ACC102 CHAPTER 19 Managerial accounting provides economic and financial information for managers and other internal users Crucial activities for companies would include The need for accurate information about the cost of each product to know whether the company is making a profit or not The need to adjust the quantity it produces in light of changes in economic conditions and consumer tastes The need to understand how changes in the quantity produced impacts its production costs and profitability The need for managers to consider alternative courses of action The preparation of budgets in order to plan for the future Comparing budgeted number with actual results to evaluate performance and identify areas The need to make substantial investment decisions such as the building of a new plant or the that need to change purchase of new equipment Comparing Managerial and Financial Accounting Managerial accounting places emphasis on special purpose information Management Functions Planning Maximize short term profit and market share Commitment to environmental protection Contributing to social programs Add value to the business Directing Coordinate diverse activities and human resources Implement planned objectives Provide incentives to motivate employees Hire and train employees 1 ACC102 CHAPTER 19 Produce smooth running operation Controlling 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 Organizational Structure Business Ethics Code of Ethical Standards Sarbanes Oxley Act SOX Clarifies top management s responsibilities Requires certifications by CEO and CFO Selection criteria for Board of Directors and Audit Committee Substantially increased penalties for misconduct Management accountants have an obligation to the organizations they serve their profession the public and themselves to maintain the highest standards of ethical conduct In recognition of this obligation the Institute of Management Accountants IMA has published and promoted standards of ethical conduct for management accountants 2 ACC102 CHAPTER 19 Members of IMA shall behave ethically A commitment to ethical professional practice includes overarching principles that express our values and standards that guide our conduct Principles Honesty Fairness Objectivity Responsibility Standards Competence Confidentiality Integrity Credibility Manufacturing Costs Manufacturing consists of activities and processes that convert raw materials into finished goods classified as Direct Materials Direct Labor and Manufacturing Overhead Raw materials basic materials and parts used in manufacturing process Direct Materials Raw materials that can be physically and directly associated with the finished product during the manufacturing process Indirect Materials 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 Direct Labor work of factory employees that can be physically and directly associated with converting raw materials into finished goods Indirect Labor 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 Manufacturing Overhead costs indirectly associated with the manufacture of the finished product includes manufacturing costs that cannot be classified as direct materials and direct labor Includes indirect materials indirect labor depreciation on factory buildings and machines insurance taxes and maintenance on factory facilities Product Costs Components o Direct materials o Direct labor o Manufacturing overhead Costs that are a necessary and integral part of producing the product Recorded in inventory account Not an expense COGS until the goods are sold Period Costs Charged to expense as incurred Non manufacturing costs Includes all selling and administrative expenses 3 ACC102 CHAPTER 19 Income Statement Under a periodic inventory system the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section Cost of Goods Manufactured Cost of Goods Sold Components Periodic inventory System Cost of goods sold sections of merchandising and manufacturing income statements 4 ACC102 CHAPTER 19 Cost of Goods Manufactured Total Work in Process 1 cost of beginning work in process and 2 total manufacturing costs for the current period Total Manufacturing Costs sum of direct material costs direct labor costs and manufacturing overhead in the current year Balance Sheet Inventory accounts for a manufacturer Raw Materials shows the cost of raw materials on hand Work in Process Inventory shows the cost applicable to units that have been started into production but are only partially completed Finished Goods Inventory Shows the cost of completed goods on hand Product Costing for Service Industries Much of the U S economy has shifted toward an emphasis on providing services Over 50 of U S workers are now employed by service companies Like a manufacturer service companies need to keep track of the costs of its services in order to know whether it is generating a profit Focus on the Value Chain Refers to all business processes associated with providing a product or performing a service For a manufacturing firm these include the following Research development and product design acquisition of raw materials production sales and marketing delivery customer relations and subsequent services 5 ACC102 CHAPTER 19 Just in Time Inventory Methods inventory system in which goods are manufactured or purchased just Total Quality Management TQM reduce defects in finished products with the goal of zero defects Theory of Constraints identification of bottlenecks constraints within the value chain that limit a in time for sale company s profitability Enterprise Resource Planning ERP systems a comprehensive centralized integrated source of information to manage all major business processes from purchasing to manufacturing to sales to human resources Activity Based Costing ABC allocates overhead based on use of activities in making the product Balance Scorecard uses both financial and non financial measures to evaluate all aspects of a company s operations in an integrated fashion Links performance to overall company objectives 6