1. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 13: Managerial Accounting Concepts and Decision-Making Support Financial and Managerial Accounting: The Cornerstones of Business Decisions, 2e

2. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Meaning and Purpose of Managerial Accounting ► Managerial Accounting is the provision of accounting information for a company’s internal users. ► Unlike financial accounting, managerial accounting is not bound by any formal criteria such as generally accepted accounting principles (GAAP). ► To accomplish its purpose, managerial accounting has three broad objectives: 1 To provide information for planning the organization’s actions. 2 To provide information for controlling the organization’s actions. 3 To provide information for making effective decisions. 1

3. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Information Needs of Managers and Other Users ► Managerial accounting information is needed by a number of individuals. In particular, managers and empowered workers need comprehensive, up-to- date information for the following activities: ► Planning - The detailed formulation of action to achieve a particular end. ► Controlling- The managerial activity of monitoring a plan’s implementation and taking corrective action as needed. ► Decision making - The process of choosing among competing alternatives. 1

4. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparison of Managerial and Financial Accounting Managerial AccountingFinancial Accounting 1. Internally focused Externally focused 2. No mandatory rules Must follow externally imposed rules 3.Financial and nonfinancial information; subjective information possible Objective financial information 4. Emphasis on the future Historical orientation 5. Internal evaluation and decisions based on very detailed information Information about the firm as a whole 6. Broad multidisciplinary More self-contained 1

5. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Role of the Managerial Accountant ► The role of managerial accountants in an organization is one of support. ► They assist those individuals who are responsible for carrying out an organization’s basic objectives. ► Positions that have direct responsibility for the basic objectives of an organization are referred to as line positions. ► Positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives are called staff positions. ► The controller supervises all accounting functions and reports directly to the general manager and chief operating officer. ► In larger companies, the controller is separate from the treasury department. The treasurer is responsible for the finance function. 2

6. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Meaning and Uses of Cost ► One of the most important tasks of managerial accounting is to determine the cost of products, services, customers, and other items of interest to managers. ► Therefore, we need to understand the meaning of cost and the ways in which costs can be used to make decisions, both for small entrepreneurial businesses and large international businesses. ► Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization. 3

7. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Objects ► Managerial accounting systems are structured to measure and assign costs to entities called cost objects. ► A cost object is any item such as a product, customer, department, project, geographic region, plant, and so on, for which costs are measured and assigned. 3

8. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Direct Costs ► Direct costs are those costs that can be easily and accurately traced to a cost object. ► When we say that a cost is easy to trace, we often mean that the relationship between the cost and the object can be physically observed and is easy to track. ► The more costs that can be traced to the object, the more accurate are the cost assignments. 3

9. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Indirect Costs ► Indirect costs are costs that cannot be easily and accurately traced to a cost object. ► Some businesses refer to indirect costs as overhead costs or support costs. ► Allocation means that an indirect cost is assigned to a cost object by using a reasonable and convenient method. ► Since no clearly observable causal relationship exists, allocating indirect costs is based on convenience or some assumed causal linkage. 3

10. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Other Categories of Cost ► In addition to being categorized as either direct or indirect, costs often are analyzed with respect to their behavior patterns, or the way in which a cost changes when the level of the output changes. ► Variable cost: A variable cost is one that increases in total as output increases and decreases in total as output decreases. ► Fixed cost: A fixed cost is a cost that does not increase in total as output increases and does not decrease in total as output decreases. ► Opportunity cost: An opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another. 3

11. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Providing Cost Information ► Managerial accountants must decide: ► what types of managerial accounting information to provide to managers, ► how to measure such information, and ► when and to whom to communicate the information. ► For example, when making most strategic and operating decisions, managers typically rely on managerial accounting information that is prepared in whatever manner the managerial accountant believes provides the best analysis for the decision at hand. 4

12. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Determining Product Cost ► Product costs are inventoried. ► Product costs initially are added to an inventory account and remain in inventory until they are sold, at which time they are transferred to cost of goods. ► Product costs can be further classified as direct materials, direct labor, and manufacturing overhead. 4

13. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Product Cost Calculations ► The total product cost equals the sum of direct materials, direct labor, and manufacturing overhead: ► Total product post = Direct materials cost + Direct labor cost + Manufacturing overhead cost ► The unit product cost equals total product cost divided by the number of units produced: ► Per-unit Cost = Total Product Cost ÷ Number of Units Produced 4

14. Conversion cost = Direct labor + Manufacturing Overhead © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prime and Conversion Costs ► Product costs of direct materials, direct labor, and manufacturing overhead are sometimes grouped into prime cost and conversion cost: ► Prime cost is the sum of direct materials cost and direct labor cost. Prime cost = Direct materials + Direct labor ► Conversion cost is the sum of direct labor cost and manufacturing overhead cost. 4

15. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Period Costs ► Period costs typically are expensed in the period in which they are incurred. ► However, if a period cost is expected to provide an economic benefit (i.e., revenues) beyond the next year, then it is recorded as an asset (i.e., capitalized) and allocated to expense through depreciation throughout its useful life. 4

16. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Preparing Income Statements: Cost of Goods Manufactured ► The cost of goods manufactured represents the total product cost of goods completed during the current period and transferred to finished goods inventory. ► The cost of direct materials used in production can be derived using the following formula: ► The direct materials used is then used to calculate the cost of goods manufactured as follows: 5 Cost of goods manufactured = Direct materials used in production + Direct labor used in production + Manufacturing overhead costs used in production + Beginning WIP inventory - Ending WIP inventory

17. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Relationship Between Flow of Costs, Inventories, and Cost of Goods Sold 5

18. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Income Statement: Manufacturing Firm ► Gross margin is the difference between sales revenue and cost of goods sold: Gross Margin= Sales Revenue – Cost of Goods Sold ► It shows how much the firm is making over and above the cost of the units sold. ► Gross margin does not equal operating income or profit. ► Selling and administrative expenses have not yet been subtracted. However, gross margin does provide useful information. ► If gross margin is positive, the firm at least charges prices that cover the product cost. 5

19. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Managerial Accounting and Ethical Conduct ► The objective of profit maximization should be constrained by the requirement that profits be achieved through legal and ethical means. ► Ethical behavior involves choosing actions that are right, proper, and just. ► Behavior can be right or wrong; it can be proper or improper; and the decisions we make can be fair or unfair. ► Companies in business for the long term find that it pays to treat all of their constituents with honesty and loyalty. 6

20. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Company Codes of Ethical Conduct ► To promote ethical behavior by managers and employees, organizations commonly establish standards of conduct referred to as Company Codes of Conduct. ► A quick review of various corporate codes of conduct shows some common ground. ► Important parts of corporate codes of conduct are integrity, performance of duties, and compliance with the rule of law. They also uniformly prohibit the acceptance of kickbacks and improper gifts, insider trading, and misappropriation of corporate information and assets. 6

21. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Certification ► The accounting profession offers three major forms of certification to managerial accountants: ► Certificate in Management Accounting ► Certificate in Public Accounting ► Certificate in Internal Auditing ► Each certification offers particular advantages to a managerial accountant. ► All three certifications offer evidence that the holder has achieved a minimum level of professional competence. 6