Ch 15 Introduction to Managerial Accounting

Most large companies are organized in terms of

"verticals" and "horizontals."

product cost

- direct materials - direct labor - factory overhead (inventory (balance sheet), cost of goods sold (income statement))

managerial accounting information plans what...

- directly daily operations - planning future operations - developing business strategies

controller

- manager of the accounting function of a vertical - chief finacial officer - rank within the accounting and finance function

•A manufacturing business reports three types of inventory on its balance sheet as follows:

- materials inventory - work in process inventory - finished goods inventory

period cost

- selling expense - administrative expenses (income statement)

Materials inventory

---(sometimes called raw materials inventory) consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process.

Finished goods inventory

---consists of completed (or finished) products that have not been sold.

Work in process inventory

---consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process).

A utilization rate

---measures the use of a fixed asset in serving customers relative to the asset's capacity. ---A higher utilization rate is considered favorable, while a lower utilization rate is considered unfavorable.

The objective of continuous process improvement is to eliminate the

---source of problems in a process. (In this way, the right products (or services) are delivered in the right quantities at the right time.)

converison cost

---which consist of direct labor and factory overhead costs -Conversion costs are the costs of converting the materials into a finished product.

example for directing

--directing is a production supervisor's efforts to keep the production line moving without interruption (downtime).

Horizontals

-are departments within the company that are not responsible for developing products. ----Horizontals provide services to the various verticals and other horizontals.

Verticals

-are sometimes referred to as business units, because they are often structured as separate businesses within the parent company. ----verticals develop products that are sold directly co customers.

the two types of accounting information

-financial accounting - managerial accounting

management process

-planning -directing -controlling -improving -decision making

1.Two such common groupings are as follows: for Direct materials, direct labor, and factory overhead costs may be grouped together for analysis and reporting.

-prime cost -conversion cost

costs

-product costs -period costs

financial statement sheets

-statement of cash flows -balance sheets -statementbof stockholders' equity -income statement

The statement of cost of goods manufactured is prepared using three steps

1. determine the cost of materials used 2. determine the total manufacturing cost incurred 3. determine the cost of goods manufactured

•To be classified as a direct materials cost, the cost must be both of the following:

1.An integral part of the finished product 2.A significant portion of the total cost of the product

•Thus, the cost of a finished product includes:

1.Direct materials cost 2.Direct labor cost 3.Factory overhead cost

•Some factory overhead costs include the following:

1.Heating and lighting the factory 2.Repairing and maintaining factory equipment 3.Property taxes on factory buildings and land 4.Insurance on factory buildings 5.Depreciation of factory plant and equipment

•Unlike the financial statements prepared in financial accounting, managerial accounting reports do not always have to be:

1.Prepared according to generally accepted accounting principles (GAAP). §Only the company's management uses the information. §In many cases, GAAP are not relevant to the specific decision-making needs of management. 2.Prepared at fixed intervals (monthly, quarterly, yearly). §Although some management reports are prepared at fixed intervals, most reports are prepared as management needs the information. 3.Prepared for the business as a whole. §Most management reports are prepared for products, projects, sales territories, or other segments of the company.

Managerial accounting provides information and reports for managers to use in operating the business:

1.The cost of manufacturing a product could be used to determine its selling price. 2.Comparing the costs of manufacturing products over time and can be used to monitor and control costs. 3.Performance reports could be used to identify any large amounts of scrap or employee downtime. 4.A report could analyze the potential efficiencies and savings of purchasing a new computerized equipment to speed up the production process. 5.A report could analyze how many units need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel.

•Examples of direct materials costs include the following: as well this is for direct labor cost

1.The cost of the wood used in producing a guitar 2.The cost of electronic components for a television 3.Silicon wafers for microcomputer chips 4.Tires for an automobile

Examples of direct labor costs include the following

1.The wages of employees who cut guitars out of raw lumber and assemble them 2.Mechanics' wages for repairing an automobile 3.Machine operators' wages for manufacturing tools 4.Assemblers' wages for assembling a laptop computer

Available room nights =

Number of available rooms × Number of nights per time period

Guest nights =

Number of guests × Number of nights per visit (per time period)

In addition, the cost of a manufactured product includes the cost of converting the materials into

a finished product

This feedback

allows management to isolate areas for further investigation and possible remedial action.

Direct materials, direct labor, and factory overhead costs may be grouped together for

analysis and reporting.

Direct costs

are identified with and can be traced to a cost object. ---For example, the cost of wood used to make guitars is a direct cost

A retail business determines its cost of good sold by first adding its net purchases for the period to its

beginning inventory

Indirect costs

cannot be identified with or traced to a cost object. ---For example, the salaries of production supervisors are indirect costs of producing a guitar because their salaries cannot be identified with or traced to any individual guitar.

financial statement focus of reporting

company as a whole

managerial accounting focus of reporting

company as a whole or segment

Monitoring operating results and comparing actual results with the expected results is

controlling

Most manufacturing processes use employees to

convert materials into finished products.

For example, costs are often classified by their relationship to a segment of operations, called a--------- -A cost object may be a product, a sales territory, a department, or an activity, such as research and development.

cost object

This determines inventory available for sale during the period. The ending inventory is then subtracted to determine the

cost of good sold

Manufacturing business must determine its

cost of goods manufactured during the period.

Inherent in each of the preceding management processes is

decision making (In managing a company, management must continually decide among alternative actions.)

In managerial accounting, costs are often classified according to the

decision-making needs of management.

Costs identified with cost objects are either

direct costs or indirect costs.

The cost of employee wages that is an integral part of the finished product is classified as

direct labor cost.

A manufacturing business makes the products it sells, using

direct materials, direct labor, and factory overhead

The process by which managers run day-to-day operations is called

directing

The number of guests is determined under single room occupancy, so that the number of guests is

equal to the number of occupied rooms

Financial statement users of information

external users and company management

Manufactured products begin with raw materials that are converted into

finished product

managerial accounting information uses these types of data

historical data estimated data

administrative expenses

incurred while managing the company and are not directly related to the manufacturing or selling functions

selling expenses

incurred while marketing and delivering the product to the customer

All factory overhead costs are

indirect costs of the product

Financial accounting

information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements.

managerial accounting users of information

management

The philosophy of controlling by comparing actual and expected results is called

management by exception.

managerial accounting information is designed to

meet the specific needs of a company's management

Different service industries will have different

names and computations used for measuring utilization rates.

Financial statement nature of information

objective

managerial accounting nature of information

objective and subjective

Management uses planning in developing the company's

objectives (goals) and translating these objectives into courses of action

In the hotel industry, for example, utilization is measured by the occupancy rate, which is computed as:

occupancy rate = (guest nights)/ (available room nights)

managerial accounting timelines of reporting

preparaed at fixed intervals and on an as-needed basis

financial statement guidelines for preparation

prepared according to GAAP

managerial accounting guidelines for preparation

prepared according to management needs

financial statement timelines of reporting

prepared at fixed intervals

Direct labor is both a

prime cost and a conversion cost

The cost of a manufactured product includes the cost of materials used in making the

product

managerial accounting reports

production reports activity anaylsis budget report

historical data

provide objective measures of past operations

estimated data

provide subjective estimates about future decisions

Most of the managerial accounting concepts that apply to manufacturing businesses also apply to

service and merchandising businesses

The operations of a business can be classified as

service, retail, or manufacturing.

external users of financial accounting

shareholders, creditors, government agencies, general public

The cost of goods manufactured is determined by preparing a ----This statement summarizes the cost of goods manufactured during the period

statement of cost of goods manufactured

•Planning may be classified as follows:

strategic planning operational planning

§These long-term courses of action are called -----------, which often involve periods of 5 to 10 years.

strategies

prime cost

which consist of direct materials and direct labor costs

operational planning

which develops short-term actions for managing the day-to-day operations of the company.

strategic planning

which is developing long-term actions to achieve the company's objectives.

Costs other than direct materials cost and direct labor that are incurred in the manufacturing process are combined and classified as

•factory overhead cost (sometimes called manufacturing overhead or factory burden).

A cost

•is a sacrifice made to obtain some benefit.

Continuous process improvement

•is the philosophy of continually improving employees, business processes, and products.