Managerial Accounting

Managerial Accounting (Chapter 1) • • o o o Used internally - no official rules - consists of whatever reports management finds useful Objective: Provide management with decision relevant information to assist in Planning Evaluation Control Manufacturing, Merchandising and Service Companies Managerial accounting is just as important in a service company as it is in a manufacturing company or a merchandising company (see the functions above). However, there is a significant difference in the cost determination between the different types of companies. A manufacturing company uses labor and other inputs to transforms raw materials into finished product and then sells the product, like a merchandising company. A service company, on the other hand, does not produce/sell products, instead it provides service. The major difference between the three types of companies can be found in the cost of goods sold (services provided) calculation. Service Company Merchandising Company Manufacturing Company Cost of services provided: Cost of goods sold: Cost of goods manufactured Primarily labor and overhead costs Net purchase price Materials Labor Overhead All three types of companies need to determine the costs of product or services to Properly price goods or services (planning) To determine profitability (evaluation) • • A final, very important function of managerial accounting is to develop plans and policies to ensure internal control and that company objectives are accomplished (control). Standard Costing System • Product cost - costs that can be associated with manufacturing a product either directly or indirectly • Examples: • • Raw material; labor Manufacturing equipment depreciation Period cost - costs that cannot be associated with specific products and are expensed in the period in which they are incurred Examples: • • Corporate advertising Depreciation of corporate headquarter • Supervisor's salary • Direct (prime) Cost - costs that are directly related and identifiable with producing a specific product. Usually raw materials and labor. • • Selling expenses Insurance • Indirect Costs - (Overhead) - costs of materials or labor that are necessary for production but cannot easily be measured for each product item. • Example of Direct Cost, Indirect Cost and Overhead Allocation XYZ manufactures two products: (A) and (B). Materials Labor Total direct costs • • B 2 pounds @ $3 3 hours @ $15/hour $ 51 Material Labor Total direct costs • • Direct Costs A Indirect Cost Examples: 3 pounds @ $1.75 • Incidental materials (nails, screws, adhesives, etc.) Incidental labor (equipment maintenance, supervisor) Utilities Joint costs (i.e., two products use the same indirect materials) Depreciation on equipment used in the manufacturing process 5 hours @ $12/ hour $65.25 Indirect Costs for A and B A: B: Indirect Material: $ 5 Indirect Material: $ 2 Indi. Labor: 1.5hours @ $9 Indirect labor: 1hour @ $10 Overhead is allocated using direct labor hours: 10,000 units of A and 4,000 units of B are produced with the same equipment. Total depreciation for the equipment for the period: $12,000 Other overhead costs total $18,000. Total hours (A) 30,000 Total hours (A): 20,000 Overhead allocation/unit: Overhead allocation/unit: 30,000/50,000*3 = $1.80/unit 30,000/50,000*5 = $3/unit Overhead allocation Overhead is allocated to products according to some system Examples: • • • Labor hours Machine hours Some other method designed to accomplish certain managerial objectives (i.e., as a motivational or control tool) Total costs per unit (A) Total costs per unit (B) Direct costs $ 51 Direct costs $65.25 Indirect costs $18.50 Indirect costs $12 Overhead Overhead Total/unit $1.80 Total/unit: $71.30 $3 $80.25 Inventory Accounts for Manufacturing Companies Manufacturing companies use multiple inventory accounts. At a minimum the following: • • • Raw Materials Inventory Work in Process Finished Goods Raw Materials Inventory: Work in Process: Used to track and report raw materials. As production occurs, raw material balances are transferred to work in process account using the standard quantity per unit produced -----> During production all appropriate costs are recorded in this account using the standard rate per unit (materials, labor, indirect materials and labor, overhead) Finished Goods As units are completed, the standard cost per unit is recorded in this account. At the end of the reporting period Variances: Note that all unit costs are recorded/transferred at the standard rate (cost) per unit. In reality, actually quantity and rates (costs) will likely differ from the standard (planned) The reasons are due to Quantity Variances Price Variances E.g., it took 3 hours and 15 minutes per unit (@ 15 per hour) to produce one unit, compared to the budgeted 3 hours per unit E.g., the product did use (as planned) 2 pounds of raw materials, however, the price per pound has increased to $3.10 (from $3) per pound. What happens to variances? A. They are closed to work in process (finished B. They are carefully analyzed to assist in the goods) for financial reporting purposes planning and evaluation/control purposes. Income Statement Comparison Merchandising versus Manufacturing Company The income statement of a manufacturing company is identical to that of a merchandising company. The difference between the two types of companies lies in the Determination of cost of goods sold Merchandising Company Manufacturing Company Beginning Inventory A. Beginning work in Process Purchases (net) Beginning Raw materials (Ending Inventory) Raw materials purchases Cost of Goods Sold (Ending raw materials inventory) Raw materials used Direct labor Overhead Total manufacturing costs (ending work in process) Cost of Goods Manufactured B. Finished goods inventory (beginning) Plus cost of goods manufactured (Finished goods inventory - ending) Cost of Goods Sold Balance Sheet Statement Comparison Merchandising versus Manufacturing Company Merchandising Company Manufacturing Company Inventory Raw Materials Inventory Work in Process Finished Goods Inventory