufacturers have three kinds of inventory:1 Materials inventory2 Work in process inventory3 Finished goods inventory


Manufacturing Firms

Materials inventory - materials for use in the manufacturing process.

For example, a glass container factory’s raw material inventory includes sand, soda ash and limestone.


Manufacturing Firms

Work in process inventory - goods that are partially completed.

Finished goods inventory - completed goods that have not yet been sold.

Finished goods are what the manufacturer sells to a merchandising business, another manufacturer or the ultimate consumer.


Objective 2

Describe the value chain and classify costs by value chain

functions.


Value Chain

Research and development (R&D) - conducted to determine what new or improved products are to be introduced to the market.

Design - the detailed engineering of products and services, or the process for producing them.


Value Chain

Production of products and services or purchases of merchandise inventory - the use of resources to produce the product or service or to purchase merchandise inventory.

Marketing - the promotion of the product or service.


Value Chain

Distribution - the delivery of the product or service to the customer.

Customer service - the support provided for customers after the sale.


Value Chain

Upstream costs (research and development) occur before manufacturing.

Downstream costs (marketing and distribution) occur after manufacturing.


Objective 3

Distinguish direct costs

from indirect costs.


Cost Objects, Direct Costsand Indirect Costs

Cost objects are anything for which a separate measurement of costs is desired.

Cost drivers are any factors that affect cost.



Cost objects may include...– individual products (laptop computers,

desktop models).– alternative marketing strategies (telephone

sales, sales to retailers).– geographic segments of the business (U.S.,

Europe).– departments (personnel, accounting).



Direct costs are those costs that can be specifically traced to the cost object.

Indirect costs are costs that cannot be specifically traced to the cost object.


Objective 4

Distinguish among full product costs, inventoriable product

costs and period costs.


Product Costs...

– are the costs to produce (or purchase) tangible products intended for sale.

There are two types of product costs:1 Full product costs2 Inventoriable product costs


Product Costs

Full product costs include all resources used from designing a product to delivering it to a customer.

Full product costs are the costs of all resources used throughout the value chain.


Inventoriable Product Costs Versus Period Costs

Inventoriable product costs are used for external reporting.

They do not include costs from all elements of the value chain.

They are narrower in scope than full product costs.

Inventoriable product costs must conform to GAAP.



For external reporting, merchandisers’ inventoriable product costs include only costs that are incurred in the purchase of goods.

These costs are included in the third element of the value chain.

Costs incurred in other elements of the value chain are period costs.



Inventoriable costs are an asset. They become an expense when the items

are sold. Period costs flow as expenses directly to

the income statement.



For external reporting, manufacturer’s inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process.

Inventoriable product costs are incurred only in the third element of the value chain.

Costs incurred in other elements of the value chain are period costs.


Major Categories ofInventoriable Product Costs

– Direct materials– Direct labor– Manufacturing overhead



Direct materials must meet two requirements:

They must become a physical part of the finished product.

Their costs must be separately and conveniently traced to the finished product.



Direct labor is the compensation of employees who physically convert materials into the company’s products.



Manufacturing overhead includes all manufacturing costs other than direct materials and direct labor.

– Indirect materials– Indirect labor– Factory utilities, rent, insurance– Depreciation


Manufacturing Overhead Includes:– Indirect materials. These cannot be conveniently or economically

traced to a particular finished product. Indirect materials are part of the manufacturing

overhead cost.– Glue, nails– Thread, buttons– Bolts, squirt of oil


– Indirect labor. This is a cost difficult to trace to

a specific product.– Forklift operators– Janitors– Plant managers– Supervisors– Machine helpers

Manufacturing Overhead Includes:


Prime Cost andConversion Costs

Prime costs are the direct costs incurred in the manufacturing process (direct materials plus direct labor).

Conversion costs are the costs of converting direct materials into finished products (direct labor plus manufacturing overhead).


Objective 5

Prepare financial statements of a manufacturing company.


Financial Statements forService Companies

There is no inventory and thus no inventoriable costs.

The income statement does not include cost of goods sold.

Revenues - Expenses = Operating income


Financial Statements for Merchandising Companies

A merchandising company buys goods that are ready for immediate resale.

Inventoriable costs are for the purchase of these goods plus freight-in.



Beginning inventory+ Purchases and Freight-in= Cost of goods available for sale – Ending inventory= Cost of goods sold



When sales occur, Inventory decreases and Cost of Goods Sold increases.

On the income statement, cost of goods sold is deducted from sales revenue to obtain the gross margin.


Financial Statements for Manufacturing Companies

Manufacturing firms have the most complicated accounting with three types of inventory accounts.

1 Materials2 Work in process3 Finished goods



Materials inventory is the cost of materials on hand intended for use in manufacturing.

Work in process inventory is the cost of goods that are in the manufacturing process but not yet complete.

Finish goods inventory is the cost of the completed goods that are not yet sold.



Hickory, Inc., is a small furniture manufacturing company.

Beginning and ending work in process inventories were $20,000 and $18,000.

Direct materials used were $70,000. Direct labor was $100,000. Manufacturing overhead incurred was

$150,000.



What is the cost of goods manufactured? Beginning work in process $ 20,000+ Direct labor $100,000+ Direct materials 70,000+ Mfg. Overhead 150,000 320,000– Ending work in process 18,000= Cost of goods manufactured $ 322,000



Hickory, Inc.’s, beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.



How much is the cost of goods sold? Beg. finished goods inventory $

60,000+ Cost of goods manufactured 322,000= Cost of goods available for sale $ 382,000– Ending finished goods 55,000= Cost of goods sold $327,000



Hickory, Inc., had sales of $627,000 for the period.

How much is the gross margin? Sales $627,000– Cost of goods sold 327,000 = Gross margin $300,000



Hickory, Inc., had operating expenses as follows:

Sales salaries and commissions $ 80,000 Delivery expense 10,000 Administrative expenses 60,000 Total $150,000 What is Hickory’s operating income?



Gross margin $300,000– Operating expenses 150,000= Operating income $150,000


Flow of Costs through a Manufacture’s Accounts

Beginning direct material inventory+ Purchases= Direct materials available for use– Ending inventory= Direct materials used



Work in Material Process

Beg. Inv. 10 40 used Beg. Inv. 80

Purchases 50 Material 40

End. Inv. 20 Direct Lab. 90

Overhead 90 200 finished

End. Inv. 100



Finished Goods Inventory Cost of Goods Sold

Beg. Inv. 50

Finished 200 210 Sold 210

End. Inv. 40


Objective 6

Identify major trends in the business environment and use cost-benefit analysis to make

business decisions.


Just-in-Time

JIT philosophy means that the company schedules production just in time to satisfy needs.

Materials are purchased and finished goods are completed only as needed to satisfy customer demand.


Just-in-Time

Firms adopting JIT report sharp reductions in inventory.

Speeding up of the production process reduces throughput time.

Throughput time is the time between buying raw materials and selling the finished products.


Quality

The goal of total quality management (TQM) is to please customers by providing them with superior products and services.

Each business function examines its own activities and works to improve by setting higher and higher goals.


Quality

TQM emphasizes educating, training and cross-training employees to do multiple tasks.

Quality improvement programs cost money today.

The benefits usually do not occur until later.


Quality

Total Benefits Total Cost Initial benefits

and costs $170 million $200 million Additional expected

benefits 68 million Total $238 million $200 million


Objective 6

Use reasonable standards to make ethical judgments.


Professional Ethics for Management Accountants

In many situations the ethical path is not so clear.

The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.



These standards require management accountants to:

– maintain their professional competence.– preserve the confidentially of the

information they handle.– act with integrity and objectivity.



Management accountants have an obligation to the organizations they serve, their profession, the public and themselves to maintain the highest standards of ethical conduct.

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Managerial Accounting - 7.1 Introduction to Management Accounting Chapter 19