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					ACG 2071
Introduction to Managerial Accounting

The Differences between Managerial and Financial Accounting
      Financial accounting - information is reported in statements that are useful for
       persons or institutions that are outside or external to the organization.
      Managerial accounting – information includes both historical and estimated data
       used by management in conducting daily operations, planning future operations,
       and developing overall business strategies.
           o The characteristics of managerial accounting are influenced by the varying
              needs of management.
                   Managerial accounting reports provide both objective measures of
                       past operations and subjective estimates of future operations.
                   Managerial reports need not be prepared according to generally
                       accepted accounting principles.
                   Managerial accounting reports may be provided periodically, as
                       with financial accounting, or at any time management needs
                       information.
                   Managerial accounting reports can be prepared to report
                       information for the business entity or a segment of the entity, such
                       as a division, product, project, or territory.




Organizational Role of Management
      In most large organizations, departments or similar units are assigned
       responsibilities for specific functions or activities.
      This operating structure of an organization can be diagrammed in an organization
       chart.
      The individual reporting units in an organization can be viewed as having either
           o Line department or unit is one directly involved in the basic objectives of
              the organization
           o Staff department or unit is one that provides services, assistance, and
              advice to the departments with line or staff responsibilities.




Created By M. Mari
Fall, 2001
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ACG 2071
Introduction to Managerial Accounting

Manufacturing Cost Terms
      Cost – is a payment of cash or its equivalent or the commitment to pay cash in the
       future for the purpose of generating revenues.
           o Cost provides a benefit that is used immediately or deferred to a future
               period of time.
           o If the benefit is used immediately or deferred to a future period of time
                    Immediately – it is an expense
                    Future period – it is an asset
      Manufacturing business – converts materials into a finished product through the
       use of machinery and labor.
      Materials
           o Direct materials – cost of materials that are an integral part of the product
           o Indirect materials – costs of materials that are not a significant portion of
               the total product cost
      Factory Labor
           o Direct labor – cost of wages of employees who are directly involved in
               converting materials into the manufactured product.
           o Indirect labor – labor costs that do not enter directly into the manufacture
               of a product.
      Factory Overhead – costs other than direct materials cost and direct labor cost
       incurred in the manufacturing process.
           o Manufacturing overhead or factory burden
           o Such as depreciation, utilities, factory supplies
      Product costs – direct materials, direct labor, and factory overhead costs because
       they are associated with the making of the product.
      Conversion costs – the costs of converting the materials into finished products
       consist of direct labor and factory overhead costs




   Cost Accounting Systems
          Objective of cost accounting systems is to accumulate product costs.
          Allow managers to establish product prices, control operations, and
            develop financial statements.
           Two main types of cost accounting systems
               o Job order cost system – provides separate record of the cost of
                   each quantity of the product that passes through the factory.
                        Custom goods
               o Process cost system – costs are accumulated for each of the
                   department or processes within the factory.
                        Manufacturers of units of product that is not distinguishable
                          from each other during a continuous production process.

Created By M. Mari
Fall, 2001
Page 2 of 9
ACG 2071
Introduction to Managerial Accounting


Job Order Costs Systems
   Inventory accounts
        o Materials inventory
        o Work in process inventory
        o Finished Goods inventory


Journal Entries
       Purchase of materials

              Materials inventory          DR
                     Accounts payable            CR


Example 1: Purchased $8,000 worth of materials for use in production.




       Requisition of materials

              Work in process              DR                   direct materials
              Factory overhead             DR                   indirect materials
                     Materials inventory         CR




Example 2: Bunny manufacturing has the following cost information for the period.
Record the material usage.

 Job No.        Materials
    125        $4,500
    126        $4,250
    127        $4,000
    128        $3,500
    129        $3,000
  Indirect     $2,000
 TOTALS        21250
Created By M. Mari
Fall, 2001
Page 3 of 9
ACG 2071
Introduction to Managerial Accounting
       Factory labor

               Work in process               DR                     direct labor
               Factory overhead              DR                     indirect labor
                      Wages payable                  CR




Example 3: Bunny manufacturing has the following cost information for the period.
  Job No.        Labor       Direct
                             Labor
                             Hours
    125      $5,000         200
    126      $4,900         175
    127      $4,500         150
    128      $4,000         125
    129      $3,500         100
  Indirect   $1,500
 TOTALS      $23,400.00     830

Record the labor costs.




       Factory overhead costs

               Factory Overhead            DR
                      Utilities payable            CR
                      Record factory overhead costs incurred.



Allocating Factory Overhead
                    Cost Allocation – the process of assigning factory overhead costs
                    to a cost object, such as a job.

                       Activity base – measure used to allocate factory overhead.

Created By M. Mari
Fall, 2001
Page 4 of 9
ACG 2071
Introduction to Managerial Accounting
                               Should be a measure that reflects the consumption or use of
                               factory overhead cost.

                        Predetermined Factory Overhead Rate
                               = Estimated total factory overhead costs
                                     Estimated activity base




              Example 4: The Corporation estimates factory overhead costs at
              $500,000 for the next period. The corporation uses direct labor hours as
              its activity bases and estimates 50,000 total direct labor hours. Compute
              the predetermined rate?




              Example 5: The Corporation estimates factory overhead costs at
              $500,000 for the next period. Factory overhead is determined as a
              percentage of direct labor costs. If direct labor costs are expected to be
              $750,000, what is the rate?




Applying Factory Overhead to Work in Process

              The factory overhead account is applied based on the predetermined rate.

       Journal Entry:

                        Work in Process              DR
                              Factory overhead              CR
Created By M. Mari
Fall, 2001
Page 5 of 9
ACG 2071
Introduction to Managerial Accounting


Example 6: Bunny manufacturing has the following cost information for the period.
  Job No.         Materials         Labor       Direct       Factory         Total
                                                Labor      Overhead          Costs
                                                Hours
     125        $4,500          $5,000         230
     126        $4,250          $4,900         175
     127        $4,000          $4,500         150
     128        $3,500          $4,000         125
     129        $3,000          $3,500         100
   Indirect     $2,000          $1,500
  TOTALS        21250           $23,400.00     780
Factory overhead rate is $50 per direct labor hour. Record the application of factory
overhead to the jobs listed above.




              At the end of the period, the factory overhead account is reviewed

                               Factory Overhead

                            Debit                  Credit


                          Under applied            Over applied




       Disposal of Factory Overhead Balance

                     Cost of goods sold                     DR
                            Factory overhead                      CR



Created By M. Mari
Fall, 2001
Page 6 of 9
ACG 2071
Introduction to Managerial Accounting
Example 7: The balance in the factory overhead account is $50,000, the corporation
applies $60,000 to work in process. Record the disposal of the balance.




         Transferred of Finished Goods

                       Finished goods                     DR
                              Work in Process                     CR



Example 7: Using the information shown below, assume that jobs 125, 126 and 127 are
completed. Record the entry.

.
    Job No.       Materials         Labor        Direct      Factory         Total
                                                 Labor      Overhead         Costs
                                                 Hours
       125       $4,500         $5,000          230        6900           16400
       126       $4,250         $4,900          175        5250           14400
       127       $4,000         $4,500          150        4500           13000
       128       $3,500         $4,000          125
       129       $3,000         $3,500          100
     Indirect    $2,000         $1,500
    TOTALS       21250          $23,400.00      780




         Transferred to Cost of Goods Sold

                       Cost of goods sold                 DR
                              Finished goods                      CR

Created By M. Mari
Fall, 2001
Page 7 of 9
ACG 2071
Introduction to Managerial Accounting
Example 8: Using the information in example 7 above, assume that jobs 125, has been
sold for $75,000. Record the entry.




Classroom Example:

  Job No.       Materials         Labor           Factory        Total
                                                 Overhead        Costs
    531        $7,600          $6,000
    532        $9,208          $5,900
    533        $8,709          $3,500
    534        $3,500          $3,000
    535        $4,000          $2,500
  Indirect     $9,100          $11,500
 TOTALS        42,17           32,400

   a> Record the usage of materials for the period




   b> Record the usage of labor for the period




   c> Factory overhead is applied based on 120% of direct labor costs. Apply factory
      overhead to all jobs.




   d> Jobs 533, 534 have been completed. Record the transfer to finished goods



Created By M. Mari
Fall, 2001
Page 8 of 9
ACG 2071
Introduction to Managerial Accounting
   e> Record the sale of job 533 for $100,000.




   Period Costs
    Are expenses that are used in generating revenue during the current period and are
      not involved in the manufacturing process.
    Two categories
          o Selling expenses
          o Administrative expenses




Created By M. Mari
Fall, 2001
Page 9 of 9

				
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