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Fundamental Managerial Accounting Concepts

4th Edition

Thomas P. Edmonds

Bor-Yi Tsay

Phillip R. Olds

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CHAPTER 1

Management Accounting and

Corporate Governance

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Learning Objective

LO1LO1

To distinguish between

managerial and financial accounting

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Learning Objective

LO2LO2

To identify the cost components of a product made by a manufacturing

company: the cost of materials, labor, and

overhead

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Product Costing

Product Costing

Managers need to know the cost of their products and

services.

Cost Plus Pricing

A common business practice.

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Product Costs in Manufacturing Companies

Materials Labor Overhead

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Average Cost per Unit

Total Cost

Number of Units= Average Cost per Unit

= $250$1,000

4

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

LO3LO3

To 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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Insert Exhibit 1-5 Here

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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

DepreciationSupervisor’s Salary

Utilities

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Indirect Cost Allocation

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Manufacturing Cost Summary

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Learning Objective

LO4LO4

To distinguish product costs from

upstream and downstream costs

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Upstream and Downstream Costs

Upstream Costs

Occur before the

manufacturing process begins.

Downstream Costs

Occur after the manufacturing process begins.

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Learning Objective

LO5LO5

To explain how product costing

differs in service, merchandising, and

manufacturing companies

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Product Costing in Service and Merchandising Companies

ServiceCompanies

Merchandising Companies

Provide services to customersSell products other companies make

Service and merchandising companies also incur materials, 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

LO6LO6

To 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 Directors

Auditors

Management

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Learning Objective

LO7LO7

To explain how cost classifications can be used to manipulate financial statements

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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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Learning Objective

LO8LO8

To identify the standards of ethical

conduct and the features that

motivate misconduct

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Ethical Considerations

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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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Learning Objective

LO9LO9

To explain how the Sarbanes-Oxley

Act affects management accountants

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Sarbanes-Oxley Act of 2002

Internal Controls

Internal Controls

CEO and CFO Certification

CEO and CFO Certification

Code of Ethics

Code of Ethics

Hotline for Anonymous Reporting

Hotline for Anonymous Reporting

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End of Chapter 1