Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 25

ManagerialAccounting Conceptsand Principles

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Managerial accountingprovides financial and

non-financial informationto managers of an

organization and other decision makers.

Financial accountingprovides generalpurpose financial

information to thosewho are outsidethe organization.

Learning Objective 1Explain the purpose and nature of managerial accounting.Managerial Accounting vs. Financial Accounting

LO1

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CustomerOrientationin a GlobalEconomy

Learning Objective 2Describe the lean business model.

Continuous Improvement

New ways to improve

operations

LO2

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Complete productsjust in time to

ship to customers.

Complete partsjust in time for

assembly into products.Receive materials

just in time forproduction.

Scheduleproduction.

Receivecustomerorders.

Just-In-Time (JIT) Manufacturing

To accomplish just-in-time manufacturing:

Processes must be aligned to eliminate delays and

inefficiencies.

Companies must establish good relations with suppliers.

LO2

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A fixed cost does not change with changes in the volume of activity.

A variable cost changes in proportionto changes in the volume of activity.

A mixed cost refers to a combinationof fixed and variable costs.

Learning Objective 3Describe accounting concepts useful in classifying costs.

Cost behavior means how a cost will react to changes in the level of business activity.

Direct costs Costs traceable to a

single cost object. Examples: material

and labor cost for a product.

Indirect costs Costs that cannot be

traced to a single cost object.

Example: maintenance expenditures benefiting two or more departments.

LO3

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Sunk costs: All costs incurred in the pastthat cannot be avoided or changed. Sunk

costs should not be considered in decisions.

Out-of-pocket costs: Cost that requires a Out-of-pocket costs: Cost that requires a future outlay of cash. Out-of-pocket costs future outlay of cash. Out-of-pocket costs

should be considered in decisions.should be considered in decisions.

Opportunity Costs: The potential benefit lost by choosing a specific action from two or

more alternatives.

LO3

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Period costs are expensesnot attached to the product.

Administrative CostsNon-manufacturing costs

of staff support andadministrative functions –

accounting, data processing,personnel, researchand development.

Selling CostsCosts incurred to obtain customer orders and todeliver finished goods

to customers –advertising and shipping.

TheProduct

DirectLabor

DirectMaterial

Manufacturing Overhead

LO4

Learning Objective 4 Define product and period costs and explain how they impact financial statements.

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Period Costs(Expenses)

Product Costs(Inventory)

Inventory Not Sold in 2009

OperatingExpenses

Cost ofGoods Sold

Raw MaterialsGoods in ProcessFinished Goods

Cost ofGoods Sold

2009 CostsIncurred

2009 IncomeStatement

2010 IncomeStatement

2009 BalanceSheet Inventory

InventorySold in 2009

Period and Product Costs inFinancial Statements

LO4

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Completedproductsfor sale.

Materialswaiting to beprocessed.

Can be director indirect.

Partially completeproducts.

Material to whichsome labor and/or

overhead havebeen added.

Balance Sheet of a Manufacturer

RawMaterials

FinishedGoods

Goods inProcess

Learning Objective 5 Explain how balance sheets and income statements for manufacturing and merchandising companies differ.Merchandisers buy goods that are already completed and make them available to customers. Manufacturers buy raw materials and convert the raw materials into completed goods for their customers.

Balance Sheet ofBalance Sheet of a Manufacturer:a Manufacturer:

The only difference

is inventory.

LO5

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Manufacturing CompanyCost of goods sold: Beg. finished goods inv. 14,200$ + Cost of goods manufactured 234,150 = Goods available for sale 248,350$ - Ending finished goods inventory (12,100) = Cost of goods sold 236,250$

Merchandising CompanyCost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 = Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

Learning Objective 6Compute cost of goods sold for a manufacturer.

Manufacturer’s Income Statement

LO6

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Direct Materials Materials that are separately and readily traced to a particular product.

Example:Steel used to manufacture

the automobile.

Manufacturer’s Income Statement

Direct Labor Labor costs that are separately and readily traced to finished product.

Example:Wages paid to an

automobile assembly worker.

Factory Overhead All manufacturing costs except direct material and direct labor.

Factory costs that cannot be separately or readily traced directly to products.

Examples:Indirect labor – maintenance

Indirect material – cleaning suppliesFactory utility costsSupervisory costs

LO6

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Finished GoodsBeginning Inventory

Cost of GoodsManufactured

FinishedGoodsEnding

Inventory

RawMaterialsBeginningInventory

RawMaterials

Purchases

Raw MaterialsEnding Inventory

Costof

GoodsSold

Goods in ProcessBeginning Inventory

Direct Labor

FactoryOverhead

Raw MaterialsUsed

Sales activityProduction activityMaterialsactivity

Learning Objective 7Explain manufacturing activities and the flow of manufacturing costs.

Goods in ProcessEnding Inventory

LO7

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Summarizes the types and amounts of costsincurred in a company’s manufacturing process.

Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured

Learning Objective 8Prepare a manufacturing statement and explain its purpose and links to financial statements.

LO8

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Learning Objective 9Compute cycle time and cycle efficiency and explain their importance to production management.

Cycletime

Processtime

Inspectiontime

Movetime

Waittime= + + +

Time spentproducing

the product. Time spent inspecting raw materials, goods in process,

and finished goods.

Time spent moving rawmaterials, goods in process,

and finished goods.

Time that anorder sits withno productionapplied to it.

Process timeProcess timeis the onlyis the only

value-added time. value-added time.

Cycleefficiency

Value-added timeCycle time=

LO9

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End of Chapter 25