Introduction to

Management Accounting

Chapter 19
 The Functions of
Management
Planning Acting Controlling

Feedback
 Objective 1

Distinguish between financial

accounting and management
accounting.
 Primary Users
Financial Management
Investors Internal managers of
Creditors the business
Government
authorities
(Income Tax
Dep), (SEBI, etc.)
 Purpose of Information
Financial Management
• Help investors, • Help managers
creditors, and plan and control
others make business
investment, operations
credit, and
other decisions
Focus and Time Dimension
Financial Management
• Reliability, • Relevance
objectivity, and
focus on the
past
 Type of Report
Financial Management
• Financial • Internal reports
statements not restricted by
restricted by GAAP;
GAAP determined by
cost-benefit
analysis
 Verification
Financial Management
• Annual • No independent
independent audit
audit by
Chartered
Accountants
 Scope of Information
Financial Management
• Summary • Detailed reports
reports primarily on parts of the
on the company company
as a whole
 Behavioral Implications
Financial Management
• Concern about • Concern about
adequacy of how reports will
disclosure affect employees
behavior
Service, Merchandising, and
Manufacturing Companies
Service Merchandising
• Provides • resells products
intangible previously bought
services, rather from suppliers
than tangible
products
Service, Merchandising, and
Manufacturing Companies
Manufacturing Company:
• uses labor, plant, and equipment to convert
raw materials into finished products
• Materials inventory
• Work in process inventory
• Finished goods inventory
 Objective 2

Describe the value chain

and classify costs by
value-chain functions.
 Value Chain

Research & Production or

Design
Development Purchases

Customer
Marketing Distribution
Services
S19-3
 Objective 3

Distinguish direct costs

from indirect costs.
Cost Objects, Direct Costs,
and Indirect Costs
• Cost objects are anything for
which a separate measurement
of costs is desired.
• Cost drivers are any factors that
affect cost.
Cost Objects, Direct Costs,
and Indirect Costs
• What are examples of cost objects?
– individual products
– alternative marketing strategies
– geographic segments of the business
– departments
 Cost Objects, Direct Costs,
and Indirect Costs
• What are direct costs?
• Direct costs are those costs that can
be specifically traced to the cost
object.
• What are indirect costs?
• Indirect costs are costs that cannot be
specifically traced to the cost object.
 Objective 4

Distinguish among full

product costs,
inventoriable product
costs, and period costs.
 Product Costs
• What are product costs?
• They are the costs to produce
(or purchase) tangible products
intended for sale.
 Product Costs

• There are two types of product

costs:

Full
Full Inventoriable
Inventoriable
product
product product
product
costs
costs costs
costs
 External Reporting

Inventoriable
Inventoriable
Period
Period
product
product costs
costs
costs
costs
Inventoriable Product Costs
• For external reporting, merchandisers’
Inventoriable product costs include only
costs that are incurred in the purchase of
goods.
• Inventoriable costs are an asset.
• Period costs flow as expenses directly to
the income statement.
Inventoriable Product Costs
• For external reporting, manufacturers’ Inventoriable
product costs include raw materials plus all other
costs incurred in the manufacturing process.
• Inventoriable product costs are incurred only in the
third element of the value chain.
• Costs incurred in other elements of the value chain
are period costs.
 Inventoriable Product Costs
Direct Direct Indirect Indirect
Other
Materials Labor Labor Materials

Manufacturing Overhead
 Inventoriable Product Costs
Direct Direct
Materials Labor

Prime Costs = Direct Materials + Direct Labor

 Inventoriable Product Costs
Direct Indirect Indirect
Other
Labor Labor Materials

Conversion Costs = Direct Labor

+ Manufacturing Overhead
 Objective 5

Prepare the financial statements

of a manufacturing company.
 Financial Statements for
Service Companies
• There is no inventory and thus
no Inventoriable costs.
• The income statement does not
include cost of goods sold.
Revenues – Expenses = Operating income
 Financial Statements for
Merchandising Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable Sales Revenue
Costs
when deduct
Purchases of sales
occur Cost of
Inventory plus Inventory
Goods Sold
Freight-In
equals Gross Margin
deduct
Period Operating
Costs Expenses
equals Operating Income
 Financial Statements for
Manufacturing Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs Sales Revenue
when deduct
Materials Finished sales
Inventory occur Cost of
Goods
Goods Sold
Inventory
equals Gross Margin
deduct
Work in
Period Operating
Process Costs Expenses
Inventory equals Operating Income
Manufacturing Company Example

• Kendall Manufacturing Company:

• Beginning and ending work-in-process
inventories were $20,000 and $18,000.
• Direct materials used were $70,000.
• Direct labor was $100,000.
• Manufacturing overhead incurred was
$150,000.
Manufacturing Company Example

• What is the cost of goods

manufactured?
Beginning work in process $ 20,000
Direct labor $100,000
Direct materials 70,000
Mfg. overhead 150,000 320,000
Ending work in process (18,000)
Cost of goods manufactured $322,000
Manufacturing Company Example

• Kendall Manufacturing Company’s

beginning finished goods inventory
was $60,000 and its ending
finished goods inventory was
$55,000.
• How much is the cost of goods
sold?
 Manufacturing Company Example

Beg. finished goods inventory $ 60,000

+ Cost of goods manufactured 322,000
= Cost of goods available for sale $382,000
– Ending finished goods 55,000
= Cost of goods sold $327,000
Manufacturing Company Example

• Kendall Manufacturing
Company had sales of
$627,000 for the period.
• How much is the gross margin?
Sales $627,000
– Cost of goods sold 327,000
= Gross margin $300,000
Manufacturing Company Example
• Kendall Manufacturing Company had
operating expenses as follows:
• 80,000 Sales salaries 10,000
Delivery expense
30,000 Administrative expenses
$120,000 Total
• What is Kendall’s operating income?
Manufacturing Company
Example

Gross margin $300,000

– Operating expenses 120,000
= Operating income $180,000
 Flow of Costs through a
Manufacturer’s Accounts
• Direct Materials Inventory Work in Process Inventory
• Beginning inventory
•

Direct materials used

• Beginning inventory
+ Direct labor
+ Manufacturing overhead
+ Total manufacturing costs
= to account for

+ Purchases and freight-in Ending inventory

– Cost of goods manufactured
=

= Direct materials available

for use
– Ending inventory

– Direct materials used

Flow of Costs through a
Manufacturer’s Accounts

• Finished Goods Inventory

• Beginning inventory
+ Cost of goods manufactured
= Cost of goods available for
sale
– Ending inventory
= Cost of goods sold
 Objective 6

Identify major trends in the

business environment, and use
cost-benefit analysis to make
business decisions.
Shift to a Service Economy
Service Industries Other

In the U.S., 55% of the workforce

is employed in service companies.
Competing in the Global
Marketplace
Foreign Operations Other

Foreign operations account

for over 30% of GE’s revenues.
 Just-in-Time
• JIT philosophy means that the
company schedules production
just in time to satisfy needs.
• Speeding up of the production
process reduces throughput
time.
 Just-in-Time
• Throughput time is the time
between buying raw materials
and selling the finished
products.
 Total Quality Management
• The goal of total quality
management (TQM) is to
please customers by providing
them with superior products and
services.
 Total Quality Management
• TQM emphasizes educating, training,
and cross-training employees.
• Quality improvement programs cost
money today.
• The benefits usually do not occur until
later.
 Total Quality Management

Total Benefits Total Cost

Initial benefits
and costs $170 million $200 million
Additional
expected benefits 68 million

Total $238 million $200 million

 Objective 7

Use reasonable standards to

make ethical judgments.
 Professional Ethics for
Management Accountants
• In many situations the ethical path
is not so clear.
• The Institute of Management
Accountants (IMA) has developed
standards to help management
accountants deal with these
situations.
 Standards of Ethical
Conduct for Management
Accountants

Competence Integrity

Confidentiality Objectivity
End of Chapter 19