Chapter 16
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Introduction Review
Cost terms and usage
Service cost flows
Merchandising cost flows
Manufacturing cost flows
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Introduction Review
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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.
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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
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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?
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Institute of Management Accountants (IMA)
Developed standards to help meet ethical challenges
Go here for help when you get stuck
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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.
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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.
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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.
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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.
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2
Cost Terms and Usage
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Increase Revenues
Manage Costs
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Product costs
• Costs to acquire and
make products
• Inventory until sold
• Expensed when sold
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Period costs
• Costs that occur
AFTER the item is
made, OR
• Costs outside of the
production process
• Not part of inventory
• Expensed when
incurred
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Product Costs
Period Costs
Period
Office Supplies
Factory
Delivery
Research
Expensed
Depreciation
Janitorial
to&
when
customers
Development
Expense
sold
Services
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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.
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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.
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Manufacturing costs that cannot efficiently be
traced directly to specific units produced.
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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
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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
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Direct labor
Factory overhead
Period costs
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Service cost flows
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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.
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Income Statement of a Service Company
What is their cost per service if 1,950 services are
provided?
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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.
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4
Merchandising Cost Flow
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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
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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?
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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.
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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.
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5
Manufacturing Cost Flow
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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
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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
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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?
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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
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Demo: Problem 16-35
Raw Materials
Work In Process
Finished Goods
COGS
Wages Payable
Manufacturing
Overhead
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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
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Groups Complete: Problem 16-27A
Raw Materials
Work In Process
Finished Goods
COGS
Wages Payable
Manufacturing
Overhead
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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.
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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.
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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.
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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.
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Copyright
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otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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