Introduction toManagement AccountingChapter 19PlanningActingFeedbackControllingThe Functions of ManagementObjective 1Distinguish between financial accounting and management accounting.Primary UsersFinancialInvestorsCreditorsGovernment authorities (IRS, SEC, etc.)ManagementInternal managers of the businessPurpose of InformationFinancial•Help investors, creditors, and others make investment, credit, and other decisionsManagement •Help managers plan and control business operationsFocus and Time DimensionFinancial•Reliability, objectivity, and focus on the pastManagement •RelevanceType of ReportFinancial•Financial statements restricted by GAAPManagement •Internal reports not restricted by GAAP; determined by cost-benefit analysisVerificationFinancial•Annual independent audit by CPAsManagement •No independent auditScope of InformationFinancial•Summary reports primarily on the company as a wholeManagement •Detailed reports on parts of the companyBehavioral ImplicationsFinancial•Concern about adequacy of disclosureManagement •Concern about how reports will affect employees behaviorService, Merchandising, and Manufacturing CompaniesService•Provides intangible services, rather than tangible productsMerchandising•resells products previously bought from suppliersService, Merchandising, and Manufacturing CompaniesManufacturing Company:•uses labor, plant, and equipment to convert raw materials into finished products•Materials inventory•Work in process inventory•Finished goods inventoryDescribe the value chainand classify costs byvalue-chain functions.Objective 2Value ChainResearch &DevelopmentDesignProduction orPurchasesMarketingDistributionCustomerServicesS19-3Distinguish direct costsfrom indirect costs.Objective 3Cost Objects, Direct Costs,and Indirect Costs•Cost objectsare anything for which a separate measurement of costs is desired.•Cost driversare any factors that affect cost.Cost Objects, Direct Costs,and Indirect Costs•What are examples of cost objects?–individual products–alternative marketing strategies–geographic segments of the business–departmentsCost Objects, Direct Costs,and Indirect Costs•What are direct costs?•Direct costsare those costs that can be specifically traced to the cost object.•What are indirect costs?•Indirect costsare costs that cannot be specifically traced to the cost object.Distinguish among full product costs, inventoriable productcosts, and period costs.Objective 4Product Costs•What are product costs?•They are the costs to produce (or purchase) tangible products intended for sale.InventoriableproductcostsFullproductcostsProduct Costs•There are two types of product costs:External ReportingInventoriableproductcostsPeriodcostsInventoriable Product Costs•For external reporting, merchandisers’inventoriable product costsinclude only costs that are incurred in the purchase of goods.•Inventoriable costsare an asset.•Period costsflow as expenses directly to the income statement.Inventoriable Product Costs•For external reporting, manufacturers’inventoriable product costsinclude raw materials plus all other costs incurred in the manufacturing process.•Inventoriable product costs are incurred only in the third element of the value chain.DirectMaterialsDirectLaborIndirectLaborIndirectMaterialsOtherManufacturing OverheadInventoriable Product CostsInventoriable Product CostsDirectMaterialsDirectLaborPrime Costs= Direct Materials + Direct Labor Inventoriable Product CostsConversion Costs= Direct Labor + Manufacturing OverheadDirectLaborIndirectLaborIndirectMaterialsOtherPrepare the financial statementsof a manufacturing company.Objective 5Revenues –Expenses = Operating incomeFinancial Statements forService Companies•There is no inventory and thus no inventoriable costs.•The income statement does not include cost of goods sold.Financial Statements for Merchandising CompaniesPurchases ofInventory plusFreight-InInventorySales RevenueCost ofGoods SoldINCOME STATEMENTOperating ExpensesInventoriableCostsBALANCE SHEETequals Operating Incomewhensalesoccurdeductequals Gross MargindeductPeriodCostsFinancial Statements forManufacturing CompaniesMaterialsInventoryFinishedGoodsInventorySales RevenueCost ofGoods SoldINCOME STATEMENTOperating ExpensesInventoriableCostsBALANCE SHEETequals Operating Incomewhensalesoccurdeductequals Gross MargindeductWork inProcessInventoryPeriodCostsManufacturing Company Example•Kendall Manufacturing Company:•Beginning and ending work-in-process inventories were $20,000 and $18,000.•Direct materials used were $70,000.•Direct labor was $100,000.•Manufacturing overhead incurred was $150,000.Manufacturing Company Example•What is the cost of goods manufactured?Beginning work in process$ 20,000Direct labor$100,000Direct materials70,000Mfg. overhead150,000320,000Ending work in process(18,000)Cost of goods manufactured$322,000Manufacturing Company Example•Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.•How much is the cost of goods sold?Manufacturing Company ExampleBeg. finished goods inventory$ 60,000+ Cost of goods manufactured322,000= Cost of goods available for sale$382,000–Ending finished goods55,000= Cost of goods sold$327,000Manufacturing Company Example•Kendall Manufacturing Company had sales of $627,000 for the period.•How much is the gross margin?Sales$627,000–Cost of goods sold327,000= Gross margin$300,000Manufacturing Company Example•Kendall Manufacturing Company had operating expenses as follows:•$80,000 Sales salaries10,000 Delivery expense30,000Administrative expenses $120,000 Total•What is Kendall’s operating income?Manufacturing Company ExampleGross margin$300,000–Operating expenses120,000= Operating income$180,000Flow of Costs through a Manufacturer’s Accounts•Direct Materials Inventory•Beginning inventory+Purchases and freight-in=Direct materials •Work in Process Inventory•Beginning inventory+Direct materials used+Direct labor+Manufacturing overhead=Total Flow of Costs through a Manufacturer’s Accounts•Finished Goods Inventory•Beginning inventory+Cost of goods manufactured=Cost of goods available for sale–Ending inventory=Cost of goods soldIdentify major trends in thebusiness environment, and usecost-benefit analysis to makebusiness decisions.Objective 6Shift to a Service EconomyIn the U.S., 55% of the workforceis employed in service companies.Service IndustriesOtherCompeting in the Global MarketplaceForeign OperationsOtherForeign operations accountfor over 30% of GE’s revenues.Just-in-Time•JIT philosophy means that the company schedules production just in timeto satisfy needs.•Speeding up of the production process reduces throughput time.•Throughput time is the time between buying raw materials Total Quality Management•The goal of total quality management (TQM) is to please customers by providing them with superior products and services.•TQM emphasizes educating, training, and cross-training employees.Total Quality ManagementInitial benefits and costs$170 million$200 millionAdditionalexpected benefits68 millionTotal$238 million$200 millionTotal Benefits Total Cost Use reasonable standards tomake ethical judgments.Objective 7Professional Ethics for Management Accountants•In many situations the ethical path is not so clear.•The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.Standards of Ethical Conduct for Management AccountantsConfidentialityIntegrityObjectivityCompetenceEnd of Chapter 19