Chapter

16

Management Accounting:
A Business Partner

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Management Accounting: Management Accounting: Basic Framework Basic Framework

a n a g e m e n t a c c o u a s s i g n i n g d e c i s i o n - m
A c c o u n t i n w h o h a s A g s y s t e m a u t h o r i t y s o

t i a k
h v

c c o u n t i n g i n p l a n n i n g a n d

f o r m a t i o d e c i s i o p r o , a n

A m o

c c o u n t i n g r e p o r t s n i t o r i n g , e v a l u a t i n g

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Comparing Financial Accounting Comparing Financial Accounting and Management Accounting and Management Accounting

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Accounting for Manufacturing Accounting for Manufacturing Operations Operations

Steps in the Manufacturing Process:
Buy raw Buy raw materials. materials. Convert raw Convert raw materials into materials into finished goods. finished goods. Sell Sell finished finished goods. goods.

Direct Direct materials materials costs. costs.

Direct labor and Direct labor and manufacturing manufacturing overhead costs. overhead costs.

Cost of Cost of goods goods sold. sold.

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Direct Materials Direct Materials

Raw materials & component parts that become an integral part of finished products. Can be traced directly and conveniently to products.

If materials cannot be traced directly to products, If materials cannot be traced directly to products, the materials are considered indirect and are part the materials are considered indirect and are part of manufacturing overhead. of manufacturing overhead.

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Direct Labor Direct Labor

Includes the payroll cost of direct workers. Includes the payroll cost of direct workers.

Those employees Those employees who work directly who work directly on the goods on the goods being being manufactured. manufactured.

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Direct Labor Direct Labor

Includes the payroll cost of direct workers. Includes the payroll cost of direct workers.

The cost of The cost of employees who do employees who do not work directly on not work directly on the goods is the goods is considered indirect considered indirect labor and is part of labor and is part of manufacturing manufacturing overhead. overhead.

Those employees Those employees who work directly who work directly on the goods on the goods being being manufactured. manufactured.

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Manufacturing Overhead Manufacturing Overhead

All manufacturing costs other than direct All manufacturing costs other than direct materials and direct labor. materials and direct labor.

Includes: Includes:

Indirect materials. Indirect materials. Indirect labor. Indirect labor. Machinery and Machinery and

equipment costs. equipment costs. Cost of regulatory Cost of regulatory compliance. compliance.

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Manufacturing Overhead Manufacturing Overhead

All manufacturing costs other than direct All manufacturing costs other than direct materials and direct labor. materials and direct labor.

Includes: Includes:

Indirect materials. Indirect materials. Indirect labor. Indirect labor. Machinery and Machinery and

equipment costs. equipment costs. Cost of regulatory Cost of regulatory compliance. compliance.

Does not include Does not include selling or general selling or general and administrative and administrative expenses. expenses.

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Manufacturing Overhead Manufacturing Overhead

The cost to The cost to produce a unit of produce a unit of product includes: product includes: Direct material Direct material Direct labor Direct labor Manufacturing Manufacturing overhead overhead

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Manufacturing Overhead Manufacturing Overhead

The cost to The cost to produce a unit of produce a unit of product includes: product includes: Direct material Direct material Direct labor Direct labor Manufacturing Manufacturing overhead overhead

Manufacturing overhead Manufacturing overhead must be mathematically must be mathematically allocated to each unit of allocated to each unit of product using a product using a predetermined overhead predetermined overhead application rate. application rate. (This will be discussed (This will be discussed later in this chapter.) later in this chapter.)

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Product Costs Versus Period Costs Product Costs Versus Period Costs
Product Costs (manufacturing costs) Balance Sheet Balance Sheet Current assets Current assets and inventory and inventory Income Income Statement Statement Revenue Revenue COGS COGS Gross profit Gross profit Expenses Expenses Net income. Net income. When goods When goods are sold. are sold.

as incurred

Period Costs (operating expenses and income taxes.)

as incurred

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Inventories of a Manufacturing Inventories of a Manufacturing Business Business

Raw materials -- inventory on Raw materials inventory on hand and available for use. hand and available for use.

Finished Finished goodsgoodscompleted completed goods awaiting goods awaiting sale. sale.

Work in Work in process -process partially partially completed completed goods. goods.

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The Flow of Physical Goods The Flow of Physical Goods

Direct materials purchased Materials Warehouse Direct materials used Factory

Direct labor & Manufacturing overhead Finished goods Warehouse

Finished goods

Goods sold

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The Flow of Manufacturing Costs The Flow of Manufacturing Costs

Direct materials purchased Materials Inventory $$$ $$$ Direct materials used Work in Process Inventory $$$ $$$

Direct labor & Manufacturing overhead Cost of Goods Sold $$$ Finished Goods Inventory $$$ $$$

Cost of goods manufactured

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The Flow of Manufacturing Costs The Flow of Manufacturing Costs Example Example
Pure-Ice Inc. had $52,000 of inventory in Pure-Ice Inc. had $52,000 of inventory in direct materials inventory on January 1, direct materials inventory on January 1, 2002. During the year, Pure-Ice 2002. During the year, Pure-Ice purchased $586,000 of additional direct purchased $586,000 of additional direct materials. At December 31, 2002, $78,000 materials. At December 31, 2002, $78,000 of the direct materials were still on hand. of the direct materials were still on hand.

How much direct material was How much direct material was placed into production during 2002? placed into production during 2002?

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The Flow of Manufacturing Costs The Flow of Manufacturing Costs Example Example

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The Flow of Manufacturing Costs The Flow of Manufacturing Costs Example Example

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The Flow of Manufacturing Costs The Flow of Manufacturing Costs Example Example
In addition to the direct materials, PureIn addition to the direct materials, PureIce incurred $306,000 of direct labor cost Ice incurred $306,000 of direct labor cost during 2002. Manufacturing overhead for during 2002. Manufacturing overhead for 2002 was $724,000. 2002 was $724,000. Pure-Ice started 2002 with $132,000 in Pure-Ice started 2002 with $132,000 in work in process. During 2002, units work in process. During 2002, units costing $1,480,000 were transfered to costing $1,480,000 were transfered to finished goods inventory. finished goods inventory.

What is the ending balance in work What is the ending balance in work in process at December 31, 2002? in process at December 31, 2002?

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The Flow of Manufacturing Costs The Flow of Manufacturing Costs Example Example

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The Flow of Manufacturing Costs The Flow of Manufacturing Costs Example Example

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Overhead Application Rates Overhead Application Rates

The overhead application rate expresses an The overhead application rate expresses an expected relationship between expected relationship between manufacturing overhead costs and some manufacturing overhead costs and some activity base related to the production activity base related to the production process. process.

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Overhead Application Rates Overhead Application Rates

Overhead costs are estimated based Overhead costs are estimated based on budgets and using mathematical on budgets and using mathematical estimation techniques. estimation techniques.

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Overhead Application Rates Overhead Application Rates

The base is the activitiy that drives the The base is the activitiy that drives the cost, called the cost driver. cost, called the cost driver. Direct labor hours and machine hours are Direct labor hours and machine hours are commonly used cost drivers. commonly used cost drivers.

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Overhead Application Rates Overhead Application Rates Example Example

Big T Company produces Big T Company produces engines for big trucks. Total engines for big trucks. Total overhead for 2002 is estimated to overhead for 2002 is estimated to be $2,600,000. Big T applies be $2,600,000. Big T applies overhead based on machine hours. overhead based on machine hours. Big T estimates machine hours Big T estimates machine hours for 2002 to be 162,500 hours. for 2002 to be 162,500 hours.

Compute Big Ts Compute Big Ts predetermined overhead rate predetermined overhead rate for 2002. for 2002.

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Overhead Application Rates Overhead Application Rates Example Example

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Overhead Application Rates Overhead Application Rates Example Example

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Overhead Application Rates Overhead Application Rates

Some companies use different cost drivers Some companies use different cost drivers for different manufacturing activities, a for different manufacturing activities, a process called ACTIVITY BASED COSTING. process called ACTIVITY BASED COSTING.

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Determining the Cost of Finished Determining the Cost of Finished Goods Manufactured Goods Manufactured
A schedule of the cost A schedule of the cost of finished goods of finished goods manufactured is manufactured is prepared to assist prepared to assist managers in managers in understanding and understanding and evaluating the overall evaluating the overall cost of manufacturing cost of manufacturing products. products.

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The cost of goods The cost of goods completed during completed during the period is used the period is used to compute COGS to compute COGS for the period. for the period.

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The income statement is prepared using established financial accounting procedures.

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End of Chapter 16 End of Chapter 16

This is a great job, but the overhead is killing my profit margin!

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