15-1 Copyright  Houghton Mifflin Company. All rights reserved. Chapter 15 Introduction to Management Accounting Belverd E. Needles, Jr. Marian Powers Sherry K. Mills Henry R. Anderson Multimedia Slides by: Dr. Paul J. Robertson New Mexico State University Steve Leask Steve Leask New Mexico State University

15-2 Copyright  Houghton Mifflin Company. All rights reserved. Introduction to Management Accounting OBJECTIVE 1 Define management accounting and distinguish between management accounting and financial accounting.

15-3 Copyright  Houghton Mifflin Company. All rights reserved. Management Accounting »Management accounting is an extension of financial accounting and applies mainly to internal operations. »Management accounting focuses on the techniques and procedures for information gathering and reporting to management.

15-4 Copyright  Houghton Mifflin Company. All rights reserved. Management Accounting  Product and service costing information.  Information for planning of and control over operations.  Special reports and analyses to assist in managerial decision making. » Managers need various types of timely, accurate information. timely, accurate information.

15-5 Copyright  Houghton Mifflin Company. All rights reserved. Management Accounting »Management accounting is necessary for all forms and sizes of business.  The types of data needed to ensure efficient operations do not depend on an organization’s size.  All organizations can become more cost-effective and more profitable.

15-6 Copyright  Houghton Mifflin Company. All rights reserved. What Is Management Accounting? »Management accounting differs from financial accounting in many respects.  Report format.  Purpose of reports.  Primary users.  Units of measure.  Nature of information.  Frequency of reporting.

15-7 Copyright  Houghton Mifflin Company. All rights reserved. The Management Cycle OBJECTIVE 2 Explain the management cycle and its connection to management accounting.

15-8 Copyright  Houghton Mifflin Company. All rights reserved. The Management Cycle »Management is expected to use resources wisely, operate profitably, pay debts, and abide by laws and regulations. »Expectations motivate managers to establish the objectives, goals, and strategic plans of the organization.

15-9 Copyright  Houghton Mifflin Company. All rights reserved. The Management Cycle

15-10 Copyright  Houghton Mifflin Company. All rights reserved. The Management Cycle »Management accounting services information needs of management by: 1.Developing plans and analyzing alternatives. 2.Communicating plans to key personnel. 3.Evaluating performance. 4.Reporting the results of activities. 5.Accumulating, maintaining, and processing an organization’s financial and nonfinancial information.

15-11 Copyright  Houghton Mifflin Company. All rights reserved. Meeting the Demands of Global Competition OBJECTIVE 3 Identify the new management philosophies for continuous improvement and discuss the role of management accounting in implementing these philosophies.

15-12 Copyright  Houghton Mifflin Company. All rights reserved. New Management Philosophies »Three significant new management philosophies are as follows: 1. Just-in-time (JIT) operating environment. 2. Total quality management (TQM). 3. Activity-based management (ABM).

15-13 Copyright  Houghton Mifflin Company. All rights reserved. New Management Philosophies »All of these approaches are designed to: 1. Increase product quality. 2. Reduce waste and inefficiency. 3. Reduce cost. 4. Increase customer satisfaction.

15-14 Copyright  Houghton Mifflin Company. All rights reserved. The Continuous Improvement Environment Just-in-Time Operating Environment Total Quality Management Activity-Based Management Reduces or eliminates wasted time Reduces or eliminates wasted resources Reduces or eliminates nonvalue-adding activities Product/service costs and time reduced Product/service quality and customer satisfaction increased Means of Continuous Improvement

15-15 Copyright  Houghton Mifflin Company. All rights reserved. Performance Measures OBJECTIVE 4 Define performance measures, recognize the uses of these measures in the management cycle, and prepare an analysis of nonfinancial data.

15-16 Copyright  Houghton Mifflin Company. All rights reserved. Performance Measures »Performance measures provide an indication of an organization’s performance in relation to a specific process, activity, or task.

15-17 Copyright  Houghton Mifflin Company. All rights reserved. Performance Measures »Financial performance measures: 1. Return on investment. 2. Net income as a percentage of sales. 3.Costs of poor quality as a percentage of sales. »Nonfinancial performance measures: 1. Number of customer complaints. 2. Hours of inspection. 3. Time to fill an order.

15-18 Copyright  Houghton Mifflin Company. All rights reserved. Performance Measures »Performance measures are useful in reducing waste in operating activities. »Management uses performance measures in all stages of the management cycle.

15-19 Copyright  Houghton Mifflin Company. All rights reserved. Merchandising Versus Manufacturing Organizations OBJECTIVE 6 Compare accounting for inventories and cost of goods sold in merchandising and manufacturing organizations.

15-20 Copyright  Houghton Mifflin Company. All rights reserved. Manufacturers »Manufacturers design and manufacture products for sale. 1.They must accumulate the costs of manufacturing products. 2.Their inventory consists of materials, work in process, and finished goods.

15-21 Copyright  Houghton Mifflin Company. All rights reserved. Manufacturing Organization Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory = Cost of Goods Sold

15-22 Copyright  Houghton Mifflin Company. All rights reserved. Merchandisers »Merchandisers purchase goods already manufactured, and resell them. 1.They accumulate the purchased cost of goods. 2.They have only one type of inventory (merchandise inventory).

15-23 Copyright  Houghton Mifflin Company. All rights reserved. Merchandising Organization Beginning Merchandise Inventory + Cost of Goods Purchased - Ending Merchandise Inventory = Cost of Goods Sold

15-24 Copyright  Houghton Mifflin Company. All rights reserved. Manufacturing Versus Merchandising » Both types of organizations report:  The cost of unsold goods on the balance sheet.  The cost of goods sold on the income statement.

15-25 Copyright  Houghton Mifflin Company. All rights reserved. Cost Classification OBJECTIVE 7 Identify various approaches managers use to classify costs and show how the purpose of a manager’s cost analysis can change the classification of a single cost item.

15-26 Copyright  Houghton Mifflin Company. All rights reserved. Cost Classification »In management accounting, a single cost can be classified as: 1. Direct or indirect. 2. Variable or fixed. 3. Value-adding or nonvalue-adding. 4. Product or period. 5. Inventoriable or noninventoriable.

15-27 Copyright  Houghton Mifflin Company. All rights reserved. Purposes of Cost Analysis »Purposes of cost analysis by classification: 1.Traceability (direct or indirect). 2.Financial reporting (product or period, inventoriable or noninventoriable). 3.Behavior (variable or fixed). 4.Value (value-adding or nonvalue- adding).

15-28 Copyright  Houghton Mifflin Company. All rights reserved. Sweet Treasures Candy Store Cost of Goods Available for Sale $26,000 Net Cost of Purchases $23,000BeginningMerchandiseInventory$3,000 EndingMerchandiseInventory$4,500 Cost of Goods Sold $21,500* *Cost of goods sold = $3,000 + $23,000 - $4,500 = $21,500 Balance Sheet Current Assets Section Merchandise Inventory (Finished Product Ready for Resale) Income Statement Cost of Goods Sold

15-29 Copyright  Houghton Mifflin Company. All rights reserved. Hatcher Candy Company Cost of GoodsManufactured$144,000BeginningFinishedGoodsInventory$52,000 Cost of Goods Available for Sale $196,000 Balance Sheet Current Assets Section Materials Inventory (Unused Materials) Work in Process Inventory (Unfinished Product) Finished Goods Inventory (Finished Product Ready for Sale) Income Statement Cost of Goods Sold Ending Finished Goods Inventory$78,000 Cost of Goods Sold $118,000* *Cost of goods sold = $52,000 + $144,000 - $78,000 = $118,000

15-30 Copyright  Houghton Mifflin Company. All rights reserved. Cost Classification and Cost Analysis Purpose of Cost Classification Cost Examples Traceability Of Product Cost BehaviorValue Financial Reporting Sugar for candy DirectVariableValue- adding Product Depreciation on mixing machine IndirectFixedValue- adding Product Sales commission____ VariableValue- adding Period Accountant's salary____ FixedNonvalue- adding Period