Managerial Accounting Concepts and Principles

1. 0 18 Managerial Accounting Concepts and Principles

2. 0 After studying this chapter, you should be able to: • Describe managerial accounting and the role of managerial accounting in a business. • Describe and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.

3. 0 After studying this chapter, you should be able to: • Describe and illustrate the statement of cost of goods manufactured, income statement, and balance sheet for a manufacturing business. • Describe the uses of managerial accounting information.

4. 0 18-1 Objective 1 Describe managerial accounting and the role of managerial accounting in a business.

5. 0 18-1 The Difference Between Managerial and Financial Accounting Financial accountinginformation is reported in statements that are useful for persons or institutions who are “outside” or external to the organization. Management also uses these financial statements in directing current operations and planning future operations.

6. 0 18-1 Managerial accounting information is provided to meet the specific needs of a company’s management, such as historical data and subjective estimates about future decisions.

7. 0 18-1 Example of Users Financial Accounting Managerial Accounting Users of Accounting Information • Management • Shareholders • Creditors • Government Agencies • General Public • Management 7

8. 0 18-1 Financial Accounting and Managerial Accounting 8

9. 0 18-1 Partial Organizational Chart for Callaway Golf Company 9

10. 0 18-1 10

11. 0 18-1 Planning Planning is used by management to develop the organization’s objectives (goals) and to translate these objectives into courses of action.

12. 0 18-1 Strategic planning is developing long-range courses of action to achieve goals. Long-range courses of action, called strategies, can often involve periods ranging from five to ten years.

13. 0 18-1 Directing Directing is the process by which managers, given their assigned level of responsibilities, run day-to-day operations.

14. 0 18-1 Controlling Controlling,sometimes calledmanagement by exception,consists of monitoring the operating results of implemented plans and comparing the actual results with the expected results.

15. 0 18-1 Comparing actual results with expected results (feedback) allows management to isolate significant departures from plans for further investigation and possible remedial action.

16. 0 18-1 Improving Continuous process improvement is the philosophy of continually improving employees, business processes, and products.

17. Example Exercise 18-1 0 18-1 Three aspects of the management process are listed below. Match each phase to the appropriate description. Phase of management process Description ___Planning a. Monitoring the operating ___Controlling results of implemented plans ___Continuous and comparing the actual Improvement results with expected results. (continued) 17

18. 0 18-1 Example Exercise 18-1 (continued) Phase of management process Description ___Planning b. Rejects solving individual ___Controlling problems with temporary ___Continuous solutions that fail to address Improvement the root cause of the problem. c. Used by management to develop the company’s objectives. 18

19. Follow My Example 18-1 0 18-1 Aspect of management process ___Planning ___Controlling ___Continuous Improvement c a b 19 For Practice: PE 18-1A, PE 18-1B

20. 0 18-2 Objective 2 Describe and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.

21. 0 18-2 Direct and Indirect Costs Costs are often classified in terms of how they relate to an object or segment of operations, called a cost object. It may be a product, a sales territory, a department, or some activity. Costs are identified with cost objects as eitherdirect costs or indirect costs.

22. 0 18-2 22

23. 0 18-2 Direct Materials Cost The cost of any material that is an integral part of the final product is classified as a direct materials cost.

24. 0 18-2 Direct Labor Cost The wages of each employee who is directly involved in converting materials into the final product are classified as direct labor cost.

25. 0 18-2 Factory Overhead Cost Costs, other than direct materials cost and direct labor cost, that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes also called manufacturing overheador factory burden).

26. 0 18-2 Examples of Factory Overhead Cost • Heating and lighting the factory • Repairing and maintaining factory equipment • Property taxes • Insurance • Depreciation of factory plant and equipment

27. Example Exercise 18-2 0 18-2 Identify the following costs as (a) direct materials, (b) direct labor, or (c) factory overhead for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Coolants for machines that sew baseball gloves • _______________ Wages of assembly line employees • _______________ Ink used to print a player’s autograph on the baseball glove 27

28. Follow My Example 18-2 0 18-2 Identify the following costs as (a) direct materials, (b) direct labor, or (c) factory overhead for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Coolants for machines that sew baseball gloves • _______________ Wages of assembly line employees • _______________ Ink used to print a player’s autograph on the baseball glove (a) Direct materials (c) Factory overhead (b) Direct labor (c) Factory overhead Left click mouse for answers. 28 For Practice: PE 18-2A, PE 18-2B

29. Direct Materials Prime Costs Direct Labor Conversion Costs Factory Overhead 0 18-2 Prime Costs and Conversion Costs 29

30. 0 18-2 30

31. Example Exercise 18-3 0 18-2 Identify the following costs as a (a) prime cost, (b) conversion cost, or (c) both for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Coolants for machines that sew baseball gloves • _______________ Wages of assembly line employees • _______________ Ink used to print a player’s autograph on the baseball glove 31

32. Follow My Example 18-3 0 18-2 Identify the following costs as a (a) prime cost, (b) conversion cost, or (c) both for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Coolants for machines that sew baseball gloves • _______________ Wages of assembly line employees • _______________ Ink used to print a player’s autograph on the baseball glove (a) Prime cost (b) Conversion cost (c) Both (b) Conversion cost Left click mouse for answers. 32 For Practice: PE 18-3A, PE 18-3B

33. 0 18-2 Product Costs Product costs consist of the three elements of manufacturing cost: direct materials, direct labor, and factory overhead.

34. 0 18-2 The cost of materials that are an integral part of the product. Direct Materials The cost of labor directly involved in converting material into the product. Product Costs Direct Labor Manufacturing costs other than direct materials and direct labor. Factory Overhead 34

35. 0 18-2 Period Costs Period costs are generally classified into two categories: Selling expenses are incurred in marketing the product and delivering the sold product to the customer. Administrative expenses are incurred in the administration of the business.

36. 0 18-2 36 (Continued)

37. 0 18-2 37 (Concluded)

38. 0 18-2 Product Costs and Period Costs 38

39. Example Exercise 18-4 0 18-2 Identify the following costs as a (a) product cost, or (b) period cost for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Cost of endorsement from a • professional baseball player • _______________ Office supplies used at the company • headquarters • _______________ Ink used to print a player’s autograph on the baseball glove 39

40. Follow My Example 18-4 0 18-2 Identify the following costs as a (a) product cost, or (b) period cost for a baseball glove manufacturer. • _______________ Leather used to make a baseball glove • _______________ Cost of endorsement from a • professional baseball player • _______________ Office supplies used at the company • headquarters • _______________ Ink used to print a player’s autograph on the baseball glove (a) Product cost (b) Period cost (b) Period cost (a) Product cost 40 Left click the mouse to reveal answers. For Practice: PE 18-4A, PE 18-4B

41. 0 18-3 Objective 3 Describe and illustrate the statement of cost of goods manufactured, income statement, and balance sheet for a manufacturing business.

42. 0 18-3 A Manufacturing Firm’s Inventories Materials inventory: • Sometimes called raw materials inventory • Consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process

43. 0 18-3 Work in process inventory: • Consists of the direct materials costs, the direct labor costs, and the factory overhead costs that have entered the manufacturing process but are associated with products that have not been completed.

44. 0 18-3 Finished goods inventory: • Consists of completed(or finished) products that have not been sold. 44

45. 0 18-3 Balance Sheet Presentation of Inventory in Manufacturing and Merchandising Companies 45

46. 0 18-3 Flow of Manufacturing Costs 46

47. to total manu- facturing cost 0 18-3 Determining the Cost of Goods Manufactured STEP 1: Materials inventory, January 1, 2008 $ 65,000 Add: Materials purchased during December 100,000 Cost of materials available for use $165,000 Less: Materials inventory, Dec. 31, 2008 35,000 Cost of materials placed in production $130,000 47

48. 0 18-3 Determining the Cost of Goods Manufactured STEP 2: Cost of materials placed in production $130,000 from Step 1 48

49. to cost of goods manufactured section 0 18-3 Determining the Cost of Goods Manufactured STEP 2: Cost of materials used during the year $130,000 Direct labor 110,000 Factory overhead 44,000 Total manufacturing costs added $284,000 49

50. from Step 2 0 18-3 Determining the Cost of Goods Manufactured STEP 3: Work in process inventory, Jan. 1, 2008 $ 30,000 Add: total manufacturing costs added 284,000 50