Introduction to Management Accounting

Management Accountability
Responsibility to stakeholders of the company
Owners Creditors Suppliers Employees Customers

Management Accounting and Financial Accounting

Primary Users
Financial External Investors, Creditors, Government authorities Management Internal Managers of the business

Management Accounting and Financial Accounting

Purpose of Information
Financial Help investors and creditors make investment and credit decisions Management Help managers plan and control business operations

Management Accounting and Financial Accounting

Focus and Time Dimension of the Information
Financial Management Relevance and reliability Relevance Focus on the past Focus on future

Management Accounting and Financial Accounting

Type of Report
Financial Financial statements restricted by GAAP Audited by independent CPAs Management Internal reports restricted by cost-benefit analysis Not audited by independent CPAs

Management Accounting and Financial Accounting

Scope of Information
Financial Accounting Summary reports primarily on the company as a whole On quarterly or annual basis Management Accounting Detailed reports on parts of the company Often on daily or weekly basis

Todays Business Trends

Shift toward a service economy Global competition Time-based competition
Advanced information systems E-Commerce Just-in-Time management

Total Quality Management

Service Company
Simplest accounting All costs are period costs - costs that are incurred and expensed in the same accounting period Operating income = Service revenue operating expenses

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E18-16
Fido Grooming Income Statement For the Month Ended July 31, 2007 Service revenue Operating expenses: Wages Grooming supplies Building rent Utilities Depreciation, equipment Operating income $15,000

$4,800 1,200 1,000 250 100

7,350 $7,650

Cost to groom one dog = $7,350/600 dogs = $12.25

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Merchandising Company
Purchase inventory from suppliers and resell to customers Has both period costs and inventoriable product costs Product costs become a part of the cost of asset, inventory
Invoice price, freight in Reported as an asset until sold
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Merchandising Company Income Statement

Sales - Cost of goods sold Gross profit - Operating expenses Operating income

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Merchandising Company Income Statement

Cost of goods sold: Beginning inventory + Purchases + Freight-in Cost of goods available for sale - Ending inventory Cost of goods sold
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In a periodic inventory system, cost of goods sold must be computed

E18-18
Kingston Brush Company Income Statement For Year Ended December 31, 2009 Service revenue Cost of goods sold: Inventory, January 1, 2009 Purchases Goods available for sale Inventory, December 31, 2009 Cost of goods sold Gross profit Selling and administrative expenses Operating income $125,000 $7,000 63,000 $70,000 (5,000) 65,000 $60,000 45,000 $15,000

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E18-18
Unit cost for one brush: Cost of goods sold Selling and administrative expenses Total cost $110,000 / 5,800 brushes = $18.97 $65,000 45,000 $110,000

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Manufacturing Companies
Use labor, plant, and equipment to convert raw materials into finished products
Materials inventory Work in process inventory Finished goods inventory

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Product Costs
Direct materials - those that become a physical part of a finished product and whose costs are separately and conveniently traceable to the finished product Direct labor - those that become a physical part of a finished product and who costs are separately and conveniently traceable to the finished product Manufacturing overhead - all other manufacturing costs other than direct materials and direct labor

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Product Costs
Direct materials Direct Costs Direct labor Indirect Costs Manufacturing overhead

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Cost Object
Anything for which managers want a separate measurement of cost Direct cost can be directly traced to cost object

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Manufacturing Overhead
Indirect costs related to manufacturing operations
Generally all manufacturing costs that are not direct costs Indirect materials Indirect labor

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Manufacturing Companies Income Statement

Sales - Cost of goods sold Gross profit - Operating expenses Operating income

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Manufacturing Company Income Statement

Cost of goods sold: Beginning finished goods inventory + Cost of goods manufactured Cost of goods available for sale - Ending finished goods inventory Cost of goods sold

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Manufacturing Company Income Statement

Cost of goods manufactured: Beginning work in process inventory + Direct materials used + Direct labor + Manufacturing overhead Total manufacturing costs to account for - Ending work in process inventory Cost of goods manufactured
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Manufacturing Company Income Statement

Direct materials used: Beginning materials inventory + Purchases of direct materials + Freight in Materials available for use - Ending materials inventory Direct materials used
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Manufacturing Companies Product & Period Costs

BALANCE SHEET Inventoriable Product Costs INCOME STATEMENT when sales occur

Materials Inventory

Finished Goods Inventory

Sales Cost of Goods Sold -

Work in Process Inventory

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Period Costs

Operating Expenses = Operating Income

Manufacturing Companies Inventory Accounts

Materials Inventory

Beginning inventory Purchases & freight Ending inventory

Materials used

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Manufacturing Companies Inventory Accounts

Work in Process Inventory

Beginning inventory Materials used

Cost of goods manufactured

Direct labor
Manufacturing overhead Ending inventory

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Manufacturing Companies Inventory Accounts

Finished Goods Inventory

Beginning inventory Cost of goods manufactured Ending inventory

Cost of goods sold

Income Statement

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E18-22
Snyder Company Statement of Cost of Goods Manufactured For Year Ended December 31, 2008 Beginning work in process inventory $100,000 Direct materials used: Beginning materials inventory $50,000 Purchases of direct materials 155,000 Materials available for use $205,000 Ending materials inventory (25,000) 180,000 Direct labor 120,000 Manufacturing overhead (see schedule) 70,000 Total manufacturing costs to account for $470,000 Ending work in process inventory (65,000) Cost of goods manufactured $405,000
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E18-22
Schedule of manufacturing overhead costs
Depreciation, plant building and equipment Insurance on plant Repairs and maintenance, plant Indirect labor Total manufacturing overhead $15,000 20,000 5,000 30,000 $70,000

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E18-22
2. $405,000 / 3,000 lamps = $135

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Statement of Cost of Goods Manufactured

This is a summary of the costs that flow through work in process during the period.
Work in Process Inventory

Beginning inventory
Total manufacturing costs to account for

Direct materials Direct labor

Cost of goods manufactured

Manufacturing overhead
Ending inventory

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Ethical Standards
Institute of Management Accountants (IMA) Standards of Ethical Conduct for Management Accountants
Competence Confidentiality Integrity Objectivity

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End

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