Chapter 19

Creating Proper Incentives

-system and controls sometimes create incentives for managers to take unethical actions. -controls need to be effective and realistic

______ A method of allocating overhead based on each product's use of activities in making the product.

Activity-based costing

______ A performance-measurement approach that uses both financial and nonfinancial measures, tied to company objectives, to evaluate a company's operations in an integrated fashion.

Balanced scorecard

Period Costs

Components: direct materials, direct labor, manufacturing overhead -cost that are a necessaryand integral part of producing the product -recorded in "inventory" account. -not an expense (COGS) until the goods are sold -charged to expense as incurred -non-manufacturing costs -includes all selling and administrative expenses.

As a result of the Sarbanes-Oxley Act, managerial accounting reports must now comply with generally accepted accounting principles (GAAP).

False

Managerial accountants have a single role within an organization, collecting and reporting costs to management.

False

Managers' activities and responsibilities can be classified into three broad functions: cost accounting, budgeting, and internal control.

False

______ Inventory system in which goods are manufactured or purchased just as they are needed for use.

Just-in-time (JIT) inventory

Product cost vs Period cost

Manufacturing costs -direct material -direct labor -manufacturing overhead: indirect materials, indirect labor, other indirect costs Non-manufacturing Costs -Selling expenses -administrative expenses

Cost of goods manufactured (cost of goods sold components - periodic inventory system)

Merchandiser Beginning merchandise inventory+ Cost of goods sold purchased- Ending Merchandise inventory = Cost of goods sold Manufacturer Beginning finished goods inventory+ Cost of goods manufactured - Ending finished goods inventory = Cost of goods sold

Organizational Structure

Organization charts show the interrelationships of activities and the delegation of authority and responsibility within the company -stockholders -board of directors -chief executive officer and president -general counsel/secretary, vice president marketing, vice president finance/chief financial officer, vice president operations, vice president human resources. -treasurer and controller (under vice president finance/chief financial officer)

Schering-Plough

Pharmaceutical manufacturer, found that employees were so concerned with meeting production quantity standards that they failed to monitor the quality of the product, and as a result the dosages were often wrong.

Boeing

Plagued by a series of scandals attributed to an evaluation system that gave employees the impression that they needed to succeed no matter what actions were required to do so

Management Functions

Planning, Directing, and Controlling

Direct Materials

Raw materials- basic materials and parts used in manufacturing process. Direct Materials- Raw materials that can be physically and directly associated with the finished product during the manufacturing process

Managers should ask questions such as the following. -What costs are involved in making a product or performing a service? -If we decrease production volume, will costs decrease? -What impact will automation have on total costs? -How can we best control costs?

To answer these questions, managers need reliable and relevant cost information.

______ Systems implemented to reduce defects in finished products with the goal of achieving zero defects.

Total quality management (TQM)

Cost of Goods Manufactured

Total work in process: (1) cost of the beginning work in process and (2) total manufacturing costs for the current period Beginning WIP Inventory +Total Manufacturing costs = Total cost of WIP Total manufacturing costs: sum of direct materials costs, direct labor costs, and manufacturing overhead in the current year Total cost of WIP - Ending WIP Inventory = Cost of goods manufactured

Financial accounting reports are general-purpose and intended for external users.

True

Managerial accounting reports are special-purpose and issued as frequently as needed.

True

Top managers must certify that a company maintains an adequate system of internal controls.

True

Income Statement (manufacturing costs in financial statements)

Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section. "cost of goods sold"

______ All activities associated with providing a product or performing a service

Value Chain

March 1 Raw materials inventory: 12,000 WIP inventory: 2,500 March 2 Raw materials inventory: 10,000 WIP inventory: 4,000 Materials purchased in march: 90,000 Direct Labor in march: 75,000 Manufacturing overhead in march: 220,000 Prepare the cost of goods manufactured schedule for the month of march.

WIP, March 1: 2,500 Direct materials Raw Materials, March 1: 12,000 Raw materials purchases: 90,000 Total raw materials available for use: 102,000 Less: raw materials, march 31: 10,000 Direct materials used: 92,000 Direct labor: 75,000 Manufacturing overhead: 220,000 Total manufacturing costs: 387,000 Total cost of WIP: 389,500 Less: WIP, march 31: 4,000 COGS manufactured: $385,500

Indirect Labor

Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced

A cost of goods manufactured schedule shows beginning and ending inventories for: a. Raw materials and work in process only b. Work in process only c. Raw materials only d. Raw materials, work in process, and finished goods

a. Raw materials and work in process only

Which of the following is not an element of manufacturing overhead? a. Sales manager's salary. b. Plant manager's salary. c. Factory repairman's wages. d. Product inspector's salary.

a. Sales manager's salary.

Managerial Accounting: a. Is governed by generally accepted accounting principles b. Places emphasis on special-purpose information c. Pertains to the entity as a whole and is highly aggregated. d. Is limited to cost data.

b. Places emphasis on special-purpose information

For the year, Red Company has cost of goods manufactured of $600,000, beginning finished goods inventory of $200,000, and ending finished goods inventory of $250,000. The cost of goods sold is a. $450,000 b. $500,000 c. $550,000 d. $600,000

c. $550,000 (Beg inventory 200,000+COGS manufactured 600,000= goods available for sale 800,000 - Ending inventory 250,000 = COGS $550,000)

Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner? a. Just-in-time inventory. b. Total-quality management. c. Balanced scorecard. d. Activity-based costing.

d. Activity-based costing.

The management of an organization performs several broad functions. They are: a. Planning, directing, and selling. b. Directing, manufacturing, and controlling. c. Planning, manufacturing, and controlling. d. Planning, directing, and controlling.

d. Planning, directing, and controlling.

Managerial Accounting

provides economic and financial information for managers and other internal users

Managerial Accounting Basics

- Comparing managerial and financial accounting - Management functions - Organizational structure - Business ethics

Managerial Accounting Today

- Focus on the value chain - Balanced scorecard - Corporate social responsibility

Manufacturing costs in Financial Statements

- Income statement - Cost of goods manufactured - Balance Sheet - Cost concepts -- A review - Product costing for service industries

Managerial Cost Concepts

- Manufacturing costs - Product vs. period cost

Business Ethics

-All employees are expected to act ethically. -many organizations have codes of business ethics. -past financial frauds: Enron, Global crossing, WorldCom

Code of Ethical Standards Sarbanes-Oxley Act(SOX)

-Clarifies top management's responsibilities. -Requires certification by CEO and CFO -Selection criteria for Board of Directors and Audit Committee -Substantially increased penalties for misconduct.

Balance Sheet (manufacturing costs in financial statements)

-Inventory accounts for a manufacturer: raw materials inventory, work in process inventory, finished goods inventory -The balance sheet for a merchandising company shows just one category of inventory. -Current assets sections of merchandising and manufacturing balance sheets

Product Costing for Service Industries (manufacturing costs in financial statements)

-Much of the U.S. economy has shifted toward an emphasis on providing services -over 50% of U.S. workers are now employed by service companies -like manufacturer, service companies need to keep track of the costs of its services in order to know whether it is generating a profit

Indirect Materials

-Not physically part of the finished product or they are an insignificant part of the finished product in terms of cost. -Considered part of manufacturing overhead

Direct Labor

-Work of factory employees that can be physically and directly associated with the converting raw materials into finished goods

Manufacturing costs

-consists of activities and processes that convert raw materials into finished goods. -Direct materials, direct labor, manufacturing overhead

Manufacturing Overhead

-costs indirectly associated with the manufacture of the finished product -includes manufacturing costs that cannot be classified as direct materials and direct labor. -includes indirect materials, indirect labor, depreciation on factory buildings and machines, and insurance, taxes, and maintenance on factory facilities

Product vs Period cost (Focus on the Value Chain)

-refers to all business processes associated with providing a product or performing a service. -for a manufacturing firm these include: research& development and product design, acquisition of raw materials, production, sales&marketing, delivery, customer relations and subsequent services

1. Material cost ($30) per board 2. Labor costs ($40) per board 3. Depreciation on factory equipment ($25,000 per year) 4. Property taxes on factory building ($6,000 per year) 5. Advertising costs ($60,000 per year) 6. Sales commissions ($20 per board) 7. Maintenance salaries (factory facilities) (45,000 per year) 8. Salary of plant manager ($70,000) 9. Cost of shipping boards ($8 per board) If Diamond Produces 10,000 snowboards the first year, what would be the total manufacturing costs?

1. Direct materials 2. Direct labor 3. Manufacturing overhead 4. Manufacturing overhead 5. Period costs 6. Period costs 7. Manufacturing overhead 8. Manufacturing overhead 9. Period costs 1. Material cost ($30X10,000): 300,000 2. Labor Cost ($40X10,000): 400,000 3. Depreciation on factory equipment: 25,000 4. Property taxes on factory building: 6,000 7. Maintenance salaries (factory facilities): 45,000 8. Salary of plant manager : 70,000 Total manufacturing costs: $846,000

Financial Accounting 1. Primary users reports 2. Types and Frequency of Reports 3. Purpose of Reports 4. Contents of Reports 5. Verification Process

1. External users: stockholders, creditors, and regulators 2. Financial statements, quarterly and annually 3. General-purpose. 4. Pertains to business as a whole. Highly aggregated (condensed). Limited to double-entry accounting and cost data. Generally accepted accounting principles. 5. Audited by CPA.

Managerial Accounting 1. Primary users reports 2. Types and Frequency of Reports 3. Purpose of Reports 4. Contents of Reports 5. Verification Process

1. Internal users: officers and managers. 2. Internal reports, as frequently as needed. 3. Special-purpose for specific decisions 4. Pertains to subunits of the business. Very detailed. Extends beyond double-entry accounting to any relevant data. Standard is relevance to decisions. 5. No independent audits.

Product vs Period costs 1. Just-In-Time Inventory Methods 2. Total Quality Management (TQM) 3. Theory of Constraints 4. Enterprise Resource Planning (ERP) system 5. Activity- Based Costing (ABC) 6. Balanced Scorecard

1. inventory system in which goods are manufactured or purchased just in time for sale 2. reduce defects in finished products, with the goal of zero defects 3. identification of "bottlenecks" - constraints within the value chain that limit a company's profitability 4. a comprehensive, centralized, integrated sources of information to manage all major business processes -- from purchasing, to manufacturing, to sales, to human resources 5. allocates overhead based on use of activities in making the product 6. Uses both financial and non-financial measures to evaluate all aspects of a companies operations in an integrated fashion