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Managerial Accounting

Concepts and Principles

Student Version

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Describe managerial accounting and the role of managerial accounting in a business.

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The Difference Between Managerial and Financial Accounting

Financial accounting information is reported at fixed intervals in general-purpose financial statements. These financial statements are prepared according to GAAP.

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Managerial accounting information is designed to meet the specific needs of a company’s management, such as historical data and subjective estimates about future decisions.

Managerial Accounting

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Planning

Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action.

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Strategic planning is developing long-range actions to achieve the company’s objectives. Long-range courses of action, called strategies, can often involve periods ranging from five to ten years.

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Strategic Planning

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Operational planning develops short-term actions for managing the day-to-day operations of the company.

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The process by which managers run day-to-day operations is called directing.

Directing

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Monitoring operating results and comparing actual results with the expected results is controlling. This feedback allows management to isolate areas for further investigation and possible remedial action.

Controlling

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Continuous process improvement is the philosophy of continually improving employees, business processes, and products.

Improving

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Inherent in each of the preceding management processes is decision making. Management must continually decide among alternative actions.

Decision Making

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Describe and illustrate the following costs: 1. direct and indirect costs; 2. direct materials, direct labor, and factory overhead costs; 3. product and period costs.

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Direct and Indirect Costs

Costs are often classified in terms of how they relate to an object or segment of operations, called a cost object. It may be a product, a sales territory, a department, or some activity. Direct costs are identified with and can be traced to a cost object. Indirect costs cannot be identified with or traced to a cost object.

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The cost of wood (materials) used by Legend Guitars in manufacturing a guitar is a direct cost of the guitar.

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A production supervisor’s salary is an indirect cost because it cannot be traced to any individual guitar.

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Direct Materials Cost

To be classified as a direct materials cost, the cost must be both of the following:

1. An integral part of the finished product

2. A significant portion of the total cost of the product

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Direct Labor Cost

The cost of employee wages that is an integral part of the finished product is classified as direct labor cost. A direct labor cost must be both of the following:1. An integral part of the finished

product2. A significant portion of the total

cost of the product

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Factory Overhead Cost

Costs, other than direct materials cost and direct labor cost, that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes also called manufacturing overhead or factory 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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Prime Costs and Conversion Costs

Prime costs consist of direct materials and direct labor costs. Conversion costs consist of direct labor and factory overhead. Conversion costs are the costs of converting the materials into a finish product.

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Product Costs

Product costs consist of the three elements of manufacturing cost: direct materials, direct labor, and factory overhead.

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Period costs are generally classified into two categories:

Period Costs

1. Selling expenses are incurred in marketing the product and delivering the sold product to the customer.

2. Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions.

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Describe and illustrate the following statements for a manufacturing business:

1. balance sheet2. statement of cost of goods

manufactured3. income statement.

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A Manufacturing Firm’s Inventories

Materials inventory:• Sometimes called raw materials

inventory• Consists of the costs of the direct

and indirect 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 the manufacturing process but are associated with products that have not been completed.

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A Manufacturing Firm’s Inventories

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Finished goods inventory:• Consists of completed (or

finished) products that have not been sold.

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A Manufacturing Firm’s Inventories

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Income Statement for a Manufacturing Company

Income statements for a merchandising and manufacturing business differ primary in the reporting of the cost of merchandise (goods) available for sale and sold during the period.

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Merchandising BusinessSales $XXXBeginning merchandise inventory $XXXPlus net purchases XXXMerchandise available for sale $XXX Less ending merchandise inventory XXXCost of merchandise sold XXXGross profit $XXX

Manufacturing BusinessSales $XXXBeginning finished goods inventory $XXXPlus cost of goods manufactured XXXCost of finished goods available for sale $XXX Less ending finished goods inventory XXXCost of goods sold XXXGross profit $XXX

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Materials inventory, January 1, 2010 $ 65,000Add: Materials purchased during December 100,000Cost of materials available for use $165,000Less: Materials inventory, Dec. 31, 2010 35,000

Cost of direct materials used $130,000

STEP 1:

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Determining the Cost of Goods Manufactured (Legend Guitar)

to total manufacturing

cost

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Determining the Cost of Goods Manufactured (Legend Guitar)

Cost of direct materials used $130,000

Factory overhead 44,000Total manufacturing costs added $284,000

STEP 2:

to cost of goods manufactured

section

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Direct labor 110,000

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Determining the Cost of Goods Manufactured (Legend Guitar)

STEP 3:

Total manufacturing costs $314,000Less work in process inventory, Dec. 31, 2010 24,000Cost of goods manufactured $290,000

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Work in process inventory, Jan. 1, 2010 $ 30,000Add: total manufacturing costs incurred 284,000

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Manufacturing Company—Income Statement with Statement of Cost of Goods Manufactured

from statement of

cost of goods manufactured

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Exhibit 10

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Describe the uses of managerial accounting information.

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Uses of Managerial Accounting

Managerial accounting provides the cost of manufacturing a product, which can be used to determine the selling price.

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Managerial accounting allows for comparing the costs of manufacturing and can, over time, be used to monitor and control the cost of direct materials, direct labor, and factory overhead.

Uses of Managerial Accounting

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Performance reports allow management to identify any large amounts of scrap materials or employee downtime.

Uses of Managerial Accounting

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Uses of Managerial Accounting

A report could analyze how many units need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel.

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