DEBITS AND CREDITS Assets Assets Liabilities Stockholders Equity

DEBITS AND CREDITS Assets = Assets Liabilities + Stockholders’ Equity Dr Cr + - + - Common Stock + Retained Earnings - Dividends + Revenue Dr Cr Dr Cr - + + - - Expense

POSTING AND ITS ROLE IN THE RECORDING PROCESS Cash 10, 000 Common Stock 10, 000

Managerial Accounting Weygandt, Kimmel Chapter 1 § Managerial Accounting Kieso, &

Managerial Accounting Basics Managerial accounting (management accounting) is a field of accounting that provides economic and financial information for managers and other internal users.

Managerial Accounting Basics The activities that are part of managerial accounting are as follows: 1 Explaining manufacturing and nonmanufacturing costs and how they are reported in the financial statements. 2 Computing the cost of rendering a service or manufacturing a product. 3 Determining the behavior of costs and expenses as activity levels change and analyzing cost-volumeprofit relationships within a company.

Managerial Accounting Basics The activities that are part of managerial accounting are as follows: 4 Assisting management in profit planning and formalizing the plans in the form of budgets. 5 Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard costs. 6 Accumulating and using relevant data for management decision making.

Differences Between Financial and Managerial Accounting Illustration 1 -1 a

Differences Between Financial and Managerial Accounting Illustration 1 -1 b

Ethical Standards for Managerial Accountants § Managerial accountants recognize that they have an ethical obligation to their companies and the public. § The Institute of Management Accountants (IMA) has developed a code of ethical standards, entitled Standards of Ethical Conduct for Management Accountants. § This code divides the managerial accountant’s responsibilities into 4 areas: – competence, – confidentiality, – integrity, and – objectivity.

Ethical Standards for Managerial Accountants § COMPETENCE – Maintain skill levels – Perform duties in accordance with laws, regulations, etc – Prepare complete and clear reports and recommendations § CONFIDENTIALITY – Refrain from disclosing confidential information – Inform subordinates as appropriate – Refrain from using or appearing to use confidential information for unethical or illegal advantage.

Ethical Standards for Managerial Accountants § INTEGRITY – Conflicts of interest – Refuse gifts or favors – Active or passive subversion of the company’s attainment of – – – objectives Recognize and communicate professional limitations Communicate unfavorable as well as favorable information Refrain from activities that would discredit the profession

Ethical Standards for Managerial Accountants § OBJECTIVITY – Communicate information fairly and objectively – Disclose fully all relevant information that could influence a decision

Management Functions The management of an organization performs three broad functions: § Planning § Directing and motivating § Controlling

Management Functions: Planning § Planning requires management to – look ahead, and – establish objectives. § These objectives are usually quite diverse, but a key modern management objective appears to be to add value to the business under its control. § Value is usually measured by – the trading price of the company’s stock and – the potential selling price of the company.

Management Functions: Directing and Motivating § Directing and motivating involves coordinating diverse activities and human resources to produce a smooth-running operation. § Most companies prepare organization charts to show – the interrelationship of activities, and – the delegation of authority and responsibility within the company.

Management Functions: Controlling § Controlling is the process of keeping the firm’s activities on track. § In controlling operations, management determines – whether planned goals are being met, and – what changes are necessary when there are deviations from targeted objectives.

Managerial Cost Concepts Manufacturing consists of activities and processes that convert raw materials into finished goods. Manufacturing costs are usually classified as follows: – Direct Materials – Direct Labor – Manufacturing Overhead

Manufacturing Costs: Direct Materials § Raw materials represent the basic materials and parts that are to be used in the manufacturing process. § Raw materials that can be physically and conveniently associated with the finished product during the manufacturing process are termed direct materials. DIRECT MATERIALS

Manufacturing Costs: Indirect Materials Some raw materials cannot be easily associated with the finished product. These are considered indirect materials. Indirect materials – do not physically become part of the finished product, or – cannot be traced because their physical association with the finished product is too small in terms of cost. Indirect materials are accounted for as part of manufacturing overhead.

Manufacturing Costs: Direct Labor Direct labor is the work of factory employees that can be physically and conveniently associated with converting raw materials into finished goods. DIRECT LABOR

Manufacturing Costs: Indirect Labor The wages of maintenance people, timekeepers, and supervisors are normally categorized as indirect labor because their efforts have no physical association with the finished product or it is impractical to trace the costs to the goods provided. . Like indirect materials, indirect labor is part of manufacturing overhead.

Manufacturing Costs: Manufacturing Overhead Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. These costs may also be defined as manufacturing costs that cannot be classified as either direct materials or direct labor. Manufacturing overhead includes MANUFACTURING – indirect materials; OVERHEAD – indirect labor; – depreciation on factory buildings and machinery; and – insurance, taxes, and maintenance on factory facilities.

Product Costs Product costs (also called inventoriable costs) include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead). They are the costs that are a necessary and integral part of producing the finished product. These costs are not expensed (as cost of goods sold) under the matching principle until the finished goods inventory is sold.

Product Versus Period Costs All Costs Product Costs Period Costs Manufacturing Costs Nonmanufacturing Costs (Go to Balance Sheet before Income Statement) Direct Materials Direct Labor Manufacturing Overhead (Go straight to Income Statement) Prime Costs Conversion Costs Selling Expenses Administrative Expenses Illustration 1 -4

Cost of Goods Sold Components Merchandising Company Beginning Merchandise Inventory + Cost of Goods Purchased - Ending Merchandise Inventory = Cost of Goods Sold Manufacturing Company Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory = Illustration 1 -5

Cost of Goods Sold Sections of Merchandising and Manufacturing Companies The following cost of goods sold sections for merchandising and manufacturing enterprises highlight the different presentations: MERCHANDISING COMPANY Partial Income Statement For the Year Ended December 31, 1999 Cost of goods sold Merchandise inventory, January 1 Cost of goods purchased Cost of goods available for sale Merchandise inventory, December 31 Cost of goods sold $ 70, 000 650, 000 720, 000 400, 000 $ 320, 000 Illustration 1 -6 a

Cost of Goods Sold Sections of Merchandising and Manufacturing Companies MANUFACTURING COMPANY Partial Income Statement For the Year Ended December 31, 1999 Cost of goods sold Finished goods inventory, January 1 Cost of goods manufactured Cost of goods available for sale Finished goods inventory, December 31 Cost of goods sold $ 90, 000 370, 000 460, 000 80, 000 $ 380, 000 Illustration 1 -6 b

Cost of Goods Manufactured Formula The total cost of work in process for the year is equal to the sum of: – the cost of the beginning work in process inventory and – the total manufacturing costs for the current period. To find the cost of goods manufactured, we subtract the cost of the ending work in process inventory from the total cost of work in process. Beginning Work in Process Inventory Total Cost of Work in Process + Total Current Manufacturing Costs = Total Cost of Work in Process - Ending Work in Process Inventory = Cost of Goods Manufactured Illustration 1 -7

Cost of Goods Manufactured Schedule To eliminate excessive detail, it is customary to present only the total cost of goods manufactured in the Income Statement. An internal financial schedule called a Cost of Goods Manufactured Schedule (as shown on the right) shows each of the cost elements. Illustration 1 -8 OLSEN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 1999 Work in process, January 1 $ 18, 400 Direct materials Raw materials inventory, January 1 $ 16, 700 Raw materials purchases 152, 500 Total raw materials available for use 169, 200 Less: Raw materials inventory, December 31 22, 800 Direct materials used $ 146, 400 Direct labor 175, 600 Manufacturing overhead Indirect labor 14, 300 Factory repairs 12, 600 Factory utilities 10, 100 Factory depreciation 9, 440 Factory insurance 8, 360 Total manufacturing overhead 54, 800 Total manufacturing costs 376, 800 Total cost of work in process 395, 200 Less: Work in process, December 31 25, 200 Cost of goods manufactured $ 370, 000

Merchandising versus Manufacturing Balance Sheets Unlike the balance sheet for a merchandising company, which shows just one inventory category, the balance sheet of a manufacturing company may have three inventory accounts: – Finished Goods Inventory, which shows the cost of completed goods on hand; – Work in Process Inventory, which shows the cost applicable to units that have been started into production but are only partially completed; and – Raw Materials Inventory, which shows the cost of raw materials on hand.

Current Assets Sections of Merchandising and Manufacturing Balance Sheets The following current assets sections of balance sheets contrast the presentation of inventories of a merchandising company with those of a manufacturing company. The remainder of the balance sheet is similar for the two types of companies. Merchandise Company Balance Sheet December 31, 1999 Current assets Cash Receivables (net) Merchandise inventory Prepaid expenses Total current assets $ 100, 000 210, 000 400, 000 22, 000 $ 732, 000 Illustration 1 -10 a

Current Assets Sections of Merchandising and Manufacturing Balance Sheets Manufacturing inventories are generally listed in the order of liquidity – their expected realization in cash. Thus, finished goods inventory is listed first. Manufacturing Company Balance Sheet December 31, 1999 Current assets Cash Receivables (net) Inventories: Finished goods Work in process Raw materials Prepaid expenses Total current assets $ 180, 000 210, 000 $ 80, 000 25, 200 22, 800 128, 000 18, 000 $ 536, 000 Illustration 1 -10 b

Cost Concepts: A Review Computation of Manufacturing Cost Total manufacturing costs are the sum of the product costs – direct materials, direct labor, and manufacturing overhead costs. Northridge Company produces 10, 000 prehung wooden doors the first year. The total manufacturing Manufacturing costs are: Cost Number and Item Illustration 1 -12 1. Material cost ($10 X 10, 000) 2. Labor cost ($8 X 10, 000) 3. Depreciation on new equipment 4. Property taxes 7. Maintenance salaries 8. Salary of plant manager Total manufacturing costs Cost $ 100, 000 80, 000 25, 000 6, 000 28, 000 70, 000 $ 309, 000

Contemporary Developments in Managerial Accounting Due to increased global competition from such countries as Japan and Germany, contemporary business managers demand different and better information than they needed just a few years ago. The factors on the following slides contribute to the expanding role of managerial accounting as we look toward the next century.

Contemporary Developments in Managerial Accounting § Technological Change — Through computerintegrated manufacturing (CIM), many companies can now manufacture products that are untouched by human hands. Also, the widespread use of computers has greatly reduced the cost of accumulating, storing, and reporting managerial accounting information.

Contemporary Developments in Managerial Accounting § Quality — Many companies have installed a total quality control (TQC) system to reduce defects in finished products. More emphasis is now put on nonfinancial measures such as customer satisfaction, number of service calls, and time to generate reports. Attention to these measures, which employees can control, leads to increased profitability. In addition, many companies have begun using just-in-time inventory methods (JIT), under which goods are manufactured or purchased just in time for use. This lowers the costs of holding and storing inventory.

Contemporary Developments in Managerial Accounting § Focus on Activities — In order to obtain more accurate product costs, many companies are accounting for overhead costs by the activities used in making the product. Activities include purchasing materials, handling raw materials, and production order scheduling. This development is called activity based costing (ABC).

Contemporary Developments in Managerial Accounting § Service Industry Needs — In some respects, the challenges for managerial accounting are greater in service enterprises than in manufacturing companies. In some companies, it may be necessary for the managerial accountant to develop new systems for measuring the cost of serving individual customers and new operating controls to improve the quality and efficiency of specific services.

Contemporary Developments in Managerial Accounting A Final Comment — Not long ago, the managerial accountant was primarily engaged in cost accounting. Today, the managerial accountant’s responsibilities extend to cost management

That’s all for now!