Accounting Principles 8th Edition

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Managerial AccountingManagerial AccountingFifth EditionWeygandt Kimmel KiesoPage1-2

study objectives1.Explain the distinguishing features of managerialaccounting.2. Identify the three broad functions of management.3. Define the three classes of manufacturing costs.4. Distinguish between product and period costs.5. Explain the difference between a merchandising and amanufacturing income statement.6. Indicate how cost of goods manufactured is determined.7. Explain the difference between a merchandising and amanufacturing balance sheet.8. Identify trends in managerial accounting.Page1-3

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Managerial Accounting BasicsManagerial accounting, also called managementaccounting, is a field of accounting that provideseconomic and financial information for managers andother internal users.Managerial accounting applies to all types ofbusinesses.Page1-5 fit

Managerial Accounting BasicsManagerial Accounting Activities1. Explaining manufacturing and nonmanufacturing costsand how they are reported in the financial statements.(Chapter 1)2. Computing the cost of providing a service ormanufacturing a product. (Chapters 2, 3, and 4)3. Determining the behavior of costs and expenses asactivity levels change and analyzing cost-volume-profitrelationships within a company. (Chapters 5 and 6)Page1-6

Managerial Accounting BasicsManagerial Accounting Activities4. Accumulating and presenting data for managementdecision making. (Chapter 7)5. Determining prices for external and internaltransactions. (Chapter 8)6. Assisting management in profit planning andformalizing these plans in the form of budgets.(Chapter 9)Page1-7

Managerial Accounting BasicsManagerial Accounting Activities7. Providing a basis for controlling costs and expensesby comparing actual results with planned objectivesand standard costs. (Chapters 10 and 11)8. Accumulating and presenting data for capitalexpenditure decisions. (Chapter 12)Page1-8

Managerial Accounting BasicsComparing Managerial And Financial AccountingIllustration 1-1Page1-9SO 1 Explain the distinguishing features of managerial accounting.

Managerial Accounting BasicsReview QuestionManagerial accounting:a. Is governed by generally accepted accountingprinciples.b. Places emphasis on special-purpose information.c. Pertains to the entity as a whole and is highlyaggregated.d. Is limited to cost data.Page1-10Solution onnotes pageSO 1 Explain the distinguishing features of managerial accounting.

Managerial Accounting BasicsManagement ize short-termprofit and marketshareCoordinate diverseactivities and humanresourcesKeeping activities ontrackCommit toenvironmentalprotection and socialprogramsAdd value to thebusinessImplement plannedobjectivesProvide incentives tomotivate employeesHire and trainemployeesProduce smoothrunning operationDetermine whethergoals are metDecide changesneeded to get backon trackMay use an informalor formal system ofevaluationsSO 2 Identify the three broad functions of management.

Managerial Accounting BasicsOrganizational StructureIllustration 1-2Organization charts show theinterrelationships of activitiesand the delegation ofauthority and responsibilitywithin the company.Page1-12SO 2 Identify the three broad functions of management.

Managerial Accounting BasicsBusiness EthicsAll employees are expected to act ethically.Many organizations have codes of business ethics.Recent financial frauds: Enron, Global Crossing, WorldComPage1-13SO 2 Identify the three broad functions of management.

Managerial Accounting BasicsBusiness EthicsCreating Proper IncentivesSystems and controls sometimes createincentives for managers to take unethical actions.Controls need to be effective and realistic.Page1-14SO 2 Identify the three broad functions of management.

Managerial Accounting BasicsBusiness EthicsCode of Ethical StandardsSarbanes-Oxley Act of 2002 (SOX) Clarifies management’s responsibilities Requires certifications by CEO and CFO Selection criteria for Board of Directors andAudit Committee Page1-15Substantially increased penalties for misconductSO 2 Identify the three broad functions of management.

Managerial Accounting BasicsReview QuestionThe management of an organization performs severalbroad functions. They are:a. Planning, directing, and selling.b. Directing, manufacturing, and controlling.c. Planning, manufacturing, and controlling.d. Planning, directing, and controlling.Page1-16Solution onnotes pageSO 2 Identify the three broad functions of management.

Managerial Accounting BasicsIndicate whether the following statementsare true or false.False1. Managerial accountants have a single role within anorganization, collecting and reporting costs tomanagement.TrueTruePage1-172. Financial accounting reports are general-purpose andintended for external users.3. Managerial accounting reports are special-purposeand issued as frequently as needed.Solution onnotes pageSO 2 Identify the three broad functions of management.

Managerial Accounting BasicsIndicate whether the following statementsare true or false.False4. Managers’ activities and responsibilities can beclassified into three broad functions: costaccounting, budgeting, and internal control.False5. As a result of the Sarbanes-Oxley Act of 2002,managerial accounting reports must now comply withgenerally accepted accounting principles (GAAP).TruePage1-186. Top managers must certify that a company maintainsan adequate system of internal controls.Solution onnotes pageSO 2 Identify the three broad functions of management.

Managerial Cost ConceptsManagers should ask questions such as the following.1. What costs are involved in making a product orproviding a service?2. If we decrease production volume, will costsdecrease?3. What impact will automation have on total costs?4. How can we best control costs?Page1-19SO 3 Define the three classes of manufacturing costs.

Managerial Cost ConceptsManufacturing CostsManufacturing consists of activities and processesthat convert raw materials into finished goods.Illustration 1-3Page1-20SO 3 Define the three classes of manufacturing costs.

Manufacturing CostsMaterialsRaw MaterialsBasic materials and parts usedin manufacturing process.Direct MaterialsRaw materials that can be physically and directlyassociated with the finished product during themanufacturing process.Page1-21SO 3 Define the three classes of manufacturing costs.

Manufacturing CostsMaterialsIndirect MaterialsRaw materials that cannot be easilyassociated with the finished product.Not physically part of the finished product orthey are an insignificant part of finishedproduct in terms of cost.Considered part of manufacturing overhead.Page1-22SO 3 Define the three classes of manufacturing costs.

Manufacturing CostsDirect LaborLaborWork of factory employees thatcan be physically and directlyassociated with converting rawmaterials into finished goods.Indirect LaborWork of factory employees that has no physicalassociation with the finished product or for which itis impractical to trace costs to the goods produced.Page1-23SO 3 Define the three classes of manufacturing costs.

Manufacturing CostsManufacturing OverheadCosts that are indirectly associated with manufacturingthe finished product.Includes all manufacturing costs except direct materialsand direct labor.Also called factory overhead, indirect manufacturingcosts, or burden.Page1-24SO 3 Define the three classes of manufacturing costs.

Manufacturing CostsReview QuestionWhich of the following is not an element ofmanufacturing overhead?a. Sales manager’s salary.b. Plant manager’s salary.c. Factory repairman’s wages.d. Product inspector’s salary.Page1-25Solution onnotes pageSO 3 Define the three classes of manufacturing costs.

Product Versus Period CostsProduct CostsComponents: Direct materials Direct labor Manufacturing overheadCosts that are an integral part of producing theproduct.Recorded in “inventory” account.Not an expense (COGS) until the goods are sold.Page1-26SO 4 Distinguish between product and period costs.

Product Versus Period CostsPeriod CostsCharged to expense as incurred.Non-manufacturing costs.Includes all selling and administrative expenses.Page1-27SO 4 Distinguish between product and period costs.

Product Versus Period CostsIllustration 1-4Page1-28SO 4 Distinguish between product and period costs.

Product Versus Period CostsA bicycle company has these costs: tires,salaries of employees who put tires on thewheels, factory building depreciation,wheel nuts, spokes, salary of factory manager, handlebars,and salaries of factory maintenance employees. Classifyeach cost as direct materials, direct labor, or overhead.Direct MaterialsTiresWheel nutsSpokesHandlebarsPage1-29Direct LaborSalaries of employeeswho put tires on thewheels.OverheadFactory depreciationFactory managersalaryFactory maintenanceemployees salarySO 4 Distinguish between product and period costs.

Manufacturing Costs in Financial StatementsManufacturing CostsUnder a periodic inventory system, the incomestatements of a merchandiser and a manufacturerdiffer in the cost of goods sold section.“COGS”Page1-30SO 5 Explain the difference between a merchandisingand a manufacturing income statement.

Manufacturing Costs in Financial StatementsCost of Goods Sold Components – (Periodic Inventory System)Illustration 1-5Page1-31SO 5 Explain the difference between a merchandisingand a manufacturing income statement.

Manufacturing Costs in Financial StatementsCost of goods sold sections of merchandisingand manufacturing income statementsPage1-32Illustration 1-6SO 5 Explain the difference between a merchandisingand a manufacturing income statement.

Manufacturing Costs in Financial StatementsReview QuestionFor the year, Red Company has cost of goodsmanufactured of 600,000, beginning finished goodsinventory of 200,000, and ending finished goodsinventory of 250,000. The cost of goods sold isPage1-33a. 450,000.Beg. Inventoryb. 500,000. COGs Manufactured600,000c. 550,000.Goods Available for Sale800,000d. 600,000.- End. Inventory250,000Solution onnotes pageCost of Goods Sold 200,000 550,000SO 5 Explain the difference between a merchandisingand a manufacturing income statement.

Manufacturing Costs in Financial StatementsDetermining the Cost of Goods ManufacturedTotal Work in Process – (1) cost of beginning work in process and(2) total manufacturing costs for the current period.Total Manufacturing Costs – sum of direct material costs, directlabor costs, and manufacturing overhead in the current year.Illustration 1-7Page1-34SO 6 Indicate how cost of goods manufactured is determined.

Manufacturing Costs in Financial StatementsCost of Goods Manufactured SchedulePage1-35Illustration 1-8SO 6 Indicate how cost of goods manufactured is determined.

Manufacturing Costs in Financial StatementsPage1-36SO 6 Indicate how cost of goods manufactured is determined.

Manufacturing Costs in Financial StatementsPage1-37Solution onnotes pageSO 6 Indicate how cost of goods manufactured is determined.

Manufacturing Costs in Financial StatementsBalance SheetInventory accounts for a manufacturerIllustration 1-9The balance sheet for a merchandising company shows just one categoryof inventory.Page1-38SO 7 Explain the difference between a merchandisingand a manufacturing balance sheet.

Manufacturing Costs in Financial StatementsBalance SheetCurrent assets sections of merchandisingand manufacturing balance sheetsIllustration 1-10Page1-39SO 7 Explain the difference between a merchandisingand a manufacturing balance sheet.

Manufacturing Costs in Financial StatementsReview QuestionA cost of goods manufactured schedule shows beginningand ending inventories for:a.Raw materials and work in process onlyb. Work in process onlyc.Raw materials onlyd. Raw materials, work in process, and finishedgoodsPage1-40Solution onnotes pageSO 7 Explain the difference between a merchandisingand a manufacturing balance sheet.