Managerial Accounting Basics

 

Managerial accounting basics 

• Managerial accounting provides economic and financial information for managers and other internal users.

Difference between Financial Accounting and Managerial Accounting

Management Function 

• PLANNING: requires managers to look ahead and to establish objectives. Focus on HOW to ADD VALUE.  
• DIRECTING: involves coordinating a company’s diverse activities and human resources to produce a smooth-running operation. This function relates to implementing planned objectives and providing necessary incentives to motivate employees. 
•  CONTROLLING: the process of keeping the company’s activities on track. In controlling operations, managers determine whether planned goals are being met.

Organizational Structure 

• Most companies prepare organization charts to show the interrelationships of activities and the delegation of authority and responsibility within the company. 
• Stockholders own the corporation, but they manage it indirectly through a board of directors they elect. 
•  The chief executive officer (CEO) has overall responsibility for managing the business.  Responsibilities within the company are frequently classified as either line or staff positions. 
•  Employees with line positions are directly involved in the company’s primary revenue-generating operating activities. Employees with staff positions are involved in activities that support the efforts of the line.
• The chief financial officer (CFO) is responsible for all of the accounting and fi nance issues the company faces. 

Business Ethics :

• CREATING PROPER INCENTIVES: if the budget is set at unattainable levels, managers sometimes take unethical actions to meet the target. 
• CODE OF ETHICAL STANDARDS: In response to corporate scandals, the U.S. Congress enacted the Sarbanes-Oxley Act (SOX) to help prevent lapses in internal control. One result of SOX was to clarify top management’s responsibility for the company’s financial statements. Another result of SOX is that companies now pay more attention to the composition of the board of director. 
• To provide guidance for managerial accountants, the Institute of Management Accountants (IMA) has developed a code of ethical standards, entitled IMA Statement of Ethical Professional Practice.

Managerial Cost Concepts

Manufacturing cost

• Manufacturing consists of activities and processes that convert raw materials into finished goods. 
• Contrast this type of operation with merchandising, which sells merchandise in the form in which it is purchased 
• Manufacturing costs are classified as direct materials, direct labor, and manufacturing overhead.

Direct Material

✘ To obtain the materials that will be converted into the finished product, the manufacturer purchases raw materials. 

✘ Raw materials are the basic materials and parts used in the manufacturing process. 

✘ Raw materials that can be physically and directly associated with the finished product during the manufacturing process are direct materials. 

✘ Examples include flour in the baking of bread, syrup in the bottling of soft drinks, and steel in the making of automobiles.

✘ Some raw materials cannot be easily associated with the finished product. 

✘ These are called indirect materials. Indirect materials have one of two characteristics: 

(1) They do not physically become part of the finished product (such as lubricants used by Current Designs in its equipment and polishing compounds used for the finishing touches on kayaks); 

(2) They are impractical to trace to the finished product because their physical association with the finished product is too small in terms of cost (such as cotter pins and lock washers). 

✘ Companies account for indirect materials as part of manufacturing overhead.

Direct Labor

✘ The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is direct labor. 

✘ Indirect labor refers to the work of employees that has no physical association with the finished product, or for which it is impractical to trace costs to the goods produced. 

✘ Like indirect materials, companies classify indirect labor as manufacturing overhead.

Manufacturing Overhead

✘ Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. 

✘ Overhead costs also include manufacturing costs that cannot be classified as direct materials or direct labor. 

✘ Manufacturing overhead includes indirect materials, indirect labor, depreciation on factory buildings and machines, and insurance, taxes, and maintenance on factory facilities

Product and Period Costs 

✘ Each of the manufacturing cost components—direct materials, direct labor, and manufacturing overhead—are product costs. 

✘ As the term suggests, product costs are costs that are a necessary and integral part of producing the finished product. 

✘ Companies record product costs, when incurred, as inventory. These costs do not become expenses until the company sells the finished goods inventory. At that point, the company records the expense as cost of goods sold.

✘ Period costs are costs that are matched with the revenue of a specific time period rather than included as part of the cost of a salable product. 

✘ These are nonmanufacturing costs. Period costs include selling and administrative expenses. 

✘ In order to determine net income, companies deduct these costs from revenues in the period in which they are incurred.

Manufacturing Costs in Financial statements

✘ The financial statements of a manufacturer are very similar to those of a merchandiser. 

✘ The principal differences between their financial statements occur in two places: the cost of goods sold section in the income statement and the current assets section in the balance sheet.

INCOME STATEMENT

✘ Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section. 

✘ Merchandisers compute cost of goods sold by adding the beginning merchandise inventory to the cost of goods purchased and subtracting the ending merchandise inventory. 

✘ Manufacturers compute cost of goods sold by adding the beginning finished goods inventory to the cost of goods manufactured and subtracting the ending finished goods inventory. 

✘ A number of accounts are involved in determining the cost of goods manufactured. To eliminate excessive detail, income statements typically show only the total cost of goods manufactured. 

✘ A separate statement, called a Cost of Goods Manufactured Schedule, presents the details

INCOME STATEMENT EXAMPLE

Cost of Goods Manufactures (COGM)

✘ An example may help show how companies determine the cost of goods manufactured. 

✘ Assume that on January 1, Current Designs has a number of kayaks in various stages of production. In total, these partially completed units are called beginning work in process inventory. 

✘ The costs the company assigns to beginning work in process inventory are based on the manufacturing costs incurred in the prior period. 

✘ Current Designs first incurs manufacturing costs in the current year to complete the work that was in process on January 1. It then incurs manufacturing costs for production of new orders. 

✘ The sum of the direct materials costs, direct labor costs, and manufacturing overhead incurred in the current year is the total manufacturing costs for the current period.

COGM Schedule 

✘ The cost of goods manufactured schedule reports cost elements used in calculating cost of goods manufactured. 

✘ The schedule in the next slide presents detailed data for direct materials and for manufacturing overhead. 

✘ You should be able to distinguish between “Total manufacturing costs” and “Cost of goods manufactured.” 

✘ The difference is the effect of the change in work in process during the period.

BALANCE SHEET

PRODUCT COSTING IN SERVICE INDUSTRIES

✘ This chapter’s examples used manufacturing companies because accounting for the manufacturing environment requires the use of the broadest range of accounts. 

✘ That is, the accounts used by service companies represent a subset of those used by manufacturers because service companies are not producing inventory. Neither the restaurant, the airline, or the marketing agency discussed above produces an inventoriable product.

✘ However, just like a manufacturer, each needs to keep track of the costs of its services in order to know whether it is generating a profit. 

✘ A successful restaurateur needs to know the cost of each offering on the menu, an airline needs to know the cost of flight service to each destination, and a marketing agency needs to know the cost to develop a marketing plan.