Managerial Accounting
A field of accounting that provides
economic and financial information
for managers and other internal users
Similarities
Both deal with economic events of a business
Both require that economic events be quantified and communicated to interested parties
Internal Users
Officers and managers used for managerial accounting
External Users
Shareholders, creditors and regulators used for financial accounting
Frequency of reports
Management: whenever needed
Financial: Quarterly and annually
Purpose of Report
General purpose: Financial
Special purpose: Management
Content of Reports
Financial: pertains to business as a whole
highly aggregated (condensed)
limited to double entry accounting and cost data
GAAP
Managerial: pertains to the subunits of a business
very detailed
extends beyond double entry accounting to any relevant data
sta
Verification process
Financial: Audited by CPA
Management: No indepentdent audits
Management Functions
Planning
Directing
Controlling
Planning
Future Oriented - Looking ahead
Establish objectives such as
Maximize short-term profit and market share
Commit to environmental protection
Contributing to social programs
Key Objective: Add value to the business
Value measured by trading price of stock a
Directing
Coordinate diverse activities and human resources
Implement planned objectives
Provide incentives to motivate employees
Hire and train employees including executives, managers, and supervisors
Controlling
Keep activities on track
Determine whether goals are met
Decide on the changes needed to get back on track
Typically use a formal system of evaluation
Organizational Chart
Treasurer
a person appointed to administer or manage the financial assets and liabilities of a society, company, local authority, or other body.
Controller
supervises the accounting department and assists management in interpreting and utilizing managerial accounting information
Business Ethics
Business scandals cause massive investment losses and employee layoffs
Corporate fraud has increased 13% in last five years
Employee fraud makes up 60% of all fraud, expense account abuse, theft of assets, etc.
Intentional misstatement of financial report
Creating Proper Incentives
Monitoring and evaluating employees may produce incentives to act unethically; for example, overly ambitious budgets may produce unethical management actions to meet targets
Employees may feel that they must succeed no matter what
Ineffective and unrealis
Statement of Ethical Professional Practice
Competence
Confidentiality
Integrity
Objectivity
Value Chain
Refers to all activities associated with providing a product or service: From R&D and Product/Service design to after-sale service and Environmentally Responsible Disposal [ERD*]
Enterprise resource planning (ERP)
Software systems that manage the value chain
In large companies, an ERP system might replace as many as 200 individual software packages
Computer-integrated manufacturing (CIM)
Makes products untouched by human hands
Just-In-Time (JIT) Inventory Methods
Inventory system in which goods are manufactured or purchased just in time for use
Quality/TQM
Increased emphasis on product quality because goods are produced only as needed
Total Quality Management (TQM) - a philosophy of zero defects; all employees participate in managing quality
Activity-Based Costing (ABC)
Overhead is allocated based on each product's use of economic resources as it undergoes various activities (number of orders or number of machine set ups)
Results in more accurate product costing and scrutiny of all activities in the value chain
Theory of Constraints
Used to identify and manage constraints or "bottlenecks"
Helps achieve overall goals of the company, particularly profits
Lean manufacturing
Today most products require little direct labour to complete, due in large part to advancements in automation. Customers now dictate requirements to suppliers and often look for smaller quantities of individualized products. Lean manufacturing was develop
five basic principles of lean thinking process
1. Define value
2. Identify the value stream
3. Make the value stream flow
4. Implement a pull system
5. Strive for perfection.
Balanced Scorecard
A performance-measurement approach to evaluate operations in an integrated fashion
Uses both financial and non-financial measures
Links performance measures to overall company objectives
Manufacturing consists of
- direct materials
- direct labor
- manufactoring overhead
merchandising
sells goods in the form in which they are purchased.
Direct Materials
Raw materials are basic materials and parts used in manufacturing.
Raw materials that can be physically and directly associated with the finished product are called direct materials.
Examples include:
Flour in the baking of bread
Syrup in the bottling of
Direct Labour
Work of factory employees that can be physically and directly associated with converting raw materials into finished goods is direct labour
Examples include
Bottlers at Coca-Cola
Bakers at Sara Lee
Typesetters at a newspaper
Manufacturing Overhead
Costs that are indirectly associated with manufacturing of finished goods
All manufacturing costs that cannot be classified as direct material and direct labour
Examples include:
Indirect materials
Indirect labour
Amortization on factory buildings, Insura
Manufacturing Overhead - Indirect Materials
Raw materials that cannot be easily associated with the finished product are called indirect materials
Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost
Consider
Prime Costs
are the sum of all direct materials costs and direct labour costs. These are all direct manufacturing costs.
Conversion costs
are the sum of all direct labour costs and manufacturing overhead costs, which together are the costs of converting raw materials into a final product.
Product Costs
Consist of the direct material cost, the direct labour cost, and the manufacturing overhead cost
Recorded as inventory when incurred
Do not become expenses until the finished goods inventory is sold
Period Costs
Matched with revenue of a specific time period and charged to expense as incurred
Non-manufacturing costs
Deducted from revenues in period incurred to determine net income
Include all
Selling expenses
General and Administrative expenses
Cost Behaviour Analysis
The study of how specific costs respond to changes in the level of business activity
Some costs change; others remain the same
Helps management plan operations and make decisions, Applies to all types of businesses and entities
Starting point is measuring
activity (or volume) index
Identifies the activity that causes changes in the behaviour of costs
Allows costs to be classified according to their response to changes in activity as:
Variable Cost
Fixed Cost
Mixed Cost
Variable Costs
Costs that vary in total directly and proportionately with changes in the activity level
Variable costs also remain constant per unit at every level of activity
Fixed Costs
Costs that remain the same in total within the relevant range regardless of changes in the activity level.
Per unit cost varies inversely with activity:
As volume increases, unit cost decline, and vice versa
Relevant Range
Throughout the range of possible levels of activity, a straight-line relationship usually does not exist for either variable costs or fixed costs
The relationship between variable costs and changes in activity level is often curvilinear
For fixed costs, t
Mixed Costs
Costs that have both
a variable cost element
and a fixed cost element
Sometimes called
semi variable cost
Change in total
but not proportionately
with changes in
activity level
Mixed Costs - High-Low Method
Uses the total costs incurred at both the high and the low levels of activity to classify mixed costs
The difference in costs between the high and low levels represents variable costs, since only variable costs change as activity levels change
Step 1: Det
Income Statement
for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section
COGS
Manufactorer: Beginning of finished goods + COG Manufactured - ending finished goods inventory
Merchandiser: Beginning Merchandise Inventory + COG Purchased - Ending Merchandise Inventory
Work in Process
partially completed units of a product
Total Manufacturing Costs
sum of direct material costs, direct labour costs, and manufacturing overhead, all incurred during the current year
Cost of Goods Manufactured
Beginning work in process inventory + total manufacturing Cost = Total cost of work in progress
Total cost of work in progress - ending work in progress inventory = COGS
Raw materials inventory
- shows the cost of raw materials on hand
Work in process inventory
shows the cost applicable to units on which production has started but is only partially complete
Finished goods inventory
shows the cost of completed goods on hand
Merchandise company inventory
Merchandise inventory
manufacturing balance sheet order
1. Finished goods
2. Work in Progress
3. Raw Materials
Traditional Costing System
allocates overhead using a single predetermined rate.
was satisfactory when:
Direct labour was a major portion of total manufacturing costs.
There was a wide acceptance of a high correlation between direct labour and overhead costs.
Job order costing
direct labour cost is assumed to be the relevant activity base.
Process costing
machine hours is the relevant activity base.
Traditional to a New approach
Tremendous change in manufacturing and service industries.
Decrease in amount of direct labour usage.
Significant increase in total overhead costs.
Often inappropriate to use plant-wide pre-determined overhead rates based on direct labour or machine hours
Reason of ABC
Products consume Activities
and
Activities consume Resources
Activity-Based Costing (ABC)
An overhead cost allocation system that allocates overhead to multiple activity cost pools and
Assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.
Activity
Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
Activity Cost Pool
A distinct type of activity. For example, ordering materials or setting up machines.
Cost Drivers
Any factors or activities that have a direct cause-effect relationship with the resources consumed.
2 stages of ABC
Stage 1: Overhead costs are allocated to activity cost pools.
Stage 2: The overhead costs allocated to the cost pools is assigned to products using cost drivers.
The more complex a product's manufacturing operation, the more activities and cost drivers li
Traditional vs. ABC
ABC does not replace an existing job order/process cost system.
ABC does segregate overhead into various cost pools to provide more accurate cost information.
ABC, thus, supplements - it does not replace - the traditional cost system.
Classification of Activity Levels
1. Unit-level activities:
Performed for each unit of production
2. Batch-level activities:
Performed for each batch of product
3. Product-level activities:
Performed in support of an entire product line, but not always performed every time a new unit or b
Value-Added Activity
An activity that increases the perceived value
of a product or service
ex. assembly, machining, packaging, legal research service
Non-Value-Added Activities
An activity that adds cost to, or increases the time spent on, a product/service without increasing its market value such as:
ex. repairing machines, inspections, reception, inventory control
Activity Based Management (ABM)
An extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making
Limitations of ABC
- Can be expensive to use
- Some arbitrary allocations continue
When to use ABC
- Products differ greatly in volume/manufacturing complexity
- Products lines are
-Numerous
-Diverse
-Require different degrees of support services
- Overhead costs are a significant portion of total costs
- Significant change in manufacturing process or
ABC in Service Industries
Overall objective:
Identify key cost-generation activities and keep track of quantity of activities performed for each service provided
General approach is to identify activities, cost pools, and cost drivers
Labeling of activities as value-added or non-v
Limitations of ABC in service industry
A larger proportion of overhead costs are company-wide costs that cannot be directly traced to specific services.