Chapter 1 - Introduction to Managerial Accounting

What are Indirect Costs?

Costs that cannot be easily or cost-effectively traced directly to a cost object are indirect costs. For Smart Touch Learning, indirect costs might include the salary of the production supervisor. Although the production supervisor is involved in the factory, he or she is not directly responsible for producing the product.

Service Companies

Service companies sell their time, skills, and knowledge. Examples of service companies include accounting firms such as Ernst & Young and law offices such as Baker & McKenzie.

The President - CEO of a Corporation

The President—chief executive officer (CEO) of Smart Touch Learning is ultimately responsible for developing a plan to meet the company's short- and long-term strategies as well as overseeing the implementation of the plans. The CEO is the liaison between the board of directors and the management of the company, and delegates the responsibility of implementing the plans to the vice presidents of the organization.

Board of Directors

The board of directors is elected by the stockholders, the owners of Smart Touch Learning, and is responsible for developing the strategic goals of the corporation. The board also selects the president—chief executive officer.

Manufacturing Companies

Unlike service and merchandising companies, manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into finished products. Managers in manufacturing companies must use these resources to create a product that customers want at a price customers are willing to pay. Honda Motor Co., Ltd., The Coca-Cola Company, and The Boeing Company are all examples of manufacturing companies.

Manufacturing companies track costs using three kinds of inventory: Define Work-in-Process Inventory (WIP)

Work-in-Process Inventory (WIP) includes goods that are in the manufacturing process but are not yet complete. Some production activities have taken place that transformed the materials, but the product is not yet finished and ready for sale. Smart Touch Learning's Work-in-Process Inventory could include tablets that only include the electronic components but not the screen.

In terms of Manufacturing Costs, What are Direct Labor (DL) costs?

Direct labor (DL) is the cost of wages and salaries of employees who convert the raw materials into the finished product. Direct labor is also a direct cost that can be easily traced to the finished product. Direct labor for Smart Touch Learning would include the wages of the employees who assemble the tablets.

In terms of Manufacturing Costs, What are Direct Material (DM) costs?

Direct materials (DM) are the cost of raw materials that are converted into the finished product and are easily traced to the product. The cost of such materials are considered direct materials. Smart Touch Learning's direct materials would include the processor, the screen, and the tablet case.

Directing

Directing involves running the day-to-day operations of a business. Managers are responsible for coordinating the company's activities including purchasing, manufacturing, and selling. For example, a division manager must ensure that a company has enough materials on hand to meet the customers' demand. Managers are also responsible for motivating employees. A marketing manager's responsibilities might include coordinating the marketing plan and training sales representatives on the sale of a new product.

Is the following characteristic primarily related to Financial Accounting (FA) or Managerial Accounting (MA)? "Helps creditors make lending decisions."

Financial Accounting (FA)

1) Identify the cost as a Period Cost or Product Cost. 2) If Product Cost, further indicate if the cost is direct materials, direct labor, or manufacturing overhead. 3) Then Determine if the product cost is a prime cost and / or a conversion cost. Cost Example to be analyzed: Salary of the factory maintenance supervisor.

Period or Product: PRODUCT COST If Product Cost, is the cost associated with Direct Materials, Direct Labor, or Manufacturing Overhead?: MANUFACTURING OVERHEAD If Product Cost, is the cost a Prime Cost, Conversion Cost, or both? CONVERSION COST

Planning

Planning means choosing goals and deciding how to achieve them. Planning requires managers to look to the future and establish goals for the business. A business's goals could be varied. For example, a common goal of all businesses is to increase operating income. Another goal might be to develop a new product or begin operations in a new territory. Planning can be classified as strategic or operational

What are Prime Costs?

Prime costs combine the direct costs: direct materials and direct labor. In a manufacturing process that is labor-intensive, the direct costs are the primary costs. Labor-intensive means people do most of the work, not machines. In that type of environment, managers may want to concentrate on these direct, or prime, costs. To be profitable, it is vital for the company to control these costs.

The IMA Expects Professional Accountants to exhibit the highest level of ethical Behavior. The IMA's standards require managerial accountants to do the follwing:

1: Maintain their professional competence. 2: Preserve the confidentiality of the information they handle. 3: Act with integrity and credibility.

Organizational Chart

A company's organizational chart helps show the relationship between departments and divisions and the managers who are responsible for each section.

What is a Cost Object?

A cost object is anything for which managers want a separate measurement of cost and may be a product, department, sales territory, or activity.

What is a Direct Cost?

A direct cost is a cost that can be easily and cost-effectively traced to a cost object

Operational Planning

Operational planning, on the other hand, focuses on short-term actions dealing with a company's day-to-day operations. Operational plans are most often one year in length, but may also span only a week, a month, or a quarter.

What are Period Costs?

Period costs, on the other hand, are non-manufacturing costs. Period costs are selling and administrative expenses and other expenses such as taxes and interest. These costs are matched with the revenue of a specific time period and expensed in the same accounting period. Examples of period costs might include the salaries and wages of the accounting staff, rent for the administrative building, sales commissions paid to sales representatives, or utilities paid for the marketing office.

Controlling

Controlling is the process of monitoring day-to-day operations and keeping the company on track. Controlling involves comparing actual results to expected results. For example, managers can compare actual costs to expected costs to evaluate their performance. If actual costs fall below budgeted costs, that is usually good news. However, if actual costs exceed the expected costs, managers will evaluate why the results were different and if modifications or changes need to be made.

What are Conversion Costs?

Conversion costs combine direct labor with manufacturing overhead. These are the costs to convert the direct materials into the finished product. In a manufacturing process that is machine-intensive, the cost of direct labor is minimal because machines do most of the work. Employees primarily set up and oversee the machine production. Overhead costs, however, can be substantial, including the cost of utilities and depreciation on the machinery. In that type of environment, managers may want to focus on the total conversion cost rather than tracking direct labor and manufacturing overhead separately.

Is the following characteristic primarily related to Financial Accounting (FA) or Managerial Accounting (MA)? "Summary reports prepared quarterly or annually."

Financial Accounting (FA)

Define Financial Accounting

Financial accounting focuses on providing information for external decision makers. While managers use financial accounting to report monetary transactions and prepare financial statements, managerial accounting helps managers make decisions needed to be successful.

Manufacturing companies track costs using three kinds of inventory: Define Finished Goods Inventory (FG)

Finished Goods Inventory (FG) includes completed goods that have not yet been sold. Finished goods are the products that the manufacturer sells, such as Smart Touch Learning's finished tablet.

Merchandising Companies

How costs are classified depends on the type of business the company engages in. Businesses are generally classified as service, merchandising, or manufacturing companies. Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory of products, and managers are accountable for the purchase, storage, and sale of the products. Companies such as Home Depot and Lowe's are examples of merchandising companies.

Service Companies

How costs are classified depends on the type of business the company engages in. Businesses are generally classified as service, merchandising, or manufacturing companies. Service companies sell their time, skills, and knowledge. Examples of service companies include accounting firms such as Ernst & Young and law offices such as Baker & McKenzie.

In terms of Manufacturing Overhead, What is included in Indirect Labor?

Indirect Labor includes the cost of wages and salaries in the factory for persons not directly producing the product. Examples include production supervisors, factory janitors, workers who repair factory equipment, and factory groundskeepers.

In terms of Manufacturing Overhead, What is included in Indirect Materials?

Indirect Materials are the cost of raw materials that are difficult or not cost-effective to trace directly to the product. For Smart Touch Learning, it may be the cost of glue used in assembling the tablets. The cost of tracing the drops of glue used on each tablet and then determining the cost of those drops exceeds the benefit of having this information.

Line Positions

Line positions are directly involved in providing goods or services to customers. Examples of line positions for Smart Touch Learning are vice president—chief operating officer (COO), tablet computer division manager, software development division manager, production manager, and sales manager. (Think of an Assembly LINE... The workers of an Assembly line are directly responsible for the producing the goods)

Is the following characteristic primarily related to Financial Accounting (FA) or Managerial Accounting (MA)? "Has a focus on the Future."

Managerial Accounting (MA)

Is the following characteristic primarily related to Financial Accounting (FA) or Managerial Accounting (MA)? "Helps in planning, directing, and controlling operations."

Managerial Accounting (MA)

Is the following characteristic primarily related to Financial Accounting (FA) or Managerial Accounting (MA)? "Is not required to follow GAAP."

Managerial Accounting (MA)

Define Managerial Accounting

Managerial accounting focuses on providing information for internal decision makers. This type of accounting concentrates on both financial and non-financial information for managers and other business users, such as supervisors, foremen, and directors. Managerial accounting helps managers make decisions needed to be successful. Individuals in management roles, such as department heads, division managers, chief executive officers, and vice presidents, rely on managerial accounting to help them plan, direct, control, and make decisions about the business.

In terms of Manufacturing Costs, What are Manufacturing Overhead (MOH) costs?

Manufacturing overhead (MOH) refers to indirect manufacturing costs that cannot be easily traced to specific products. It includes all manufacturing costs other than direct materials and direct labor. These costs are created by all of the supporting production activities, including storing materials, setting up machines, and cleaning the work areas. Examples include costs of indirect materials, manufacturing factory managers' salaries and other indirect labor, repair and maintenance costs, and depreciation on manufacturing buildings and equipment. Other examples include the following costs for the factory: utilities, rent, insurance, and property taxes. Manufacturing overhead is also called factory overhead or indirect manufacturing costs.

1) Identify the cost as a Period Cost or Product Cost. 2) If Product Cost, further indicate if the cost is direct materials, direct labor, or manufacturing overhead. 3) Then Determine if the product cost is a prime cost and / or a conversion cost. Cost Example to be analyzed: Salary of the sales manager.

Period or Product: PERIOD COST If Product Cost, is the cost associated with Direct Materials, Direct Labor, or Manufacturing Overhead?: N / A If Product Cost, is the cost a Prime Cost, Conversion Cost, or both? N / A

1) Identify the cost as a Period Cost or Product Cost. 2) If Product Cost, further indicate if the cost is direct materials, direct labor, or manufacturing overhead. 3) Then Determine if the product cost is a prime cost and / or a conversion cost. Cost Example to be analyzed: Wages of the office receptionist in an administrative office.

Period or Product: PERIOD COST If Product Cost, is the cost associated with Direct Materials, Direct Labor, or Manufacturing Overhead?: N/A If Product Cost, is the cost a Prime Cost, Conversion Cost, or both? N/A

1) Identify the cost as a Period Cost or Product Cost. 2) If Product Cost, further indicate if the cost is direct materials, direct labor, or manufacturing overhead. 3) Then Determine if the product cost is a prime cost and / or a conversion cost. Cost Example to be analyzed: Wages of assembly line workers for a factory.

Period or Product: PRODUCT COST If Product Cost, is the cost associated with Direct Materials, Direct Labor, or Manufacturing Overhead?: DIRECT LABOR If Product Cost, is the cost a Prime Cost, Conversion Cost, or both? PRIME AND CONVERSION COST

1) Identify the cost as a Period Cost or Product Cost. 2) If Product Cost, further indicate if the cost is direct materials, direct labor, or manufacturing overhead. 3) Then Determine if the product cost is a prime cost and / or a conversion cost. Cost Example to be analyzed: Sugar and flour used to make cookies.

Period or Product: PRODUCT COST If Product Cost, is the cost associated with Direct Materials, Direct Labor, or Manufacturing Overhead?: DIRECT MATERIALS If Product Cost, is the cost a Prime Cost, Conversion Cost, or both? PRIME COST

1) Identify the cost as a Period Cost or Product Cost. 2) If Product Cost, further indicate if the cost is direct materials, direct labor, or manufacturing overhead. 3) Then Determine if the product cost is a prime cost and / or a conversion cost. Cost Example to be analyzed: Property taxes on the factory

Period or Product: PRODUCT COST If Product Cost, is the cost associated with Direct Materials, Direct Labor, or Manufacturing Overhead?: MANUFACTURING OVERHEAD If Product Cost, is the cost a Prime Cost, Conversion Cost, or both? CONVERSION COST

What are Product Costs?

Product costs include the costs of purchasing or making a product. Direct materials, direct labor, and manufacturing overhead are all examples of product costs. Product costs are recorded as assets in inventory accounts on the balance sheet when they are incurred. The cost does not become an expense until the company has sold the inventory. At that time, the cost is reported as Cost of Goods Sold on the income statement.

Manufacturing companies track costs using three kinds of inventory: Define Raw Materials Inventory (RM)

Raw Materials Inventory (RM) includes materials used to make a product. For example, Smart Touch Learning's raw materials include the processor, screen, tablet case, and glue.

Staff Positions

Staff positions support the line positions. Vice president—chief financial officer (CFO), controller, treasurer, and payroll processing manager are examples of staff positions.

Strategic Planning

Strategic planning involves developing long-term strategies to achieve a company's goals. Strategic plans often span 3 to 10 years.