The Role of Management 1 page Accounting

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SEU_ACT500_Module01_PPT_Ch01.pptx

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Chapter 1

Introduction to Managerial Accounting

Differences Between Managerial and Financial Accounting (slide 1 of 4)

Types of accounting information

Financial accounting

Managerial accounting

Financial Accounting and Managerial Accounting

Differences Between Managerial and Financial Accounting (slide 2 of 4)

Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements.

Differences Between Managerial and Financial Accounting (slide 3 of 4)

Differences Between Managerial and Financial Accounting (slide 4 of 4)

Unlike the financial statements prepared in financial accounting, managerial accounting reports do not always have to be:

Prepared according to generally accepted accounting principles (GAAP).

Only the company’s management uses the information.

In many cases, GAAP are not relevant to the specific decision-making needs of management.

Prepared at fixed intervals (monthly, quarterly, yearly).

Although some management reports are prepared at fixed intervals, most reports are prepared as management needs the information.

Prepared for the business as a whole.

Most management reports are prepared for products, projects, sales territories, or other segments of the company.

Managerial Accounting in the Organization (slide 1 of 2)

Most large companies are organized in terms of “verticals” and “horizontals.”

Verticals are sometimes referred to as business units, because they are often structured as separate businesses within the parent company.

Verticals develop products that are sold directly co customers.

Horizontals are departments within the company that are not responsible for developing products.

Horizontals provide services to the various verticals and other horizontals.

Managerial Accounting in the Organization (slide 2 of 2)

Controller

Manager of the accounting function of a vertical

Chief financial officer

Rank within the accounting and finance function

The Management Process (slide 1 of 2)

The Management Process (slide 2 of 2)

Planning

Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action.

Planning may be classified as follows:

Strategic planning, which is developing long-term actions to achieve the company’s objectives.

These long-term courses of action are called strategies, which often involve periods of 5 to 10 years.

Operational planning, which develops short-term actions for managing the day-to-day operations of the company.

Directing

The process by which managers run day-to-day operations is called directing.

For example, directing is a production supervisor’s efforts to keep the production line moving without interruption (downtime).

Controlling

Monitoring operating results and comparing actual results with the expected results is controlling.

This feedback allows management to isolate areas for further investigation and possible remedial action.

The philosophy of controlling by comparing actual and expected results is called management by exception.

Improving

Continuous process improvement is the philosophy of continually improving employees, business processes, and products.

The objective of continuous process improvement is to eliminate the source of problems in a process.

In this way, the right products (or services) are delivered in the right quantities at the right time.

Decision Making

Inherent in each of the preceding management processes is decision making.

In managing a company, management must continually decide among alternative actions.

Uses of Managerial Accounting Information

Managerial accounting provides information and reports for managers to use in operating the business.

The cost of manufacturing a product could be used to determine its selling price.

Comparing the costs of manufacturing products over time and can be used to monitor and control costs.

Performance reports could be used to identify any large amounts of scrap or employee downtime.

A report could analyze the potential efficiencies and savings of purchasing a new computerized equipment to speed up the production process.

A report could analyze how many units need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel.

Manufacturing Operations

The operations of a business can be classified as service, retail, or manufacturing.

Most of the managerial accounting concepts that apply to manufacturing businesses also apply to service and merchandising businesses.

The manufacturing operations for a guitar manufacturer, Legend Guitars, is illustrated on the following slide.

Direct and Indirect Costs (slide 1 of 2)

A cost is a sacrifice made to obtain some benefit.

In managerial accounting, costs are often classified according to the decision-making needs of management.

For example, costs are often classified by their relationship to a segment of operations, called a cost object.

A cost object may be a product, a sales territory, a department, or an activity, such as research and development.

Direct and Indirect Costs (slide 2 of 2)

Costs identified with cost objects are either direct costs or indirect costs.

Direct costs are identified with and can be traced to a cost object.

For example, the cost of wood used to make guitars is a direct cost.

Indirect costs cannot be identified with or traced to a cost object.

For example, the salaries of production supervisors are indirect costs of producing a guitar because their salaries cannot be identified with or traced to any individual guitar.

Manufacturing Costs

The cost of a manufactured product includes the cost of materials used in making the product.

In addition, the cost of a manufactured product includes the cost of converting the materials into a finished product.

Thus, the cost of a finished product includes:

Direct materials cost

Direct labor cost

Factory overhead cost

Direct Materials Cost

Manufactured products begin with raw materials that are converted into finished products.

To be classified as a direct materials cost, the cost must be both of the following:

An integral part of the finished product

A significant portion of the total cost of the product

Examples of direct materials costs include the following:

The cost of the wood used in producing a guitar

The cost of electronic components for a television

Silicon wafers for microcomputer chips

Tires for an automobile

Direct Labor Cost

Most manufacturing processes use employees to convert materials into finished products.

The cost of employee wages that is an integral part of the finished product is classified as direct labor cost.

A direct labor cost must meet both of the following criteria:

An integral part of the finished product

A significant portion of the total cost of the product

Examples of direct labor costs include the following:

The wages of employees who cut guitars out of raw lumber and assemble them

Mechanics’ wages for repairing an automobile

Machine operators’ wages for manufacturing tools

Assemblers’ wages for assembling a laptop computer

Factory Overhead Cost (slide 1 of 2)

Costs other than direct materials cost and direct labor that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes called manufacturing overhead or factory burden).

All factory overhead costs are indirect costs of the product.

Some factory overhead costs include the following:

Heating and lighting the factory

Repairing and maintaining factory equipment

Property taxes on factory buildings and land

Insurance on factory buildings

Depreciation of factory plant and equipment

Prime Costs and Conversion Costs (slide 1 of 2)

Direct materials, direct labor, and factory overhead costs may be grouped together for analysis and reporting.

Two such common groupings are as follows:

Prime costs, which consist of direct materials and direct labor costs

Conversion costs, which consist of direct labor and factory overhead costs

Conversion costs are the costs of converting the materials into a finished product.

Direct labor is both a prime cost and a conversion cost.

Product Costs and Period Costs (slide 1 of 2)

Costs

Product costs

Direct materials

Direct labor

Period costs

Incurred while marketing and delivering the product to the customer

Factory overhead

Administrative expenses

Selling expenses

Incurred while managing the company and are not directly related to the manufacturing or selling functions

Product Costs and Period Costs (slide 2 of 2)

As product costs are incurred, they are recorded and reported on the balance sheet as inventory. When the inventory is sold, the cost of the manufactured product sold is reported as cost of goods sold on the income statement.

Period costs are reported as expenses on the income statement in the period in which they are incurred, and, thus, they never appear on the balance sheet.

Product Costs, Period Costs, and the Financial Statements

Financial Statements for a Manufacturing Business

The statement of stockholders’ equity and statement of cash flows for a manufacturing business are similar to those for service and retail businesses.

However, the balance sheet and income statement for a manufacturing business are more complex.

This is because a manufacturer makes the products that it sells and, thus, must record and report product costs.

Balance Sheet for a Manufacturing Business

A manufacturing business reports three types of inventory on its balance sheet as follows:

Materials inventory (sometimes called raw materials inventory) consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process.

Work in process inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process).

Finished goods inventory consists of completed (or finished) products that have not been sold.

Income Statement for a Manufacturing Business (slide 1 of 4)

The income statements for retail and manufacturing businesses differ primarily in the reporting of the cost of goods (merchandise) available for sale and sold during the period.

Income Statement for a Manufacturing Business (slide 2 of 4)

A retail business determines its cost of good sold by first adding its net purchases for the period to its beginning inventory.

This determines inventory available for sale during the period. The ending inventory is then subtracted to determine the cost of good sold.

A manufacturing business makes the products it sells, using direct materials, direct labor, and factory overhead.

Manufacturing business must determine its cost of goods manufactured during the period.

Income Statement for a Manufacturing Business (slide 3 of 4)

The cost of goods manufactured is determined by preparing a statement of cost of goods manufactured.

This statement summarizes the cost of goods manufactured during the period

Income Statement for a Manufacturing Business (slide 4 of 4)

The statement of cost of goods manufactured is prepared using three steps

Determine the cost of materials used

Determine the total manufacturing costs incurred

Determine the cost of goods manufactured

Flow of Manufacturing Costs

Utilization Rates (slides 1 of 3)

A utilization rate measures the use of a fixed asset in serving customers relative to the asset’s capacity.

A higher utilization rate is considered favorable, while a lower utilization rate is considered unfavorable.

Different service industries will have different names and computations used for measuring utilization rates.

Utilization Rates (slides 2 of 3)

In the hotel industry, for example, utilization is measured by the occupancy rate, which is computed as:

Where,

Guest nights = Number of guests × Number of nights per visit (per time period)

Available room nights = Number of available rooms × Number of nights per time period

The number of guests is determined under single room occupancy, so that the number of guests is equal to the number of occupied rooms.

Utilization Rates (slides 3 of 3)

Assume EasyRest Hotel is a single hotel with 150 rooms. During the month of June, the hotel had 3,600 guests, each staying for a single night. The occupancy rate would be determined as follows:

The hotel was occupied to 80% of capacity, which would be considered favorable.

Guest nights

Occupancy rate =

Available room nights

Guest nights

Occupancy rate =

Available room nights

3,600 guest nights

= = 80%

150 rooms × 30days