WKK Chapter 1 Managerial accounting provides economic and nancial information for managers and other internal users In response to corporate scandals the U S Congress enacted the Sarbanes Oxley Act SOX to help prevent lapses in internal control Raw materials that can be physically and directly associated with the nished product during the manufacturing process are direct materials Indirect materials have one of two characteristics 1 They do not physically become part of the nished product such as lubricants used by Current Designs in its equipment and polishing compounds used for the nishing touches on kayaks Or 2 they are impractical to trace to the nished product because their physical association with the nished product is too small in terms of cost such as cotter pins and lock washers Companies account for indirect materials as part of manufacturing overhead The work of factory employees that can be physically and directly associated with converting raw materials into nished goods is direct labor Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the nished product Overhead costs also include manufacturing costs that cannot be classi ed as direct materials or direct labor Manufacturing overhead includes indirect materials indirect labor depreciation on factory buildings and machines and insurance taxes and maintenance on factory facilities As the term suggests product costs are costs that are a necessary and integral part of producing the nished product Period costs are costs that are matched with the revenue of a speci c time period rather than included as part of the cost of a salable product Merchandisers compute cost of goods sold by adding the beginning merchandise inventory to the cost of goods purchased and subtracting the ending merchandise inventory Manufacturers compute cost of goods sold by adding the beginning nished goods inventory to the cost of goods manufactured and subtracting the ending nished goods inventory The value chain refers to all business processes associated with providing a product or service Just in time JIT inventory methods which have signi cantly lowered inventory levels and costs for many companies are one innovation that resulted from the focus on the value chain Under the JIT inventory method goods are manufactured or purchased just in time for sale many companies now focus on total quality management TQM to reduce defects in nished products with the goal of zero defects The TQM philosophy has been employed by some of the most successful businesses to improve all aspects of the value chain the theory of constraints involves identi cation of bottlenecks constraints within the value chain that limit a company s pro tability enterprise resource planning ERP systems such as those provided by SAP provide a comprehensive centralized integrated source of information to manage all major business processes from purchasing to manufacturing to sales to human resources Managerial accounting devised an approach called activity based costing ABC which allocates overhead based on each product s use of particular activities in making the product The balanced scorecard corrects for this limited perspective This approach uses both nancial and non nancial measures to evaluate all aspects of a company s operations in an integrated fashion In addition to pro tability corporate social responsibility considers a company s efforts to employ sustainable business practices with regard to its employees and the environment This is sometimes referred to as the triple bottom line because it evaluates a company s performance with regard to people planet and pro t SUMMARY 1 Explain the distinguishing features of managerial accounting The primary users of managerial accounting reports are internal users who are of cers department heads managers and supervisors in the company Managerial accounting issues internal reports as frequently as the need arises The purpose of these reports is to provide special purpose information for a particular user for a speci c decision The content of managerial accounting reports pertains to subunits of the business may be very detailed and may extend beyond the double entry accounting system The reporting standard is relevance to the decision being made No independent audits are required in managerial accounting 2 Identify the three broad functions of management The three functions are planning directing and controlling Planning requires management to look ahead and to establish objectives Directing involves coordinating the diverse activities and human resources of a company to produce a smooth running operation Controlling is the process of keeping the activities on track 3 De ne the three classes of manufacturing costs Manufacturing costs are typically classi ed as either 1 direct materials 2 direct labor or 3 manufacturing overhead Raw materials that can be physically and directly associated with the nished product during the manufacturing process are called direct materials The work of factory employees that can be physically and directly associated with converting raw materials into nished goods is considered direct labor Manufacturing over head consists of costs that are indirectly associated with the manufacture of the nished product 4 Distinguish between product and period costs Product costs are costs that are a necessary and integral part of producing the nished product Product costs are also called inventoriable costs Under the expense recognition principle these costs do not become expenses until the company sells the nished goods inventory Period costs are costs that are identi ed with a speci c time period rather than with a salable product These costs relate to nonmanufacturing costs and therefore are not inventoriable costs 5 Explain the difference between a merchandising and a manufacturing income statement The difference between a merchandising and a manufacturing income statement is in the cost of goods sold section A manufacturing cost of goods sold section shows beginning and ending nished goods inventories and the cost of goods manufactured 6 Indicate how cost of goods manufactured is determined Companies add the cost of the beginning work in process to the total manufacturing costs for the current year to arrive at the total cost of work in process for the year They then subtract the ending work in process from the total cost of work in process to arrive at the cost of