Chapter 16 1 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Introduction Review Cost terms and usage Service cost flows Merchandising cost flows Manufacturing cost flows Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1 Introduction Review 4 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Managerial and financial accounting differ in many aspects. 1. For each of the following, indicate whether the statement relates to managerial accounting (M) or financial accounting (F): _____a. Helps investors make investment decisions. F _____ M b. Provides detailed reports on parts of the company. _____ M c. Helps in planning and controlling operations. _____ F d. Reports must follow generally accepted accounting principles (GAAP). _____ F e. Reports audited annually by independent certified public accountants. 5 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Global competition Moving operations to be closer to new markets Services and outsourcing Speed Advanced information systems E-commerce Lean management High expectations Total Quality Management Perfection quest and customer centric innovation Efficiency: Lean management and lean accounting 10 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Fairness Is the action fair to the parties involved? Objectivity Does the action optimize the total utility outcome across all parties? Honesty Are the rights of involved parties respected? Responsibility Does your action show that you care about the various stakeholders? 13 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Institute of Management Accountants (IMA) Developed standards to help meet ethical challenges Go here for help when you get stuck 14 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The standards of ethical practice include the following: I. Competence 1. Maintain an appropriate level of professional expertise. 2. Perform professional duties in accordance with laws, regulations, and standards. 3. Provide information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional limitations. 15 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The standards of ethical practice include the following: II. Confidentiality 1. Keep information confidential except when authorized or legally required. 2. Inform relevant parties regarding appropriate use of confidential information. 3. Refrain from using confidential information to your advantage. 16 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The standards of ethical practice include the following: III. Integrity 1. Mitigate actual conflicts of interest. 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3. Abstain from engaging in activity that might discredit the profession. 17 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The standards of ethical practice include the following: IV. Credibility 1. Communicate information fairly and objectively. 2. Disclose all relevant information. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls. 18 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Cost Terms and Usage 19 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Increase Revenues Manage Costs Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Product costs • Costs to acquire and make products • Inventory until sold • Expensed when sold 21 Period costs • Costs that occur AFTER the item is made, OR • Costs outside of the production process • Not part of inventory • Expensed when incurred Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Product Costs Period Costs Period Office Supplies Factory Delivery Research Expensed Depreciation Janitorial to& when customers Development Expense sold Services Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Materials that become part of the product and are worthwhile to trace to it Which materials might not be worthwhile to trace? Example: The battery pack in this Tesla. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Labor costs which can be efficiently traced to individual products. Which Labor costs might not be efficiently traceable? Example: Wages paid to this factory worker to build this iphone. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing costs that cannot efficiently be traced directly to specific units produced. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Direct costs Can be directly traced to a cost object Direct materials Direct labor Indirect costs Needed to finish products Cannot be directly traced to a cost object Manufacturing overhead Tracking costs to cost objects A cost object is anything management wants to track the costs of, inventory, customer, segment Direct costs are traced Indirect costs are pooled, and later assigned Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Are the following costs: Direct materials, Direct labor, Factory overhead, or Period costs? Cost Cost Type Shaft and handle of weed eater Direct materials Motor of weed eater Direct materials Factory workers assembling weed eaters Nylon thread used by the weed eater Factory overhead Glue to hold housing together Factory overhead Plant janitorial wages Factory overhead Depreciation on factory equipment Factory overhead Rent on plant Factory overhead Sales commission expense Period costs Administrative salaries Period costs Plant utilities Shipping costs to customers 27 Direct labor Factory overhead Period costs Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Service cost flows 28 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Service Company Service companies sell their time, skills, and knowledge Simplest accounting No inventory or products for sale All costs are period costs Incurred and expensed in same accounting period Services may use cost accounting to accumulate costs to particular jobs using cost flow models similar to manufacturing companies, but GAAP doesn’t generally allow that for reporting. 29 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Income Statement of a Service Company What is their cost per service if 1,950 services are provided? 30 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost per service Helps to set the price of each service provided Consider all operating expenses (period costs) Unit cost per service If a service company does choose to assign costs to service jobs, they will be able to make better decisions as to the relative profitability of different cost objects. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 4 Merchandising Cost Flow 32 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Merchandising Company Resell products purchased from suppliers Keep an inventory of products Cost of goods sold is a major expense Product costs flow through the inventory GAAP requires companies to record inventoriable product costs as an asset until sold 33 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Includes cost to purchase goods plus freight-in Beginning Inventory + Net Purchases {all inventory costs) – Ending Inventory = Cost of Goods Sold Do you remember the account math equation? 34 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Beginning Balance Goods Available Withdrawals Any Inventory Account $100,000 $400,000 Additions $200,000 $300,000 This Output becomes what for a merchandiser? Ending Balance Let’s convert this “T” accounting into schedule form. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 36 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Unit cost per product—helps managers set appropriate selling prices Formula: Note how this differs from the service example: The merchandiser tracks inventory costs separately from other non-product costs, so they can better report and manage this significant cost. 37 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 5 Manufacturing Cost Flow 38 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use labor, plant, supplies, and facilities to convert raw materials into finished products Three kinds of inventory Finished goods inventory Work in process inventory Materials inventory 40 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Type Service company Inventoriable product costs None Period costs (Expenses) Salaries, depreciation, utilities, insurance, property taxes, advertising expenses Merchandising Purchases plus freight in company Salaries, depreciation, utilities, insurance, property taxes on storage building, advertising, delivery expenses Manufacturing Direct materials, direct company labor, and manufacturing overhead (including indirect materials; indirect labor; depreciation on the manufacturing plant and equipment; plant insurance, utilities, and property taxes Delivery expense; depreciation expense, utilities, insurance, and property taxes on executive headquarters (separate from the manufacturing plant); advertising; CEO’s salary 41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The three categories of product costs: Direct Materials (DM) Direct Labor (DL) Manufacturing Overhead (MOH) Note Prime vs. Conversion Product vs. Period Costs What happens when these are mis-classified? Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Costs Material Purchases Direct Labor Manufacturing Overhead Selling and Administrative Balance Sheet Inventories Raw Materials Income Statement Expenses Work in Process Finished Goods Period Costs Cost of Goods Sold Selling and Administrative Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Demo: Problem 16-35 Raw Materials Work In Process Finished Goods COGS Wages Payable Manufacturing Overhead Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1 Raw materials BB +Raw materials purchased =Raw materials available for use - Raw materials EB =Raw materials used in production +Direct Labor +Manufacturing overhead 2 =Total manufacturing Costs +Work in process BB - Work in process EB =Cost of Goods Manufactured + Finished Goods BB = Goods available for sale 3 - Finished Goods EB = Cost of Goods Sold Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 48 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Groups Complete: Problem 16-27A Raw Materials Work In Process Finished Goods COGS Wages Payable Manufacturing Overhead Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Managerial accounting focuses on the information needs of internal users. Generally, managerial accounting reports provide more details so that managers have the information they need to plan and control costs. The benefits of the managerial accounting system must outweigh its cost. 55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Developed economies have shifted from a manufacturing focus to a service focus. Global competition, e-commerce, and the Internet have expedited both the need and the speed with which information must be available to decision makers. JIT production and TQM mean producing just in time to satisfy customer demand, while constantly improving the quality of goods and services offered to customers. Issues where professional judgments must be made arise often. Determining the ethical action is usually easy. Acting ethically is where integrity and credibility prevail. The excerpt from the IMA’s Statement of Ethical Professional Practice guides managerial accountants in ethical matters. 56 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Service companies sell their time, skills, or knowledge. All of their operating expenses are normally considered period costs and are considered part of the cost of providing each service unit. In larger, more advanced service companies, the operating expenses (period costs) may be split between service costs (part of the cost per unit of service) and non-service costs (expenses unrelated to the service). Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory of products, and managers are accountable for the purchase, storage, and sale of the products. Inventory is an asset until it is sold. Cost of goods sold is the total cost of merchandise inventory sold during the period, and includes the freight to get the goods into the warehouse. COGS divided by total units sold equals the cost per unit for the merchandiser. 57 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The manufacturer creates a product from raw materials by adding direct labor and manufacturing overhead. Because at any point in time products are at various stages of completion, manufacturers have three inventory accounts: Raw materials, Work in process, and Finished goods. The schedule of cost of goods manufactured captures these production costs to determine the cost of goods manufactured for a period. Product cost per unit is calculated by dividing cost of goods manufactured by the total number of units produced. 58 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 59 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 60 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
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