Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Management Accounting: A Business Partner Chapter 16

16-2 Management Accounting: Basic Framework

16-3 Management Accounting System Framework Budget Plans: Future Top Management Assign Decision Making Actual Results: Current Support Decision Making Performance Evaluation: Past Evaluate Decision Making

16-4 Demand for Accounting Information

16-5 The cost to produce a unit of product includes: Direct material Direct labor Manufacturing overhead Accounting for Manufacturing Operations

16-6 Raw materials & component parts that become an integral part of finished products. Can be traced directly and conveniently to products. Direct Materials If materials cannot be traced directly to products, the materials are considered indirect and are part of manufacturing overhead.

16-7 Includes the payroll cost of direct workers. Direct Labor Those employees who work directly on the goods being manufactured. The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead.

16-8 All manufacturing costs other than direct materials and direct labor. Includes: Indirect materials. Indirect labor. Machinery and equipment costs. Cost of regulatory compliance. Manufacturing Overhead Does not include selling or general and administrative expenses.

16-9 Direct Materials Purchased Direct Materials Used Direct Labor Manufacturing Overhead Finished Goods Goods Sold MegaLoMart Flow of Physical Goods in Production

16-10 Direct Materials Direct Labor Prime Cost Conversion Cost Manufacturing costs are often combined as follows: Manufacturing Overhead Flow of Physical Goods in Production

16-11 Balance Sheet Current assets and finished goods inventory Product Costs (manufacturing costs) Income Statement Revenue COGS Gross margin Period expenses Operating profit When goods are sold as incurred Period Costs (operating expenses and income taxes) as incurred Product Costs versus Period Costs

16-12 Ethics, Fraud, and Corporate Governance Product costs are capitalized as part of inventory and only charged to expense when the inventory is sold. Income will be artificially inflated if period costs are capitalized. Period costs are charged to expense as incurred.

16-13 Raw materials - inventory on hand and available for use. Work in process - partially completed goods. Finished goods- completed goods awaiting sale. Inventories of a Manufacturing Business

16-14 Direct materials purchased Materials Inventory $$$ Flow of Costs Associated With Production Direct materials used Work in Process Inventory $$$ Direct labor & Manufacturing Overhead Cost of Goods Sold $$$ Cost of goods manufactured Finished Goods Inventory $$$

16-15 Pure-Ice Inc. had $52,000 of inventory in direct materials inventory on January 1, of this year. During the year, Pure-Ice purchased $586,000 of additional direct materials. At December 31 of this year $78,000 of the direct materials were still on hand. How much direct material was placed into production during the year? Accounting for Manufacturing Costs

16-16 ? Accounting for Manufacturing Costs ?

16-17 ! Accounting for Manufacturing Costs

16-18 In addition to the direct materials, Pure- Ice incurred $306,000 of direct labor cost during the year. Manufacturing overhead for the year was $724,000. Pure-Ice started the year with $132,000 in work in process. During the year, units costing $1,480,000 were transferred to finished goods inventory. What is the balance in work in process at the end of the year? Accounting for Manufacturing Costs

16-19 Accounting for Manufacturing Costs

16-20 ! Accounting for Manufacturing Costs

Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost objective. Examples: direct material and direct labor Indirect costs Costs cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead Direct Costs and Indirect Costs 16-21

16-22 A schedule of the cost of finished goods manufactured is prepared to provide managers with an overview of manufacturing activities during a period. Determining the Cost of Finished Goods Manufactured

16-23

16-24 The cost of goods completed during the period is used to compute COGS for the period.

16-25 Financial Statements of a Manufacturing Company Income StatementBalance Sheet

16-26 The income statement is prepared using established financial accounting procedures.

16-27 Manufacturers have three inventory accounts. Financial Statements of a Manufacturing Company

16-28 End of Chapter 16