Management Accounting PresentationWHBM16.ppt

Accounting

1. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Management Accounting:
A Business Partner
Chapter
16

2. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin Accounting systems help to identify
who has authority over assets.
Accounting information supports
planning and decision-making.
Accounting reports provide a means of
monitoring, evaluating, and rewarding performance.
Management accounting and
assigning decision-making authority.
Management Accounting:
Basic Framework

3. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinFinancial Accounting Management Accounting
Purpose
Provide information about the
financial position and
performance of the company.
Provide information for
planning, evaluating, and
rewarding performance.
Types of
Reports
Balance sheet, income
statement, and statement of
cash flows.
Various, non-standard reports.
Standards GAAP None
Reporting
Entity
Usually, the company taken
as a whole.
A component of the
company's value chain.
Time
Periods
Usually a year, quarter, or a
month.
Any period.
Users
Investors, creditors, and other
external parties.
Management, customers, and
others in the value chain.
Comparing Financial Accounting
and Management Accounting

4. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Cost of
goods
sold.
Direct labor and
manufacturing
overhead costs.
Direct
materials
costs.
Steps in the Manufacturing Process:
Convert raw
materials into
finished goods.
Sell
finished
goods.
Accounting for Manufacturing
Operations
Buy raw
materials.

5. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Raw materials
& component
parts that
become an
integral part
of finished
products.
Can be traced
directly and
conveniently
to products.
Direct Materials
If materials cannot be traced directly to products,
the materials are considered indirectand are part
of manufacturing overhead.

6. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Includes the payroll cost of direct workers.Direct labor
hours
×
Wage
rate
Direct Labor
Those employees
who work directly
on the goods
being
manufactured.

7. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Includes the payroll cost of direct workers.
The cost of
employees who do
not work directly on
the goods is
considered indirect
laborand is part of
manufacturing
overhead.
Direct Labor
Those employees
who work directly
on the goods
being
manufactured.

8. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
All manufacturing costs other than direct
materials and direct labor.
Includes:
Indirect materials.
Indirect labor.
Machinery and
equipment costs.
Cost of regulatory
compliance.
Manufacturing Overhead

9. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
All manufacturing costs other than direct
materials and direct labor.
Does not include
selling or general
and administrative
expenses.
Manufacturing Overhead
Includes:
Indirect materials.
Indirect labor.
Machinery and
equipment costs.
Cost of regulatory
compliance.

10. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The cost to
produce a unit of
product includes:
Direct material
Direct labor
Manufacturing
overhead
Manufacturing Overhead

11. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The cost to
produce a unit of
product includes:
Direct material
Direct labor
Manufacturing
overhead
Manufacturing Overhead
Manufacturing overhead
must be mathematically
allocated to each unit of
product using a
predetermined overhead
application rate.
(This will be discussed
later in this chapter.)

12. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Balance Sheet
Current assets
and inventory
Product Costs
(manufacturing
costs)
Income
Statement
Revenue
COGS
Gross profit
Expenses
Net income.
When goods
are sold.
as
incurred
Period Costs
(operating
expenses and
income taxes.)
as
incurred
Product Costs Versus Period Costs

13. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Raw materials -inventory on
hand and available for use.
Work in
process -
partially
completed
goods.
Finished
goods-
completed
goods awaiting
sale.
Inventories of a Manufacturing
Business

14. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Direct
materials
purchased
Materials
Warehouse
Finished
goods
Finished goods
Warehouse
Goods
sold
Direct
materials
used
Factory
Direct labor &
Manufacturing overhead
The Flow of Physical Goods

15. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Direct
materials
purchased
Direct
materials
used
Cost of goods
manufactured
Cost of
Goods Sold
$$$
Materials
Inventory
$$$$$$
Finished Goods
Inventory
$$$$$$
Work in Process
Inventory
$$$$$$
The Flow of Manufacturing Costs
Direct labor &
Manufacturing overhead

16. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Pure-Ice Inc. had $52,000 of inventory in
direct materials inventory on January 1,
2002. During the year, Pure-Ice
purchased $586,000 of additional direct
materials. At December 31, 2002, $78,000
of the direct materials were still on hand.
How much direct material was
placed into production during 2002?
The Flow of Manufacturing Costs
Example

17. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinBeginning materials
inventory 52,000$
+Materials purchased 586,000
=
Materials available to be
placed into production 638,000
–
Materials placed into
production ?
=
Ending materials
inventory 78,000$
?
The Flow of Manufacturing Costs
Example

18. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinBeginning materials
inventory 52,000$
+Materials purchased 586,000
=
Materials available to be
placed into production 638,000
–
Materials placed into
production 560,000
=
Ending materials
inventory 78,000$
!
The Flow of Manufacturing Costs
Example

19. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
In addition to the direct materials, Pure-
Ice incurred $306,000 of direct labor cost
during 2002. Manufacturing overhead for
2002 was $724,000.
Pure-Ice started 2002 with $132,000 in
work in process. During 2002, units
costing $1,480,000 were transfered to
finished goods inventory.
What is the ending balance in work
in process at December 31, 2002?
The Flow of Manufacturing Costs
Example

20. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin Beginning work in
process inventory 132,000$
+Manufacturing costs
added 1,590,000
=Total costs in process
during the year 1,722,000
–Cost of goods
completed during the
year (1,480,000)
=Ending work in
process inventory ? Direct Materials 560,000$
Direct Labor 306,000
Manufacturing
Overhead 724,000
Total costs added
during the year 1,590,000$
The Flow of Manufacturing Costs
Example

21. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin Beginning work in
process inventory 132,000$
+Manufacturing costs
added 1,590,000
=Total costs in process
during the year 1,722,000
–Cost of goods
completed during the
year (1,480,000)
=Ending work in
process inventory 242,000$
!
The Flow of Manufacturing Costs
Example

22. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The overhead application rate expresses an
expected relationship between
manufacturing overhead costs and some
activity base related to the production
process.Overhead
Application
Rate
=
Estimated
Overhead
Costs
÷
Estimated Units
in the Activity
Base
Overhead Application Rates

23. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Overhead costs are estimated based
on budgets and using mathematical
estimation techniques.Overhead
Application
Rate
=
Estimated
Overhead
Costs
÷
Estimated Units
in the Activity
Base
Overhead Application Rates

24. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The base is the activitiy that “drives” the
cost, called the cost driver.
Direct labor hours and machine hours are
commonly used cost drivers.Overhead
Application
Rate
=
Estimated
Overhead
Costs
÷
Estimated Units
in the Activity
Base
Overhead Application Rates

25. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Big “T” Company produces
engines for big trucks. Total
overhead for 2002 is estimated to
be $2,600,000. Big “T” applies
overhead based on machine hours.
Big “T” estimates machine hours
for 2002 to be 162,500 hours.
Compute Big “T’s”
predetermined overhead rate
for 2002.
Overhead Application Rates
Example

26. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinOverhead
Application
Rate
=
Estimated
Overhead
Costs
÷
Estimated
Units in the
Activity Base
=
2,600,000$
÷
162,500
= 16.00$ per hour
Overhead Application Rates
Example

27. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinOverhead
Application
Rate
=
Estimated
Overhead
Costs
÷
Estimated
Units in the
Activity Base
=2,600,000$ ÷ 162,500
= 16.00$ per hour
Overhead Application Rates
Example

28. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Some companies use different cost drivers
for different manufacturing activities, a
process called ACTIVITY BASED COSTING .Overhead
Application
Rate
=
Estimated
Overhead
Costs
÷
Estimated Units
in the Activity
Base
Overhead Application Rates

29. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
A schedule of the cost
of finished goods
manufactured is
prepared to assist
managers in
understanding and
evaluating the overall
cost of manufacturing
products.
Determining the Cost of Finished
Goods Manufactured

30. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinCONQUEST, INC.
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31, 2002
Work in process inventory, beg. 30,000$
Manufacturing cost assigned to
production:
Direct Materials 150,000$
Direct Labor 300,000
Manufacturing overhead 360,000
Total manufacturing costs 810,000
Total cost of all work in process
during the year 840,000
Less: Work in process
inventory, end of year (40,000)
Cost of finished goods manufactured 800,000$

31. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinCONQUEST, INC.
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31, 2001
Work in process inventory, beg. 30,000$
Manufacturing cost assigned to
production:
Direct Materials 150,000$
Direct Labor 300,000
Manufacturing overhead 360,000
Total manufacturing costs 810,000
Total cost of all work in process
during the year 840,000$
Less: Work in process
inventory, end of year (40,000)
Cost of finished goods manufactured 800,000$ Beginning finished goods
inventory 150,000$
Add: Cost of finished goods
manufactured during the year 800,000
Cost of finished goods
available for sale 950,000
Less: Ending finished goods
inventory 168,000
Cost of Goods Sold 782,000$
The cost of goods
completed during
the period is used
to compute COGS
for the period.

32. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/IrwinCONQUEST, INC.
Income Statement
For the Year Ended December 31, 2002
Sales 1,300,000$
Cost of Goods Sold 782,000
Gross profit on sales 518,000$
Operating expenses 400,000
Income from operations 118,000$
Less: Interest expense 18,000
Income before income
taxes 100,000$
Income tax expense 30,000
Net income 70,000$
The income
statement is
prepared
using
established
financial
accounting
procedures.

33. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
This is a great job, but
the overhead is killing
my profit margin!
End of Chapter 16