15-1 Copyright Houghton Mifflin Company. All rights reserved. Chapter 15 Introduction to Management Accounting Belverd E. Needles, Jr. Marian Powers

15-15-11Copyright Houghton Mifflin Company. All rights reserved.

Chapter 15Chapter 15Introduction toIntroduction to

Management AccountingManagement Accounting

Belverd E. Needles, Jr.Belverd E. Needles, Jr.

Marian PowersMarian Powers

Sherry K. MillsSherry K. Mills

Henry R. AndersonHenry R. Anderson- - - - - - - - - - -- - - - - - - - - - -

Multimedia Slides by:Multimedia Slides by:

Dr. Paul J. RobertsonDr. Paul J. RobertsonNew Mexico State UniversityNew Mexico State University

Steve LeaskSteve LeaskNew Mexico State UniversityNew Mexico State University


Introduction to Introduction to Management AccountingManagement Accounting

OBJECTIVE 1OBJECTIVE 1

DefineDefine management accounting management accounting and and distinguish between management distinguish between management accounting and financial accounting.accounting and financial accounting.


Management AccountingManagement Accounting» Management accounting is an Management accounting is an

extension of financial accounting and extension of financial accounting and applies mainly to internal operations.applies mainly to internal operations.

» Management accounting focuses on Management accounting focuses on the techniques and procedures for the techniques and procedures for information gathering and reporting information gathering and reporting to management.to management.


Management AccountingManagement Accounting

Product and service costing information.Product and service costing information.

Information for planning of and control Information for planning of and control over operations.over operations.

Special reports and analyses to assist in Special reports and analyses to assist in managerial decision making.managerial decision making.

» Managers need various types of Managers need various types of timely, accurate information.timely, accurate information.


Management AccountingManagement Accounting» Management accounting is necessary Management accounting is necessary

for all forms and sizes of business.for all forms and sizes of business.

The types of data needed to ensure The types of data needed to ensure efficient operations do not depend on an efficient operations do not depend on an organization’s size.organization’s size.

All organizations can become more All organizations can become more cost-effective and more profitable.cost-effective and more profitable.


What Is Management What Is Management Accounting?Accounting?

» Management accounting differs from Management accounting differs from financial accounting in many respects.financial accounting in many respects. Report format.Report format.

Purpose of reports.Purpose of reports.

Primary users.Primary users.

Units of measure.Units of measure.

Nature of information.Nature of information.

Frequency of reporting.Frequency of reporting.


The Management CycleThe Management Cycle


Explain the management cycle Explain the management cycle and its connection to management and its connection to management accounting.accounting.


The Management CycleThe Management Cycle» Management is expected to use Management is expected to use

resources wisely, operate profitably, resources wisely, operate profitably, pay debts, and abide by laws and pay debts, and abide by laws and regulations.regulations.

» Expectations motivate managers to Expectations motivate managers to establish the objectives, goals, and establish the objectives, goals, and strategic plans of the organization.strategic plans of the organization.


The Management CycleThe Management Cycle


The Management CycleThe Management Cycle» Management accounting services Management accounting services

information needs of management by:information needs of management by:

1.1. Developing plans and analyzing Developing plans and analyzing alternatives.alternatives.

2.2. Communicating plans to key personnel.Communicating plans to key personnel.

3.3. Evaluating performance.Evaluating performance.

4.4. Reporting the results of activities.Reporting the results of activities.

5.5. Accumulating, maintaining, and Accumulating, maintaining, and processing an organization’s financial processing an organization’s financial and nonfinancial information.and nonfinancial information.


Meeting the DemandsMeeting the Demandsof Global Competitionof Global Competition


Identify the new management Identify the new management philosophies for continuous philosophies for continuous improvement and discuss the role improvement and discuss the role of management accounting in of management accounting in implementing these philosophies.implementing these philosophies.


New Management New Management PhilosophiesPhilosophies

» Three significant new management Three significant new management philosophies are as follows:philosophies are as follows:

1. Just-in-time (JIT) operating environment.1. Just-in-time (JIT) operating environment.

2. Total quality management (TQM).2. Total quality management (TQM).

3. Activity-based management (ABM).3. Activity-based management (ABM).


New Management New Management PhilosophiesPhilosophies

» All of these approaches are designed All of these approaches are designed to:to:

1. Increase product quality.1. Increase product quality.

2. Reduce waste and inefficiency.2. Reduce waste and inefficiency.

3. Reduce cost.3. Reduce cost.

4. Increase customer satisfaction.4. Increase customer satisfaction.


The Continuous The Continuous Improvement EnvironmentImprovement Environment

Just-in-TimeOperating

Environment

Total QualityManagement

Activity-BasedManagement

Reduces or eliminates wasted time

Reduces or eliminateswasted resources

Reduces or eliminates nonvalue-adding

activities

Product/service costs and time reduced

Product/service quality andcustomer satisfaction increased

Means of Continuous Improvement


Performance MeasuresPerformance Measures


Define Define performance measures,performance measures, recognize the uses of these recognize the uses of these measures in the management measures in the management cycle, and prepare an analysis of cycle, and prepare an analysis of nonfinancial data.nonfinancial data.



» Performance measures provide an Performance measures provide an

indication of an organization’s indication of an organization’s

performance in relation to a specific performance in relation to a specific

process, activity, or task.process, activity, or task.


Performance MeasuresPerformance Measures» Financial performance measures:Financial performance measures:

1. Return on investment.1. Return on investment.

2. Net income as a percentage of sales.2. Net income as a percentage of sales.

3.3. Costs of poor quality as a percentage of Costs of poor quality as a percentage of sales.sales.

» Nonfinancial performance measures:Nonfinancial performance measures:

1. Number of customer complaints.1. Number of customer complaints.

2. Hours of inspection.2. Hours of inspection.

3. Time to fill an order.3. Time to fill an order.



» Performance measures are useful Performance measures are useful in reducing waste in operating in reducing waste in operating activities.activities.

» Management uses performance Management uses performance measures in all stages of the measures in all stages of the management cycle.management cycle.


Merchandising Versus Merchandising Versus Manufacturing OrganizationsManufacturing Organizations


Compare accounting for Compare accounting for

inventories and cost of goods sold inventories and cost of goods sold

in merchandising and in merchandising and

manufacturing organizations.manufacturing organizations.


ManufacturersManufacturers» Manufacturers design and Manufacturers design and

manufacture products for sale.manufacture products for sale.

1.1. They must accumulate the costs They must accumulate the costs

of manufacturing products.of manufacturing products.

2.2. Their inventory consists of Their inventory consists of

materials, work in process, materials, work in process,

and and finished goods.finished goods.


Manufacturing OrganizationManufacturing Organization

Beginning Finished Goods Inventory

+ Cost of Goods Manufactured

- Ending Finished Goods Inventory

= Cost of Goods Sold


MerchandisersMerchandisers» Merchandisers purchase goods Merchandisers purchase goods

already manufactured, and resell them.already manufactured, and resell them.

1.1. They accumulate the They accumulate the purchasedpurchased cost of goods.cost of goods.

2.2. They have only one type of They have only one type of inventory (merchandise inventory).inventory (merchandise inventory).


Merchandising OrganizationMerchandising Organization

Beginning Merchandise Inventory

+ Cost of Goods Purchased

- Ending Merchandise Inventory

= Cost of Goods Sold


ManufacturingManufacturingVersus MerchandisingVersus Merchandising

» Both types of organizations report:Both types of organizations report:

The cost of unsold goods on the The cost of unsold goods on the balance sheet.balance sheet.

The cost of goods sold on the The cost of goods sold on the income statement.income statement.


Cost ClassificationCost Classification


Identify various approaches Identify various approaches managers use to classify costs managers use to classify costs and show how the purpose of a and show how the purpose of a manager’s cost analysis can manager’s cost analysis can change the classification of a change the classification of a single cost item.single cost item.


Cost ClassificationCost Classification» In management accounting, a single In management accounting, a single

cost can be classified as:cost can be classified as:

1. Direct or indirect.1. Direct or indirect.

2. Variable or fixed.2. Variable or fixed.

3. Value-adding or nonvalue-adding.3. Value-adding or nonvalue-adding.

4. Product or period.4. Product or period.

5. Inventoriable or noninventoriable.5. Inventoriable or noninventoriable.


Purposes of Cost AnalysisPurposes of Cost Analysis» Purposes of cost analysis by Purposes of cost analysis by

classification:classification:

1.1. Traceability (direct or indirect).Traceability (direct or indirect).

2.2. Financial reporting (product or period, Financial reporting (product or period, inventoriable or noninventoriable).inventoriable or noninventoriable).

3.3. Behavior (variable or fixed).Behavior (variable or fixed).

4.4. Value (value-adding or nonvalue-Value (value-adding or nonvalue-adding).adding).


Sweet Treasures Candy StoreSweet Treasures Candy Store

Cost of GoodsCost of GoodsAvailable for SaleAvailable for Sale

$26,000$26,000

Net CostNet Costof Purchasesof Purchases$23,000$23,000

Beginning Beginning MerchandiseMerchandiseInventoryInventory$3,000$3,000

Ending Ending MerchandiseMerchandiseInventoryInventory$4,500$4,500Cost ofCost of

Goods SoldGoods Sold$21,500*$21,500*

*Cost of goods sold = $3,000 + $23,000 - $4,500 = $21,500

Balance SheetBalance SheetCurrent Assets SectionCurrent Assets Section

Merchandise Inventory(Finished Product Ready for Resale)

Income StatementIncome StatementCost of Goods SoldCost of Goods Sold


Hatcher Candy CompanyHatcher Candy Company

Cost ofCost ofGoodsGoodsManufacturedManufactured$144,000$144,000

Beginning Beginning FinishedFinishedGoodsGoodsInventoryInventory$52,000$52,000

Cost of GoodsCost of GoodsAvailable for SaleAvailable for Sale

$196,000$196,000

Balance SheetBalance SheetCurrent Assets SectionCurrent Assets Section

Materials Inventory(Unused Materials)Work in Process Inventory(Unfinished Product)Finished Goods Inventory(Finished Product Readyfor Sale)

Income StatementIncome StatementCost of Goods SoldCost of Goods Sold

Ending Ending Finished GoodsFinished GoodsInventoryInventory$78,000$78,000

Cost ofCost ofGoods SoldGoods Sold$118,000*$118,000*

*Cost of goods sold = $52,000 + $144,000 - $78,000 = $118,000


Cost Classification Cost Classification and Cost Analysisand Cost Analysis

Purpose of Cost Classification

CostExamples

TraceabilityOf Product

CostBehavior Value

FinancialReporting

Sugar forcandy

Direct Variable Value-adding

Product

Depreciation onmixing machine

Indirect Fixed Value-adding

Product

Salescommission ____

Variable Value-adding

Period

Accountant'ssalary ____

Fixed Nonvalue-adding

Period

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15-1 Copyright Houghton Mifflin Company. All rights reserved. Chapter 15 Introduction to Management Accounting Belverd E. Needles, Jr. Marian Powers