Introduction to Managerial Accounting Module 4 Managerial Accounting Concepts Created by M. Mari Fall 2007-1
Purpose of Managerial Accounting • Providing useful information to decision makers • They do this by collecting, managing, and reporting information in demand by their users. • Much of managerial accounting involves gathering information about costs for planning and control decisions
Managerial Characteristics • Provides estimates of future operations • Used by mgmt in conducting daily operations, planning, and developing strategies
Management Accountant in the Organization • Individual reporting units in an organization can be viewed as having either • Line responsibilities • One directly involved in the basic objectives of the organization • Such as production and distribution • Staff responsibilities • Is one that provides services, assistance, and advice to the departments with line or other staff responsibilities • Has no direct authority over a line department • Controller is such an example
Purpose of Managerial Accounting • Planning • Is the process of setting goals and making plans to achieve them • Strategic planning – developing long range courses of action to achieve goals • Operational planning – develop short-term courses of action to manage the day to day operations of a business
Purpose of Managerial Accounting • Directing • Is the process by which managers, given their assigned level of responsibilities, run day-to-day operations.
Purpose of Managerial Accounting • Controlling • Is the process of monitoring planning decisions and evaluating an organization’s activities and employees. • It includes the measurement and evaluation of actions, processes, and outcomes.
Purpose of Managerial Accounting • Improving • Feedback is used by managers to support continuous process improvement. • CPI is the philosophy of continually improving employees, business processes, and products.
Purpose of Managerial Accounting • Decision making • is inherent in each of the four management processes described.
Types of Cost Classification • Cost object – is a product, process, department, or customer to which costs are assigned.
Types of Cost Classification • Direct cost – traceable to a cost object • Material • Labor • Indirect cost – are incurred for the benefit of more than one cost object • Maintenance • Utilities
Materials • Direct – • cost of materials that are an integral part of the product • Indirect – • Cost of materials that are not a significant portion of the total product cost
Labor • Direct • Cost of wages of employees who are directly involved in the converting materials into the manufactured product • Indirect • Labor that do not enter directly into the manufacture of a product
Factory Overhead • Costs other than direct materials cost and direct labor costs • Manufacturing overhead • Factory burden • Depreciation • utilities
Manufacturing Formulas: • Prime Costs = Direct Material + Direct Labor • Conversion Costs = Direct Labor + Factory Overhead
Example • Example: Suppose that direct materials are $5,000, direct labor is $4,000 and factory overhead is $3,000, what are prime costs and conversion costs? • Prime costs = direct material + direct labor • = $5,000 + 4,000 • = $9,000 • Conversion costs = direct labor + factory overhead • = $4,000 + $3,000 • = $7,000
Example • Example: Suppose the direct materials are $3,000, prime costs are $5,000, conversion costs are $9,000, and factory overhead is $7,000. What are direct labor costs? • Prime costs = Direct materials + Direct Labor • $5,000 = $3,000 + DL • $2,000 = DL • Conversion costs = Direct labor + Factory overhead • $9,000 = $2,000 + FO • $7,000 = FO
Product costs Direct materials, direct labor, and factory overhead Associated with the production of the product Period costs Refer to expenditures identified more with a time period than with finished products. Selling and administrative expenses Costs
Inventory Accounts • Materials inventory • Refers to the goods a company acquires to use in making products • Direct and indirect material costs • Asset account • Work in process inventory • Consists of products in the process of being manufactured but not yet complete. • Consists of direct materials, direct labor and factory overhead costs • Finished goods inventory • Consists of completed products ready for sale. • Contains all of the costs incurred to manufacture the completed product.
Cost of Goods Sold • Beginning finished goods inventory • + cost of goods manufactured • Goods available for sale • Less Ending finished goods inventory • Cost of goods sold