Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 19 Managerial Accounting Prepared by Coby Harmon University of California, Santa Barbara Westmont College Chapter Outline Learning Objectives LO Identify the features of managerial accounting and LO the functions of management Describe the classes of manufacturing costs and the differences between product and period costs LO Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer LO Discuss trends in managerial accounting Copyright ©2018 John Wiley & Son, Inc Managerial Accounting Basics Provides economic and financial information for managers and other internal users Comparing Managerial and Financial Accounting Similarities and differences: Each field deals with economic events of a business Both require that economic events be quantified and communicated to interested parties LO Copyright ©2018 John Wiley & Son, Inc Comparing Managerial and Financial Feature Financial Accounting Primary Users External users: stockholders, of Reports creditors, and regulators Types and Frequency of Reports Purpose of Reports Managerial Accounting Internal users: officers and managers Financial statements Internal reports Quarterly and annually As frequently as needed General-purpose Special-purpose for specific decisions Content of Reports Pertains to business as a whole Highly aggregated (condensed) Limited to double-entry accounting and cost data Generally accepted accounting principles Pertains to subunits of the business Very detailed Extends beyond double-entry accounting to any relevant data Evaluated based on relevance to decisions Verification Process Audited by CPA No independent audits ILLUSTRATION 19.1 Differences between financial and managerial accounting LO Copyright ©2018 John Wiley & Son, Inc Management Functions Planning • Maximize short-term profit and Directing • • Keeping activities on track human resources • Determine whether goals are met • Implement planned objectives • Decide changes needed to get back • Provide incentives to motivate market share • Commit to environmental protection and social programs • Controlling Add value to the business Coordinate diverse activities and employees • Hire and train employees • Produce a smooth-running on track • May use an informal or formal system of evaluations operation LO Copyright ©2018 John Wiley & Son, Inc Organizational Structure Stockholders Organization charts show the interrelationships of activities and the Board of Directors delegation of authority and responsibility within the company Chief Executive Officer and President General Counsel/ Secretary ILLUSTRATION 19.2 Vice President Marketing Vice President Finance/Chief Financial Officer Treasurer Vice President Operations Vice President Human Resources Controller A Typical corporate organization chart LO Copyright ©2018 John Wiley & Son, Inc DO IT! Managerial Accounting Indicate whether the following statements are true or false _ Managerial accountants have a single role within an organization: collecting False and reporting costs to management _ Financial accounting reports are general-purpose and intended for external users True _ Managerial accounting reports are special-purpose and issued as frequently as needed True LO Copyright ©2018 John Wiley & Son, Inc DO IT! Managerial Accounting Indicate whether the following statements are true or false _ Managers’ activities and responsibilities can be classified into three broad False cost accounting, budgeting, and internal control functions: _ Managerial accounting reports must now comply with generally accepted accounting principles (GAAP) False LO Copyright ©2018 John Wiley & Son, Inc Managerial Cost Concepts Managers should ask questions such as the following LO What costs are involved in making a product or providing a service? If we decrease production volume, will costs decrease? What impact will automation have on total costs? How can we best control costs? Copyright ©2018 John Wiley & Son, Inc Managerial Costs Activities and processes that convert raw materials into finished goods Direct Materials Direct Labor Manufacturing Overhead LO Copyright ©2018 John Wiley & Son, Inc 10 DO IT! Cost of Goods Manufactured The following information is available for Keystone Company March Raw materials inventory March 31 $12,000 $10,000 Work in process inventory 2,500 4,000 Materials purchased in March $ 90,000 Direct labor in March 75,000 Manufacturing overhead in March 220,000 Prepare the cost of goods manufactured schedule for the month of March 2020 LO Copyright ©2018 John Wiley & Son, Inc 29 Keystone Company Cost of Goods Manufactured Schedule For the Month Ended March 31, 2020 Work in process, March $ 2,500 Direct materials Raw materials, March $ 12,000 Raw materials purchases 90,000 Total raw materials available for use 102,000 Less: Raw materials, March 31 10,000 Direct materials used $ 92,000 Direct labor 75,000 Manufacturing overhead 220,000 Total manufacturing costs 387,000 Total cost of work in process 389,500 Less: Work in process, March 31 4,000 Cost of goods manufactured LO $385,500 Copyright ©2018 John Wiley & Son, Inc 30 Managerial Accounting Today Service Industries Much of U.S economy has shifted toward an emphasis on providing services rather than goods Over 50% of U.S workers are now employed by service companies Most techniques learned for manufacturing firms are applicable to service companies LO Copyright ©2018 John Wiley & Son, Inc 31 Focus on the Value Chain Refers to all business processes associated with providing a product or service For a manufacturing firm these include the following: Research & Acquisition of raw development materials Production Sales and marketing Delivery Customer relations and subsequent services and product design ILLUSTRATION 19.12 A manufacturer’s value chain LO Copyright ©2018 John Wiley & Son, Inc 32 Focus on the Value Chain Just-In-Time (JIT) Inventory Method System in which goods are manufactured or purchased just in time for sale Total Quality Management (TQM) Reduce defects in finished products, with goal of zero defects LO Copyright ©2018 John Wiley & Son, Inc 33 Focus on the Value Chain Theory of Constraints Constraints (“bottlenecks” ) limit company’s potential profitability A specific approach to identify and manage these constraints in order to achieve company goals Enterprise Resource Planning (ERP) Software programs designed to manage all major business processes LO Copyright ©2018 John Wiley & Son, Inc 34 Focus on the Value Chain Activity-Based Costing (ABC) Allocates overhead based on use of activities Results in more accurate product costing and scrutiny of all activities in value chain LO Copyright ©2018 John Wiley & Son, Inc 35 Balanced Scorecard Evaluates operations in an integrated fashion Uses both financial and non-financial measures Links performance to overall company objectives LO Copyright ©2018 John Wiley & Son, Inc 36 Business Ethics All employees are expected to act ethically Many organizations have codes of business ethics Creating Proper Incentives Systems and controls sometimes create incentives for managers to take unethical actions Controls need to be effective and realistic LO Copyright ©2018 John Wiley & Son, Inc 37 Business Ethics Code of Ethical Standards Sarbanes-Oxley Act (SOX) Clarifies management’s responsibilities Requires certifications by CEO and CFO Selection criteria for Board of Directors and Audit Committee Substantially increased penalties for misconduct LO Copyright ©2018 John Wiley & Son, Inc 38 Corporate Social Responsibility Considers a company’s efforts to employ sustainable business practices Sometimes referred to as triple bottom line because it evaluates a company’s performance with regard to people, planet, and profit Recent reports indicate that over 50% of the 500 largest U.S companies provide sustainability reports LO Copyright ©2018 John Wiley & Son, Inc 39 DO IT! Trends in Managerial Accounting Match the descriptions that follow with the corresponding terms gAll activities associated with providing a product or performing service A method of allocating overhead based on each product’s a activities in making the product use of Terms: a b c d e f g Activity-based costing Balanced scorecard Corporate social responsibility Just-in-time (JIT) inventory Total quality management (TQM) Statement of Ethical Professional Practice Value chain eSystems implemented to reduce defects in finished products with the goal of achieving zero defects LO Copyright ©2018 John Wiley & Son, Inc 40 DO IT! Trends in Managerial Accounting Match the descriptions that follow with the corresponding terms bA performance-measurement approach that uses both financial and nonfinancial measures, tied to company objectives, to evaluate a company’s operations in an integrated fashion Terms: a b c d e f g Activity-based costing Balanced scorecard Corporate social responsibility Just-in-time (JIT) inventory Total quality management (TQM) Statement of Ethical Professional Practice Value chain dInventory system in which goods are manufactured or purchased just as they are needed for use LO Copyright ©2018 John Wiley & Son, Inc 41 DO IT! Trends in Managerial Accounting Match the descriptions that follow with the corresponding terms cA company’s efforts to employ sustainable business practices with regards to its employees, society, and the environment f A code of ethical standards developed by the Institute of Terms: a b c d e f g Activity-based costing Balanced scorecard Corporate social responsibility Just-in-time (JIT) inventory Total quality management (TQM) Statement of Ethical Professional Practice Value chain Management Accountants LO Copyright ©2018 John Wiley & Son, Inc 42 Copyright Copyright © 2018 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2018 John Wiley & Son, Inc 43 ... Limited to double-entry accounting and cost data Generally accepted accounting principles Pertains to subunits of the business Very detailed Extends beyond double-entry accounting to any relevant... Financial Feature Financial Accounting Primary Users External users: stockholders, of Reports creditors, and regulators Types and Frequency of Reports Purpose of Reports Managerial Accounting Internal... financial statements for a manufacturer LO Discuss trends in managerial accounting Copyright ©2018 John Wiley & Son, Inc Managerial Accounting Basics Provides economic and financial information for