1. Introduction to Management Accounting
Chapter 18

2. Management Accountability
Responsibility to stakeholders of the company
Owners
Creditors
Suppliers
Employees
Customers

3. Distinguish between financial accounting and management accounting
Objective 1
Distinguish between financial accounting and management accounting

4. Management Accounting and Financial Accounting
Primary Users
Financial
External
Investors, Creditors, Government authorities
Management
Internal
Managers of the business

5. Management Accounting and Financial Accounting
Purpose of Information
Financial
Help investors and creditors make investment and credit decisions
Management
Help managers plan and control business operations

6. Management Accounting and Financial Accounting
Focus and Time Dimension of the Information
Financial
Relevance and reliability
Focus on the past
Management
Relevance
Focus on future

7. Management Accounting and Financial Accounting
Type of Report
Financial
Financial statements restricted by GAAP
Audited by independent CPA’s
Management
Internal reports restricted by cost-benefit analysis
Not audited by independent CPA’s

8. Management Accounting and Financial Accounting
Scope of Information
Financial Accounting
Summary reports primarily on the company as a whole
On quarterly or annual basis
Management Accounting
Detailed reports on parts of the company
Often on daily or weekly basis

9. Management Accounting and Financial Accounting
Behavioral
Financial
Concern about adequacy of disclosure
Behavioral implications are secondary
Management
Concern about how reports will affect employee behavior

10. Objective 2
Identify trends in the business environment and the role of management accountability

11. Today’s Business Trends
Shift toward a service economy
Global competition
Time-based competition
Advanced information systems
E-Commerce
Just-in-Time management
Total Quality Management

12. Classify costs and prepare an income statement for a service company
Objective 3
Classify costs and prepare an income statement for a service company

13. Service Company Simplest accounting
All costs are period costs - costs that are incurred and expensed in the same accounting period
Operating income =
Service revenue – operating expenses

14. For the Month Ended July 31, 2007
Fido Grooming
Income Statement
For the Month Ended July 31, 2007
Service revenue $15,000
Operating expenses:
Wages $4,800
Grooming supplies 1,200
Building rent 1,000
Utilities 250
Depreciation, equipment 100 7,350
Operating income $7,650
Cost to groom one dog = $7,350/600 dogs = $12.25

15. Objective 4
Classify costs and prepare an income statement for a merchandising company

16. Merchandising Company
Purchase inventory from suppliers and resell to customers
Has both period costs and inventoriable product costs
Product costs – become a part of the cost of asset, inventory
Invoice price, freight in
Reported as an asset until sold

17. Merchandising Company – Income Statement
Sales
- Cost of goods sold
Gross profit
- Operating expenses
Operating income

18. Merchandising Company – Income Statement
In a periodic inventory system, cost of goods sold must be computed
Cost of goods sold:
Beginning inventory
+ Purchases
+ Freight-in
Cost of goods available for sale
- Ending inventory
Cost of goods sold

19. E18-18 Kingston Brush Company Income Statement
For Year Ended December 31, 2009
Service revenue $125,000
Cost of goods sold:
Inventory, January 1, 2009 $7,000
Purchases 63,000
Goods available for sale $70,000
Inventory, December 31, 2009 (5,000)
Cost of goods sold 65,000
Gross profit $60,000
Selling and administrative expenses 45,000
Operating income $15,000

20. E18-18 Unit cost for one brush: Cost of goods sold $65,000
Selling and administrative expenses 45,000
Total cost $110,000
$110,000 / 5,800 brushes = $18.97

21. Objective 5
Classify costs and prepare an income statement for a manufacturing company

22. Manufacturing Companies
Use labor, plant, and equipment to convert raw materials into finished products
Materials inventory
Work in process inventory
Finished goods inventory

23. Product Costs
Direct materials - those that become a physical part of a finished product and whose costs are separately and conveniently traceable to the finished product
Direct labor - those that become a physical part of a finished product and who costs are separately and conveniently traceable to the finished product
Manufacturing overhead - all other manufacturing costs other than direct materials and direct labor

24. Product Costs Direct materials Direct labor Direct Costs
Manufacturing overhead
Direct Costs
Indirect Costs

25. Cost Object
Anything for which managers want a separate measurement of cost
Direct cost – can be directly traced to cost object

26. Manufacturing Overhead
Indirect costs related to manufacturing operations
Generally all manufacturing costs that are not direct costs
Indirect materials
Indirect labor

27. Manufacturing Companies – Income Statement
Sales
- Cost of goods sold
Gross profit
- Operating expenses
Operating income

28. Manufacturing Company – Income Statement
Cost of goods sold:
Beginning finished goods inventory
+ Cost of goods manufactured
Cost of goods available for sale
- Ending finished goods inventory
Cost of goods sold

29. Manufacturing Company – Income Statement
Cost of goods manufactured:
Beginning work in process inventory
+ Direct materials used
+ Direct labor
+ Manufacturing overhead
Total manufacturing costs to account for
- Ending work in process inventory
Cost of goods manufactured

30. Manufacturing Company – Income Statement
Direct materials used:
Beginning materials inventory
+ Purchases of direct materials
+ Freight in
Materials available for use
- Ending materials inventory
Direct materials used

31. Manufacturing Companies Product & Period Costs
BALANCE SHEET
INCOME STATEMENT
Inventoriable
Product Costs
Sales
when
sales
occur
Materials
Inventory
Finished
Goods
Inventory -
Cost of
Goods Sold -
Work in
Process
Inventory
Operating
Expenses
Period
Costs =
Operating Income

32. Manufacturing Companies Inventory Accounts
Materials Inventory
Beginning inventory
Materials used
Purchases & freight
Ending inventory

33. Manufacturing Companies Inventory Accounts
Work in Process
Inventory
Beginning inventory
Cost of goods
manufactured
Materials used
Direct labor
Manufacturing overhead
Ending inventory

34. Manufacturing Companies Inventory Accounts
Finished Goods
Inventory
Income Statement
Beginning inventory
Cost of goods
sold
Cost of goods
manufactured
Ending inventory

35. E18-22 Snyder Company Statement of Cost of Goods Manufactured
For Year Ended December 31, 2008
Beginning work in process inventory $100,000
Direct materials used:
Beginning materials inventory $50,000
Purchases of direct materials 155,000
Materials available for use $205,000
Ending materials inventory (25,000) 180,000
Direct labor 120,000
Manufacturing overhead (see schedule) 70,000
Total manufacturing costs to account for $470,000
Ending work in process inventory (65,000)
Cost of goods manufactured $405,000

36. Schedule of manufacturing overhead costs
Depreciation, plant building and equipment $15,000
Insurance on plant 20,000
Repairs and maintenance, plant 5,000
Indirect labor 30,000
Total manufacturing overhead $70,000

37. E18-22
2. $405,000 / 3,000 lamps = $135

38. Statement of Cost of Goods Manufactured
This is a summary of the costs that flow through work in process during the period.
Work in Process
Inventory
Beginning inventory
Cost of goods
manufactured
Total manufacturing
costs to account for
Direct materials
Direct labor
Manufacturing overhead
Ending inventory

39. Use reasonable standards to make ethical judgments
Objective 6
Use reasonable standards to make ethical judgments

40. Ethical Standards Institute of Management Accountants (IMA)
Standards of Ethical Conduct for Management Accountants
Competence
Confidentiality
Integrity
Objectivity

41. End of Chapter 18