19-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College

19-2 Learning Objectives After studying this chapter, you should be able to: [1] Explain the distinguishing features of managerial accounting. [2] Identify the three broad functions of management. [3] Define the three classes of manufacturing costs. [4] Distinguish between product and period costs. [5] Explain the difference between a merchandising and a manufacturing income statement. [6] Indicate how cost of goods manufactured is determined. [7] Explain the difference between a merchandising and a manufacturing balance sheet. [8] Identify trends in managerial accounting. 19 Managerial Accounting

19-3 Preview of Chapter 19 Accounting Principles Eleventh Edition Weygandt Kimmel Kieso

19-4 Managerial accounting provides economic and financial information for managers and other internal users. Crucial activities for companies would include: Managerial Accounting Basics  The need for accurate information about the cost of each product to know whether the company is making a profit (Chapters 20 and 21).  The need to adjust the quantity it produces in light of changes in economic conditions and consumer tastes. The need to understand how changes in the quantity produced impacts its production costs and profitability (Chapter 22). LO 1 Explain the distinguishing features of managerial accounting.

19-5 Managerial Accounting Basics  The need for managers to consider alternative courses of action (Chapter 26).  The preparation of budgets in order to plan for the future (Chapter 23).  Comparing budgeted numbers with actual results to evaluate performance and identify areas that need to change (Chapters 24 and 25).  The need to make substantial investment decisions, such as the building of a new plant or the purchase of new equipment (Chapter 26). Crucial activities for companies would include: LO 1 Explain the distinguishing features of managerial accounting.

19-6 LO 1 Explain the distinguishing features of managerial accounting. Comparing Managerial and Financial Accounting Illustration 19-1 Managerial Accounting Basics

19-7 Managerial accounting: a.Is governed by generally accepted accounting principles. b.Places emphasis on special-purpose information. c.Pertains to the entity as a whole and is highly aggregated. d.Is limited to cost data. LO 1 Explain the distinguishing features of managerial accounting. Managerial Accounting Basics Question

19-8 LO 2 Identify the three broad functions of management. Management Functions Planning  Maximize short-term profit and market share  Commitment to environmental protection  Contributing to social programs.  Add value to the business. DirectingControlling  Coordinate diverse activities and human resources.  Implement planned objectives.  Provide incentives to motivate employees  Hire and train employees.  Produce smooth- running operation.  Keeping activities on track.  Determine whether goals are met.  Decide changes needed to get back on track.  May use an informal or formal system of evaluations. Managerial Accounting Basics

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19-10 LO 2 Illustration 19-2 Organization charts show the interrelationships of activities and the delegation of authority and responsibility within the company. Organizational Structure Managerial Accounting Basics

19-11 LO 2 Identify the three broad functions of management. Business Ethics  All employees are expected to act ethically.  Many organizations have codes of business ethics.  Past financial frauds: ► Enron, ► Global Crossing, ► WorldCom Managerial Accounting Basics

19-12 LO 2 Creating Proper Incentives  Systems and controls sometimes create incentives for managers to take unethical actions.  Controls need to be effective and realistic. Managerial Accounting Basics Business Ethics Boeing Plagued by a series of scandals attributed to an evaluation system that gave employees the impression that they needed to succeed no matter what actions were required to do so. Schering-Plough Pharmaceutical manufacturer, found that employees were so concerned with meeting production quantity standards that they failed to monitor the quality of the product, and as a result the dosages were often wrong. Schering-Plough Pharmaceutical manufacturer, found that employees were so concerned with meeting production quantity standards that they failed to monitor the quality of the product, and as a result the dosages were often wrong.

19-13 LO 2 Identify the three broad functions of management. Sarbanes-Oxley Act (SOX)  Clarifies top management’s responsibilities.  Requires certifications by CEO and CFO.  Selection criteria for Board of Directors and Audit Committee.  Substantially increased penalties for misconduct. Code of Ethical Standards Managerial Accounting Basics Business Ethics

19-14 The management of an organization performs several broad functions. They are: a. a.Planning, directing, and selling. b. b.Directing, manufacturing, and controlling. c. c.Planning, manufacturing, and controlling. d. d.Planning, directing, and controlling. LO 2 Identify the three broad functions of management. Question Managerial Accounting Basics

19-15 Indicate whether the following statements are true or false. 1.Managerial accountants have a single role within an organization, collecting and reporting costs to management. 2.Financial accounting reports are general-purpose and intended for external users. 3.Managerial accounting reports are special-purpose and issued as frequently as needed. False True LO 2 Identify the three broad functions of management. DO IT! >

19-16 False True LO 2 Identify the three broad functions of management. Indicate whether the following statements are true or false. 4.Managers’ activities and responsibilities can be classified into three broad functions: cost accounting, budgeting, and internal control. 5.As a result of the Sarbanes-Oxley Act, managerial accounting reports must now comply with generally accepted accounting principles (GAAP). 6.Top managers must certify that a company maintains an adequate system of internal controls. DO IT! >

19-17 LO 3 Define the three classes of manufacturing costs. Managers should ask questions such as the following. 1.What costs are involved in making a product or performing a service? 2.If we decrease production volume, will costs decrease? 3.What impact will automation have on total costs? 4.How can we best control costs? To answer these questions, managers need reliable and relevant cost information. Managerial Cost Concepts

19-18 LO 3 Define the three classes of manufacturing costs. Manufacturing consists of activities and processes that convert raw materials into finished goods. Classified as: Manufacturing Costs Managerial Cost Concepts

19-19 Direct Materials LO 3 Define the three classes of manufacturing costs. Managerial Cost Concepts Raw Materials  Basic materials and parts used in manufacturing process. Direct Materials  Raw materials that can be physically and directly associated with the finished product during the manufacturing process.

19-20 Indirect Materials  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. Direct Materials LO 3 Define the three classes of manufacturing costs. Managerial Cost Concepts Raw Materials  Basic materials and parts used in manufacturing process.

19-21 Work of factory employees that can be physically and directly associated with converting raw materials into finished goods. LO 3 Define the three classes of manufacturing costs. Direct Labor Managerial Cost Concepts 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.

19-22  Costs indirectly associated with the manufacture of the finished product. LO 3 Define the three classes of manufacturing costs. Manufacturing Overhead Managerial Cost Concepts  Includes manufacturing costs that cannot be classified as direct materials and direct labor.  Includes indirect materials, indirect labor, depreciation on factory buildings and machines, and insurance, taxes, and maintenance on factory facilities.

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19-24 Which of the following is not an element of manufacturing overhead? a. a.Sales manager’s salary. b. b.Plant manager’s salary. c. c.Factory repairman’s wages. d. d.Product inspector’s salary. Question LO 3 Define the three classes of manufacturing costs. Managerial Cost Concepts

19-25  Components:  Costs that are a necessary and integral part of producing the product.  Recorded in “inventory” account.  Not an expense (COGS) until the goods are sold. LO 4 Distinguish between product and period costs. Product Costs  Direct materials  Direct labor  Manufacturing overhead Product versus Period Costs Alternative Terminology Product costs are also called inventoriable costs. Alternative Terminology Product costs are also called inventoriable costs.

19-26  Charged to expense as incurred.  Non-manufacturing costs.  Includes all selling and administrative expenses. LO 4 Distinguish between product and period costs. Period Costs Product versus Period Costs

19-27 LO 4 Distinguish between product and period costs. Illustration 19-3 Product versus Period Costs

19-28 LO 4 A bicycle company has these costs: tires, salaries of employees who put tires on the wheels, factory building depreciation, lubricants, 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  Lubricants  Factory depreciation  Factory manager salary  Factory maintenance employees salary DO IT! >

19-29 Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section. LO 5 Explain the difference between a merchandising and a manufacturing income statement. Income Statement “Cost of Goods Sold” Manufacturing Costs in Financial Statements

19-30 Cost of Goods Sold Components – (Periodic Inventory System) LO 5 Illustration 19-4 Cost of Goods Manufactured Manufacturing Costs in Financial Statements

19-31 Cost of goods sold sections of merchandising and manufacturing income statements Illustration 19-5 LO 5 Explain the difference between a merchandising and a manufacturing income statement. Manufacturing Costs in Financial Statements

19-32 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 Beginning Inventory$200,000 + COGs Manufactured600,000 Goods Available for Sale800,000 - Ending Inventory250,000 Cost of Goods Sold$550,000 Question LO 5 Explain the difference between a merchandising and a manufacturing income statement. Manufacturing Costs in Financial Statements

19-33 Cost of Goods Manufactured Total Work in Process – (1) cost of beginning work in process and (2) total manufacturing costs for the current period. Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead in the current year. LO 6 Indicate how cost of goods manufactured is determined. Illustration 19-6 Manufacturing Costs in Financial Statements

19-34 Illustration 19-8 Illustration 19-7

19-35 LO 6 Indicate how cost of goods manufactured is determined. DO IT! >

19-36 LO 6 Manufacturing Costs in Financial Statements Advance slide in presentation mode to reveal answers.

19-37 LO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Illustration 19-8 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

19-38 LO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Illustration 19-9 Current assets sections of merchandising and manufacturing balance sheets Manufacturing Costs in Financial Statements Balance Sheet

19-39 a.Raw materials and work in process only b. Work in process only c. Raw materials only d. Raw materials, work in process, and finished goods A cost of goods manufactured schedule shows beginning and ending inventories for: LO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Question Manufacturing Costs in Financial Statements

19-40 LO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Illustration Illustration: Suppose you started your own snowboard factory, Diamond Snowboards. Here are some of the costs that your snowboard factory would incur. Assign the following costs: Manufacturing Costs in Financial Statements Advance slide in presentation mode to reveal answers.

19-41 Illustration Manufacturing Costs in Financial Statements LO 7

19-42 If Diamond produces 10,000 snowboards the first year, what would be the total manufacturing costs? LO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Illustration Manufacturing Costs in Financial Statements Advance slide in presentation mode to reveal answers.

19-43  Much of the U.S. economy has shifted toward an emphasis on providing services.  Over 50% of U.S. workers are now employed by service companies.  Like a manufacturer, service companies need to keep track of the costs of its services in order to know whether it is generating a profit. Product Costing for Service Industries LO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Manufacturing Costs in Financial Statements

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19-45 Refers to all business processes associated with providing a product or performing a service. For a manufacturing firm these include the following: LO 8 Identify trends in managerial accounting. Focus on the Value Chain Illustration Product versus Period Costs

19-46 Just-In-Time Inventory Methods  Inventory system in which goods are manufactured or purchased just in time for sale. LO 8 Identify trends in managerial accounting.  Reduce defects in finished products, with the goal of zero defects. Total Quality Management (TQM) Product versus Period Costs  Identification of “bottlenecks”—constraints within the value chain that limit a company’s profitability. Theory of Constraints

19-47  A comprehensive, centralized, integrated source of information to manage all major business processes— from purchasing, to manufacturing, to sales, to human resources. Enterprise Resource Planning (ERP) systems LO 8 Identify trends in managerial accounting. Product versus Period Costs  Allocates overhead based on use of activities in making the product. Activity-Based Costing (ABC)

19-48  Uses both financial and non-financial measures to evaluate all aspects of a company’s operations in an integrated fashion.  Links performance to overall company objectives. Balanced Scorecard LO 8 Identify trends in managerial accounting. Product versus Period Costs

19-49 Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner? a.Just-in-time inventory. b.Total-quality management. c.Balanced scorecard. d.Activity-based costing. LO 8 Identify trends in managerial accounting. Question Product versus Period Costs

______ Systems implemented to reduce defects in finished products with the goal of achieving zero defects. 1. ______ All activities associated with providing a product or performing a service. 2. ______ A method of allocating overhead based on each product’s use of activities in making the product. Match the descriptions that follow with the corresponding terms. e a d LO 8 Identify trends in managerial accounting. DO IT! >

______ A performance- measurement approach that uses both financial and nonfinancial measures, tied to company objectives, to evaluate a company’s operations in an integrated fashion. b c 5. ______ Inventory system in which goods are manufactured or purchased just as they are needed for use. LO 8 Identify trends in managerial accounting. Match the descriptions that follow with the corresponding terms. DO IT! >

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