Chapter 1:

Managerial Accounting Refers to the field of accounting that generates financial and non-financial information for use by managers in their decision-making roles within a company (internal users).

Financial Accounting Is the area of accounting concerned primarily with the preparation of general-use financial statements for creditors, investors, and other users outside the company (external)

Accounting Information
Traditional Financial Accounting Information Non-Financial Information

Financial Information
Assets Liabilities Revenues Gross margin Operating expenses

Quantitative Information
Percentage of defects Number of customer complaints Warranty claims Units in inventory Budgeted hours

Qualitative Information
Customer satisfaction Employee satisfaction Product quality Service quality Reputation

Detailed comparison between Financial and Managerial Accounting

Financial Accounting Users of Reports: Stockholders, creditors & regulators Types of Reports: Financial statements Frequency of Reports: Quarterly & annually Purpose of Reports: General purposes F/S that communicate firms financial position to investor, creditors, regulators and other parties Content of Reports: Pertains to business as a whole Highly aggregated Follow Generally Accepted Accounting Principles Limited to double-entry accounting and cost data.

Vs 1

Managerial Accounting Users of Report: Officers and managers

2 3 4

2 3 4

Types of Reports: Internal reports Frequency of Reports: As frequently as needed Purpose of Reports: Specific-purpose for specific decisions. Help managers make decisions to fulfill and organizations goals Contents of Reports: Pertains to subunits of the business Very detailed reports Does not follow GAAP. Standard is relevance to decisions Extends beyond double-entry accounting to any relevant data

6 Verification : Audited by independent CPA auditors Focus and emphasis: Past- oriented (Reports on 2013 performance prepared in 2014 Behavioral implications: Primarily reports economic events but also influence behavior because managers compensation is often based on reported financial results 6 Verification Process: No independent audit Future-oriented (Budget for 2014 prepared in 2013 Designed to influence the behavior of managers and other employees

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Role of a Manager: 1. Planning: Involves the development of both the short-term (operational) and long-term (strategic) objectives and goals of an organization and the identification of the resources needed to achieve them. Two Types of Planning: a. Operational (Tactical) Planning: It involves developing of short term objectives and goals, typically those to be achieved in less than one year. Examples include the following: Planning for raw material and production needs for each t ype of GMs car for the next four quarters Involves determining the companys short-term cash needs Setting the current months production levels by General Motors Operational planning for a hospitals budgeting for the number of physicians, nurses, and other staff needed for the upcoming month. Determining the appropriate level of medical supplies that a hospital would have in inventory. Operational planning of determining short-term performance goals and objectives, including meeting customer service expectations and sales quotas. Determining the hiring needs for part-time employees during a holiday shopping period by a merchandising firm.

b.

Strategic Planning: Addresses long-term questions of how an organization positions and distinguishes itself with respect to competitors.

Examples include the following: Jane and Johns strategy for producing ice cream that is different from that used by company (a competitor) producing a store brand of lower-priced ice cream. Long-term decisions about where to locate plants and other facilities. Long-term decision whether to invest in new, state-of-art production equipment Long term decisions whether to introduce new products or services and whether to enter new markets. It is also involves determining long-term performance and profitability measures, such as market share, sales growth and stock price.

2. Organizing: Refers to the process by which managers assign responsibility to individual for achieving enterprise goals. Organizational chart is a typical example. 3. Directing: Refers to the process by which managers, given their assigned level of responsibilities, run day-to-day operations. For example, the effort of production supervisor to keep the production line moving smoothly throughout the work shifts.
4. Controlling: Refers to process of monitoring operation results and comparing the actual results from the expected results. This feed-back allows management to isolate significant variation or deviations for further investigation and possible remedial action. It may also lead to a revision of future plans This philosophy of controlling is sometimes referred to as management by exception Management by exception: Refers to the review of budget reports by top management that is focused entirely or primarily on differences between actual results and planned objectives

Changing Business Environment Companies now realize that they must continuously improve to remain competitive. 1. Value Chain: Encompasses all activities associated with providing a product or service. For a manufacturer, these include: R&D, product design, acquiring raw material, production, sales and marketing, delivery, customer relations and subsequent services. To remain competitive, companies must analyze all stages of the value chain in an effort to improve productivity and eliminate waste or simply remove those activities that do not add value or remove those that add value that consumers are not willing and able to purchase. Technological Change: Technology has played a large role in the value chain. Computerization and automation have permitted companies to be more effective in streamlining production and thus enhancing the value chain which in turn makes it competitive in the global market.

2.

3. Just-In-Time Inventory System: Refers to a production system in which inventory is available just-in-time to produce exactly what the consumers want. It eliminates storage cost.

4. Total Quality Management (TQM) Focuses on producing quality products for the consumer with ultimate goal of achieving zero defects. 5. Activity-Based Costing: Management philosophy where overhead costs are allocated based on each products u se of activities. Activity-Based Costing results in more accurate product costing. 6. Theory of Constraints: Focuses on the fact that every organization has at least one constraint. Constraints prevent an organization from getting more of what they want. - For example, capacity constraints prevents meeting production needs of consumers.

Cost Concepts and Classifications: 1. 2. 3. 4. 5. 6. 7. Cost: Refers to financial measure of the resources used or given up to achieve a stated purpose. Expense: Refers to expired cost Opportunity cost: Refer to the benefit given up or sacrifice when an alternative is chosen Sunk Cost: Refers to historical cost or past cost. A paid cost that is irretrievable Controllable Cost: Refers to costs that managers have control over Uncontrollable Cost: Costs that managers have no control over Cost Object: Refers to an item or activity such as a product, department or projects to which costs are assigned

8. Direct Cost: Refers to costs that are traceable to cost object

9. Indirect Cost: Refers to costs that are not traceable to cost object

Functional Classification of Cost: 1. Manufacturing Cost: Refers to the total cost of manufacturing a product which includes the cost of direct material (DM), direct labor (DL), and factory overhead (FOH). a. DM: Refers to cost of basic components that are directly traceable to specific product b. DL: Refers to cost of labor by employees actually working to convert material into finished goods (FG). c. FOH: Refers to all cost incurred to manufacture a product except DM and DL.

2.

Non-Manufacturing Costs: Generally classified as selling and administrative costs a. Selling Costs: Costs incurred to obtain customer orders and get the finished goods into customers possession b. Administrative Costs: These include top administrative functions and various staff departments

Product Cost Vs Period Cost: 1. Product Costs: Refer to the three elements of manufacturing cost: DM, DL & FOH. These are treated as assets until products are sold. Period Costs: Refer to those costs that are used up in generating revenue during the current period and not involved in the manufacturing process. For example, selling & administrative expenses Other Cost Terms and Terminology: Prime Costs: Refer to sum of DM and DL Conversion Costs: Refer to sum of DL and FOH Cost of Goods Sold: Refer to cost of DM, DL and FOH attached to units sold Work In Process (Progress): Refer to partially completed goods

2.

1. 2. 3. 4.

INCOME STATEMENT

Merchandising Firm: Sales (net) COGS Beg merchandise inv + Purchases (net) = Goods available for sale - Ending merchandise inv = Cost of goods sold = Gross margin - Operating expenses = Net income

$xx $ xx xx $ xx xx xx $ xx xx $xx

Manufacturing Firm: Sales (net) COGS Beg Finished goods +Cost of goods manufactured = Goods available for sale - Ending Finished goods = Cost of goods sold = Gross margin - Operating expenses = Net income

$xx

$ xx xx $ xx xx xx $xx xx $xx

Partial Balance Sheet

Merchandising Firm: Current assets: Cash A/R (net) Merchandise inventory Prepaid expenses Total current assets

$XX XX XX XX $XX

Manufacturing Firm: Current assets: Cash $ XX A/R net XX Inventories: Finished good XX Work in process XX Raw materials XX Prepaid expenses XX Total current assets $ XX

Illustrative problem: The following cost and inventory data were taken last year from the books of ABC Corporation. Costs Incurred: Sales commission expense Supplies - factory Direct labor cost Indirect labor cost Depreciation, Office equipment Supplies Factory .. Purchases of raw material* Depreciation, factory equipment Supplies, office *Raw materials purchased are all direct material

300 500 2,400 900 200 100 6,800 300 250

Inventory: Direct Material Work in process Finished goods inventory

January 1, 20xx $ 800 2,300 1,400

December 31, 20xx $ 1,400 2,600 1,800

During the period, ABC Corporation produced 400 units and sold 300 units @ $35 per unit. 1. Compute cost of Direct Material used in production

2.

Compute Cost of Goods Manufactured (COGM)

3.

Compute unadjusted Cost of Goods Sold (COGS)

4.

Compute prime cost

5.

Compute conversion cost

6.

Compute period cost

7.

Compute product cost

8.

Compute unit product cost

9.

Ignoring income taxes, prepare an income statement.

Practice Sample Principles of Managerial Accounting

1.

Presented below are incomplete inventory and income statement data for Trevor Corporation. Determine the missing amounts.
Cost of Goods Sold Cost of Goods Manufactured Beginning Finished Goods Inventory Ending Finished Goods Inventory

$10,000 1 $140,000 2 ? 3

$12,000

$1,000

$45,000

$60,000

$89,000

$23,000

$20,000

2.

Incomplete manufacturing cost data for Davis Corporation for 2010 are presented below. Compute the missing amount for each letter Direct labor Used $140,000 200,000 100,000 g. Factory Overhead $77,000 132,000 e. 75,000 Total Mfg. Cost a. 450,000 245,000 288,000 Beginning WIP $33,000 d. 60,000 45,000 Ending WIP b. 40,000 80,000 h.

Direct material Used 1 2 3 4 $127,000 c. 80,000 70,000

COGM $360,000 470,000 f. 270,000

Use the ABC Corporation data below for questions 3-4: Beginning of Year End of Year Material inventory . $ 22,000 $ 28,000 Work in- process inventory 38,000 30,000 Finished goods inventory .. 18,000 25,000 Purchases of raw materials (direct materials) 78,000 Direct labor . 82,000 Indirect labor .. 15,000 Insurance on plant . 9,000 Depreciation plant building & plant equipment .. 16,000 Repairs and maintenance-plant 4,000 Marketing expense . 77,000 General and administrative expense .. 29,000 Income tax expense ... 30,000 Repairs and maintenance office building and office equipment .. 10,000 3. Prepare schedule of cost of goods manufactured for the period ending December 31, 20xx. (Note: Label every data to receive credit)

4.

Compute cost of goods sold (Label every data to receive credit) (25 points)