chap 1 concepts and principles
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ManagerialAccounting
Concepts andPrinciples
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1. Describe managerial accounting, and
the role of managerial accounting in a
business.
After studying this chapter, you shouldbe able to:
2. Define and illustrate the following
costs: direct and indirect, direct
materials, direct labor, factoryoverhead, and product and period
costs.
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3. Describe and illustrate the financial
statement elements and cost
relationships for a manufacturing
business.
After studying this chapter, you shouldbe able to:
4. Describe the various uses of
managerial accounting information.
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Describe managerialaccounting, and the
role of managerial
accounting in abusiness.
Objective 1
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The Difference Between Managerialand Financial Accounting
Financial accountinginformation is
reported in statements that are useful for
persons or institutions who are outsideor external to the organization.
Management also uses these financial
statements in directing current operationsand planning future operations.
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Managerial accounting
information is provided to meet
the specific needs of acompanys management, such as
historical data and subjective
estimates about future decisions.
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Financial Accounting Managerial Accounting
Shareholders
Creditors
Government Agencies
General Public Management
Management
Users of Accounting Information
Example of Users 1-1
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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
organizationsobjectives(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,calledstrategies, can often
involve periods ranging from
five to ten years.
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Directing is the process by
which managers, given theirassigned level of
responsibilities, run day-to-
day operations.
Directing 1-1
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Controlling,sometimes called
management by exception,
consists of monitoring theoperating results of
implemented plans and
comparing the actual results
with the expected results.
Controlling 1-1
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Comparing actual results with
expected results (feedback)
allows management to isolatesignificant departures from
plans for further investigation
and possible remedial action.
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Continuous process
improvement is the
philosophy of continuallyimproving employees,
business processes, and
products.
Improving 1-1
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Example Exercise 1-1
Three aspects of the management process are listed
below. Match each phase to the appropriate description.
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17(continued)
Aspect ofmanagement process Description
___Planning a. Monitoring the operating
___Controlling results of implemented plans
___Continuous and comparing the actualImprovement results with expected results.
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Example Exercise 1-1 (continued)
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Description
___Planning b. Rejects solving individual___Controlling problems with temporary
___Continuous solutions that fail to address
Improvement the root cause of the problem.
c. Used by management todevelop the organizations
objectives.18
Aspect of
management process
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For Practice: PE 1-1A, PE 1-1B19
Follow My Example 1-1
1-1
Aspect of management process
___Planning
___Controlling
___Continuous Improvement
c
a
b
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Define and illustrate the
following costs: direct and
indirect, direct materials, direct
labor, factory overhead, and
product and period costs.
Objective 2
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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 acost object. It maybe a product, a sales territory, a
department, or some activity. Costs are
identified with cost objects as either
direct costs or indirect costs.
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Direct Materials Cost
The cost of any material
that is an integral part ofthe final product is
classified as adirect
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 manufacturingprocess are combined and
classified asfactory overhead cost
(sometimes also called
manufacturing overheadorfactory 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 1-2
Identify the following costs as (a) direct materials, (b)
direct labor, or (c) factory overhead for a baseball glove
manufacturer.
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1. _______________ Leather used to make a baseballglove
2. _______________ Coolants for machines that sew
baseball gloves
3. _______________ Wages of assembly line employees4. _______________ Ink used to print a players autograph
on the baseball glove
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Identify the following costs as (a) direct materials, (b)
direct labor, or (c) factory overhead for a baseball glove
manufacturer.
1-2
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1. _______________ Leather used to make a baseballglove
2. _______________ Coolants for machines that sew
baseball gloves
3. _______________ Wages of assembly line employees4. _______________ Ink used to print a players autograph
on the baseball glove
Follow My Example 1-2
For Practice: PE 1-2A, PE 1-2B
(a) Direct materials
(c) Factory overhead
(b) Direct labor(c) Factory overhead
Left click mouse for answers.
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1-2Prime Costs and Conversion Costs
Factory
Overhead
Direct
Materials
Direct
Labor
Prime
Costs
Conversion
Costs
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Example Exercise 1-3
Identify the following costs as a (a) prime cost,
(b) conversion cost, or (c) both for a baseball glove
manufacturer.
1-2
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1. _______________ Leather used to make a baseballglove
2. _______________ Coolants for machines that sew
baseball gloves
3. _______________ Wages of assembly line employees
4. _______________ Ink used to print a players autographon the baseball glove
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For Practice: PE 1-3A, PE 1-3B32
Follow My Example 1-3
1-2
Identify the following costs as a (a) prime cost,
(b) conversion cost, or (c) both for a baseball glove
manufacturer.
1. _______________ Leather used to make a baseballglove
2. _______________ Coolants for machines that sew
baseball gloves
3. _______________ Wages of assembly line employees
4. _______________ Ink used to print a players autographon the baseball glove
(a) Prime cost
(b) Conversion cost
(c) Both
(b) Conversion cost
Left click mouse for answers.
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Product Costs
Product costs consist of the
three elements ofmanufacturing cost: direct
materials, direct labor, and
factory overhead.
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3434
Factory
Overhead
Direct
Materials
Direct
Labor
ProductCosts
The cost of materialsthat are an integral
part of the product.
The cost of labordirectly involved in
converting material into
the product.
Manufacturing costsother than direct
materials and direct
labor.
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Period costs are generally classified intotwo categories:
Period Costs
Selling expenses are incurred in
marketing the product anddelivering the sold product to
the customer.
Administrative expenses are
incurred in the administration ofthe business.
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3636(Continued)
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3737(Concluded)
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Product Costs and
Period Costs
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Example Exercise 1-4
Identify the following costs as a (a) product cost, or
(b) period cost for a baseball glove manufacturer.
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1. _______________ Leather used to make a baseballglove
2. _______________ Cost of endorsement from a
professional baseball player
3. _______________ Office supplies used at the company
headquarters4. _______________ Ink used to print a players autograph
on the baseball glove
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For Practice: PE 1-5A, PE 1-5B
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Follow My Example 1-4
1-2
Identify the following costs as a (a) product cost, or
(b) period cost for a baseball glove manufacturer.
(a) Product cost
(b) Period cost
(b) Period cost
(a) Product cost
1. _______________ Leather used to make a baseballglove
2. _______________ Cost of endorsement from a
professional baseball player
3. _______________ Office supplies used at the company
headquarters4. _______________ Ink used to print a players autograph
on the baseball gloveLeft click the mouse to reveal answers.
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Describe and illustrate the
financial statement elements
and cost relationships for a
manufacturing business.
Objective 3
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A Manufacturing Firms Inventories
Materials inventory:
Sometimes called raw materials
inventory
Consists of the costs of the direct andindirect 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 themanufacturing process but are
associated with products that have
not been completed.
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Finished goods inventory:
Consists ofcompleted(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 1-3
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Determining the Cost of GoodsManufactured
Materials inventory, December 1, 2008 $ 65,000
Add: materials purchased during December 100,000
Cost of materials available for use $165,000Less: materials inventory, Dec. 31, 2008 35,000
Cost of materials placed in production $130,000
to total manu-
facturing cost
STEP 1:
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Determining the Cost of GoodsManufactured
Cost of materials placed in production $130,000
from Step 1
STEP 2:
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Determining the Cost of GoodsManufactured
Cost of materials placed in production $130,000
Direct labor 110,000
to cost of goodsmanufactured
section
Factory overhead 44,000Total manufacturing costs added $284,000
STEP 2:
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Determining the Cost of GoodsManufactured
Work in process inventory, Dec. 1, 2008 $ 30,000
Add: total manufacturing costs added 284,000
from Step 2
STEP 3:
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5151
Determining the Cost of GoodsManufactured
Work in process inventory, Dec. 1, 2008 $ 30,000
Add: total manufacturing costs added 284,000
Total manufacturing costs $314,000Less: work in process inv, Dec 31, 2008 24,000
Cost of goods manufactured $290,000
STEP 3:
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5252
Manufacturing Company
Income Statement with
Statement of Cost ofGoods Manufactured (contd)
to income
statement
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Manufacturing Company
Income Statement with
Statement of Cost ofGoods Manufactured
fromstatement of
cost of goods
manufactured
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Example Exercise 1-5
Gauntlet Company has the following information for
January:
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Cost of materials placed in production $25,000
Direct labor 35,000
Factory overhead 20,000Work 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 12,000For January, determine the (a) cost of goods
manufactured, and (b) cost of goods sold.
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Follow My Example 1-5
1-3
(a) Work in process inventory, January 1 $ 30,000
Cost of materials placed in production $25,000
Direct labor 35,000
Factory overhead 20,000Total manufacturing costs added 80,000
Total manufacturing costs 110,000
Less: Work in process inventory, Jan. 31 25,000
Cost of goods manufactured $ 85,000
(Continued)
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5656
Follow My Example 1-5 (continued)
1-3
(b) Finished goods inventory, January 1 $ 15,000
Cost of goods manufactured 85,000
Cost of finished goods available for sale 100,000
Less: Finished goods inventory, January 31 12,000Cost of goods sold $ 88,000
For Practice: PE 18-5A, PE 18-5B
(Concluded)
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Describe the various
uses of managerial
accounting information.
Objective 4
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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 companys 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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