Chapter 1-1 STRANGE FACTS … continued 1 In New York, it is against the law for a blind person to drive an automobile. In New York, it is against the law for a blind person to drive an automobile. In West Virginia, only babies can ride in a baby carriage. In West Virginia, only babies can ride in a baby carriage. In Georgia, it is against the law to slap a man on the back or front. In Georgia, it is against the law to slap a man on the back or front. A barber is not to advertise prices in the State of Georgia. A barber is not to advertise prices in the State of Georgia. In Louisiana, a bill was introduced years ago in the State House of Representatives that fixed a ceiling on haircuts for bald men of 25 cents. In Louisiana, a bill was introduced years ago in the State House of Representatives that fixed a ceiling on haircuts for bald men of 25 cents. In Oklahoma, no baseball team can hit the ball over the fence or out of a ballpark. In Oklahoma, no baseball team can hit the ball over the fence or out of a ballpark. In Rochester, Michigan, the law is that anyone bathing in public must have the bathing suit inspected by a police officer ! In Rochester, Michigan, the law is that anyone bathing in public must have the bathing suit inspected by a police officer ! In Kentucky, it's the law that a person must take a bath once a year. In Kentucky, it's the law that a person must take a bath once a year. In Utah, birds have the right of way on any public highway. In Utah, birds have the right of way on any public highway. In Ohio, one must have a license to keep a bear. In Ohio, one must have a license to keep a bear.

Chapter 1-2 CHAPTER 1 MANAGERIAL ACCOUNTING MANAGERIAL ACCOUNTING Managerial Accounting, Fifth Edition

Chapter 1-3 Managerial Accounting Basics A field of accounting that provides economic and financial information for managers and other internal users. Also called Management Accounting. Definition of Managerial Accounting

Chapter 1-4 Managerial Accounting Basics Applies to all types of business - Service, Merchandising, and Manufacturing. Applies to all forms of business organizations – Proprietorships, Partnerships, and Corporations. Applies to not-for-profit as well as profit-oriented companies. Distinguishing Features SO 1 Explain the distinguishing features of managerial accounting.

Chapter 1-5 Managerial Accounting Basics Responsible for strategic cost management – assisting in evaluating how well resources are employed by the company. Allows for valuable input from a variety of departments including production, marketing, ngineering, etc. Aid in making critical strategic decisions. Distinguishing Features (Continued) SO 1 Explain the distinguishing features of managerial accounting.

Chapter 1-6 Comparing Managerial and Financial Accounting Both managerial and financial accounting deal with economic events of a business – Thus, interests overlap. Both require that economic events be quantified and communicated to interested parties – Determining unit cost is part of managerial accounting, Reporting cost of goods manufactured is a part of financial accounting. Similarities SO 1 Explain the distinguishing features of managerial accounting.

Chapter 1-7 Managerial Accounting Basics Management’s activities and responsibilities can be classified into the following three broad functions: Management’s activities and responsibilities can be classified into the following three broad functions:Planning, Directing, and Directing, and Controlling. Controlling. Management Functions SO 2 Identify the 3 broad functions of management.

Chapter 1-8 Within a company, organization charts show: The interrelationships of activities and The delegation of authority and responsibility. Organizational Structure Illustration 1-2

Chapter 1-9 Business Ethics: All employees are expected to act ethically. An increasing number of organizations have codes of business ethics. Despite organizational efforts: Business scandals have caused massive investment losses and employee layoffs. Corporate fraud has increased 13% in last 5 years. Employee fraud – 60% of all fraud. Intentional misstatement of financial reports. (Financial reporting fraud is most costly.) Good Ethics – Good Business

Chapter 1-10 Creating Proper Incentives: Companies like Motorola, IBM, and Nike expend substantial resources to monitor and evaluate the actions of employees & managers. Monitoring can have the negative result of producing incentives for unethical actions. Employees may feel that they must succeed no matter what. Ineffective and unrealistic controls may also result in declining product quality. Good Ethics – Good Business

Chapter 1-11 Sarbanes-Oxley Act of 2002 Clarifies management’s responsibilities. Certifications by CEO and CFO - fairness of financial statements and adequacy of internal control. Selection criteria for Board of Directors and Audit Committee. Substantially increased penalties for misconduct. IMA Statement of Ethical Professional Practices. Good Ethics – Good Business Code of Ethical Standards

Chapter 1-12 Manufacturing Costs Manufacturing consists of activities and processes to convert raw materials into finished goods. In contrast, a merchandising firm sells goods in the form in which they were purchased. Manufacturing costs are typically classified as: Direct Materials Direct Labor Manufacturing Overhead Managerial Cost Concepts SO 3 – Define the three classes of manufacturing costs. Illustration 1-3

Chapter 1-13 Manufacturing Costs Materials SO 3 Define the three classes of manufacturing costs. Raw Materials: Basic materials and parts used in manufacturing process. Direct Materials : Raw materials that can be physically and directly associated with the finished productduring the manufacturing process.

Chapter 1-14 Manufacturing Costs Materials SO 3 Define the three classes of manufacturing costs. Indirect Materials: Raw materials that cannot be easily associated with the finished product. Not physically part of the finished product or they are an insignificant part of finished product in terms of cost. Considered part of manufacturing overhead.

Chapter 1-15 Manufacturing Costs Labor SO 3 Define the three classes of manufacturing costs. Direct Labor: Work of factory employees that can be physically and directly associated with converting raw materials into finished goods. Indirect Labor: Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced.

Chapter 1-16 Manufacturing Costs SO 3 Define the three classes of manufacturing costs. Manufacturing Overhead Costs that are indirectly associated with manufacturing the finished product. Includes all manufacturing costs except direct materials and direct labor. Allocation of overhead to productscan present problems. Also called factory overhead, indirect manufacturing costs, or burden.

Chapter 1-17 BE1-4 page 35 Determine whether each of the following costs should be classified as direct materials (DM), Direct Labor (DL), or Manufacturing Overhead (MO) Frames and tires used in manufacturing bicycles Frames and tires used in manufacturing bicycles Wages paid to production workers Wages paid to production workers Insurance on factory equipment and machinery Insurance on factory equipment and machinery Depreciation on factory equipment Depreciation on factory equipment

Chapter 1-18 Answers to BE1-4 Frames and tires would be Direct Materials Frames and tires would be Direct Materials Wages to Production workers would be Direct Labor Wages to Production workers would be Direct Labor Insurance on factory Equipment would be Manufacturing Overhead Insurance on factory Equipment would be Manufacturing Overhead Depreciation on factory Equipment would be Manufacturing Overhead Depreciation on factory Equipment would be Manufacturing Overhead

Chapter 1-19 BE 1-5 page 35 Indicate whether each of the following costs of an automobile manufacturer would be classified as direct materials, direct labor or manufacturing overhead… Windshield Windshield Engine Engine Wages of assembly line worker Wages of assembly line worker depreciation of factory machinery depreciation of factory machinery factory machinery overhead factory machinery overhead tires tires steering wheel steering wheel salary of painting supervisor salary of painting supervisor

Chapter 1-20 BE 1-5 page 35  Windshield DM  Engine DM  Wages of assembly line worker DL  depreciation of factory machinery MO  factory machinery overhead MO  tires DM  steering wheel DM  salary of painting supervisor IL or MO

Chapter 1-21 Product Versus Period Costs SO 4 Distinguish between product and period costs. Product Costs Components: Direct material cost, direct labor cost, and manufacturing overhead. Costs that are a necessary and integral part of producing the product. Recorded as inventory when incurred, thus may be called inventoriable costs. Not an expense until the finished goods inventory is sold, then cost of goods sold.

Chapter 1-22 Product Versus Period Costs SO 4 Distinguish between product and period costs. Period Costs Matched with revenue of a specific time period and charged to expense as incurred. Non-manufacturing costs. Deducted from revenues in period incurred to determine net income. Includes all selling and administrative expenses.

Chapter 1-23 Product Versus Period Costs SO 4 Distinguish between product costs and period costs. Illustration 1-4

Chapter 1-24 BE 1-6 PAGE 36 Identify whether each of the following costs would be classified as product cost or period costs. Manufacturing Overhead Manufacturing Overhead Selling Expenses Selling Expenses Administrative Expenses Administrative Expenses Advertising Expenses Advertising Expenses Direct labor Direct labor Direct materials Direct materials

Chapter 1-25 BE 1-6 PAGE 36 Identify whether each of the following costs would be classified as product cost or period costs. Manufacturing Overhead - Product Cost Manufacturing Overhead - Product Cost Selling Expenses – Period Cost Selling Expenses – Period Cost Administrative Expenses – Period Cost Administrative Expenses – Period Cost Advertising Expenses – Period Cost Advertising Expenses – Period Cost Direct labor – Product Cost Direct labor – Product Cost Direct materials – Products Cost Direct materials – Products Cost

Chapter 1-26 Manufacturing Costs in Financial Statements SO 5 Explain the difference between a merchandising and a manufacturing income statement. Income Statement The income statement for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section.

Chapter 1-27 Manufacturing Costs in Financial Statements Cost of Goods Sold Section of the Income Statement SO 5 Explain the difference between a merchandising and a manufacturing income statement. Illustration 1-6

Chapter 1-28 Manufacturing Costs in Financial Statements Determining the Cost of Goods Manufactured SO 6 Indicate how cost of goods manufactured is determined. Work in Process – partially completed units of product. Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period. Illustration 1-7

Chapter 1-29 Manufacturing Costs in Financial Statements SO 6 Indicate how cost of goods manufactured is determined. Illustration 1-8

Chapter 1-30 For the year, Red Company has cost of goods manufactured of $600,000, beginning balance of finished goods inventory of $200,000, and ending balance of finished goods inventory of $250,000. The cost of goods sold is: a.$450,000. b. $500,000. c. $550,000. d. $600,000. Review Question Manufacturing Costs in Financial Statements

Chapter 1-31 For the year, Red Company has cost of goods manufactured of $600,000, beginning balance of finished goods inventory of $200,000, and ending balance of finished goods inventory of $250,000. The cost of goods sold is: a.$450,000. b. $500,000. c. $550,000. d. $600,000. Review Question Manufacturing Costs in Financial Statements SO 5 Explain the difference between a merchandising and a manufacturing income statement. Beginning Inventory$200,000 Cost of Goods Manufactured 600,000 $800,000 Minus Ended Finished Goods 250,000 Cost of Goods Sold $550,000

Chapter 1-32 Manufacturing Costs in Financial Statements Balance Sheet - Inventories SO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Merchandising Company One category of inventory: Merchandise Inventory Manufacturing Company May have three inventories: Raw Materials Work in Process Finished Goods

Chapter 1-33 Manufacturing Costs in Financial Statements Balance Sheet - Inventories SO 7 Explain the difference between a merchandising and a manufacturing balance sheet Illustration 1-10

Chapter 1-34 Managerial Accounting Today SO 8 Identify trends in management accounting. Service Industry Trends 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.

Chapter 1-35 Managerial Accounting Today SO 8 Identify trends in management accounting. Managerial Accounting Practices Value Chain Refers to all activities associated with providing a product or service. For a manufacturing firm these include the following: Illustration 1-13

Chapter 1-36 Managerial Accounting Today SO 8 Identify trends in management accounting. Managerial Accounting Practices Technological Change Enterprise Resource Planning (ERP) – software programs designed to manage all major business processes. Computer-Integrated Manufacturing (CIM) – manufacturing products with increased automation. Just-In-Time (JIT) Inventory Methods Inventory system in which goods are manufactured or purchased just in time for sale.

Chapter 1-37 Managerial Accounting Today SO 8 Identify trends in management accounting. Managerial Accounting Practices Quality Increased emphasis on product quality because goods are produced only as needed. Total Quality Management (TQM) - a philosophy of zero defects. Activity-Based-Costing (ABC) Allocates overhead based on use of activities. Results in more accurate product costing and scrutiny of all activities in the value chain.

Chapter 1-38 Managerial Accounting Today SO 8 Identify trends in management accounting. Managerial Accounting Practices Theory of Constraints Constraints (“bottlenecks” ) limit the company’s potential profitability. A specific approach to identify and manage these constraints in order to achieve company goals. Balanced Scorecard Evaluates operations in an integrated fashion. Uses both financial and non-financial measures. Links performance measures to overall company objectives.

Chapter 1-39 A Music Company has these costs: Classify these cost as period or product and indicate if the cost are part of direct materials (DM), direct labor (DL) or manufacturing overhead (MO). Chapter Review – Do it! 1-2 ______ a. Advertising ______ b. Blank CDs ______ c. Depreciation on CD image burner ______ d. Salary of Factory manager ______ e. Factory supplies used ______ f. Paper inserts for CD cases ______ g. CD plastic cases ______ h. Salaries of factory maintenance employees ______ i. Salaries of employee who burn music onto CDs

Chapter 1-40 Any Questions?

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