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.
Cost Objects, Direct Costs,and Indirect Costs
• What are examples of cost objects?
– individual products– alternative marketing strategies– geographic segments of the
business– departments
Cost Objects, Direct Costs,and Indirect Costs
• 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
Inventoriableproduct
costs
Fullproduct
costs
Fullproduct
costs
Product Costs
• There are two types of product costs:
External Reporting
Inventoriableproduct
costs
Inventoriableproduct
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.
Inventoriable Product Costs
• 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
Inventoriable Product Costs
Inventoriable Product Costs
DirectMaterials
DirectLabor
Prime Costs = Direct Materials + Direct Labor
Inventoriable Product Costs
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.
Manufacturing Company Example
• 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
Manufacturing Company Example
• 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?
Manufacturing Company Example
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
Manufacturing Company Example
• 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
Manufacturing Company Example
• 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?
Manufacturing Company Example
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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