MANAGEMENT ACCOUNTING:

A BUSINESS PARTNER

Lecture # 1
 16-2

THE NEED FOR COST ACCOUNTING

 Cost accounting provides the detailed cost data that
management needs to control current operations and plan
for the future.
 Companies must control costs in order to keep prices
competitive.
 In today’s global environment, cost information is more
crucial than ever in remaining competitive.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-3

MANAGEMENT ACCOUNTING:
BASIC FRAMEWORK

M a n a g e m e n t a c c o u n tin g a n d
a s s ig n in g d e c is io n - m a k in g a u t h o r it y .

A c c o u n t in g s y s t e m s h e lp to id e n t ify
w h o h a s a u th o r ity o v e r a s s e ts .

A c c o u n tin g in fo r m a tio n s u p p o r ts
p la n n in g a n d d e c i s i o n - m a k i n g .

A c c o u n tin g r e p o r ts p r o v id e a m e a n s o f
m o n ito r in g , e v a lu a tin g , a n d r e w a r d in g p e r fo r m a n c e .
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-4

MANAGEMENT ACCOUNTING
SYSTEMS FRAMEWORK
Top
Top Management
Management

Budget:
Budget: Actual
Actual Results:
Results: Performance
Performance
Future
Future Plans
Plans Current
Current Evaluation:
Evaluation: Past
Past

Assign
Assign Support
Support Evaluate
Evaluate
Decision-Making
Decision-Making Decision-Making
Decision-Making Decision-Making
Decision-Making
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-5

COMPARING FINANCIAL ACCOUNTING AND MANAGEMENT

ACCOUNTING

Financial Accounting Management Accounting

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-6

TYPES OF BUSINESSES THAT USE COST ACCOUNTING

 Manufacturers (Ford, General Motors)

 Merchandisers (WalMart, Kmart)
 Wholesalers (Beverage Distributors)
 For-profit Service Businesses (CPAs, Attorneys)
 Not-for-profit Service Agencies (United Way,
Red Cross)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-7

THE BALANCED SCORECARD

Financial
Perspective
Goals Measures
Customer
Perspective
Goals Measures

Internal Operations
Perspective
Goals Measures

Innovation and
Leaning Perspective
Goals Measures

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-8

ACCOUNTING FOR
MANUFACTURING OPERATIONS

The
The cost
cost to
to
produce
produce aa unit
unit of
of
product
product includes:
includes:
Direct
Direct material
material
Direct
Direct labor
labor
Manufacturing
Manufacturing
overhead
overhead

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-9

DIRECT MATERIALS

Raw materials
& component Can be traced
parts that directly and
become an conveniently
integral part to products.
of finished
products.

IfIf materials
materialscannot
cannot be
betraced
traceddirectly
directlyto
to products,
products,
the
thematerials
materialsareareconsidered
considered indirect
indirect and
and are
arepart
part
of
of manufacturing
manufacturingoverhead.
overhead.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-10

DIRECT LABOR

Includes
Includes the
the payroll
payroll cost
cost of
of direct
direct workers.
workers.

Those
Thoseemployees
employees
Direct labor Wage who
× who work
workdirectly
directly
hours rate on
onthe
thegoods
goodsbeing
being
manufactured.
manufactured.

The
Thecost
cost of
of employees
employeeswho
who do
do not
not work
work
directly
directlyon
onthe
thegoods
goodsis
isconsidered
considered indirect
indirect
labor
labor and
andisispart
partof
ofmanufacturing
manufacturingoverhead.
overhead.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-11

MANUFACTURING OVERHEAD

All
All manufacturing
manufacturing costs
costs other
other than
than direct
direct
materials
materials and
and direct
direct labor.
labor.

Includes:
Includes:
 Indirect
 Indirect materials.
materials.
 Indirect
 Indirect labor.
labor.
 Machinery
 Machinery andand
equipment
equipment costs.
costs. Does
Doesnot
not include
include
 Cost
 Cost of
of regulatory
regulatory selling
selling or
or general
general and
and
compliance.
compliance. administrative
administrative
expenses.
expenses.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-12

FLOW OF PHYSICAL
GOODS IN PRODUCTION
Direct
Direct Direct
Direct
Materials
Materials Materials
Materials
Purchased
Purchased Used
Used

Finished
Finished
Goods
Goods

Direct
Direct Manufacturing
Manufacturing
Labor Overhead Goods
Goods
Labor Overhead Sold
Sold
MegaLoMart

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-13

ACCOUNTING FOR
MANUFACTURING OPERATIONS

Manufacturing
Manufacturing costs
costs are
are often
often
combined
combined asas follows:
follows:

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead

Prime Conversion
Cost Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-14

PRODUCT COSTS VERSUS PERIOD COSTS

Balance
BalanceSheet
Sheet
Product Costs
(manufacturing Current
Current assets
assets
costs) as and
andinventory
inventory
incurred
When
Whengoods
goods
Income
Income are
aresold.
sold.
Statement
Statement
Period Costs Revenue
Revenue
(operating COGS
COGS
expenses and Gross
Grossprofit
profit
income taxes.) Expenses
Expenses
as Net
Net income.
income.
incurred
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-15

INVENTORIES OF A
MANUFACTURING BUSINESS

Raw
Rawmaterials
materials-- inventory
inventoryon
on
hand
handand
andavailable
availableforforuse.
use.

Finished
Finished Work
Work in
in
goods-
goods- process
process--
completed
completed partially
partially
goods
goodsawaiting
awaiting completed
completed
sale.
sale. goods.
goods.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005