Introduction to Management Accounting

Introduction toManagement Accounting

Planning Acting

Feedback

Controlling

The Functions of Management

Objective 1

Distinguish between financial accounting and management

accounting.

Primary Users

FinancialInvestorsCreditorsGovernment

authorities

ManagementInternal managers

of the business

Purpose of Information

Financial• Help investors,

creditors, and others make investment, credit, and other decisions

Management • Help managers

plan and control business operations

Focus and Time Dimension

Financial• Reliability,

objectivity, and focus on the past

Management • Relevance

Type of Report

Financial• Financial

statements restricted by GAAP

Management • Internal reports

not restricted by GAAP; determined by cost-benefit analysis

Verification

Financial• Annual

independent audit by CPAs

Management • No independent

audit

Scope of Information

Financial• Summary reports

primarily on the company as a whole

Management • Detailed reports on

parts of the company

Behavioral Implications

Financial• Concern about

adequacy of disclosure

Management • Concern about

how reports will affect employees behavior

Service, Merchandising, and Manufacturing Companies

Service• Provides

intangible services, rather than tangible products

Merchandising• resells products

previously bought from suppliers

Service, Merchandising, and Manufacturing Companies

Manufacturing Company:• uses labor, plant, and equipment to

convert raw materials into finished products

• Materials inventory• Work in process inventory• Finished goods inventory

Describe the value chain

and classify costs byvalue-chain functions.

Objective 2

Value Chain

Research &Development

DesignProduction or

Purchases

Marketing Distribution CustomerServices

Distinguish direct costs

from indirect costs.

Objective 3

Cost Objects, Direct Costs,and Indirect Costs

• Cost objects are anything for which a separate measurement of costs is desired.

• Cost drivers are any factors that affect cost.


• What are examples of cost objects?

– individual products– alternative marketing strategies– geographic segments of the

business– departments


• What are direct costs?• Direct costs are those costs that can be

specifically traced to the cost object.• What are indirect costs?• Indirect costs are costs that cannot be

specifically traced to the cost object.

Distinguish among full product costs,

inventoriable productcosts, and period costs.

Objective 4

Product Costs

• What are product costs?• They are the costs to produce (or

purchase) tangible products intended for sale.

Inventoriableproduct

costs


costs

Fullproduct

costs

Fullproduct

costs

Product Costs

• There are two types of product costs:

External Reporting


costs


costs

PeriodcostsPeriodcosts

Inventoriable Product Costs

• For external reporting, merchandisers’ inventoriable product costs include only costs that are incurred in the purchase of goods.

• Inventoriable costs are an asset.• Period costs flow as expenses directly to

the income statement.


• For external reporting, manufacturers’ inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process.

• Inventoriable product costs are incurred only in the third element of the value chain.

• Costs incurred in other elements of the value chain are period costs.

DirectMaterials

DirectLabor

IndirectLabor

IndirectMaterials

Other

Manufacturing Overhead



DirectMaterials

DirectLabor

Prime Costs = Direct Materials + Direct Labor


Conversion Costs = Direct Labor + Manufacturing Overhead

DirectLabor

IndirectLabor

IndirectMaterials

Other

Prepare the financial statements

of a manufacturing company.

Objective 5

Revenues – Expenses = Operating income

Financial Statements forService Companies

• There is no inventory and thus no inventoriable costs.

• The income statement does not include cost of goods sold.

Financial Statements for Merchandising Companies

Purchases ofInventory plus

Freight-In Inventory

Sales Revenue

Cost ofGoods Sold

INCOME STATEMENT

Operating Expenses

InventoriableCosts

BALANCE SHEET

equals Operating Income

whensalesoccur

deduct

equals Gross Margindeduct

PeriodCosts

Financial Statements forManufacturing Companies

Materials

InventoryFinishedGoods

Inventory

Sales Revenue

Cost ofGoods Sold

INCOME STATEMENT

Operating Expenses

InventoriableCosts

BALANCE SHEET

equals Operating Income

whensalesoccur

deduct

equals Gross Margindeduct

Work inProcess

InventoryPeriodCosts

Manufacturing Company Example

• Kailash Manufacturing Company:• Beginning and ending work-in-process

inventories were 20,000 and 18,000.• Direct materials used were 70,000.• Direct labor was 100,000.• Manufacturing overhead incurred was

150,000.


• What is the cost of goods manufactured?

Beginning work in process 20,000Direct labor 100,000Direct materials 70,000Mfg. overhead 150,000 320,000Ending work in process (18,000)Cost of goods manufactured 322,000


• Kailash Manufacturing Company’s beginning finished goods inventory was 60,000 and its ending finished goods inventory was 55,000.

• How much is the cost of goods sold?


Beg. finished goods inventory 60,000+ Cost of goods manufactured 322,000= Cost of goods available for sale 382,000– Ending finished goods 55,000= Cost of goods sold 327,000


• Kailash Manufacturing Company had sales of 627,000 for the period.

• How much is the gross margin?

Sales 627,000– Cost of goods sold 327,000= Gross margin 300,000


• Kailash Manufacturing Company had operating expenses as follows:

• 80,000 Sales salaries 10,000 Delivery expense

30,000 Administrative expenses 120,000 Total

• What is Kailash’s operating income?


Gross margin 300,000– Operating expenses 120,000= Operating income 180,000

Flow of Costs through a Manufacturer’s Accounts

• Direct Materials Inventory

• Beginning inventory+ Purchases and freight-in

= Direct materials available for use

– Ending inventory= Direct materials used

• Work in Process Inventory• Beginning inventory+ Direct materials used+ Direct labor+ Manufacturing overhead= Total manufacturing costs

to account for– Ending inventory= Cost of goods

manufactured

Flow of Costs through a Manufacturer’s Accounts

• Finished Goods Inventory• Beginning inventory+ Cost of goods manufactured= Cost of goods available for sale– Ending inventory= Cost of goods sold

Identify major trends in thebusiness environment, and

usecost-benefit analysis to make

business decisions.

Objective 6

Shift to a Service Economy

In the U.S., 55% of the workforceis employed in service companies.

Service Industries Other

Competing in the Global Marketplace

Foreign Operations Other

Foreign operations accountfor over 30% of GE’s revenues.

Just-in-Time

• JIT philosophy means that the company schedules production just in time to satisfy needs.

• Speeding up of the production process reduces throughput time.

• Throughput time is the time between buying raw materials and selling the finished products.

Total Quality Management

• The goal of total quality management (TQM) is to please customers by providing them with superior products and services.

• TQM emphasizes educating, training, and cross-training employees.

• Quality improvement programs cost money today.

• The benefits usually do not occur until later.

Total Quality Management

Total Benefits

Total Cost

Initial Benefit and Cost

170 200

Additional Expected Benefits

68

Total 238 200

Amt in CroresAmt in Crores

Use reasonable standards to

make ethical judgments.

Objective 7

Professional Ethics for Management Accountants

• In many situations the ethical path is not so clear.

• The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.

Standards of Ethical Conduct for Management Accountants

Confidentiality

Integrity

Objectivity

Competence

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Introduction to Management Accounting

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