15-1 Illustration 15-2 Organization charts show the interrelationships of activities and the delegation of authority and responsibility within the company. Organizational Structure Managerial Accounting Basics

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15-20 Manufacturing consists of activities and processes that convert raw materials into finished goods. Manufacturing Costs

15-21 Raw Materials Basic materials and parts used in manufacturing process. Manufacturing Costs

15-22 Direct Materials  Materials that physically and directly associated with the finished product during manufacturing.  Becomes a PART of the product. Raw Materials

15-23 Indirect Materials  Not physically part of the finished product or an insignificant part of finished product.  Considered to be … Manufacturing Overhead. Raw Materials

15-24 Work of factory employees that can be physically and directly associated with converting raw materials into finished goods. Direct Labor Labor Costs

15-25 Indirect Labor Factory employees BUT no physical association with the finished product or it is impractical to trace costs to the goods produced. Labr Costs

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15-30  Costs indirectly associated with making finished product.  ALL mfg costs BUT direct materials & direct labor.  aka factory overhead, indirect mfg costs, or burden. Manufacturing Overhead Manufacturing Costs

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15-32 ALL Costs All Costs Manufacturing Costs Non Manufacturing Costs

15-33 Manufacturing costs consists of activities and processes that convert raw materials into finished goods. Manufacturing … Factory … Plant Costs Manufacturing Costs

15-34 A bicycle company has these costs: tires, salaries of employees who put tires on the wheels, factory building depreciation, wheel spokes, salary of factory manager, handlebars, and salaries of factory maintenance employees. Classify each cost as direct materials, direct labor, or overhead. Direct Materials  Tires.  Spokes.  Handlebars. Direct Labor Overhead  Salaries of employees who put tires on the wheels.  Factory depreciation.  Factory manager salary.  Factory maintenance employees salary.

15-35 All Costs Product CostsPeriod Costs In addition to classifying costs as “manufacturing” or “non-manufacturing”, All Costs can also be classified as either: Product costs or Period costs. ALL Costs

15-36  Components:  Costs that are an integral part of producing the product.  Recorded in “inventory” account. (Work-In-Process; Finished Goods)  Not an expense (COGS) until the goods are sold. Product Costs Product Versus Period Costs

15-37 Inventory accounts for a manufacturer The balance sheet for a merchandising company shows just one category of inventory. Balance Sheet Manufacturing Costs in Financial Statements

15-38 To understand the difference … go back to financial accounting and the “Matching Principle”: Match revenues in a period to the expenses of the same period … (to capture cause-effect relationship between them). Ex: Toys-R-Us buys $1,000,000 Xbox’s in Sept. to sell in Dec. When is the $1,000,000 and expense – Sept or Dec … why ? What “classification” is the $1,000,000 in Sept, Oct, Nov ? Product vs Period Costs

15-39  All NON-manufacturing costs.  Charged as expense as incurred.  All selling & administrative expenses. Period Costs Product vs Period Costs

15-40 Product vs Period Costs

15-41 All Costs Raw Materials Direct Materials Factory Overhead Period Costs Balance Sheet Raw Materials Inventory Work-In-Process Inventory Finished Goods Inventory Income Statement Cost of Goods Sold Corporate Jet Insurance Expense Office Bldg Security Salary Expense Inventoriable Costs When “finished good” is sold to customer, THEN:

15-42 Cost of Goods Sold Components Manufacturing Costs in Financial Statements

15-43 Cost of goods sold sections of merchandising and manufacturing income statements Manufacturing Costs in Financial Statements

15-44 a.$450,000. b. $500,000. c. $550,000. d. $600,000. For the year, Red Company has cost of goods manufactured of $600,000, beginning finished goods inventory of $200,000, and ending finished goods inventory of $250,000. The cost of goods sold is Review Question Beg. Inventory$200,000 + COGs Manufactured600,000 Goods Available for Sale800,000 - End. Inventory250,000 Cost of Goods Sold$550,000 Manufacturing Costs in Financial Statements

15-45 Illustration 1-8 Illustration 15-7

15-46 Illustration Illustration: Suppose you started your own snowboard factory, KRT Boards. Here are some of the costs that your snowboard factory would incur. Assign the following costs: Manufacturing Costs in Financial Statements

15-47 Illustration Manufacturing Costs in Financial Statements

15-48 If KRT Boards produces 10,000 snowboards the first year, what would be the total manufacturing costs? Illustration Manufacturing Costs in Financial Statements

15-49  U.S. economy, in general, 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. Product Costing For Service Industries Manufacturing Costs in Financial Statements

15-50 Refers to all business process associated with providing a product or service. For a manufacturing firm these include the following: Focus on the Value Chain Illustration Managerial Accounting Today

15-51 Just-In-Time Inventory Methods  Inventory system in which goods are manufactured or purchased just in time for sale.  Reduce defects in finished products, with the goal of zero defects. Total Quality Management (TQM) Managerial Accounting Today

15-52  Constraints (“bottlenecks” ) limit the company’s potential profitability.  A specific approach to identify and manage these constraints in order to achieve company goals. Theory of Constraints Managerial Accounting Today

15-53  Allocates overhead based on use of activities.  Results in more accurate product costing and scrutiny of all activities in the value chain. Activity-Based Costing (ABC) Managerial Accounting Today

15-54  Evaluates operations in an integrated fashion.  Uses both financial and non-financial measures.  Links performance to overall company objectives. Balanced Scorecard Managerial Accounting Today