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Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

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Page 1: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-1

Page 2: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-2

Chapter 19

Managerial

Accounting

Accounting Principles, Ninth Edition

Page 3: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-3

1. Explain the distinguishing features of managerial accounting.

2. Identify the three broad functions of management.

3. Define the three classes of manufacturing costs.

4. Distinguish between product and period costs.

5. Explain the difference between a merchandising and a manufacturing income statement.

6. Indicate how cost of goods manufactured is determined.

7. Explain the difference between a merchandising and a manufacturing balance sheet.

8. Identify trends in managerial accounting.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Page 4: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-4

Managerial AccountingManagerial AccountingManagerial AccountingManagerial Accounting

Compare Compare Managerial and Managerial and Financial Financial AccountingAccounting

Management Management FunctionsFunctions

Business Ethics Business Ethics

Manufacturing Manufacturing CostsCosts

Product vs. Product vs. Period CostsPeriod Costs

Service Industry Service Industry TrendsTrends

Managerial Managerial Accounting Accounting PracticesPractices

Income Income StatementStatement

Balance SheetBalance Sheet

Cost Concepts – Cost Concepts – A Review A Review

Managerial Managerial

Accounting Accounting

BasicsBasics

Managerial Managerial

Accounting Accounting

BasicsBasics

Managerial Cost Managerial Cost

ConceptsConcepts

Managerial Cost Managerial Cost

ConceptsConcepts

Manufacturing Manufacturing Costs in Costs in Financial Financial

StatementsStatements

Manufacturing Manufacturing Costs in Costs in Financial Financial

StatementsStatements

Managerial Managerial

Accounting Accounting

TodayToday

Managerial Managerial

Accounting Accounting

TodayToday

Page 5: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-5

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

A field of accounting that provides economic A field of accounting that provides economic and financial information for managers and and financial information for managers and

other internal users.other internal users.

Also calledAlso called Management AccountingManagement Accounting

Definition of Managerial Accounting

Page 6: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-6

Managerial Accounting Activities

Explain manufacturing and nonmanufacturing costs and how they are reported. (Chapter 19)

Compute cost of providing a service or manufacturing a product. (Chapters 20 and 21)

Determine behavior of costs and expenses as activity changes. (Chapter 22)

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

Page 7: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-7

Managerial Accounting Activities (continued)

Assist management in profit planning and formalizing these plans in the form of budgets. (Chapter 23)

Help to control costs by comparing actual results with planned objectives and standard costs. (Chapters

24 and 25)

Accumulate and present data for making decisions. (Chapter 26)

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

Page 8: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-8

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

Applies to all types of business -Service, Merchandising, and Manufacturing

Applies to all forms of businesses –Proprietorships, Partnerships, and Corporations

Applies to not-for-profit and profit oriented companies

Distinguishing Features

Page 9: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-9

More responsible for strategic cost management

Teams with people from production, marketing, engineering, etc.

Aid in making critical decisions

Distinguishing Features: Continued

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

Page 10: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-10

Both deal with economic events of a business –

Thus, interests overlap

Both require that economic events be quantified and communicated tointerested parties –

Determining unit cost is part of managerial accounting,

Reporting cost of goods manufactured

is a part of financial accounting

Similarities

SO 1 Explain the distinguishing features of managerial accounting.SO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccountingComparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting

Page 11: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-11

Differences

SO 1 Explain the distinguishing features of managerial accountingSO 1 Explain the distinguishing features of managerial accounting ..

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccountingComparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting

Illustration 19-1

Page 12: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-12

Managerial accounting:Managerial accounting:

a.a. Pertains to the entity as a whole and is highly Pertains to the entity as a whole and is highly aggregatedaggregated.

b. Places emphasis on special-purpose information.

c. Is limited to cost data.

d. Is governed by generally accepted accounting principles.

Review QuestionReview Question

SO 1 Explain the distinguishing features of managerial SO 1 Explain the distinguishing features of managerial accounting.accounting.

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccountingComparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting

Page 13: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-13

Management’s activities and responsibilities Management’s activities and responsibilities can be classified into the following three can be classified into the following three

broad functions:broad functions:

PlanningPlanning DirectingDirecting

ControllingControlling

Management Functions

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

Page 14: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-14

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

Look ahead and establish objectives such as –

Maximize short-term profitCommit to environmental protection

Key Objective: Add value to the business

Value measured by trading price of stock and by potential selling price of the company

Planning

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Page 15: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-15

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including executives, managers, and supervisors

Produce smooth-running operation

Directing

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Page 16: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-16

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

Keep activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or formal system of evaluations

Good decision making is the outcome of good judgment in planning, directing, and

controlling.

Controlling

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Page 17: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-17

The management of an organization performs The management of an organization performs several broad functions. They are:several broad functions. They are:

a.a. Planning, directing, and sellingPlanning, directing, and selling.

b. Directing, manufacturing, and controlling.

c. Planning, manufacturing, and controlling.

d. Planning, directing, and controlling.

Review QuestionReview Question

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Page 18: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-18

Business Ethics

Business scandals caused massive investment losses and employee layoffs.

Corporate fraud has increased 13% in last 5 years.

Employee fraud – 60% of all fraud

Intentional misstatement of financial reports Aka financial reporting fraud

Most costly to companies

Good Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good Business

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Page 19: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-19

Creating Proper Incentives

Systems to monitor and evaluate employees may produce incentives for unethical actions.

Employees may feel that they must succeed no matter what.

Ineffective and unrealistic controls may result in declining product quality.

Good Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good Business

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Page 20: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-20

Sarbanes-Oxley Act of 2002

Clarifies management’s responsibilities.

Certifications by CEO and CFO -fairness of financial statements and

adequacy of internal control

Selection criteria for Board of Directors and Audit Committee

Substantially increased penalties for misconduct

IMA Statement of Ethical Professional Practices

Good Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good Business

Code of Ethical Standards

SO 2 Identify the 3 broad functions of management.SO 2 Identify the 3 broad functions of management.

Page 21: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-21

Manufacturing Costs

Manufacturing consists of activities to convert raw materials into finished goods.

In contrast, a merchandising firm sells goods in the form in which they were bought.

Categories of manufacturing costs include:

Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts

SO 3 – Define the three classes of manufacturing costs.SO 3 – Define the three classes of manufacturing costs.

Illustration 19-2

Page 22: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-22

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

Materials

SO 3 Define the three classes of manufacturing SO 3 Define the three classes of manufacturing costs.costs.

Raw MaterialsBasic materials used in manufacturing

Direct Materials Raw materials that can be physically and directly associated with the finished

product

Page 23: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-23

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

Materials

SO 3 Define the three classes of manufacturing SO 3 Define the three classes of manufacturing costs.costs.

Indirect Materials

Raw materials that cannot be easily associated with the finished product

Not physically part of the finished product or they are an insignificant part of finished product in terms of cost

Considered part of manufacturing overhead

Page 24: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-24

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

Labor

SO 3 Define the three classes of manufacturing SO 3 Define the three classes of manufacturing costs.costs.

Direct LaborWork of factory employees that can be

physically and directly associated with converting raw materials into finished goods

Indirect Labor Work of factory employees that has no

physical association with the finished product or for which it is impractical to trace to the goods produced

Page 25: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-25

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

SO 3 Define the three classes of manufacturing SO 3 Define the three classes of manufacturing costs.costs.

Manufacturing Overhead

Costs that are indirectly associated with manufacturing the product

Includes all manufacturing costs except direct materials and direct labor

Page 26: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-26

Which of the following is Which of the following is notnot an element an element of manufacturing overhead?:of manufacturing overhead?:

a.a. Sales manager’s salary.Sales manager’s salary.

b. Plant manager’s salary.

c. Factory repairman’s wages.

d. Product inspector’s salary.

Review QuestionReview Question

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

SO 3 Define the three classes of manufacturing SO 3 Define the three classes of manufacturing costs.costs.

Page 27: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-27

Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs

SO 4 Distinguish between product and period costs.SO 4 Distinguish between product and period costs.

Product Costs

Components: direct material cost, direct labor cost, and manufacturing overhead

A necessary and integral part of producing the product

Recorded as inventory when incurred

Not an expense until the finished goods inventory is sold, then record as cost of goods sold

Page 28: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-28

Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs

SO 4 Distinguish between product and period costs.SO 4 Distinguish between product and period costs.

Period Costs

Matched with revenue of a specific time period and charged to expense as incurred

Non-manufacturing costs

Deducted from revenues in period incurred to determine net income

Includes all selling and administrative expenses

Page 29: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-29

Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs

SO 4 Distinguish between product costs and SO 4 Distinguish between product costs and

period costsperiod costs..

Illustration 19-3

Page 30: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-30

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

SO 5 Explain the difference between a SO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statement.statement.

Income Statement

The income statement for a manufacturer is similar to that of a merchandiser except

for the cost of goods sold section.

Page 31: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-31

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Cost of Goods Sold ComponentsMerchandiser versus Manufacturer

SO 5 Explain the difference between a SO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statement.statement.

Illustration 19-4

Page 32: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-32

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Cost of Goods Sold Section of the Income Statement

SO 5 Explain the difference between a SO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statementstatement..

Illustration 19-5

Page 33: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-33

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Determining the Cost of Goods Manufactured

SO 6 Indicate how cost of goods manufactured is determinedSO 6 Indicate how cost of goods manufactured is determined ..

Work in Process – partially completed units of product

Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period

Illustration 19-6

Page 34: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-34

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

SO 6 Indicate how cost of goods manufactured is determinedSO 6 Indicate how cost of goods manufactured is determined ..

Illustration 19-7

Page 35: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-35

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Balance Sheet - Inventories

SO 7 Explain the difference between a merchandising and a SO 7 Explain the difference between a merchandising and a manufacturing balance sheet.manufacturing balance sheet.

Merchandising Company

One category of inventory:Merchandise Inventory

Manufacturing CompanyMay have three inventories:

Raw Materials Work in Process Finished Goods

Illustration 19-8

Page 36: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-36

Balance Sheet - Inventories

SO 7 Explain the difference between a merchandising and a SO 7 Explain the difference between a merchandising and a manufacturing balance sheetmanufacturing balance sheet

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Illustration 19-9

Page 37: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-37

Direct Materials are a:Direct Materials are a:

Product Manufacturing PeriodProduct Manufacturing Period CostCost Overhead Overhead Cost Cost

a.a. Yes Yes No Yes Yes No

b. Yes No No

c. Yes Yes Yes

d. No No No

Review QuestionReview Question

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatementsManufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Page 38: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-38

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

SO 8 Identify trends in management accounting.SO 8 Identify trends in management accounting.

Service Industry Trends

U.S. economy has shifted toward an emphasis on providing services rather than goods

Over 50% of U.S. workers are now employed by service companies

Trend is expected to continue in the future

Most of the techniques learned for manufacturing firms are applicable to service companies

Page 39: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-39 SO 8 Identify trends in management accounting.SO 8 Identify trends in management accounting.

Managerial Accounting Practices

Value Chain

Refers to all activities associated with providing a product or service

For a manufacturing firm these include the following:

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

Illustration 19-12

Page 40: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-40 SO 8 Identify trends in management accounting.SO 8 Identify trends in management accounting.

Managerial Accounting Practices

Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured or purchased just in time for use

Quality

Increased emphasis on product quality because goods are produced only as needed

Total Quality Management (TQM) - a philosophy of zero defects -

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

Page 41: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-41

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

SO 8 Identify trends in management accounting.SO 8 Identify trends in management accounting.

Managerial Accounting Practices

Activity-Based-Costing (ABC)

Allocates overhead based on use of activities

Results in more accurate product costing and scrutiny of all activities in the

value chain

Balanced Scorecard

Evaluates operations in an integrated fashion

Uses both financial and non-financial measures

Links performance measures to overall company objectives

Page 42: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-42

Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner?

a. Just-in-time inventory.

b. Total-quality management.

c. Balanced scorecard.

d. Activity-based costing.

Review QuestionReview Question

SO 8 Identify trends in management SO 8 Identify trends in management accounting.accounting.

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

Page 43: Chapter 19-1. Chapter 19-2 Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Chapter 19-43

Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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