PP For Chapter 7 - Introduction To Managerial Accounting - Final

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Accounting: A Malaysian Perspective, 4
th
ed
(Adapted from Accounting 22
nd
ed)
Warren, Reeve and Duchac
Introduction to
Managerial
Accounting
7
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1. Describe managerial accounting and
the role of managerial accounting in a
business.
After studying this chapter, you should
be able to:
2. Describe and illustrate the following
costs: direct and indirect, direct
materials, direct labor, factory
overhead, and product and period
costs.
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3. Describe and illustrate the statement
of cost of goods manufactured,
income statement, and balance sheet
for a manufacturing business.
After studying this chapter, you should
be able to:
4. Describe the uses of managerial
accounting information.
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Describe managerial accounting
and the role of managerial
accounting in a business.
Objective 1
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Financial accounting information is reported in
statements that are useful for persons or
institutions who are outside or external to the
organization. Management also uses these
financial statements in directing current
operations and planning future operations.
Managerial accounting information is provided
to meet the specific needs of a companys
management, such as historical data and
subjective estimates about future decisions.
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Financial Accounting
Managerial Accounting
Shareholders
Creditors
Government Agencies
General Public
Management
Management
Users of Accounting Information
Example of users
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Financial Accounting and Managerial Accounting
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Planning
Planning is used by management to develop
the organizations objectives (goals) and to
translate these objectives into courses of
action.
Strategic planning is developing long-range
courses of action to achieve goals. Long-
range courses of action, called strategies,
can often involve periods ranging from five
to ten years.
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Directing is the process by which managers,
given their assigned level of responsibilities,
run day-to-day operations.
Directing
Controlling, sometimes called management
by exception, consists of monitoring the
operating results of implemented plans and
comparing the actual results with the
expected results.
Controlling
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Comparing actual results with expected results
(feedback) allows management to isolate significant
departures from plans for further investigation and
possible remedial action.
Feedback
Continuous process improvement is the philosophy
of continually improving employees, business
processes, and products.
Improving
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Describe and illustrate the
following costs: direct and
indirect, direct materials, direct
labor, factory overhead, and
product and period costs.
Objective 2
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Direct and Indirect Costs
Costs are often classified in terms of how they relate
to an object or segment of operations, called a cost
object. It may be a product, a sales territory, a
department, or some activity. Costs are identified
with cost objects as either direct costs or indirect
costs.
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Direct Materials Cost
The cost of any material that is an integral
part of the final product is classified as a
direct materials cost.
Direct Labor Cost
The wages of each employee who is directly
involved in converting materials into the
final product are classified as direct labor
cost.
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Factory Overhead Cost
Costs, other than direct materials cost and direct
labor cost, that are incurred in the manufacturing
process are combined and classified as factory
overhead cost (sometimes also called
manufacturing overhead or factory burden).
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Examples of Factory Overhead Cost
Heating and lighting the factory
Repairing and maintaining factory equipment
Property taxes
Insurance
Depreciation of factory plant and equipment
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Prime Costs and Conversion Costs
Factory
Overhead
Direct
Materials
Direct
Labor
Prime
Costs
Conversion
Costs
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Product costs consist of the three elements of
manufacturing cost: direct materials, direct
labor, and factory overhead.
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Factory
Overhead
Direct
Materials
Direct
Labor
Product
Costs
The cost of materials
that are an integral
part of the product.
The cost of labor directly
involved in converting
material into the
product.
Manufacturing costs
other than direct
materials and direct
labor.
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Period costs are generally classified into two
categories:
Selling expenses are incurred in marketing
the product and delivering the sold product
to the customer.
Administrative expenses are incurred in the
administration of the business.
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(Continued)
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Describe and illustrate the statement
of cost of goods manufactured, income
statement, and balance sheet for a
manufacturing business.
Objective 3
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A Manufacturing Firms Inventories
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
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Work in process inventory:
Consists of the direct materials costs, the
direct labor costs, and the factory overhead
costs that have entered the manufacturing
process but are associated with products that
have not been completed.
Finished goods inventory:
Consists of completed (or finished)
products that have not been sold.
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Balance Sheet Presentation of Inventory in
Manufacturing and Merchandising Companies
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Determining the Cost of Goods Manufactured
Materials inventory, January 1, 2008 $ 65,000
Add: Materials purchased during December 100,000
Cost of materials available for use $165,000
Less: Materials inventory, Dec. 31, 2008 35,000
Cost of materials placed in production $130,000
to total
manufacturing cost
STEP 1:
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Cost of materials placed in production $130,000
from
Step 1
STEP 2:
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Cost of materials used during the year $130,000
Direct labor 110,000
to cost of goods
manufactured
section

Factory overhead 44,000
Total manufacturing costs added $284,000
STEP 2:
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Work in process inventory, Jan. 1, 2008 $ 30,000
Add: total manufacturing costs added 284,000
from Step 2
STEP 3:
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Work in process inventory, Jan. 1, 2008 $ 30,000
Add: total manufacturing costs added 284,000
Total manufacturing costs $314,000
Less: work in process inven., Dec. 31, 2008 24,000
Cost of goods manufactured $290,000
STEP 3:
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Manufacturing Company
Income Statement with
Statement of Cost of
Goods Manufactured (contd)
to income
statement
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Manufacturing Company
Income Statement with
Statement of Cost of
Goods Manufactured
from
statement of
cost of goods
manufactured
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Describe the uses of
managerial accounting
information.
Objective 4
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Managerial accounting provides information
and reports that help managers run the day-
to-day operations of their business.
Managerial reports provide data that help
managers evaluate the performance of a
companys operations.
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Companies use managerial accounting
information to support long-term planning
decisions, such as investment decisions.
Managerial accounting data can be used to
help managers understand how many units
need to be sold in a month to cover
recurring monthly costs.
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