Introduction to Managerial Accounting and Cost Concepts

1. Introduction to Managerial Accounting and Cost Concepts

2. Managerial Accounting Basics Definition of Managerial Accounting A field of accounting that provides economic and financial information for managers and other internal users. Also calledManagement Accounting

3. Akuntansi Manajemen (Managerial Accounting) Akuntansi manajemen adalah sistem pengakumulasian, pemrosesan, dan pengkomunikasian yang didesain untuk informasi pengambilan keputusan oleh pemakai internal Akuntansi manajemen dikomunikasikan dengan laporan perusahaan internal dan tidak dibatasi oleh ketentuanyang membatasi akuntansi keuangan Akuntansi manajemen hanya dibatasi oleh manfaat tidaknya informasi yang dihasilkan dan biaya yang dihabiskan untuk menghasilkan informasi tersebut

4. Management Accounting Information • The institute of Management Accountants has defined management accounting as: • A value-adding continuous improvement process of planning, designing, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and supports and creates the cultural values necessary to achieve an organization’s strategic, tactical and operating objectives

5. Management Accounting Information • Management accounting provides both financial information and nonfinancial information • The role of management information supports strategic (planning), operational (operating) and control (performance evaluation) management decision making • In short, management accounting information is pervasive and purposeful

6. Management Accounting Information • Examples of management accounting information include: • The reported expense of an operating department, such as the assembly department of an automobile plant or an electronics company • The costs of producing a product • The cost of delivering a service • The cost of performing an activity or business process – such as creating a customer invoice • The costs of serving a customer

7. Management Accounting Information • Management accounting also produces measures of the economic performance of decentralized operating units, such as: • Business units • Divisions • Departments • These measures help senior managers assess the performance of the company’s decentralized units

8. Management Accounting Information • Management accounting information is a key source of information for decision making, improvement, and control in organizations • Effective management accounting systems can create considerable value to today’s organizations by providing timely and accurate information about the activities required for their success

9. Review Question Managerial accounting: a. Pertains to the entity as a whole and is highly aggregated. b. Places emphasis on special-purpose information. c. Is limited to cost data. d. Is governed by generally accepted accounting principles.

10. Characteristics of Management Accounting Information Timeliness Identify Decision-Making Authority A Means to an End Measures of Efficiency and Effectiveness Oriented Toward Future

11. Managerial accountingprovides informationfor managers of anorganization whodirect and controlits operations. Financial accountingprovides informationto stockholders,creditors and otherswho are outsidethe organization. Managerial Accounting and Financial Accounting

12. Management Functions • Management’s activities and responsibilities can be classified into the following three broad functions: • Planning • Directing • Controlling

13. Work of Management Planning Directing and Motivating Controlling

14. Management Functions Planning Look ahead and 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

15. 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 Produce smooth-running operation

16. 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 formal system of evaluations Good decision making is the outcome of good judgment in planning, directing, and controlling.

17. Questions asked: What do I want to do? How can I do it? Am I getting it done? How well did I do it? Management functions: Planning for the future (Strategic) Planning for the future (Operational) Monitoring and controlling the present Evaluating the past The Three Management Functions

18. Begin Comparing ActualtoPlanned Performance (Controlling) Implementing the Plans(Directing and Motivating) DecisionMaking MeasuringPerformance (Controlling) Planning and Control Cycle Formulating Long-andShort-Term Plans (Planning)

19. Review Question The management of an organization performs several broad functions. They are: a. Planning, directing, and selling. b. Directing, manufacturing, and controlling. c. Planning, manufacturing, and controlling. d. Planning, directing, and controlling.

20. Information about decision-making authority, for decision-making support, and for evaluating and rewarding decision-making performance. Objectives of Managerial Reporting Information useful in assessing both the past performance and future directions of the enterprise and information from external and internal sources. Information useful to help the enterprise achieve its goal, objectives and mission.

21. Decision Making Attention Directing: Compare Actual Results to Expected Scorekeeping: Evaluate Organizational Performance Problem Solving: Assess Possible Courses of Action

22. A Model of the Decision-Making Process

23. Planning for future periods Strategic planning Capital budgeting Annual budgeting Short-range planning Organizing – using resources in the best way to achieve objectives Directing – using daily information (e.g, costs, margins, sales etc) to oversee operations Controlling – comparing actual results against what was planned; feedback in the form of performance reports is quite useful. Uses of Management Accounting Information

24. Organizations • An organization is a group of people joined together in seeking some common goal(s) or objective(s) • Organizations differ in their objectives; business firms seek to generate profits, while not-for-profit organizations do not. • Management of an organization will use strategic planning to help it achieve its objectives • strategic decisions about the products • Not-for-profit organizations will make similar decisions

25. Organizations – Differences & Similarities • Two Major Types of Organizations • Profit-seeking • Corporations • Partnerships • Single proprietorships • Not-for-profit • Governmental organizations • Non-governmental organizations

26. Merchandisers . . . Buy finished goods Sell finished goods Manufacturers . . . Buy raw materials. Produce and sell finished goods MegaLoMart Comparing Merchandising and Manufacturing Activities

27. Managerial Cost Concepts • Manufacturing Costs • 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. • Categories of manufacturing costs include:

28. DirectMaterials DirectLabor ManufacturingOverhead Manufacturing Costs The Product

29. Materials Raw Materials Basic materials used in manufacturing Direct Materials Raw materials that can be physically and directly associated with the finished product

30. Direct Materials Those materials that become an integral part of the product and that can be conveniently traced directly to it. Example:A radio installed in an automobile

31. Indirect Materials • Raw materials that cannot be easily associated with the finished product • Not physically part of the finished product or they are an insignificant part of finished product in terms of cost • Considered part of manufacturing overhead

32. Labor Direct Labor Work of factory employees that can be physically and directly associated with converting raw materials into finished goods Indirect Labor Work of factory employees that has no physical association with the finished product or for which it is impractical to trace to the goods produced

33. Direct Labor Those labor costs that can be easily traced to individual units of product. Example:Wages paid to automobile assembly workers

34. Manufacturing Overhead • Costs that are indirectly associated with manufacturing the product • Includes all manufacturing costs exceptdirect materials and direct labor

35. Wages paid to employees who are not directly involved in production work.Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant. Manufacturing Overhead Manufacturing costs that cannot be traced directly to specific units produced. Examples:Indirect labor and indirect materials

36. PrimeCost ConversionCost Classifications of Costs Manufacturing costs are oftenclassified as follows: DirectMaterial DirectLabor ManufacturingOverhead

37. Nonmanufacturing Costs Marketing and selling costs . . . • Costs necessary to get the order and deliver the product. Administrative costs . . . • All executive, organizational, and clerical costs.

38. Review Question Which of the following is not an element of manufacturing overhead?: a. Sales manager’s salary. b. Plant manager’s salary. c. Factory repairman’s wages. d. Product inspector’s salary.

39. Quick Check  Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.) A. Depreciation on factory forklift trucks. B. Sales commissions. C. The cost of a flight recorder in a Boeing 767. D. The wages of a production shift supervisor.

40. Product Versus Period Costs • Product Costs • A necessary and integral part of producing the product • Recorded as inventory when incurred • Not an expense until the finished goods inventory is sold then cost of goods sold

41. 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 • Includes all selling and administrative expenses

42. Product costs include direct materials, direct labor, and manufacturing overhead. Period costs are not included in product costs. They are expensed on the income statement. Inventory Expense Cost of Good Sold Sale BalanceSheet IncomeStatement IncomeStatement Product Costs Versus Period Costs

43. Product Versus Period Costs

44. Quick Check  Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility.

45. Chapter Review - Brief Exercise Indicate whether each of the following costs of an automobile manufacturer would be classified as direct materials, direct labor, or manufacturing overhead. ______ a. Windshield ______ b. Engine ______ c. Wages of assembly line worker ______ d. Depreciation of factory machinery ______ e. Factory machinery lubricants ______ f. Tires ______ g. Steering wheel ______ h. Salary of painting supervisor DM DM DL MO MO DM DM MO

46. Chapter Review - Brief Exercise Identify whether each of the following costs should be classified as product costs or period costs. ____________ a. Manufacturing overhead ____________ b. Selling expenses ____________ c. Administrative expenses ____________ d. Advertising expense ____________ e. Direct labor ____________ f. Direct material Product Period Period Period Product Product

47. Manufacturing Costs in FinancialStatements Balance Sheet - Inventories • Manufacturing Company • May have three inventories: • Raw Materials • Work in Process • Finished Goods • Merchandising Company • One category of inventory: • Merchandise Inventory

48. Balance Sheet Merchandiser Current assets • Cash • Receivables • Prepaid expenses • Merchandise inventory • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods

49. Materials waiting to be processed. Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Balance Sheet Merchandiser Current assets • Cash • Receivables • Prepaid expenses • Merchandise inventory • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods

50. Balance Sheet - Inventories