1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Introduction to Management Accounting Chapter 18

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Management Accountability Responsibility to stakeholders of the company –Owners –Creditors –Suppliers –Employees –Customers

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Objective 1 Distinguish between financial accounting and management accounting

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Management Accounting and Financial Accounting Financial External Investors, Creditors, Government authorities Management Internal Managers of the business Primary Users

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Management Accounting and Financial Accounting Financial Help investors and creditors make investment and credit decisions Management Help managers plan and control business operations Purpose of Information

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Management Accounting and Financial Accounting Financial Relevance and reliability Focus on the past Management Relevance Focus on future Focus and Time Dimension of the Information

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Management Accounting and Financial Accounting 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 Type of Report

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 Management Accounting and Financial Accounting 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 Scope of Information

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Management Accounting and Financial Accounting Financial Concern about adequacy of disclosure Behavioral implications are secondary Management Concern about how reports will affect employee behavior Behavioral

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 Objective 2 Identify trends in the business environment and the role of management accountability

11. Copyright © 2007 Prentice-Hall. All rights reserved 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. Copyright © 2007 Prentice-Hall. All rights reserved 12 Objective 3 Classify costs and prepare an income statement for a service company

13. Copyright © 2007 Prentice-Hall. All rights reserved 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. Copyright © 2007 Prentice-Hall. All rights reserved 14 E18-16E18-16 Fido Grooming Income Statement For the Month Ended July 31, 2007 Service revenue$15,000 Operating expenses: Wages$4,800 Grooming supplies1,200 Building rent1,000 Utilities250 Depreciation, equipment1007,350 Operating income$7,650 Cost to groom one dog = $7,350/600 dogs = $12.25

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Objective 4 Classify costs and prepare an income statement for a merchandising company

16. Copyright © 2007 Prentice-Hall. All rights reserved 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. Copyright © 2007 Prentice-Hall. All rights reserved 17 Merchandising Company – Income Statement Sales - Cost of goods sold Gross profit - Operating expenses Operating income

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 Merchandising Company – Income Statement Cost of goods sold: Beginning inventory + Purchases + Freight-in Cost of goods available for sale - Ending inventory Cost of goods sold In a periodic inventory system, cost of goods sold must be computed

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 E18-18E18-18 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 Purchases63,000 Goods available for sale$70,000 Inventory, December 31, 2009(5,000) Cost of goods sold65,000 Gross profit$60,000 Selling and administrative expenses45,000 Operating income$15,000

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 E18-18E18-18 Unit cost for one brush: Cost of goods sold$65,000 Selling and administrative expenses45,000 Total cost$110,000 $110,000 / 5,800 brushes = $18.97

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Objective 5 Classify costs and prepare an income statement for a manufacturing company

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 Manufacturing Companies Manufacturing Companies Use labor, plant, and equipment to convert raw materials into finished products –Materials inventory –Work in process inventory –Finished goods inventory

23. Copyright © 2007 Prentice-Hall. All rights reserved 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. Copyright © 2007 Prentice-Hall. All rights reserved 24 Product Costs Direct materials Direct labor Manufacturing overhead Direct Costs Indirect Costs

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 Cost Object Anything for which managers want a separate measurement of cost Direct cost – can be directly traced to cost object

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Manufacturing Overhead Indirect costs related to manufacturing operations –Generally all manufacturing costs that are not direct costs –Indirect materials –Indirect labor

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 Manufacturing Companies – Income Statement Sales - Cost of goods sold Gross profit - Operating expenses Operating income

28. Copyright © 2007 Prentice-Hall. All rights reserved 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. Copyright © 2007 Prentice-Hall. All rights reserved 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. Copyright © 2007 Prentice-Hall. All rights reserved 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. Copyright © 2007 Prentice-Hall. All rights reserved 31 Manufacturing Companies Product & Period Costs Materials Inventory Finished Goods Inventory Sales Cost of Goods Sold INCOME STATEMENT Operating Expenses Inventoriable Product Costs BALANCE SHEET = Operating Income when sales occur - - Work in Process Inventory Period Costs

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 Manufacturing Companies Inventory Accounts Materials Inventory Beginning inventory Purchases & freight Ending inventory Materials used

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 Manufacturing Companies Inventory Accounts Work in Process Inventory Materials used Direct labor Manufacturing overhead Beginning inventory Ending inventory Cost of goods manufactured

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 Manufacturing Companies Inventory Accounts Finished Goods Inventory Beginning inventory Ending inventory Cost of goods sold Cost of goods manufactured Income Statement

35. Copyright © 2007 Prentice-Hall. All rights reserved 35 E18-22E18-22 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 materials155,000 Materials available for use$205,000 Ending materials inventory(25,000)180,000 Direct labor120,000 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. Copyright © 2007 Prentice-Hall. All rights reserved 36 E18-22E18-22 Schedule of manufacturing overhead costs Depreciation, plant building and equipment$15,000 Insurance on plant20,000 Repairs and maintenance, plant5,000 Indirect labor30,000 Total manufacturing overhead$70,000

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 E18-22E18-22 2. $405,000 / 3,000 lamps = $135

38. Copyright © 2007 Prentice-Hall. All rights reserved 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 Direct labor Manufacturing overhead Beginning inventory Ending inventory Cost of goods manufactured Direct materials Total manufacturing costs to account for

39. Copyright © 2007 Prentice-Hall. All rights reserved 39 Objective 6 Use reasonable standards to make ethical judgments

40. Copyright © 2007 Prentice-Hall. All rights reserved 40 Ethical Standards Institute of Management Accountants (IMA) Standards of Ethical Conduct for Management Accountants –Competence –Confidentiality –Integrity –Objectivity

41. Copyright © 2007 Prentice-Hall. All rights reserved 41 End of Chapter 18