ACCTG 211 1st Edition Lecture 18 Outline of Last Lecture I Examples of different instances on different ratios Outline of Current Lecture I Managerial vs Financial Accounting II Definitions from the book III Flow of inventory IV Budgeting Current Lecture V VI Introduction to Managerial Accounting and The Master Budgeting Process Differences between Financial and Managerial Accounting These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute VII VIII Historical implications of managerial accounting a Born out of the Second Industrial Revolution late 1800 s to early 1900 s history economies of scale b Need for information drove the innovation of managerial accounting data c Originally called cost accounting systems d Used by railroad and steel companies e Goal maintain profit margins as sales prices declined due to efficiencies of scale and scope f Shift to management accounting systems g Integrated companies such as DuPont and GM h Included measures of quality and service Definitions from the book a Cost Object i The object to which we are interested in assigning costs ii Size dependent Apple laptop keyboard vs entire Apple laptop computer vs factory where Apple laptop was built vs laptop division of Apple b Direct Cost vs Indirect Cost i Direct used in one and only one cost object Traceable to that cost object ii Indirect shared by more than one cost object Allocated to the cost objects c Product Costs a k a Manufacturing Costs i Materials Labor Manufacturing Mfg Overhead ii Abbreviations DM Direct Materials DL Direct Labor OVHD Mfg Overhead iii Materials and Labor are direct costs Mfg Overhead is an indirect cost iv So formula is often expressed as DM DL OVHD d Prime Costs vs Conversion Costs i Prime Costs DM DL ii Conversion Costs DL OVHD e Product Costs vs Period Costs i Product costs related to the production of a particular product ii Period cost recurring each period accounted for on a periodic basis iii Period cost examples salaries rent depreciation insurance utilities f Difference Between a Product Cost and a Period Cost i DM and DL are product costs ii Selling General and Administrative expenses are period costs iii Research and Development costs are period costs iv OVHD can be either a product cost or a period cost v If it is related to the manufacturing facility product cost vi If it is related to the administrative facility period cost vii So OVHD that is not related to the production facility is NOT considered to be a product cost rather it is considered to be a period cost g Variable Cost i Remains constant on a per unit basis but varies in total ii Example an hourly wage h Fixed Cost i Remains constant in total but varies on a per unit basis ii Example rent i Mixed Cost i Has characteristics of both a fixed cost or a mixed cost ii Example cell phone bill or moving truck j Relevant Range Concept i Economic costs typically follow a curved path in a P Q graph ii To evaluate these costs we would typically employ Calculus iii For Accounting we prefer Algebra it is linear rather than curvi linear iv Thus we assume that costs are linear within a defined range of production v Relevant Range and Linearity Assumption 1 When Relevant Range is Exceeded Fixed Costs Often Change k Total Costs Total Fixed Costs Total Variable Costs l Total Variable Costs Variable Cost per Unit x Units Produced m Average Total Cost Total Cost Units Produced i Also known as Average Cost per Unit ii Valid ONLY for the level of output in the denominator iii If interested in Average Manufacturing Cost per Unit must ensure that numerator includes only manufacturing costs I Flow of Inventory in Managerial Accounting a Raw Materials RM i Beginning RM ii Plus RM Purchases direct material purchases including freight in iii Minus RM Used text uses direct materials used or transferred to WIP iv Equals Ending RM b Work in Process WIP i Beginning WIP ii Plus RM Used from RM roll forward DL OVHD Manufacturing OVHD iii Minus Cost of Goods Manufactured COGM which is transferred to FG iv Equals Ending WIP c Finished Goods FG d Beginning FG e Plus COGM f Minus Cost of Goods Sold COGS which is transferred to Income Statement g Equals Ending FG II III Why Budgets a Plan Organize Control process b Process is iterative and cyclical c Budgeting fits into the Planning and Controlling phases of the process Master Budgeting Process Exhibit 9 4 Braun Page 519 a Start with a Sales Budget driven by demand forecasting b Then determine how much inventory is needed to support the sales c Then determine the operating expenses needed to support the sales d Then produce budgeted financial statements I S S E B S SOCF e In the financial statement process isolate the company s cash needs i e cash budget and also isolate the company s fixed asset needs i e capital expenditures budget f MUCH easier said than done