Chapter 18

Slide 1:Chapter 18

Managerial Accounting Concepts and Principles Previous chapters focused on the financial accounting system, whose main purpose is to prepare general-purpose financial statements. However, this information is incomplete for internal decision makers who manage organizations. This chapter discusses the purpose of managerial accounting, cost concepts, and reporting of manufacturing activities. We also look at how these concepts help managers gather, organize, and use this information. Previous chapters focused on the financial accounting system, whose main purpose is to prepare general-purpose financial statements. However, this information is incomplete for internal decision makers who manage organizations. This chapter discusses the purpose of managerial accounting, cost concepts, and reporting of manufacturing activities. We also look at how these concepts help managers gather, organize, and use this information.

Slide 2:Conceptual Learning Objectives

C1: Explain the purpose and nature of managerial accounting C2: Describe the lean business model C3: Describe accounting concepts useful in classifying costs C4: Define product and period costs and explain how they impact financial statements C5: Explain how the balance sheets for manufacturing and merchandising companies differ C6: Explain manufacturing activities and the flow of manufacturing costs. In this chapter, you will learn the following conceptual objectives: C1: Explain the purpose and nature of managerial accounting C2: Describe the lean business model C3: Describe accounting concepts useful in classifying costs C4: Define product and period costs and explain how they impact financial statements C5: Explain how the balance sheets for manufacturing and merchandising companies differ C6: Explain manufacturing activities and the flow of manufacturing costs. In this chapter, you will learn the following conceptual objectives: C1: Explain the purpose and nature of managerial accounting C2: Describe the lean business model C3: Describe accounting concepts useful in classifying costs C4: Define product and period costs and explain how they impact financial statements C5: Explain how the balance sheets for manufacturing and merchandising companies differ C6: Explain manufacturing activities and the flow of manufacturing costs.

Slide 3:A1: Compute cycle time and cycle efficiency, and explain their importance to production management

Analytical Learning Objectives In this chapter, you will learn the following analytical objectives: A1: Compute cycle time and cycle efficiency, and explain their importance to production management In this chapter, you will learn the following analytical objectives: A1: Compute cycle time and cycle efficiency, and explain their importance to production management

Slide 4:P1: Compute cost of goods sold for a manufacturer P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.

Procedural Learning Objectives In this chapter, you will learn the following procedural objectives: P1: Compute cost of goods sold for a manufacturer P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.In this chapter, you will learn the following procedural objectives: P1: Compute cost of goods sold for a manufacturer P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.

Slide 5:Managerial and Financial Accounting

C 1 The purpose of both managerial and financial accounting is providing useful information to decision makers. Both areas of accounting report monetary information, although managerial accounting includes the practice of reporting non-monetary information. The focus of managerial and financial accounting are different, however.The purpose of both managerial and financial accounting is providing useful information to decision makers. Both areas of accounting report monetary information, although managerial accounting includes the practice of reporting non-monetary information. The focus of managerial and financial accounting are different, however.

Slide 6:Planning and Control

C 1 Planning is the process of setting goals and making plans to achieve them. Strategic plans usually set a firm�s long-term direction by developing a road map based on opportunities such as new products, new markets, and capital investments. Medium- and short-term plans are more operational in nature. They translate the strategic plans into actions. A short-term plan often covers a one-year period that, then translated into monetary terms is knows as a budget. Control 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. Feedback provided by the control system allows managers to revise their plans and take corrective actions to avoid undesirable outcomes.Planning is the process of setting goals and making plans to achieve them. Strategic plans usually set a firm�s long-term direction by developing a road map based on opportunities such as new products, new markets, and capital investments. Medium- and short-term plans are more operational in nature. They translate the strategic plans into actions. A short-term plan often covers a one-year period that, then translated into monetary terms is knows as a budget. Control 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. Feedback provided by the control system allows managers to revise their plans and take corrective actions to avoid undesirable outcomes.

Slide 7:Nature of Managerial Accounting

Exh. 18-2 C 1 Here we see a detailed comparison of financial accounting and managerial accounting. In addition to the focus on internal decisions, note particularly that managerial accounting information may follow a flexible format, involves frequent, timely reports, and may contain more estimates and projections than financial accounting.Here we see a detailed comparison of financial accounting and managerial accounting. In addition to the focus on internal decisions, note particularly that managerial accounting information may follow a flexible format, involves frequent, timely reports, and may contain more estimates and projections than financial accounting.

Slide 8:Lean Business Model

Customer Orientation Global Economy LeanBusinessModel C 2 By meeting customer needs in an efficient manner, a lean business model provides a positive return to its owners. Today�s customers have many choices, both domestic and foreign. To be successful, a business must deliver quality products and services to customers in a cost efficient manner. By meeting customer needs in an efficient manner, a lean business model provides a positive return to its owners. Today�s customers have many choices, both domestic and foreign. To be successful, a business must deliver quality products and services to customers in a cost efficient manner.

Slide 9:Lean Practices

C 2 Lean business practices include total quality management and just-in-time manufacturing. The central focus is always on the customer. Lean business practices include total quality management and just-in-time manufacturing. The central focus is always on the customer.

Slide 10:Continuous Improvement

C 2 Continuous improvement rejects the notion of �good enough� or �acceptable� and challenges employees and managers to continuously experiment with new and improved business practices. This has led to adopting practices such as total quality management and just-in-time manufacturing.Continuous improvement rejects the notion of �good enough� or �acceptable� and challenges employees and managers to continuously experiment with new and improved business practices. This has led to adopting practices such as total quality management and just-in-time manufacturing.

Slide 11:Total Quality Management

C 2 Total quality management focuses on quality improvement and applies this standard to all aspects of business activities. Awards such as the Malcolm Baldrige National Quality Awards encourage an emphasis on quality. Total quality management focuses on quality improvement and applies this standard to all aspects of business activities. Awards such as the Malcolm Baldrige National Quality Awards encourage an emphasis on quality.

Slide 12:Just-In-Time (JIT) Manufacturing

C 2 A just-in-time manufacturer acquires inventories and produces goods only when needed. Companies manufacture products only after they receive an order (a demand-pull system) and then deliver the customer�s requirements on time. A just-in-time manufacturer acquires inventories and produces goods only when needed. Companies manufacture products only after they receive an order (a demand-pull system) and then deliver the customer�s requirements on time.

Slide 13:Just-In-Time (JIT) Manufacturing

C 2 To accomplish just-in-time manufacturing: Processes must be aligned to eliminate delays and inefficiencies Companies must establish good relations with suppliers

Slide 14:Implications of Lean Manufacturing

C 2 Understand the nature and sources of cost Measure value provided to customers Determine price customers pay Managerial accounting has an important role to play by providing accurate cost and performance information. Companies must understand the nature and sources of cost and develop systems that capture costs accurately. Developing such a system is important to measuring the �value� provided to customers. The price that customers pay is an important determinant of value. In turn, the costs a company incurs are key determinants of price. All else being equal, the better a company is at controlling its costs, the better its performance.Managerial accounting has an important role to play by providing accurate cost and performance information. Companies must understand the nature and sources of cost and develop systems that capture costs accurately. Developing such a system is important to measuring the �value� provided to customers. The price that customers pay is an important determinant of value. In turn, the costs a company incurs are key determinants of price. All else being equal, the better a company is at controlling its costs, the better its performance.

Slide 15:Cost Accounting Concepts

C 3 Managers often need different cost classifications for different decisions. We will discuss each of these types of cost classifications individually.Managers often need different cost classifications for different decisions. We will discuss each of these types of cost classifications individually.

Slide 16:Classification by Behavior

C 3 A fixed cost does not change with changes in the volume of activity A variable cost changes in proportion to changes in the volume of activity A mixed cost refers to a combination of fixed and variable Classification of costs by behavior is helpful in cost-volume-profit analyses and short-term decision making. These are discussed in future chapters.Classification of costs by behavior is helpful in cost-volume-profit analyses and short-term decision making. These are discussed in future chapters.

Slide 17:Classification by Behavior

Cost behavior means how a cost will react to changes in the level of business activity. Total fixed costs donot change when activity changes. Total variable costs change in proportionto activity changes. C 3 The upper chart shows that a fixed cost does not change when an activity changes. For example, rent for Rocky Mountain Bikes� building is $22,000 and doesn�t change with the number of bikes produced. The lower chart shows that variable costs increase as activity increases. For example, the cost of bicycle tires is variable with the number of bikes producedThe upper chart shows that a fixed cost does not change when an activity changes. For example, rent for Rocky Mountain Bikes� building is $22,000 and doesn�t change with the number of bikes produced. The lower chart shows that variable costs increase as activity increases. For example, the cost of bicycle tires is variable with the number of bikes produced

Slide 18:Classification by Traceability

C 3 Cost objects may be products, services, departments, or customers to which costs are assignedCost objects may be products, services, departments, or customers to which costs are assigned

Slide 19:Classification by Controllability

C 3 Managers at higher levels in the organization have a greater degree of control over costs than do managers at lower levels in the organization. Classifying costs by controllability is an important part of assigning cost, responsibility, and evaluating a manager�s cost control performance. Managers at higher levels in the organization have a greater degree of control over costs than do managers at lower levels in the organization. Classifying costs by controllability is an important part of assigning cost, responsibility, and evaluating a manager�s cost control performance.

Slide 20: All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.

Classification by Relevance:Sunk Costs C 3 Costs can be classified by relevance by identifying it as a sunk cost or an out-of-pocket costCosts can be classified by relevance by identifying it as a sunk cost or an out-of-pocket cost

Slide 21:Classification by Relevance:Out-of-Pocket Costs

C 3 A cost that requires a future outlay of cash. Out-of-pocket costs should be considered in decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future

Slide 22: The potential benefit lost by choosing a specific action from two or more alternatives Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.

Classification by Relevance: Opportunity Costs C 3 Opportunity costs are always relevant to a selection decision.Opportunity costs are always relevant to a selection decision.

Slide 23:Classification by Function:Product Costs

C 4 Product costs are incurred to manufacture a product. Product costs are not expensed as they are incurred. Instead, they are assigned to inventory and do not become expenses until the product is sold. Inventory is reported at cost as an asset on the balance sheet. Product costs are incurred to manufacture a product. Product costs are not expensed as they are incurred. Instead, they are assigned to inventory and do not become expenses until the product is sold. Inventory is reported at cost as an asset on the balance sheet.

Slide 24:Classification by Function:Period Costs

C 4 Period costs are expensed in the period incurred. They are non-manufacturing costs usually grouped into two broad categories: selling and administrative.Period costs are expensed in the period incurred. They are non-manufacturing costs usually grouped into two broad categories: selling and administrative.

Slide 25:Period and Product Costsin Financial Statements

Exh. 18-8 C 4 Starting on the left side of this flow chart of costs, we see that costs incurred are categorized as either period costs or product costs. Period costs flow directly to the current year�s income statement as they are expensed in the period incurred. Product costs are first assigned to the inventory account. Later, when the inventory is sold, product costs flow from the inventory account to cost of goods sold on the income statement for the year in which the products are sold.Starting on the left side of this flow chart of costs, we see that costs incurred are categorized as either period costs or product costs. Period costs flow directly to the current year�s income statement as they are expensed in the period incurred. Product costs are first assigned to the inventory account. Later, when the inventory is sold, product costs flow from the inventory account to cost of goods sold on the income statement for the year in which the products are sold.

Slide 26:Potential Multiple Cost Classifications

Exh. 18-9 C 4 Here we see examples of costs classified according to three of the means that we have discussed: behavior, traceability, and function.Here we see examples of costs classified according to three of the means that we have discussed: behavior, traceability, and function.

Slide 27:Cost Concepts for Service Companies

C 4 While our primary focus has been on manufacturing companies, we should realize that the same cost concepts also apply to service companies such as airlines and hotels.While our primary focus has been on manufacturing companies, we should realize that the same cost concepts also apply to service companies such as airlines and hotels.

Slide 28:Reporting Manufacturing Activities

C 5 Merchandisers buy goods that are already completed and make them available to customers. Manufacturers buy raw materials and convert the raw materials into completed goods for their customers.Merchandisers buy goods that are already completed and make them available to customers. Manufacturers buy raw materials and convert the raw materials into completed goods for their customers.

Slide 29:Balance Sheet of a Manufacturer

C 5 Manufacturers have three major inventory categories: raw materials, goods in process, and finished goods.Manufacturers have three major inventory categories: raw materials, goods in process, and finished goods.

Slide 30:Balance Sheet of a Manufacturer

RawMaterials FinishedGoods Goods inProcess C 5 Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials.Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials.

Slide 31:Balance Sheet of a Manufacturer

C 5 Inventory is a current asset on the balance sheet. Manufacturers have three major categories of inventory: raw materials, goods in process, and finished goods.Inventory is a current asset on the balance sheet. Manufacturers have three major categories of inventory: raw materials, goods in process, and finished goods.

Slide 32:Income Statement of a Manufacturer

Exh. 18-11 P1 The finished goods inventory of a manufacturer is the equivalent of a merchandiser�s merchandise inventory account. Items in this inventory account are complete and awaiting sale. The major difference is that the manufacturer manufactures the items in the finished goods account, while the merchandiser buys the items in the merchandise inventory account. When items are sold from these inventory accounts, the cost of inventory, whether purchased or manufactured, becomes cost of goods sold on the income statement. The finished goods inventory of a manufacturer is the equivalent of a merchandiser�s merchandise inventory account. Items in this inventory account are complete and awaiting sale. The major difference is that the manufacturer manufactures the items in the finished goods account, while the merchandiser buys the items in the merchandise inventory account. When items are sold from these inventory accounts, the cost of inventory, whether purchased or manufactured, becomes cost of goods sold on the income statement.

Slide 33: Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

Income Statement of a Manufacturer Exh. 18-12 P1 The inventory cost flows are similar for both merchandisers and manufacturers. Beginning inventory plus additions equals goods available for sale. Subtracting ending inventory from goods available for sale results in cost of goods sold.The inventory cost flows are similar for both merchandisers and manufacturers. Beginning inventory plus additions equals goods available for sale. Subtracting ending inventory from goods available for sale results in cost of goods sold.

Slide 34:Income Statement of a Manufacturer

P1 Direct materials can be separately and readily traced to the individual units of product being manufactured. Direct materials are sufficiently significant in amount to justify the separate tracing.Direct materials can be separately and readily traced to the individual units of product being manufactured. Direct materials are sufficiently significant in amount to justify the separate tracing.

Slide 35:Income Statement of a Manufacturer

P1 Direct labor is the effort of employees who actually convert materials into a finished product. Direct labor costs are the wages of direct labor employees. Direct labor costs can be separately and readily traced to the individual units of product being manufactured. Direct labor is the effort of employees who actually convert materials into a finished product. Direct labor costs are the wages of direct labor employees. Direct labor costs can be separately and readily traced to the individual units of product being manufactured.

Slide 36:Income Statement of a Manufacturer

P1 Factory overhead is all manufacturing costs other than direct material and direct labor. Factory overhead costs are indirect manufacturing costs that support the major manufacturing activities. As indirect costs, they cannot be separately and readily traced to the individual units of product. Factory overhead is all manufacturing costs other than direct material and direct labor. Factory overhead costs are indirect manufacturing costs that support the major manufacturing activities. As indirect costs, they cannot be separately and readily traced to the individual units of product.

Slide 37:Income Statement of a Manufacturer

P1 Direct labor and direct material are called the prime costs of manufacturing. Direct labor and manufacturing overhead are called conversion costs. Direct labor and direct material are called the prime costs of manufacturing. Direct labor and manufacturing overhead are called conversion costs.

Slide 38:Question

What type of account is the goods in process account? a. Income statement expense account. b. Balance sheet inventory account. c. Temporary clearing account for direct material and direct labor. d. Holding account for manufacturing overhead and direct labor. C 5 Take a minute and answer the next two questions before we proceed.Take a minute and answer the next two questions before we proceed.

Slide 39:Goods in process is one of the three manufacturing inventory accounts. Inventory is a current asset on the balance sheet. Goods in process is one of the three manufacturing inventory accounts. Inventory is a current asset on the balance sheet.

Slide 40:Question

The primary distinction between product and period costs is . . . a. Product costs are expensed in the period incurred. b. Product costs are directly traceable to product units. c. Product costs are inventoriable. d. Period costs are inventoriable. C 4 Here is your second question.Here is your second question.

Slide 41:Product costs are assigned to inventory until the products are sold. Choice b is tempting, but remember that factory overhead is an indirect product cost. Product costs are assigned to inventory until the products are sold. Choice b is tempting, but remember that factory overhead is an indirect product cost.

Slide 42:Flow of Manufacturing Activities

Goods in ProcessEnding Inventory Exh. 18-15 C 6 Starting on the left side of this flow chart, we see that material purchases are combined with the materials beginning inventory. Materials are then either used or they remain in inventory. In the center portion of the flow chart, we see the materials being used are combined with labor, overhead, and the goods in process beginning balance. As goods are finished, they are transferred out of the goods in process inventory account into the finished goods inventory account. The cost of the goods finished in the period is called cost of goods manufactured. Finished goods are either sold, called cost of goods sold, or they remain in the finished goods inventory account. Starting on the left side of this flow chart, we see that material purchases are combined with the materials beginning inventory. Materials are then either used or they remain in inventory. In the center portion of the flow chart, we see the materials being used are combined with labor, overhead, and the goods in process beginning balance. As goods are finished, they are transferred out of the goods in process inventory account into the finished goods inventory account. The cost of the goods finished in the period is called cost of goods manufactured. Finished goods are either sold, called cost of goods sold, or they remain in the finished goods inventory account.

Slide 43: Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process � Ending Work in Process = Cost of Goods Manufactured

Manufacturing Statement P2 The production activities in the center portion of the preceding flow chart can be summarized in a manufacturing statement. The three product costs are totaled and added to the beginning balance of the goods in process inventory account. Subtracting the ending balance of the goods in process account from this total results in the cost of goods manufactured for the period.The production activities in the center portion of the preceding flow chart can be summarized in a manufacturing statement. The three product costs are totaled and added to the beginning balance of the goods in process inventory account. Subtracting the ending balance of the goods in process account from this total results in the cost of goods manufactured for the period.

Slide 44:Manufacturing Statement

The information for Rocky Mountain Bikes is taken from your textbook. The information for Rocky Mountain Bikes is taken from your textbook.

Slide 45:Manufacturing Statement

Here you see the manufacturing statement for Rocky Mountain bikes in a highly summarized form. We will build each of the major parts of the statement starting with materials.Here you see the manufacturing statement for Rocky Mountain bikes in a highly summarized form. We will build each of the major parts of the statement starting with materials.

Slide 46:Material purchases for the current year are added to the beginning balance of materials inventory. The beginning balance of materials inventory for the current year is the ending balance of materials inventory from last year. Materials are either used or they remain in inventory. Subtracting the amount of materials on hand in inventory at the end of the year results in the cost of materials used for the current year. Material purchases for the current year are added to the beginning balance of materials inventory. The beginning balance of materials inventory for the current year is the ending balance of materials inventory from last year. Materials are either used or they remain in inventory. Subtracting the amount of materials on hand in inventory at the end of the year results in the cost of materials used for the current year.

Slide 47:Manufacturing Statement

Direct labor costs are the wages of direct labor employees who actually convert materials into a finished bike.Direct labor costs are the wages of direct labor employees who actually convert materials into a finished bike.

Slide 48:Manufacturing Statement

Exh. 18-16 P2 Factory overhead costs are indirect manufacturing costs that support the manufacturing activities. The eight factory overhead items in this example, totaling thirty thousand dollars, are commonly encountered in many manufacturing companies. Factory overhead costs are indirect manufacturing costs that support the manufacturing activities. The eight factory overhead items in this example, totaling thirty thousand dollars, are commonly encountered in many manufacturing companies.

Slide 49:Manufacturing Statement

Total manufacturing costs for the current period are added to the beginning balance of goods in process. The beginning balance of goods in process for the current year is the ending balance of goods in process from last year.Total manufacturing costs for the current period are added to the beginning balance of goods in process. The beginning balance of goods in process for the current year is the ending balance of goods in process from last year.

Slide 50:Manufacturing Statement

Subtracting the ending balance of the goods in process account from the total cost of goods in process results in the cost of goods manufactured for the current year. Cost of goods manufactured is cost of goods completed and transferred to finished goods for the current year. Subtracting the ending balance of the goods in process account from the total cost of goods in process results in the cost of goods manufactured for the current year. Cost of goods manufactured is cost of goods completed and transferred to finished goods for the current year.

Slide 51:Now that we have mastered some of the basic concepts and principles of managerial accounting, we are ready to put this knowledge to work.Now that we have mastered some of the basic concepts and principles of managerial accounting, we are ready to put this knowledge to work.