intro to ma - chapter 1

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Chapter 1

Managerial Accounting


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Management Accounting

It is the process of identifying, measuring,accumulating, analyzing, preparing,interpreting, and communicatinginformation that managers use tofulfill organizational objectives.

What is Management Accounting?


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MANAGERIAL ACCOUNTING BASICS

A field of accounting that provides

economic and financial information

for managers and other internal users


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Financial Accounting

It refers to accounting informationdeveloped for the use of external partiessuch as stockholders, suppliers, banks,and government regulatory agencies.

What is Financial Accounting?


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COST ACCOUNTING

Technique or method for determining the cost of a product, process or thing.

Comprehensive set of principles, methods and techniques in the determination and appropriate analysis of cost to meet the needs of management accounting.


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Planning and Controlling

It is the purposeful choice from amonga set of alternative courses of actiondesigned to achieve some objective.

What is decision making?

This is the core of the management process.


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Planning and Controlling

The Management Process Internal Accounting System

Planning•Increase Productivity

Controlling•Actions•Evaluations

Cor

rect

ion

s an

d

Rev

isio

ns

of P

lan

s an

d A

ctio

ns

Budgets,Special Reports

FinancialAccountingSystem

PerformanceReports

Customersurveys

Competitoranalysis

Advertisingimpact

New itemsreport


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Role of Budgets

A budget is a quantitative expression of a plan of action and is an aid to coordinating and implementing the plan.

Budgets are the chief devices for compelling and disciplining management planning.


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Role ofPerformance Reports

Performance reports formalize controls andprovide feedback by comparing results withplans and by highlighting variances.

Variances are deviations from the plan.


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Performance Report

Budgeted Actual Variance Amount Amount Amount

Revenues 25,000 19,000 6,000 U

Expenses 20,000 15,000 5,000 FNet Income 5,000 4,000 1,000 U F = Favorable U = Unfavorable


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MANAGERIAL COST CONCEPTSManufacturing Costs Manufacturing consists of activities to

convert raw materials into finished goods.

In contrast, a merchandising firm sells goods in the form in which they were bought.


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MANAGERIAL COST CONCEPTS

Manufacturing Costs - Materials Direct Materials

Raw materials - basic materials used in manufacturing.

Raw materials that can be physically and directly associated with the finished product are called direct materials.

Examples includeFlour in the baking of breadSyrup in the bottling of soft drinksSteel used in making automobiles


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Manufacturing Costs- Materials Indirect Materials

Raw materials that cannot be easily associated with the finished product are called indirect materials.

Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost

Considered part of manufacturing overhead


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Manufacturing Costs - Labor Direct Labor

Work of factory employees that can be physically and directly associated with converting raw materials into finished goods

Examples include Bottlers at Coca-Cola Bakers at Sara Lee Typesetters at a newspaper


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Manufacturing Costs - Labor Indirect Labor

Work of factory workers that have no physical association with the finished product or for which it is impractical to trace to the goods produced

Examples include Wages of maintenance workers Supervisors Time-Keepers


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Manufacturing Costs – Manufacturing

Overhead Costs that are indirectly associated with manufacturing

the product

Examples includeIndirect materialsIndirect laborDepreciation on factory buildingsInsurance, taxes, maintenance on

factory facilities

Basically manufacturing overhead includes all manufacturing costs except direct materials and direct labor.


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PRODUCT VERSUS PERIOD COSTSProduct Costs

Consist of the direct material cost, the direct labor cost, and the manufacturing overhead cost

A necessary and integral part of producing the product

Recorded as inventory when incurred

Do not become expenses until the finished goods inventory is sold


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PRODUCT VERSUS PERIOD

COSTS

Period Costs Matched with revenue of a specific time period and charged to

expense as incurred.

Non-manufacturing costs

Deducted from revenues in period incurred to determine net income

Include all Selling expenses General and Administrative expenses


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PRODUCT VERSUS PERIOD COSTS

All cost

Product cost Period cost

MaterialLaborFOH

Selling and AdminExpenses


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MANAGERIAL ACCOUNTING TODAY

Managerial Accounting Practices Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured or purchased just in time for use

Quality Increased emphasis on product quality because goods

are produced only as neededTotal Quality Management (TQM) - a philosophy of

zero defects Activity-Based Costing (ABC)

Allocates overhead based on use of specific activities or functions of the company (number of orders or number of machine set ups)

Results in more accurate product costing and scrutiny of all activities in the value chain


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Raw material used

Raw material beginning 50,000

Net Purchases of raw material- (return and discount) 300,000

Carriage in 5000

Raw material available for use 355,000

Raw material ending -40,000

Raw material used 395,000


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Prime cost


Direct labor 200,000

Direct expenses or cost 45,000

Prime cost 640,000


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Conversion cost


Factory overhead 160,000

Conversion cost 360,000


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Total manufacturing cost

Direct material used

Direct labor

Direct expenses

Factory overhead

+


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Direct expense 45,000



Total manufacturing cost 800,000


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Cost of goods manufactured


+Work In Process- beginning

-Work In Process-ending


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Cost of goods manufactured


Add: Work-in-process-beg 56,000

Less: Work-in-process-end 75,000

Cost of goods manufactured 781,000


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COST OF GOODS SOLD of Trading activities

Opening Stock 50,000

Purchases-net 400,000

Goods available for sale 450,000

Less: Ending stock (80,000)

Cost of goods sold 370,000


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Cost of Goods Sold of Manufacturing concern

Finished goods-opening 125,000



Less: Finished goods-ending 37800



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STATEMENT OF COST OF GOODS MANUFACTURED

Raw material used

Raw material beginning 50,000

Purchases 300,000

Carriage in 5000

available for use 355,000

Raw material ending -40,000



Direct expenses or cost 45,000

Prime cost 640,000



Add: Work-in-process-beg 56,000

Less: Work-in-process-end 75,000



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INCOME STATEMENT

Sales revenue 1500000

less: Sales return 20,000

Sales discount 15000

Net Sales 1,465,000

Less: Cost of goods sold

Finished goods-opening 125,000



Less: Finished goods-ending 37800


Gross Profit 596,800

Less: Operating expense

Administrative expense 75,000

Selling expense 60,000

Total expense 135,000

Net profit 461,800


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SALES - COST OF GOODS SOLD =

GROSS PROFIT


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COST CONCEPT

FIXED COSTThat do not vary as production volume change under relevant range

For example: Rent, depreciation, repair and maintenance

VARIABLE COSTthat vary as production volume change

For example: Direct material, direct labor, electricity, indirect material


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SEMI VARIABLE COST

Some portion of cost remains fixed and some vary as production volume change

For example: Repair, indirect labor, supervisor salary, telephone charges,

intro to ma - chapter 1

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