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Fundamental Managerial Accounting ConceptsThomas P. Edmonds

Bor-Yi Tsay

Philip R. Olds

Copyright © Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinMcGraw-Hill/Irwin

Fifth Edition

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CHAPTER 1Management Accounting and Corporate Governance

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Learning Objective

LO1

Distinguish between

managerial and financial

accounting.

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Learning Objective

LO2

Identify the cost components of a product made by a manufacturing

company: the cost of materials, labor, and

overhead.

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Product Costs in Manufacturing Companies

Materials Labor Overhead

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Average Cost per Unit

Total CostNumber of Units

= Average Cost per Unit

= $250$1,000

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Tabor Example Average Cost Per Unit

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Costs Can Be Assets or Expenses

Period Cost Expense

COGSAssetProduct

Cost

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Learning Objective

LO3

Explain the effects on financial statements of product costs versus general, selling, and administrative costs.

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Patillo Manufacturing Company Transactions

Event 1 Acquired additional $15,000 cash by issuing common stock. Event 2 Paid $2,000 for the materials that were used to make its products. All

products started were completed during the period. Event 3 Paid $1,200 for salaries of selling and administrative employees. Event 4 Paid $3,000 for wages of production workers. Event 5 Paid $2,800 for furniture used in selling and administrative offices. Event 6 Recognized depreciation expense on office furniture purchased in Event

5. The furniture acquired on January 1 had a $400 estimated salvage value and a four-year useful life. The annual depreciation charge is $600 [($2,800 - $400)/4].

Event 7 Paid $4,500 for manufacturing equipment. Event 8 Recognized depreciation expense on equipment purchased in Event 7.

The equipment acquired on January 1 had a $1,500 estimated salvage value and a three-year useful life. The annual depreciation charge is $1,000 [($4,500 - $1,500)/3].

Event 9 Sold inventory to customers for $7,500 cash. Event 10 The inventory sold in Event 9 cost $4,000 to make.

Patillo Manufacturing Company experienced the following transactions:

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Labor Costs

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Overhead Costs

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Total Product Cost

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Overhead Costs: A Closer Look

Indirect Costs

Depreciation Supervisor’s Salary Utilities

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Indirect Cost Allocation

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Manufacturing Cost Summary

DirectMaterials

DirectLabor

ManufacturingOverhead

Raw materialcosts that can

be easily tracedto products.

Factory wagesthat can be easily traced to products.

Other factory costs such as indirect

materials and labor, utilities, rent, security,

and depreciation.

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Learning Objective

LO4

Distinguish product costs from

upstream and downstream costs.

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Upstream and Downstream CostsUpstream

Costs

Occur before the manufacturing process begins.

Downstream Costs

Occur after the manufacturing process begins.

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Learning Objective

LO5

Explain how product costing differs in

service, merchandising, and

manufacturing companies.

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Product Costing in Service and Merchandising CompaniesService

CompaniesMerchandising

Companies

Provide products to customers that are

consumed immediately

Sell products other companies make

Service and merchandising companies also incur labor and overhead costs. However, these costs are normally treated as general, selling and administrative expenses

rather than accumulated in inventory accounts.

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Learning Objective

LO6

Explain how just-in-time inventory

can increase profitability.

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Just-in-TimeMany businesses have been able to simultaneously reduce their inventory holding costs and increase

customer satisfaction by making products available just-in-time (JIT) for customer consumption.

For example, hamburgers that are cooked to order

are fresher and more individualized than those

that are prepared in advance and stored until a

customer orders one.

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Corporate GovernanceCorporate governance is a set of relationships between

the board of directors, management, shareholders, auditors, and other stakeholders that determine how a

company is operated.

Board of DirectorsAuditors

Management

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Learning Objective

LO7

Identify the key components of

corporate governance.

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The Motive to Manipulate

PromotionsPay raisesBonuses

Stock options

Passed over for promotionsDemoted

Fired

Strong Financials Weak Financials

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Marion Manufacturing Company

Marion Manufacturing Company (MMC) had the following transactions:

1. MMC was started when it acquired $12,000 from issuing common stock.

2. MMC incurred $4,000 of costs to design its product and plan the manufacturing process.

3. MMC incurred specifically identifiable product costs of $8,000.

4. MMC made 1,000 units of product and sold 700 of the units for $18 each.

Let’s look at two scenarios for MMC.

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Marion Manufacturing Company

Scenario 1

The $4,000 of design and planning costs are

classified as selling and general and administrative.

Scenario 2

The $4,000 of design and planning costs are classified as product costs, meaning they are first accumulated

in the inventory account and then

expensed when the goods are sold.

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Ethical ConsiderationsCertified Management Accountants are

guided by the IMA Statement of Ethical Professional Practice

The statement provides standards onCompetenceConfidentialityIntegrityCredibilityResolution of ethical conflict

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Common Features of Criminal and Ethical Misconduct

Fraud Triangle

Opportunity

RationalizationPressure

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Internal Control Practices

Separating Duties

Hiring Competent Personnel

Bonding Employees

Using Prenumbered Documents

Establishing Physical Controls

Performing Evaluations at

Regular Intervals

Requiring Extended Absences

Establishing Clear Lines of

Authority & Responsibility

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Sarbanes-Oxley Act of 2002

Internal Controls

CEO and CFO Certification

Code of Ethics

Hotline for Anonymous Reporting

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Learning Objective

LO8

Identify emerging trends in

accounting. (Appendix A)

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Benchmarking: Identifying Best Practices of Global Competitors

Total Quality Management

(TQM)

Activity-Based Management

(ABM)

Comprehensive Value Chain

Analysis

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End of Chapter 1