Professional Documents
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CH 20
CH 20
Prepared by
Marianne Bradford, Ph.D.
Bryant College
CHAPTER 20
MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:
1 Explain the distinguishing features of
managerial accounting.
2 Identify the 3 broad functions of management.
3 Define the 3 classes of manufacturing costs.
4 Distinguish between product and period costs.
5 Explain the difference between a
merchandising and a manufacturing income
statement.
CHAPTER 20
MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:
6 Indicate how cost of goods manufactured is
determined.
7 Explain the difference between a
merchandising and a manufacturing balance
sheet.
PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING
Managerial
Accounting Basics
Comparing
managerial and
financial accounting
Ethical
standards
Management
functions
Managerial
Cost Concepts
Manufacturing
Product
costs
PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING
Manufacturing Costs in
Financial Statements
Income
statement
Balance
sheet
Cost
Concepts: a review
Contemporary Developments
in Managerial Accounting
Service
industry
trends
Value
chain
management
STUDY OBJECTIVE 1
Explain
Explain the
the distinguishing
distinguishing features
features
of
of managerial
managerial accounting.
accounting.
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
MANAGERIAL ACCOUNTING
BASICS
4 Assisting management in profit planning and
formalizing these 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 presenting relevant data for
management decision making.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Primary Users of Reports
External users: stockholders, creditors, and regulatory.
Purpose of Reports
General-purpose information for all users.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Content of Reports
Pertains to business as a whole and is highly aggregated (condensed).
Limited to double-entry accounting system and cost data.
Reporting standard is generally accepted accounting principles.
Verification Process
Annual independent audit by certified public accountant.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Primary Users of Reports
Internal users: officers, department heads, managers, and
supervisors.
Purpose of Reports
Special-purpose information for a particular user for a specific decision.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Content of Reports
Pertains to subunits of the entity and may be very detailed.
May extend beyond double-entry accounting system to any type of
relevant data.
Reporting standard is relevance to the decision to be made.
Verification Process
No independent audits.
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 accountants
responsibilities into 4 areas:
1 competence,
2 confidentiality,
3 integrity, and
4 objectivity.
STUDY OBJECTIVE 2
Identify
Identify the
the three
three broad
broad
functions
functions of
of management.
management.
MANAGEMENT
FUNCTIONS
The management of an organization
performs (3) broad functions:
1 Planning
2 Motivating and Directing
3 Controlling
MANAGEMENT FUNCTIONS
PLANNING
MANAGEMENT FUNCTIONS
ORGANIZING AND DIRECTING
Motivating and directing involves coordinating
diverse activities and human resources to
produce a smooth-running operation.
This function relates to implementing of
planned objectives.
Most companies prepare organization charts to
show
1 the interrelationship of activities and
2 the delegation of authority and responsibility
within the company.
MANAGEMENT FUNCTIONS
CONTROLLING
MANAGERIAL
COST CONCEPTS
To perform the three management functions effectively,
management needs information. One very important
type of information is related to costs.
The following questions need answering:
1 What costs are involved in making the product or
providing a service?
2 If production volume is decreased, will costs decrease?
3 What impact will automation have on total costs?
4 How can costs best be controlled?
STUDY OBJECTIVE 3
Define
Define the
the three
three classes
classes
of
of manufacturing
manufacturing costs.
costs.
MANAGERIAL
COST CONCEPTS
Manufacturing consists of activities and
processes that convert raw materials into
finished goods.
Manufacturing costs are usually classified
as follows:
1 direct materials,
2 direct labor, and
3 manufacturing overhead.
ILLUSTRATION 20-2
CLASSIFICATIONS OF
MANUFACTURING COSTS
DIRECT MATERIALS
DIRECT LABOR
MANUFACTURING
OVERHEAD
MANUFACTURING COSTS
DIRECT MATERIALS
Raw materials are the basic materials and parts
that are to be used in the manufacturing process.
Raw materials that can be physically and directly
associated with the finished product during the
manufacturing process are called direct materials.
Materials
MANUFACTURING COSTS
INDIRECT MATERIALS
Some raw materials cannot be easily
associated with the finished product. These
are considered indirect materials which
areaccounted for as part of manufacturing
overhead and
1 do not physically become part of the
finished product or
2 cannot be traced because their physical
association with the finished product is too
small in terms of cost.
MANUFACTURING COSTS
DIRECT LABOR
Direct labor is the work of factory employees that can be
physically and directly associated with converting raw
materials into finished goods.
The wages of maintenance people, timekeepers, and
supervisors are usually identified as indirect labor. Their
efforts have no physical association with the finished product.
Like indirect materials, indirect labor is
part of manufacturing overhead.
Factory
Labor
MANUFACTURING COSTS
MANUFACTURING OVERHEAD
STUDY OBJECTIVE 4
Distinguish
Distinguish between
between product
product and
and period
period costs.
costs.
ILLUSTRATION 20-4
PRODUCT VERSUS PERIOD COSTS
Product Costs
Direct Labor
Manufacturing
Overhead
Period Costs
Nonmanufacturing
Costs
Selling Expenses
Administrative
Expenses
{
{
Manufacturing
Costs
Direct Materials
Prime
Costs
Conversion
Costs
STUDY OBJECTIVE 5
Explain
Explain the
the difference
difference between
between aa
merchandising
merchandising and
and aa manufacturing
manufacturing
income
income statement.
statement.
ILLUSTRATION 20-5
COST OF GOODS SOLD
COMPONENTS
Merchandiser
Beginning
Merchandise
Inventory
Cost of Goods
Purchased
Ending
Merchandise
Inventory
=
Cost of
Goods Sold
Manufacturer
Beginning
Finished Goods
Inventory
Cost of Goods
Manufactured
Ending
Finished Goods
Inventory
ILLUSTRATION 20-6
COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
ILLUSTRATION 20-6
COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
STUDY OBJECTIVE 6
Indicate
Indicate how
how cost
cost of
of goods
goods
manufactured
manufactured isis determined.
determined.
ILLUSTRATION 20-7
COST OF GOODS MANUFACTURED
FORMULA
The total cost of work in process for the year is equal to the sum of:
1 the cost of the beginning work in process inventory and
2 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
Ending Work in
Process Inventory
Total Cost of
Work in Process
Cost of Goods
Manufactured
ILLUSTRATION 20-8
COST OF GOODS MANUFACTURED
SCHEDULE
The Cost of
Goods
Manufactured
Schedule as
shown on the
right is an
internal financial
schedule that
shows each of the
cost elements
explained in
Illustration 20-7.
STUDY OBJECTIVE 7
Explain
Explain the
the difference
difference between
between
aa merchandising
merchandising and
and aa
manufacturing
manufacturing balance
balance sheet.
sheet.
ILLUSTRATION 20-10
CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
ILLUSTRATION 20-10
CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
ILLUSTRATION 20-11
ASSIGNMENT OF
COSTS TO COST
CATEGORIES
Product Costs
Direct
Direct Manufacturing
Materials Labor
Overhead
Period
Costs
X
X
X
X
Prime
Costs
Conversion
Costs
X
X
X
X
X
X
X
X
X
X
X
X
ILLUSTRATION 20-12
COMPUTATION OF TOTAL
MANUFACTURING COSTS
Total manufacturing costs are the sum of the product costs
direct materials, direct labor, and manufacturing overhead
costs. Northridge Company produces 10,000 pre-hung wooden
doors the first year. The total manufacturing costs are:
Cost Number and Item
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
Manufacturing
Cost
$ 100,000
80,000
25,000
6,000
28,000
70,000
$ 309,000
CONTEMPORARY DEVELOPMENTS IN
MANAGERIAL ACCOUNTING
Global competition has intensified. Today,
contemporary business managers demand from
managerial accountants different and better
information than they needed just a few years
ago.
Service Industry Trends in some respects the
challenges for managerial accounting are greater
in service companies than in manufacturing
companies.
ILLUSTRATION 20-13
SERVICE INDUSTRIES AND COMPANIES
What are the questions faced by service company
managers in these industries?
Transportation
Package delivery services
Telecommunications
Professional services
Financial institutions
Health Care
CONTEMPORARY DEVELOPMENTS IN
MANAGERIAL ACCOUNTING
VALUE CHAIN
The value chain is the term that describes all
activities associated with providing a product or
service.
Activities included in the value chain include:
CONTEMPORARY DEVELOPMENTS IN
MANAGERIAL ACCOUNTING
VALUE CHAIN
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CHAPTER 20
MANAGERIAL ACCOUNTING