Accounting 2000 Chapter 14 Notes Study Objectives 1 Explain the distinguishing features of managerial accounting 2 Identify the 3 broad functions of management 3 Define the 3 classes of manufacturing costs 4 Distinguish between product and period costs 5 Explain the differences between a merchandising and a manufacturing income statement 6 6Explain the difference between a merchandising and a manufacturing balance sheet Managerial Accounting is a field of accounting that provides economic and financial information for managers and other internal users Applies to all types of business merchandising manufacturing service Applies to all forms of business organizations sale partnership corporation Applies to not for profit as well as profit oriented companies 1 Accounting 2000 Chapter 14 Notes Management s activities and responsibilities can be classified into the following three broad functions Planning Directing Look ahead and establish objectives such as Maximize short term profit and market share commit to environmental protection and social programs Key Objective Add value to the business Value measured by trading price of stock and by potential selling price of the company Implement planned objectives Coordinate diverse activities and human resources Provide incentives to motivate employees Hire and train employees including executives managers and supervisors Produce smooth running operation Controlling Process of keeping activities on track Determine whether goals are met Decide changes needed to get back on track May use an informal or formal system of evaluations Decision making is not a separate management function but the OUTCOME of the exercise of good judgment in planning directing and controlling 2 Accounting 2000 Chapter 14 Notes Manufacturing Costs Manufacturing consists of activities and processes to convert raw materials into finished products In contrast a merchandising firm sells goods in the form in which they were purchased Manufacturing costs are typically classified as Raw Materials Basic materials and parts used in the manufacturing process 2 Types of Raw Materials direct Materials indirect Materials Raw materials that can be physically and directly associated with the finished product the manufacturing process during Raw materials that cannot be easily associated with the finished product Not physically part of the finished product or they are an insignificant part of finished product in terms of cost Considered part of manufacturing overhead 2 Types of Labor 3 Accounting 2000 Chapter 14 Notes direct Labor indirect Labor Work of factory employees that can be physically and directly associated with converting raw materials into finished goods Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced Considered part of Manufacturing overhead Manufacturing Overhead Costs that are indirectly associated with manufacturing the finished product indirect material and indirect labor Depreciation of factory machinery utilities property taxes and insurance indirect material indirect labor Includes all manufacturing costs except direct materials and direct labor Also called factory overhead indirect manufacturing costs or burden Brief Exercise 14 5 Indicate whether each of the following costs of an automobile manufacturer would be classified as direct materials direct labor or manufacturing overhead DM a Windshield DM b Engine Indirect Material MOH e Factory machinery lubricants Indirect Labor MOH c Wages of assembly line worker DM f Tires DM g Steering wheel MOH d Depreciation of factory machinery Indirect Labor MOH h Salary of painting supervisor 4 Accounting 2000 Chapter 14 Notes Product Costs Manufacturing costs Incurred in the factory plant Components DL DM and MOH Costs that are a necessary and integral part of producing the product Recorded as inventory when incurred thus may be called inventoriable costs When the finished goods inventory is sold it then becomes an expense called Cost of Goods Sold income statement Period Costs Non manufacturing Costs office costs outside of the factory Matched with revenue of a specific time period and charged to expense as incurred Non manufacturing costs Deducted from revenues in period incurred to determine net income Includes all selling and administrative expenses 5 Accounting 2000 Chapter 14 Notes Brief Exercise 14 6 Indicate whether each of the costs are product costs or period costs product a Manufacturing overhead period d Advertising expense period b Selling expenses non manf Cost period c Administrative expenses product e Direct labor product f Direct material depreciation on office equipment period marketing managers salary period Manufacturer Financial Statements The income statement for a manufacturer is similar to that of a merchandiser except for the COGS section For the year Red Company has cost of goods manufactured of 600 000 beginning balance of finished goods inventory of 200 000 and ending balance of finished goods inventory of 250 000 6 Accounting 2000 Chapter 14 Notes Beg inv 200 000 COGmanufactured 600 000 COGavailable for sale 800 000 End inv 250 000 The cost of goods sold is 550 000 The Balance Sheet of a Manufacturer has 3 types of Inventory Finished goods work in process raw materials Class Problem Problem 14 2A 7