© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Management Accounting: A Value-Added Discipline Chapter 1

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Differences Between Managerial and Financial Accounting

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Differences Between Managerial and Financial Accounting

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Relationship Between Type of User and Type of Information Economic DataFinancial DataNonfinancial Data Outsiders Insiders Investors and Creditors Senior Executives Middle Managers Operating Workers

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Product Costing Managers need to know the cost of products to help... Set the selling price of the product. Control costs within the organization. Properly determine inventory costs.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The Product Materials Labor Overhead Product Costs in Manufacturing Companies

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Product Costs in Manufacturing Companies Financial AssetsManufacturing Process Physical Assets $1,000 Cash $390 Materials $470 Labor $140 Overhead $1,000 of Finished Goods Converted

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Cost Per Unit Financial AssetsManufacturing Process Physical Assets $1,000 Cash $390 Materials $470 Labor $140 Overhead $1,000 of Finished Goods Converted Converted The average cost of each unit manufactured is $125. ($1,000 ÷ 8 horses)

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Costs Can Be Assets or Expenses Cost CategoryBalance Sheet Income Statement $1,000 Product Costs Materials Labor Tools $200 Selling and Administrative Costs $1,000 Cost of Finished Goods $750 Cost of Good Sold $250 Products Not Sold (Ending Inventory $200 Selling and Administrative Costs

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flow of Material Costs Inventory Cost of Goods Sold Material Costs Balance Sheet Income Statement

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flow of Labor Costs Production Wages Inventory Cost of Goods Sold Salary Expense Labor Costs Selling and Administrative Salaries Balance Sheet Income Statement

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flow of Depreciation Charges Depreciation on Manufacturing Equipment Depreciation on Manufacturing Equipment Inventory Cost of Goods Sold Depreciation Expense Overhead Costs Depreciation on Office Equipment Balance Sheet Income Statement

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Total Product Cost

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Costs - A Closer Look indirect costs Cost that cannot be traced to products and services in a cost effective manner are called indirect costs and are part of manufacturing overhead. Manufacturing Overhead Indirect Materials Indirect Labor Factory Utilities Rent on Manufacturing Facilities Depreciation on Manufacturing Assets Production Planning

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Costs - A Closer Look allocated Since indirect costs cannot be traced to products, they are normally allocated to the product in a reasonable manner. Allocation Rate Total Manufacturing Overhead Relevant Activity =

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Cost Allocation Allocation rate: $120 ÷ 8 = $15 per labor hour

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Product Costs Direct Materials Direct Labor Manufacturing Overhead * Manufacturing Product Cost Summary * Indirect materials Indirect labor

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Importance of Cost Classification Everyone interested in a company’s financial statements will be concerned with how costs are classified. I guess you know that the amount of total assets and net income will be higher if a cost is classified as an asset than if it is expensed. I guess you know that the amount of total assets and net income will be higher if a cost is classified as an asset than if it is expensed.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Importance of Cost Classification The financial statement impact of cost classification may impact both the availability of financing and motivation of management. Efficient Markets Hypothesis Creditors and investors look to the substance of business events regardless of how the transactions are reported in the financial statements.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Ethical Considerations Common conflicts faced by accountants: Common conflicts faced by accountants: Pressure to perform duties that require abilities for which they are not competently trained. Pressure to perform duties that require abilities for which they are not competently trained. Disclosure of confidential information. Disclosure of confidential information. Ignore falsifications, embezzlements, bribery, etc. Ignore falsifications, embezzlements, bribery, etc. Distort objectivity by issuing misleading or incomplete reports. Distort objectivity by issuing misleading or incomplete reports. Common conflicts faced by accountants: Common conflicts faced by accountants: Pressure to perform duties that require abilities for which they are not competently trained. Pressure to perform duties that require abilities for which they are not competently trained. Disclosure of confidential information. Disclosure of confidential information. Ignore falsifications, embezzlements, bribery, etc. Ignore falsifications, embezzlements, bribery, etc. Distort objectivity by issuing misleading or incomplete reports. Distort objectivity by issuing misleading or incomplete reports.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Ethical Considerations Users must be able to trust information provided by accountants. Management accountants are governed by a code of ethics issued by the Institute of Management Accountants (IMA).

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standards of Ethical Conduct for Management Accountants CompetenceConfidentialityIntegrityObjectivity Resolution of Ethical Conflict CompetenceConfidentialityIntegrityObjectivity

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standards of Ethical Conduct for Management Accountants Prepare complete and clear reports after appropriate analysis. Maintain professional competence. Competence Follow applicable laws, regulations and standards.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standards of Ethical Conduct for Management Accountants Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage. Confidentiality Ensure that subordinates do not disclose confidential information.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standards of Ethical Conduct for Management Accountants Recognize and communicate personal and professional limitations. Do not subvert organization’s legitimate objectives. Integrity Avoid conflicts of interest and advise others of potential conflicts.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standards of Ethical Conduct for Management Accountants Integrity Communicate unfavorable as well as favorable information. Refrain from activities that could discredit the profession. Refuse gifts or favors that might influence behavior. Avoid activities that could affect your ability to perform duties.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standards of Ethical Conduct for Management Accountants Objectivity Communicate information fairly and objectively. Disclose all information that might be useful to management.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Common Features of Criminal and Ethical Misconduct Three factors common to all trust violation cases...  The existence of a secret problem.  The presence of an opportunity.  The capacity for rationalization.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Upstream and Downstream Costs Upstream Costs incurred before the manufacturing process begins. Example: R&D costs. Downstream Costs incurred after the manufacturing process is complete. Example: Advertising. Profitability analysis requires close attention to these costs as well as manufacturing costs.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Product Costs in Service Companies Output of service company is consumed immediately. Materials Labor Overhead

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Emerging Trends in Managerial Accounting Re-engineering production and delivery systems to eliminate waste, reduce errors, and minimize costs. Re-engineering production and delivery systems to eliminate waste, reduce errors, and minimize costs. Benchmarking best practices used by world-class competitors. Benchmarking best practices used by world-class competitors.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Total Quality Management (TQM) A systematic problem- solving philosophy that encourages front-line workers to achieve zero defects. An organizational commitment to achieving customer satisfaction.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Activity-Based Management We manage activities that cause costs to be incurred. Identify value-added and nonvalue-added activities. Identify ways to reduce or eliminate the nonvalue-added activities. Identify ways to reduce or eliminate the nonvalue-added activities. A value-added activity is work that contributes to a product’s ability to satisfy customer needs.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The Value Chain Research and Development Research and Development Obtain Materials Manufacturing Marketing Delivery Value-added activities include all steps involved in the actual processing of goods or performing of services. Value-added activities include all steps involved in the actual processing of goods or performing of services.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Complete parts just in time for assembly into products. Just-in-Time (JIT) Inventory Complete products just in time to ship to customers. Receive materials just in time for production. Schedule production. Receive customer orders.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Just-in-Time (JIT) Inventory Flexible workforce Reduced setup time Zero production defects Improved plant layout Most Favored Customer Status Fewer, but more reliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries. Most Favored Customer Status Fewer, but more reliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin More rapid response to customer orders Less warehouse space needed Just-in-Time (JIT) Inventory Reduced inventory costs Greater customer satisfaction Higher quality products

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin End of Chapter 1