Accounting Chapter 14

More Info between Manufacturing and Merchandising inventory

+A manufacturer produces the units that it will sell. The balance sheet includes three different inventories: Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory. +A merchandiser does not manufacture its units; instead it purchases units for resale. The balance sheet of a merchandiser includes a single inventory, Merchandise Inventory. A service provider, as the name indicates, does not provide a product; instead it provides a service. The balance sheet of a service provider will not report any inventories for sale or resale. So, the Merchandise Inventory account appears on the merchandiser's balance sheet. Finished goods Inventory appears on a manufacturer's balance sheet. Cost of goods sold is inventory expense. +Both the manufacturer and the merchandiser carry inventories, and will therefore report cost of goods sold on the income statement. Operating expenses are incurred by all three types of organizations. Cost of goods manufactured only applies to the manufacturer. Cost of goods manufactured represents the cost of units that are completed during the current period, and transferred from the Work in Process Inventory account to the Finished Goods Inventory account. Supplies inventory can apply to all three types of organizations.

Schedule of Cost of Good Manufactured

+Summarizes the types and amounts of costs incurred in a company's manufacturing process. Managers of manufacturing firms analyze product costs in detail. Those managers aim to make better decisions about materials, labor, and overhead to reduce the cost of goods manufactured and improve income. A company's manufacturing activities are described in a report called a schedule of cost of goods manufactured also called a manufacturing statement and a statement of cost of goods manufactured. The schedule of cost of goods manufactured summarizes the types and amounts of costs incurred in the manufacturing process. Direct Materials Used +Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process - Ending Work in Process = Cost of Goods Manufactured +The schedule is divided into four parts: direct materials, direct labor, overhead, and computation of cost of goods manufactured. Direct materials, direct labor, and overhead costs are summarized in the schedule of cost of goods manufactured; then the amount of cost of goods manufactured from that statement is used to compute cost of goods sold on the income statement. Physical counts determine the dollar amounts of ending raw materials inventory and work in process inventory, and those amounts are included on the end-of-period balance sheet.

Fixed versus Variable

- A cost can be classified by how it behaves with changes in the volume of activity.

Period costs(expenses not attached to the product)

Are the non-factory costs. These costs are expensed on the income statement as incurred, as either selling expense, or general and administrative expense. Ex: +Advertising costs are non-factory costs, and are expensed in the period incurred. +Real estate taxes paid on the sales office is non-factory related; this is a period cost. Period costs are non-production costs and are usually more associated with activities linked to a time period than with completed products. -Common examples of period costs include salaries of the sales staff, wages of maintenance workers, advertising expenses, and depreciation on office furniture and equipment. Period costs and are expensed in the period when incurred either as selling expenses or as general and administrative expenses. + Are recorded on the income statement as expenses

Variable costs

Change in proportion to changes in the volume of activity. Ex: Sales commissions computed as a percent of sales revenue.

Reporting Manufacturing Activities

Companies with manufacturing activities differ from both merchandising and service companies. The main difference between merchandising and manufacturing companies is that merchandisers buy goods ready for sale while manufacturers produce goods from materials and labor. Merchandisers . . . Buy finished goods. Sell finished goods. Manufacturers . . . Buy raw materials. Produce and sell finished goods.

Reporting of Costs

Companies with manufacturing activities differ from both merchandising and service companies. The main difference between merchandising and manufacturing companies is that merchandisers buy goods ready for sale while manufacturers produce goods from materials and labor. Amazon is an example of a merchandising company. It buys and sells goods without physically changing them. Adidas is primarily a manufacturer of shoes, apparel, and accessories. It purchases materials such as leather, cloth, dye, plastic, rubber, glue, and laces and then uses employees' labor to convert these materials to products.

Different Ways to Classify Costs-Managerial Accounting is focused on Costs

Costs may be classified as a period or product cost, whether it changes or not based upon a change in activity (behavior) and whether it can be traced to a specific product or department or not (direct or indirect). The cost concepts described also apply to service organizations. For example, consider Southwest Airlines, and assume the cost object is a flight. The airline's cost of beverages for passengers is a variable cost based on number of flights. The monthly cost of leasing an aircraft is fixed with respect to number of flights. We can also trace a flight crew's salary to a specific flight whereas we likely cannot trace wages for the ground crew to a specific flight. Classification as product versus period costs is not relevant to service companies because services are not inventoried. Instead, costs incurred by a service firm are expensed in the reporting period when incurred. To be effective, managers in service companies must understand and apply cost concepts. For example, an airline manager must often decide between canceling or rerouting flights. The manager must be able to estimate costs saved by canceling a flight versus rerouting. Knowledge of fixed costs is equally important.

Fixed costs

Do not change with changes in the volume of activity (within a range of activity known as an activity's relevant range). +For example, straight-line depreciation on equipment is a fixed cost.

Nonmanufacturing Costs -

Factory overhead does not include selling and administrative expenses because they are not incurred in manufacturing products. These expenses are period costs, and they are recorded as expenses on the income statement when incurred. For a manufacturing company, such costs are also called nonmanufacturing costs. Examples include office workers salaries, depreciation on office equipment, and advertising expenses.

Corporate Social Responsibility

In addition to maximizing shareholder value, corporations must consider: 1. the demands of other stakeholders, including employees, suppliers, and society in general. 2. Corporate social responsibility (CSR) is a concept that goes beyond following the law. 3. Triple bottom line, focuses on three measures: financial ("profits"), social ("people"), and environmental ("planet"). 4. Adopting a triple bottom line impacts how businesses report. In response to a growing trend of such reporting, the Sustainability Accounting Standards Board (SASB) was established to develop reporting standards for businesses' sustainability activities. Some of the business sectors for which the SASB has developed reporting standards include health care, nonrenewable resources, and renewable resources and alternative energy.

Fraud and Ethics in Managerial Accounting

Fraud, and the role of ethics in reducing fraud, are important factors in running business operations. +Fraud involves the use of one's job for personal gain through the deliberate misuse of the employer's assets. +Examples include theft of the employer's cash or other assets, overstating reimbursable expenses, payroll schemes, and financial statement fraud. +Three factors must exist for a person to commit fraud: opportunity, financial pressure, and rationalization. This is known as the fraud triangle. Fraud affects all business and it is costly: The 2016 Report to the Nations from the Association of Certified Fraud Examiners (ACFE) estimates the average U.S. business loses 5% of its annual revenues to fraud. -Combating fraud requires ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. Identifying the ethical path can be difficult. -The Institute of Management Accountants (IMA), the professional association for management accountants, has issued a code of ethics to help accountants in solve ethical dilemmas. The IMA's Statement of Ethical Professional Practice requires that management accountants be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner. +An internal control system is the policies and procedures used to: 1. Ensure reliable accounting 2. Protect assets 3. Uphold company policies 3. Promote efficient operations.

Flow of Manufacturing Activities

In addition to income statements and balance sheets, manufacturing companies prepare additional reports for planning and control. To understand these reports, we must know the flow of manufacturing activities and costs. This slide shows the flow of manufacturing activities and the cost flows of those activities. + the activities flow consists of materials activity; (Raw materials beginning inventory and Raw materials purchased) +followed by production activity,(Work in process beginning inventory, Direct materials used Direct labor used, and Indirect materials /factory overhead used) +followed by sales activity, (Finished goods beginning inventory, Goods manufactured) T The production activity that takes place in the period results in products that are either finished or not finished at the end of the period. The cost of finished products makes up the cost of goods manufactured for the current period. The cost of goods manufactured is the total cost of making and finishing products in the period. The company adds the cost of the beginning inventory of finished goods with the cost of the newly completed units (goods manufactured). Together, they make up total finished goods available for sale in the current period. As they are sold, the cost of finished products sold is reported on the income statement as cost of goods sold. The cost of any finished products not sold in the period is reported as a current asset, finished goods inventory, on the current period's balance sheet.

The purpose of managerial accounting

Is to provide useful information to aid in three key managerial tasks: (1) Determining the costs of an organization's products and services (2) Planning future activities (3) Comparing actual results to planned results

Identifications of Cost Classifications

It is important to understand that a cost can be classified using any one (or combination) of the three different means described here. Understanding how to classify costs in several different ways enables managers to use cost information for a variety of decisions. Factory rent, for instance, is classified as a product cost; it is fixed with respect to the number of units produced, and it is indirect with respect to the product. Potential multiple classifications are shown in this slide using different cost items incurred in manufacturing mountain bikes. The finished bike is the cost object. Managerial decisions based on cost data depend on correct cost classifications.

Product Costs

It represent all of the factory costs. Assets are valued on the balance sheet at all necessary costs to get the asset ready for its intended purpose. Product costs include direct material, direct labor, and all other factory costs,(factory overhead.) Examples of factory overhead because they are not direct materials or direct labor: +The plastic board used to mount the chip is a direct material cost +Factory maintenance workers' salaries are factory costs, and therefore product costs, but don't qualify as direct materials or direct labor. Therefore, these costs are classified as factory overhead. +Real estate taxes paid on the factory is a factory cost +The factory supervisor salary is also a product cost, part of factory overhead. +Depreciation on factory equipment is also part of factory overhead. Direct materials and direct labor examples: The assembly worker's hourly wage to make the chips can be traced directly to the product. All production (or factory) costs are product costs. Product costs are those production costs necessary to create a product and consist of the 3 categories: direct materials, direct labor, and factory overhead. Overhead refers to production costs other than direct materials and direct labor. Product costs are capitalized as inventory during and after completion of the products; they are recorded as cost of goods sold when those products are sold. +Are recorded on the balance sheet as inventory

Careers in Managerial Accounting

Managerial accountants are highly regarded and in high demand. Managerial accountants must have strong communication skills, understand how businesses work, and be team players. They must also possess skills to analyze information and think critically, and they are often considered to be important business advisors.

Estimating Cost Per Unit

Managers use the schedule of cost of goods manufactured to make rough estimates of per unit costs. For example, if Rocky Mountain Bikes made 1,000 bikes during the year, the average manufacturing cost per unit is $170.50 (computed as $170,500, which is the total costs of goods manufactured/1,000). Average cost per unit is not always an the appropriate cost for managerial decisions

Manufacturer's Balance Sheet

Manufacturers carry several unique assets and usually have three inventories instead of the single inventory that merchandisers carry. The three inventories are raw materials, work in process, and finished goods.

Period and Product Costs in Financial Statements

Period costs flow directly to the current income statement as expenses. They are not reported as assets. Product costs are first assigned to inventory. Their final treatment depends on when inventory is sold or disposed of. (1.) Product costs assigned to finished goods that are sold in year 2017 are reported on the 2017 income statement as cost of goods sold. (2.) Product costs assigned to unsold inventory are carried forward on the balance sheet at the end of year 2017. If this inventory is sold in year 2018, product costs assigned to it are reported as cost of goods sold in that year's income statement.

Cost of Goods Sold for a Merchandiser and Manufacturer

The Cost of Goods Sold sections for both a merchandiser (Tele-Mart) and a manufacturer (Rocky Mountain Bikes) are shown in this slide to highlight these differences. The remaining income statement sections are similar for merchandisers and manufacturers. Although the cost of goods sold computations are similar, the numbers in these computations reflect different activities. A merchandiser's cost of goods purchased is the cost of buying products to be sold. A manufacturer's cost of goods manufactured is the sum of direct materials, direct labor, and factory overhead costs incurred in making products. Since a service provider does not make or buy inventory to be sold, it does not report cost of goods manufactured or cost of goods sold. Instead, its operating expenses include all of the costs it incurs in providing its service.

Cost Concepts for Service Companies

The cost concepts described are generally applicable to service organizations. -The cost concepts described also apply to service organizations. For example, consider Southwest Airlines, and assume the cost object is a flight. The airline's cost of beverages for passengers is a variable cost based on number of flights. The monthly cost of leasing an aircraft is fixed with respect to number of flights. We can also trace a flight crew's salary to a specific flight whereas we likely cannot trace wages for the ground crew to a specific flight. Classification as product versus period costs is not relevant to service companies because services are not inventoried. Instead, costs incurred by a service firm are expensed in the reporting period when incurred. To be effective, managers in service companies must understand and apply cost concepts. For example, an airline manager must often decide between canceling or rerouting flights. The manager must be able to estimate costs saved by canceling a flight versus rerouting. Knowledge of fixed costs is equally important.

Costs and the Income Statement

The main difference between the income statement of a manufacturer and that of a merchandiser involves the items making up cost of goods sold. Merchandisers add cost of goods purchased to beginning merchandise inventory and then subtract ending merchandise inventory to get cost of goods sold. Manufacturers add cost of goods manufactured to beginning finished goods inventory and then subtract ending finished goods inventory to get cost of goods sold. In computing cost of goods sold, a merchandiser uses merchandise inventory while a manufacturer uses finished goods inventory. A manufacturer's inventories of raw materials and work in process are not included in finished goods because they are not available for sale. A manufacturer also shows cost of goods manufactured instead of cost of goods purchased. This difference occurs because a manufacturer produces its goods instead of purchasing them ready for sale.

Balance Sheets for Manufacturers, Merchandisers and Servicers

The primary difference in the Balance Sheet of a Merchandiser and a Manufacturer is the presentation of Inventory under the Current Assets section. Merchandisers have one category of inventory called Merchandise Inventory. Manufacturers have three major categories of inventory: Raw Materials, Work in Process, also called goods in process, and Finished Goods. The current assets section of the balance sheet will look different for merchandising and service companies as compared to manufacturing companies. A merchandiser will report only merchandise inventory rather than the three types of inventory reported by a manufacturer. A service company's balance sheet does not have any inventory held for sale.

Trends in Managerial Accounting

Tools and techniques of managerial accounting continue to evolve due to changes in the business environment. 1. Customer Orientation 2. E-Commerce 3. Lean Practices 4. Global Economy 5. Service Economy 6. Value Chain

Direct Materials

are tangible components of a finished product. Direct material costs are the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods. Examples of direct materials in manufacturing a mountain bike include its tires, seat, frame, pedals, brakes, cables, gears, and handlebars.

Work in process inventory

also called goods in process inventory consists of products in the process of being manufactured but not yet complete. The amount of work in process inventory depends on the type of production process.

Factory Overhead

also called manufacturing overhead, consists of all manufacturing costs that are not direct materials or direct labor. Factory overhead costs cannot be separately or readily traced to finished goods. All factory overhead costs are considered indirect costs. These costs include indirect materials, indirect labor, and other costs not directly traceable to the product.

Indirect materials

are components used in manufacturing the product, but they are not clearly identified with specific product units. Direct materials are often classified as indirect materials when their costs are low. Examples include screws and nuts used in assembling mountain bikes, and staples and glue used in manufacturing shoes. Applying the materiality principle, it does not make economic sense to individually trace costs of each of these materials to individual products. For example, keeping detailed records of the amount of glue used to manufacture one shoe is not cost-beneficial.

Prime Cost

are expenditures directly associated with the manufacture of finished goods, which includes both direct material and direct labor costs.

Conversion costs

are expenditures incurred in the process of converting raw materials to finished goods, which includes both direct labor costs and manufacturing overhead costs. Notice that direct labor costs are considered both prime costs and conversion costs. Classification into conversion costs is useful for process costing.

period costs-Selling costs

are incurred to obtain orders and to deliver finished goods to customers.

period costs-Administrative costs

are non-manufacturing costs of staff support and administrative functions.

Direct costs

are traceable to a single cost object. Ex:material and labor cost for a product

Indirect costs

cannot be easily and cost-beneficially traced to a single cost object. Ex: janitorial services benefiting two or more departments.

Just-in-time manufacturing

is a system that acquires inventory and produces only when needed. An important aspect of JIT is that companies manufacture products only after they receive an order (a demand-pull system) and then deliver the customer's requirements on time. This means that processes must be aligned to eliminate delays and inefficiencies including inferior inputs and outputs. Companies must also establish good communications with their suppliers. On the downside, JIT is more susceptible to disruption than traditional systems. As one example, several General Motors plants were temporarily shut down due to a strike at a supplier which supplied components just in time to the assembly division.

Raw materials inventory

is the goods a company acquires to use in making products. Companies use raw materials in two ways: directly and indirectly. Raw materials that are possible and practical to trace to product are called direct materials; they are included in raw materials inventory.

Managerial Accounting

provides financial and nonfinancial information to an organization's managers. +Managers include, for example, employees in charge of a company's divisions; the heads of marketing, information technology, and human resources; and top-level managers such as the chief executive officer (CEO) and chief financial officer (CFO). +This section explains the purpose of managerial accounting (also called management accounting) and compares it with financial accounting.

Indirect labor costs

refer to the costs of workers who assist in or supervise the manufacturing. Indirect labor are workers who assist or supervise in manufacturing the product, but they are not clearly identified with specific product units. Examples include costs for employees who maintain the manufacturing equipment and salaries of production supervisors.

Direct Labor

refers to the efforts of employees who physically convert materials to finished product. Direct labor costs are the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods. Examples of direct labor in manufacturing a mountain bike include operators directly involved in converting raw materials into finished products (welding, painting, forming) and assembly workers who attach materials such as tires, seats, pedals, and brakes.

The value chain

refers to the series of activities that add value to a company's products or services. This slide illustrates a possible value chain for a retail cookie company. Companies can use lean practices across the value chain to increase efficiency and profits.

Finished goods inventory

which consists of completed products ready for sale, is similar to merchandise inventory owned by a merchandising company.

A cost is often traced to a cost object

which is a product, process, department, or customer to which costs are assigned.