Managerial Accounting Chapter 14

What is required to combat fraud?

Ethics

What costs are classified by behavior?

Fixed and Variable (also mixed cost?)

Implications of Fraud

Increases business costs Could lead to poor pricing decisions

What are the other differences between Managerial and Financial Accounting?

Managerial Accounting info is used to help managers make planning/control decisions, their reporting is relatively flexible with no GAAP restrictions and are available quickly with no wait for audit, and their time dimension is the future (projections, estimates, with SOME historical info), their focus is on individual parts of the business rather that it as a whole, and the nature of their information is mostly monetary, but with some none monetary.

What is the main difference between managerial and financial accounting?

Managerial accounting information is more for internal users and focuses on parts of the organization Financial accounting information is more for external users and focuses on the organization as a whole

What is the Schedule of COGManufactured used for?

Managers use its info to plan and control the company's manufacturing activities

What is the main difference between merchandising and manufacturing companies?

Merchandisers buy goods ready for sale Manufacturers produce goods from materials and labor

opportunity cost

the cost of potential benefit lost (?)

Indirect labor

the costs of workers who assist in or supervise the manufacturing process, but do NOT assemble nor are they specifically linked to specific units of product

Direct labor

the efforts of employees who physically convert materials to finished product

Cost of goods manufactured

the total cost of making and finishing products

What 3 tasks does managerial accounting help managers with?

1. Determining the costs of an organization's products and services 2. Planning future activities 3. Comparing actual results to planned results

How many inventories do manufacturer's have?

3 Raw Materials Work in Process Finished Goods

Raw Materials Inventory Turnover

= Raw materials used / average materials inventory (high ratio preferred)

Service Economy

Businesses that provide services are a growing part of the economy Account for 60-70% of total economic activity in developed countries

What is Feedback?

Communicating the results of control back to planning

What are the 6 trends in managerial accounting?

Customer Orientation Global Economy Service Economy Value Chain Lean Practices E-Commerce

Variable cost

DOES change in proportion to changes in the volume of activity (Ex sales commissions computed as a percent of sales revenue)

Short-term plans

Developed to support achieving strategic plans, and are better defined Also known as a budget

The Schedule of Cost of Goods Manufactured is divided into four parts:

Direct Materials Direct Labor Overhead Computation of Cost of Goods Manufactured

What costs are classified by traceability (the ability to trace costs to a cost object)?

Direct costs and indirect costs

What are the Manufacturer's Costs?

Direct materials (45%) Direct labor (15%) Factory overhead (40%)

Fraud Triangle

Opportunity Financial pressure Rationalization

Managerial Accounting concept

Primarily concerned with reporting to internal users, goal is to produce reports that improve organizational decision making; oriented on the future

What costs are classified by function?

Product costs and Period costs

Sales Activity (Flow of manufacturing activities)

The company combines the beginning inventory of finished goods with the newly completed units, making up TOTAL FINISHED GOODS AVAILABLE FOR SALE in the current period. As they're sold, cost of finished products sold is reported on the income statement as COGS. Any unsold finished products are reported as finished goods inventory on the balance sheet

What is the main difference between the income statement of a manufacturer and a merchandiser?

The items making up costs of goods sold A merchandiser adds costs of goods PURCHASED to beg. MERCHANDISE inventory and then subtracts ending inventory A manufacturer adds costs of goods MANUFACTURED to beg FINISHED GOODS inventory and then subtracts ending inventory. (raw material inventory and WIP aren't included bc they're not available for sale) (costs of merchandise purchased vs costs of goods manufactured)

What is the primary difference in the Balance Sheet of a Merchandiser and a Manufacturer?

The presentation of inventory under Current Assets Merchandisers have one category: merchandise inventory Manufacturers have 3: raw materials, goods in process, and finished goods

What is Planning?

The process of setting goals and making plans to achieve them

Examples of Fraud

Theft of employer's cash/assets Overstating reimbursable expenses Payroll schemes Financial statement fraud

Production Activity (flow of manufacturing activities)

There are 4 factors in production: Beg. WIP Inventory, Raw Materials, Direct Labor, and Overhead. The last 3 added to Beg. WIP Inv. The cost of finished product makes up COST OF GOODS MANUFACTURED Unfinished products are ending WIP inventory, reported on the current period's balance sheet. The costs of finished goods manufactured and WIP are product costs.

T or F: A 2014 Report to the Nation from the Association of Certified Fraud Examiners (ACFE) estimates the average US business loses 5% of its annual revenues to fraud

True

T or F: Direct labor is both a prime and conversion cost

True

T or F: Direct materials will always be a variable cost

True

T or F: Period costs flow directly to the current income statement as expenses

True

T or F: a service company has no inventory

True

Strategic plans

Usually a 5-10 year plan, set a firm's long term direction based on opportunities Long term goals and objectives are broadly defined

Continuous Improvement

a concept requiring every manager and employee to continually look to improve operations (a lean practice including total quality management and just-in-time manufacturing)

Cost object

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

Schedule of Cost of Goods Manufactured

a report that summarizes the types and amounts of costs incurred in a company's manufacturing process (a recap of the activity of a company in converting raw material to finished components) Direct Material Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning WIP = Total Costs of Work in Process - Ending WIP = Cost of Goods Manufactured

Just-in-Time Manufacturing

a system that acquires inventory and produces ONLY when needed. Companies make products only after they receive an order (demand-pull system)and then deliver the customer's requirements on time. JIT is more susceptible to disruption than traditional systems

Managerial Accounting

an activity that provides financial and nonfinancial information to an organization's managers (aka internal users)

Ethics

beliefs that distinguish right from wrong accepted standards of good and bad behavior

Factory overhead costs

can NOT be separately or readily traced to finished goods, all of it is considered indirect costs includes indirect material, indirect labor, and other costs not directly traceable

Indirect cost

can NOT be traced to a single cost object (ex a maintenance expenditure benefiting two or more departments, indirect material/labor)

Customer Orientation

company position that its managers and employees be in tune with the changing wants and needs of customers and align their management and operating practices accordingly

Total Quality Management

concept calling for all employees at all stages of operations to strive toward higher standards and reduce the number of defects, focuses on quality improvement and applies this to all aspects seek to uncover waste in business activities

Factory overhead

consists of all manufacturing costs that are not direct materials or direct labor

Finished Goods Inventory

consists of completed products ready for sale

Work in Process Inventory (Goods in Process)

consists of products in the process of being manufactured but not yet complete

Mixed cost

contain both a fixed component and a variable component

Cost Concepts for Service Companies

cost concepts are generally applicable to service organizations classification as product vs period isn't relevant as their services aren't inventoried (ex the cost of drinks for passengers is variable based on number of passengers) (ex the monthly cost of leasing an aircraft is fixed with respect to number of flights) (ex can trace a flight crew's salary to a specific flight whereas we can't trace wages for the ground crew)

E Commerce

customers expect and demand to be able to buy items electronically many businesses have enhanced their websites and online sales make up 6% of total sales

Fixed cost

does NOT change with changes in the volume of activity (ex straight line depreciation on equipment)

Internal Controls are the policies and procedures managers use to

ensure reliable accounting information protect assets promote efficient operations urge adherence to company policies

Prime costs

expenditures directly associated with the manufacturing of finished goods Direct material and direct labor are these

Conversion costs

expenditures incurred in the process of converting raw material to finished goods Direct labor and Manufacturing overhead are these

sunk cost

has already been incurred and can't be avoided or changed irrelevant to decision making (?)

Selling costs

incurred to obtain orders and to deliver finished goods to customers

Materials Activity (Flow of Manufacturing Activities)

manufacturers start a period with some beginning raw materials inventory left over from the previous period. They then acquire additional raw material in the current period, and adding these together gives TOTAL RAW MATERIAL AVAILABLE FOR USE

Indirect material

materials used in manufacturing a product but not clearly identified with specific product units (ex screws, nuts, staples, glue)

Administrative costs

non-manufacturing costs of staff support and administrative functions

Period costs

non-production costs and more associated with activities linked to a time period than with completed products Expensed when incurred as either selling expenses or general and administrative expenses (ex salaries of the sales staff, wages of maintenance workers, advertising expenses, depreciation on office furniture)

Global Economy

our global economy expands competitive boundaries and provides competitors more choices and produces changes in business activities

Financial Accounting concept

primarily concerned with reporting to external users through financial statements prepared in accordance with GAAP; historically focused

Value Chain

refers to the series of activities that add value to a company's products or services including design, production, marketing, distribution and service companies can use lean practices across this to increase efficiency and profits

Institute of Management Accountants (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

Cost Accounting concept

supports both Financial and Managerial Accounting Concerned with information about cost of resources acquired and consumed by an organization for effective reporting to both external and internal users

Direct materials

tangible components of a finished product

Direct material costs

the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods, ie identifiable AND measurable (Ex tires, seat, frame, pedals, brakes, handlebars, gears)

Raw Materials Inventory

the goods a company acquires to use in making products (can contain both indirect or direct materials)

What is Control?

the process of monitoring planning decisions and evaluating an organization's activities and employees includes the measurement and evaluation of actions, processes, and outcomes (comparing actual to planned)

Fraud

the use of one's job for personal gain through deliberate misuse of the employer's assets

Direct labor costs

the wages and salaries for direct labor that are separately AND readily traced through the manufacturing process to finished goods, identifiable AND measurable (ex operators directly involved in converting raw material into finished products and assembly workers)

Product cost

those production costs necessary to create a product and consist of: direct materials, direct labor, and factory overhead (inventory during and after completion of the products, recorded as cost of goods sold when the products are sold)

What is the purpose of managerial accounting?

to provide useful information to managers of an organization

Direct cost

traceable to a single cost object (ex direct material and labor cost for a product)