Topic 8

KAL1013 Chapter Eight 1

Chapter Eight

MANAGEMENT ACCOUNTING


Outline Difference between managerial and financial

accounting. Purpose and importance of managerial

accounting information for decision making. Cost concept Preparing statement for goods manufactured. Preparing financial statement for manufacturing

companies


Difference between managerial and financial accounting

1. Users of the information

Internal and external users

Internal users

Financial Acc. Managerial Acc.


2. Types and frequency of the reports

- classified financial statements

- issued quarterly & annually

- internal reports- issued as frequently

as needed

Financial Acc.Managerial Acc.


3. Content of the reports

Objective: Standardreporting format

according togenerally accepted

accounting principles

Objective and subjective flexiblereporting format

according tomanagement needs



4. Purpose of the reports

General-purpose information for

all users.

Special-purpose information for a particular user for

a specific decision.



4. Verification

Annual independent audit by certified public accountant.

No independent audits



Importance of managerial accounting information for decision making

Planning

Directing

Controlling

Improving

Decision making


Cost Concept

Cost : a payment of cash; or its equivalent; or the commitment to pay cash in the future for the purpose of generating revenues

Classification of costs

By behavior

By function

By period


Classification by behavior

1. Fixed costs

3. Semi variable costs

2. Variable costs

Does not change when the volume of activity changes.

Changes in proportion with the changes in the volume of activity.

A mixed of fixed and variable costs.


Relationship between fixed costs and activity

Costs

Activity (unit)

Total fixed cost

10 20 30


Relationship between variable costs and activity

Costs

Activity (unit)

Total variable cost

10 20 30


Relationship between mixed costs and activity

Cost

Activity (unit)

Total mixed costs

10 20 30


Classification by function

1. Manufacturing costs

2. Administration costs

3. Selling costs

Cost incurred in the process of transferring raw material to finished goods.

Cost incurred and related to administration activities.

Cost incurred and related to the selling and distributing activities.


Manufacturing Cost Concept

Manufacturing consists of activities and processes that convert raw materials into finished goods.

Manufacturing costs are usually classified as follows:

Direct materials

Direct labor

Manufacturing overhead


Manufacturing Cost : Direct Materials

Raw materials are the basic materials and parts that are to be used in the manufacturing process.

Raw materials that can be physically and directly associated with the finished product during the

manufacturing process are called direct materials.


Manufacturing Cost : Indirect Materials

Some raw materials cannot be easily associated with the finished product. These are considered indirect materials.

Are accounted for as part of manufacturing overhead and :

1 do not physically become part of the finished product; or

2 cannot be traced because their physical association with the finished product is too small in terms of cost.


Manufacturing Cost : Direct Labor

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

The wages of maintenance people, timekeepers, and supervisors are usually identified as indirect labor. Their efforts have no physical association with the finished product.

Like indirect materials, indirect labor is part of manufacturing overhead.


Manufacturing Cost : Overhead

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

These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor.

Manufacturing overhead includes1 indirect materials;2 indirect labor;3 depreciation on factory buildings and machines4 insurance, taxes, and maintenance on

factory facilities.


Product Cost vs. Period Cost

Product costs include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead); they are costs that are a necessary and integral part of producing the finished product.

These costs are not expensed to cost of goods sold under the matching principle until the finished goods inventory is sold.



Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product.

Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods.



Period costs:

are identifiable with a specific time period,

relate to non-manufacturing non-inventoriable costs,

and

include selling and administrative expenses.



Direct Material

Direct Labor

Factory OH

Prime Cost

Conversion Cost

Selling Expenses

Admin Expenses

Product Cost

Period Cost

Manufacturing Costs

Non-manufacturing Costs


Financial Statement for Manufacturing Company

Statement of Cost of Goods Manufactured

Statement of Income

Balance Sheet


Cost of Goods Manufactured

Total Current Manufacturing Cost

Beginning Work in Progress

+

- Ending Work in Progress

= Cost of Goods Manufactured /Total Manufacturing Cost


Statement of Cost of Goods Manufactured for the year ended 31/12/2001Opening work in progress xxxDirect material:Opening inventories xxx(+) Purchases xxxRaw material available for use xxx(-) Closing inventories (xx)Raw material consumed / used xxxDirect labor xxxFactory overhead: Indirect material xx Indirect labor xx Others xxTotal factory overhead xxxTotal current manufacturing cost xxx

xxxxLess: Closing work in progress (xx)

Total manufacturing costs xxxx


Income Statement for the year ended 31/12/2001Sales Revenue xxxx

Less: Cost of Goods SoldFinished Goods Inventory 1/1/2001 xxxCost of Goods Manufactured xxxx Cost of Goods Available for Sale xxxx(-) Finished Goods Inventory 31,12,2001 (xxx)

Cost of Goods Sold (xxx)

Gross Profit xxxxLess: Operating Expenses

Selling Expenses

Administrative Expenses xxxx

Net Income xxxx


Balance Sheet (extracted) As at 31/12/2001Current Assets:

Cash xxx

Accounts Receivable xxx

Inventories:Raw Materials xxxWork in Progress xxxFinished Goods xxx

xxx

Prepaid Insurance xxx

Total Current Assets xxxx


Documents

Topic 8