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0. 16. Managerial Accounting Concepts and Principles. 0. After studying this chapter, you should be able to:. Describe managerial accounting, and the role of managerial accounting in a business.

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Managerial Accounting Concepts and Principles

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After studying this chapter, you should be able to:

Describe managerial accounting, and the role of managerial accounting in a business.

Define and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.

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After studying this chapter, you should be able to:

Describe and illustrate the financial statement elements and cost relationships for a manufacturing business.

Describe the various uses of managerial accounting information.

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Objective 1

Describe managerial accounting, and the role of managerial accounting in a business.

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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.

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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.

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Example of Users

Financial Accounting

Managerial Accounting

Users of Accounting Information

  • Management
  • Shareholders
  • Creditors
  • Government Agencies
  • General Public
  • Management

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Financial Accounting and Managerial Accounting

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Partial Organizational Chart for Callaway Golf Company

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Planning

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

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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.

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Directing

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

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Controlling

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

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

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Improving

Continuous process improvement is the philosophy of continually improving employees, business processes, and products.

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Objective 2

Define and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.

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Direct and Indirect Costs

Costs are often classified in terms of how they relate to some 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.

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Direct Materials Cost

The cost of any material that is an integral part of the final product is classified as a direct materials cost.

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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.

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Factory Overhead Cost

Costs, other than direct materials cost and direct labor costs, that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes also called manufacturing overheador factory burden).

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Examples of Factory Overhead Cost

  • Heating and lighting the factory
  • Repairing and maintaining factory equipment
  • Property taxes
  • Insurance
  • Depreciation of factory plant and equipment
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Example Exercise 16-2

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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

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Direct

Materials

Prime Costs

Direct

Labor

Conversion Costs

Factory

Overhead

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Prime Costs and Conversion Costs

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Example Exercise 16-3

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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

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Follow My Example 16-3

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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.

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For Practice: PE 18-3A, PE 18-3B

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Product Costs

Product costs consist of the three elements of manufacturing cost: direct materials, direct labor, and factory overhead.

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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

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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.

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(Continued)

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(Concluded)

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Product Costs and Period Costs

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Example Exercise 16-4

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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

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Follow My Example 16-4

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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

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Left click the mouse to reveal answers.

For Practice: PE 18-4A, PE 18-4B

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Objective 3

Describe and illustrate the financial statement elements and cost relationships for a manufacturing business.

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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
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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.
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Finished goods inventory:

  • Consists of completed(or finished) products that have not been sold.

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Balance Sheet Presentation of Inventory in Manufacturing and Merchandising Companies

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Flow of Manufacturing Costs

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to total manu- facturing cost

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Determining the Cost of Goods Manufactured

STEP 1:

Materials inventory, December 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

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Determining the Cost of Goods Manufactured

STEP 2:

Cost of materials placed in production $130,000

from Step 1

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to cost of goods manufactured section

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Determining the Cost of Goods Manufactured

STEP 2:

Cost of materials placed in production $130,000

Direct labor 110,000

Factory overhead 44,000

Total manufacturing costs added $284,000

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from Step 2

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Determining the Cost of Goods Manufactured

STEP 3:

Work in process inventory, Dec. 1, 2008 $ 30,000

Add: total manufacturing costs added 284,000

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Determining the Cost of Goods Manufactured

STEP 3:

Work in process inventory, Dec. 1, 2008 $ 30,000

Add: total manufacturing costs added 284,000

Total manufacturing costs $314,000

Less: work in process inventory 24,000

Cost of goods manufactured $290,000

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Manufacturing Company— Income Statement with Statement of Cost of Goods Manufactured (cont’d)

to income statement

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Manufacturing Company— Income Statement with Statement of Cost of Goods Manufactured

from statement of cost of goods manufactured

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Example Exercise 16-5

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Gauntlet Company has the following information for January:

Cost of materials placed in production $25,000

Direct labor 35,000

Factory overhead 20,000

Work in process inventory, January 1 30,000

Work in process inventory, January 31 25,000

Finished goods inventory, January 1 15,000

Finished goods inventory, January 31 12,000

For January, determine the (a) cost of goods manufactured, and (b) cost of goods sold.

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Follow My Example 16-5

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(a)

Work in process inventory, January 1

Cost of materials placed in production

Direct labor

Factory overhead

Total manufacturing costs added

Total manufacturing costs

Less: Work in process inventory, Jan. 31

Cost of goods manufactured

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(Continued)

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Follow My Example 16-5 (continued)

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(b)

Finished goods inventory, January 1

Cost of goods manufactured

Cost of finished goods available for sale

Less: Finished goods inventory, January 31

Cost of goods sold

(Concluded)

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For Practice: PE 18-5A, PE 18-5B

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Objective 4

Describe the various uses of managerial accounting information.

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Uses of Managerial Accounting

Managerial accounting, as mentioned earlier, provides information and reports that help managers run the day-to-day operations of their business.

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Managerial reports provide data that help managers evaluate the performance of a company’s operations.

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Companies use managerial accounting information to support long-term planning decisions, such as investment decisions.

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Managerial accounting data can be used to help managers understand how many units need to be sold in a month to cover recurring monthly costs.

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