MANAGEMENT ADVISORY SERVICES

TOPICS COVERED:
ALLIED ACCOUNTING COURSES
COST, FINANCIAL & MANAGEMENT ACCTG.
PLANNING TOPICS
CONTROLLING TOPICS
PERFORMANCE MEASURES TOPICS
DECISION MAKING TOPICS

McGraw-Hill/Irwin Slide 1
 MANAGEMENT ADVISORY SERVICES
ALLIED ACCOUNTING COURSES
FINANCIAL ACCOUNTING
COST ACCOUNTING
MANAGEMENT ACCOUNTING
FORENSIC ACCOUNTING
FINANCIAL MANAGEMENT

McGraw-Hill/Irwin Slide 2
 MANAGEMENT ADVISORY SERVICES
PLANNING TOPICS
PROFIT PLANNING
MASTER BUDGETING
BREAK EVEN COMPUTATION
FLEXIBLE BUDGETING
CAPITAL BUDGETING

McGraw-Hill/Irwin Slide 3
 MANAGEMENT ADVISORY SERVICES
PLANNING TOPICS
PROFIT PLANNING
MASTER BUDGETING
BREAK EVEN COMPUTATION
FLEXIBLE BUDGETING
CAPITAL BUDGETING

McGraw-Hill/Irwin Slide 4
 MANAGEMENT ADVISORY SERVICES
CONTROLLING TOPICS
PERFORMANCE MEASURES
STANDARDS & VARIANCE ANALYSIS
BALANCED SCORE CARD
PROFIT VARIATION ANALYSIS
RESPONSIBILITY ACCOUNTING

McGraw-Hill/Irwin Slide 5
 MANAGEMENT ADVISORY SERVICES
DECISION MAKING TOPICS
MANAGEMENT CONSULTANCY
ANALYTICAL REVIEW AND PROCESS
FINANCIAL STATEMENT ANALYSIS
DIFFERENTIAL COST ANALYSIS
CVP & SENSITIVITY ANALYSIS

McGraw-Hill/Irwin Slide 6
MANAGERIAL ACCOUNTING
CONCEPTS AND PRINCIPLES
C1 MANAGERIAL ACCOUNTING BASICS

Managerial accounting Financial accounting

provides financial and
non-financial information
for managers of an
organization and other
decision makers
provides general
purpose financial
information to those
who are outside
the organization.

McGraw-Hill/Irwin Slide 8
C1 PURPOSE OF MANAGERIAL ACCOUNTING

McGraw-Hill/Irwin Slide 9
C1 NATURE OF MANAGERIAL ACCOUNTING
Financial Accounting Managerial Accounting

1. Users and Investors, creditors and Managers, employees and

decision makers other external users other internal users
2. Purpose of Making investment, credit Planning and
information and other decisions control decisions
3. Flexibility Structured and often Relatively flexible
of practice controlled by GAAP (no GAAP)
4. Timeliness of Often available only Available quickly without
information after audit is complete need to wait for audit
5. Time dimension Historical information Many projections
with some predictions and estimates
6. Focus of Emphasis on Projects, processes and
information whole organization segments of an organization
7. Nature of Monetary Monetary and
information information nonmonetary information
McGraw-Hill/Irwin Slide 10
C2 MANAGERIAL ACCOUNTING IN BUSINESS
Lean Business Model

Customer Global
Orientation Economy

Lean
Business
Model

Elimination Satisfy the Positive

of Waste Customer Return
McGraw-Hill/Irwin Slide 11
C2 LEAN PRACTICES

Customer
Orientation
in a Global
Economy

McGraw-Hill/Irwin Slide 12
C2 TOTAL QUALITY MANAGEMENT

Quality improvement Seek and uncover

applied to all aspects of waste.
business activities.

on

Employees encouraged Company emphasizes

to try new methods value of quality through
to improve quality. quality awards.
McGraw-Hill/Irwin Slide 13
C2 JUST-IN-TIME (JIT) MANUFACTURING

Receive
customer Complete products
orders. just in time to
ship to customers.

Schedule
production.

Receive materials Complete parts

just in time for just in time for
production. assembly into products.

McGraw-Hill/Irwin Slide 14
C2
IMPLICATIONS FOR
MANAGERIAL ACCOUNTING

Understand Price paid is

Measure an important
the nature and
value provided determinant
sources of
to customers of value
cost

McGraw-Hill/Irwin Slide 15
 FRAUD AND ETHICS IN
C3
MANAGERIAL ACCOUNTING
Fraud involves the use of one’s job for personal gain through the
deliberate misuse of the employer’s assets. There are many types
of fraud, but common characteristics of all fraud are that it:
• Is done to provide direct or indirect benefit to the employee.
• Violates the employees’ duties to his employer.
• Costs the employer money.
• Is secret.
Fraud increases business costs. Management relies on internal
control systems to monitor business activities and on accounting
systems to track costs and identify unexpected amounts.
Ethics are beliefs that distinguish right from wrong. They are
accepted standards of good and bad behavior. The Institute of
Management Accountants has issued a code of ethics to help
accountants involved in solving ethical dilemmas.
McGraw-Hill/Irwin Slide 16
C4
TYPES OF COST CLASSIFICATIONS
CLASSIFICATION BY BEHAVIOR
Cost behavior refers to
how a cost will react to
Cost

changes in the level of

business activity.
Activity • Total fixed costs do
not change when
activity changes.
Cost

• Total variable costs

change in proportion
Activity to activity changes.
• Mixed costs are
Cost

combinations of fixed
and variable costs.
McGraw-Hill/Irwin Activity Slide 17
C4
TYPES OF COST CLASSIFICATIONS
CLASSIFICATION BY TRACEABILITY
Direct costs Indirect costs
 Costs traceable to a  Costs that cannot
single cost object. be traced to a
 Examples: material single cost object.
and labor cost for a  Example: A
product. maintenance
expenditure
benefiting two or
more departments.

McGraw-Hill/Irwin Slide 18
C4 TYPES OF COST CLASSIFICATIONS
CLASSIFICATION BY CONTROLLABILITY
The degree of control depends on the
level of management in the organization.

Very little control

McGraw-Hill/Irwin Slide 19
C4
TYPES OF COST CLASSIFICATIONS
CLASSIFICATION BY RELEVANCE
Sunk costs have already been incurred and cannot be avoided
or changed. Sunk costs should not be considered in decisions.

Example: An automobile purchased two years ago cost $15,000.

The $15,000 cost is sunk because whether the car is driven, sold,
traded, or abandoned, the cost will not change.

Out-of-pocket costs require future outlays of cash.

Out-of-pocket costs should be considered in decisions.

Example: You plan on buying a new car for $25,000 next month.
The cost of the new car is an out-of-pocket cost because you can
choose to spend or not to spend the $25,000 next month.

McGraw-Hill/Irwin Slide 20
C4
TYPES OF COST CLASSIFICATIONS
CLASSIFICATION BY RELEVANCE
An opportunity cost is the potential benefit lost by choosing
a specific action from two or more alternatives

Example: If you were not attending college, you could be

earning $20,000 per year. Your opportunity cost of
attending college for one year is $20,000.

McGraw-Hill/Irwin Slide 21
C5
TYPES OF COST CLASSIFICATIONS
CLASSIFICATION BY FUNCTION
Direct Direct Manufacturing
Labor Material Overhead

Product

Period costs are expenses

not attached to the product.

Administrative costs are

Selling costs are incurred to
non-manufacturing costs
obtain orders and to deliver
of staff support and
finished goods to customers.
administrative functions.
McGraw-Hill/Irwin Slide 22
 C5
PERIOD AND PRODUCT COSTS
IN FINANCIAL STATEMENTS
2009 Income
Statement
Period Costs Operating
(Expenses) Expenses

2009 Costs Cost of

Incurred Goods Sold
Inventory
Sold in 2009
Product Costs 2010 Balance 2010 Income
(Inventory) Sheet Inventory Statement
Raw Materials
Inventory Not Cost of
Goods in Process
Sold in 2009 Goods Sold
Finished Goods
McGraw-Hill/Irwin Slide 23
C5
EXAMPLES OF MULTIPLE COST
CLASSIFICATIONS

Cost Item Behavior Traceability Function

Materials Variable Direct Product

Assembly Wages Variable Direct Product

Advertising Fixed Indirect Period

Production Manager's Salary Fixed Indirect Product

Office Depreciation Fixed Indirect Period

McGraw-Hill/Irwin Slide 24
C5
COST CONCEPTS FOR
SERVICE COMPANIES

I suppose these same

cost concepts apply to
service companies.

McGraw-Hill/Irwin Slide 25
C6 REPORTING MANUFACTURING ACTIVITIES

Merchandisers . . . Manufacturers . . .
 Buy finished goods.  Buy raw materials.
 Sell finished goods.  Produce and sell
finished goods.

SaleMart

McGraw-Hill/Irwin Slide 26
C6 MANUFACTURER’S BALANCE SHEET

Raw Goods in Finished

Materials Process Goods

Materials Partially complete Completed

waiting to be products. products
processed. for sale.
Material to which
Can be direct some labor and/or
or indirect. overhead have
been added.
McGraw-Hill/Irwin Slide 27
C6 MANUFACTURER’S BALANCE SHEET

MERCHANDISER MANUFACTURER

Current Assets Current Assets

 Cash  Cash
 Receivables  Receivables
 Merchandise  Inventories
Inventory Raw Materials
Goods in Process
Finished Goods

The only difference is inventory.

McGraw-Hill/Irwin Slide 28
C6 MANUFACTURER’S INCOME STATEMENT
Merchandiser Manufacturer

Beginning Beginning
Merchandise Finished Goods
Inventory Inventory
+ +
Cost of Goods The major Cost of Goods
Purchased difference Manufactured
_ _
Ending Ending
Merchandise Finished Goods
Inventory Inventory
Cost of Goods
= Sold =
McGraw-Hill/Irwin Slide 29
P1 COST OF GOODS SOLD FOR A
MERCHANDISER AND MANUFACTURER
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.

Merchandising Company Manufacturing Company

Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 11,200
+ Purchases 234,150 + Cost of goods
= Goods available manufactured 170,500
for sale $ 248,350 = Goods available
- Ending for sale $ 181,700
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (10,300)
sold $ 236,250 = Cost of goods
sold $ 171,400

McGraw-Hill/Irwin Slide 30
P1 DIRECT MATERIALS

Materials that are separately and readily

traced to a particular product.
Example:
Steel used in the
frame of a
mountain bike.

McGraw-Hill/Irwin Slide 31
P1 DIRECT LABOR

Labor costs that are separately and

readily traced to finished product.

Example:
Wages paid to a
mountain bike
assembly worker.

McGraw-Hill/Irwin Slide 32
P1 FACTORY OVERHEAD

• All manufacturing costs except direct

material and direct labor.
• Factory costs that cannot be separately
or readily traced directly to products.

Examples:
Indirect labor – maintenance
Indirect material – cleaning supplies
Factory utility costs
Supervisory costs

McGraw-Hill/Irwin Slide 33
P1 PRIME AND CONVERSION COSTS

Manufacturing costs are often

combined as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost

McGraw-Hill/Irwin Slide 34
P1 QUESTION

What type of account is the goods in

process account?

a. Income statement expense account.

b. Balance sheet inventory account.
c. Temporary clearing account for direct
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
McGraw-Hill/Irwin Slide 35
P1 QUESTION

The primary distinction between product

and period costs is . . .

a. Product costs are expensed in the period

incurred.
b. Product costs are directly traceable to
product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
McGraw-Hill/Irwin Slide 36
C7
ACTIVITIES AND COST FLOWS
IN MANUFACTURING
Materials Production activity Sales activity
activity
Goods in Process Finished Goods
Raw Beginning Inventory Beginning Inventory
Materials
Beginning Cost of Goods
Inventory Direct Labor
Manufactured

Raw Factory
Materials Overhead Finished Cost
Purchases Goods of
Raw Materials
Used Ending Goods
Inventory Sold

Raw Materials Goods in Process

Ending Inventory Ending Inventory
McGraw-Hill/Irwin Slide 37
P2 MANUFACTURING STATEMENT

Summarizes the types and amounts of costs

Incurred in a company’s manufacturing process.

Direct Materials Used

+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Work in Process
– Ending Work in Process
= Cost of Goods Manufactured
McGraw-Hill/Irwin Slide 38
P2 MANUFACTURING STATEMENT

Let’s take a look

at Rocky
Mountain Bikes’
Manufacturing
Statement.

McGraw-Hill/Irwin Slide 39
P2
MANUFACTURING STATEMENT

ROCKY MOUNTAIN BIKES

Manufacturing Statement
For Year Ended December 31, 2009
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin Slide 40
 Computation of Cost of Direct Material Used
P2
Beginning raw materials inventory $ 8,000
Add: Purchases of raw materials 86,500
Cost of raw materials available for use $ 94,500
Deduct: Ending raw materials inventory 9,000
ROCKYused
Cost of direct materials MOUNTAIN BIKES
in production $ 85,500
Manufacturing Statement
For Year Ended December 31, 2009
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin Slide 41
P2 MANUFACTURING STATEMENT

Include all direct labor

costs
ROCKYincurred
MOUNTAINduring the
BIKES
current period.
Manufacturing Statement
For Year Ended December 31, 2009
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin Slide 42
 Computation of Total Manufacturing Overhead
P2 MIndirect
ANUFACTURING
labor STATEMENT
$ 9,000
Factory supervision 6,000
Factory utilities 2,600
Property taxes, factory building 1,900
Factory supplies used
ROCKY MOUNTAIN BIKES 600
Factory insurance expired 1,100
Manufacturing Statement
Depreciation, building and equipment 5,300
For Year Ended December 31, 2009
Other factory overhead 3,500
Total materials
Direct factory overhead
used costs
in production $ 30,000 $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin Slide 43
P2 MANUFACTURING STATEMENT
Beginning work in
process inventory is
ROCKY MOUNTAIN BIKES
carried over from the
Manufacturing Statement
prior period.
For Year Ended December 31, 2009
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin Slide 44
P2 MANUFACTURING STATEMENT

Ending work in process inventory

contains
ROCKY the cost ofBIKES
MOUNTAIN unfinished goods,
and is reportedStatement
Manufacturing in the current assets
section
For Year of the balance
Ended December sheet.
31, 2009
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin Slide 45
A1
CYCLE TIME AND CYCLE
EFFICIENCY
Order Production Goods
Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Manufacturing Cycle Time

Total Cycle Time

Process time is the only value-added time.

McGraw-Hill/Irwin Slide 46
A1
CYCLE TIME AND CYCLE
EFFICIENCY
Order Production Goods
Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Manufacturing Cycle Time

Total Cycle Time

Manufacturing Value-added time
Cycle =
Efficiency Manufacturing cycle time
McGraw-Hill/Irwin Slide 47
McGraw-Hill/Irwin Slide 48