Management Accounting

A Business Partner
Chapter 16

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright 2012 The McGraw-Hill Companies, Inc.

Management Accounting: Basic Framework

Management accounting and assigning decision-making authority.
Accounting systems help to identify who has authority over assets.
Accounting information supports planning and decision-making. Accounting reports provide a means of monitoring, evaluating, and rewarding performance.
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Management Accounting System Framework

Top Management

Budget Plans: Future

Actual Results: Current

Performance Evaluation: Past

Assign Decision Making

Support Decision Making

Evaluate Decision Making

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Demand for Accounting Information

Financial Accounting Management Accounting Provide information about the Provide information for Purpose financial position and planning, evaluating, and performance of the company. rewarding performance. Balance sheet, income Types of statement, and statement of Various, non-standard reports. Reports cash flows. Standards GAAP None Reporting Usually, the company taken A component of the Entity as a whole. company's value chain. Time Usually a year, quarter, or a Any period. Periods month. Investors, creditors, and other Management, customers, and Users external parties. others in the value chain.
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Accounting for Manufacturing Operations

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

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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, the materials are considered indirect and are part of manufacturing overhead.
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Direct Labor
Includes the payroll cost of direct workers.

Direct labor hours

Wage rate

Those employees who work directly on the goods being manufactured.

The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead.
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Manufacturing Overhead
All manufacturing costs other than direct materials and direct labor.

Includes:
Indirect materials. Indirect labor. Machinery and equipment costs. Cost of regulatory compliance.

Does not include selling or general and administrative expenses.

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Flow of Physical Goods in Production

Direct Materials Purchased Direct Materials Used

Finished Goods

Direct Labor

Manufacturing Overhead

Goods Sold
MegaLoMart

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Flow of Physical Goods in Production

Manufacturing costs are often combined as follows:
Direct Materials Direct Labor Manufacturing Overhead

Prime Cost

Conversion Cost
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Product Costs versus Period Costs

Product Costs (manufacturing costs)

Balance Sheet
Current assets and finished goods inventory Income Statement Revenue COGS Gross margin Period expenses Operating profit
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as incurred
Period Costs (operating expenses and income taxes)

When goods are sold

as incurred

Ethics, Fraud, and Corporate Governance

Product costs are capitalized as part of inventory and only charged to expense when the inventory is sold.

Period costs are charged to expense as incurred.

Income will be artificially inflated if period costs are capitalized.

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Inventories of a Manufacturing Business

Raw materials - inventory on hand and available for use.

Finished goodscompleted goods awaiting sale.

Work in process partially completed goods.

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Flow of Costs Associated With Production

Direct materials purchased Materials Inventory
$$$ $$$

Direct materials used

Work in Process Inventory

$$$ $$$

Direct labor & Manufacturing Overhead

Cost of goods manufactured

Finished Goods Inventory

$$$ $$$

Cost of Goods Sold

$$$
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Accounting for Manufacturing Costs

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

How much direct material was placed into production during the year?
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Accounting for Manufacturing Costs

Beginning materials inventory Materials purchased Materials available to be placed into production Materials placed into production Ending materials inventory $ 52,000 586,000 638,000 560,000 $ 78,000
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+ = =

Accounting for Manufacturing Costs

Beginning materials inventory Materials purchased Materials available to be placed into production Materials placed into production Ending materials inventory $ 52,000 586,000 638,000 560,000 $ 78,000
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+ = =

Accounting for Manufacturing Costs

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

What is the balance in work in process at the end of the year?

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Accounting for Manufacturing Costs

Beginning work in process inventory $ 132,000 + Manufacturing costs added 1,590,000 = Total costs in process during the year $ 560,000 1,722,000 Direct Materials Cost of goods Direct Labor 306,000 completed during the Manufacturing year (1,480,000) Overhead 724,000 = Ending work in Total costs added process inventory ?

during the year

$ 1,590,000

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Accounting for Manufacturing Costs

+ = Beginning work in process inventory Manufacturing costs added Total costs in process during the year Cost of goods completed during the year Ending work in process inventory $ 132,000 1,590,000 1,722,000

!
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(1,480,000) $ 242,000

Direct Costs and Indirect Costs

Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost objective. Examples: direct material and direct labor Indirect costs Costs cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead

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Determining the Cost of Finished Goods Manufactured

A schedule of the cost of finished goods manufactured is prepared to provide managers with an overview of manufacturing activities during a period.
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CONQUEST, INC. Schedule of the Cost of Finished Goods Manufactured For the Year Ended December 31, 2011 Work in process inventory, beg. Manufacturing cost assigned to production: Direct materials $ 150,000 Direct labor 300,000 Manufacturing overhead 360,000 Total manufacturing costs Total cost of all work in process during the year Less: Work in process inventory, end of year Cost of finished goods manufactured $ 30,000

810,000 840,000 (40,000) 800,000

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Beginning finished goods inventory Add: Cost of finished goods manufactured during the year Cost of finished goods available for sale Less: Ending finished goods CONQUEST, INC. Schedule of the Cost of Finished Goods Manufactured inventory For the Year Ended December 31, 2009 Cost of goods sold
Work in process inventory, beg. Manufacturing cost assigned to production: Direct Materials $ Direct Labor Manufacturing overhead Total manufacturing costs Total cost of all work in process during the year Less: Work in process inventory, end of year Cost of finished goods manufactured $ 30,000

$ 150,000

800,000 950,000 168,000 $ 782,000

150,000 300,000 360,000 810,000 840,000 (40,000) 800,000

The cost of goods completed during the period is used to compute COGS for the period.
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Financial Statements of a Manufacturing Company

Income Statement

Balance Sheet

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CONQUEST, INC. Income Statement For the Year Ended December 31, 2011 Sales Cost of goods sold Gross profit on sales Operating expenses Income from operations Less: Interest expense Income before income taxes Income tax expense Net income $ 1,300,000 782,000 $ 518,000 400,000 $ 118,000 18,000 $ $ 100,000 30,000 70,000

The income statement is prepared using established financial accounting procedures.

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Financial Statements of a Manufacturing Company

CONQUEST, INC. Partial Balance Sheet December 31, 2011 Current Assets: Cash and Cash Equivalents Accounts Receivable, net Inventories Materials Work in Process Finished Goods Total Inventories Total current Assets

$ 60,000 190,000 $ 20,000 40,000 168,000 228,000 $ 478,000

Manufacturers have three inventory accounts.

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End of Chapter 16

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