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MDC ACG 2071 - Differences between Financial and Managerial Accounting

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ACG 2071Module 4: Managerial Accounting ConceptsDifferences between Financial and Managerial AccountingFinancial ManagerialUsers and decision makersInvestors, creditors, andother users external to the organizationManagers, employees,and decision makers internal to the organizationPurpose of informationAssist external users in making investment, credit decisionsAssist managers in making planning and control decisionFlexibility of practiceStructured and often controlled by GAAPRelatively flexibleTimeliness of informationOften available only after an audit is completeAvailable quickly without the need to wait for an auditTime dimension Historical information with some predictionsMany projections and estimates historical information also presentedFocus on informationEmphasis on whole organizationEmphasis on an organization’s project,processes, and subdivisionsNature of InformationMonetary information Mostly monetary, but also non-monetary informationManagement Accountant in the OrganizationCreated by M. MariFall 2007-1Page 1 of 8ACG 2071Module 4: Managerial Accounting ConceptsIndividual reporting units in an organization can be viewed as having eithero Line responsibilities One directly involved in the basic objectives of the organization Such as production and distributiono Staff responsibilities Is one that provides services, assistance, and advice to the departments with line or other staff responsibilities Has no direct authority over a line department Controller is such an examplePurpose of Managerial Accounting Providing useful information to decision makers They do this by collecting, managing, and reporting information in demand by their users. Much of managerial accounting involves gathering information about costs for planning and control decisionso PlanningCreated by M. MariFall 2007-1Page 2 of 8V P o f P r o d u c t i o nD i r e c t o r o f A d v e r t i s i n gD i r e c t o r o f M a r k e t i n gV P o f S a l e sV P o f D i s t r i b u t i o nP a y r o l lA c c t s R e cA c c t s P a y a b l eC o n t r o l l e rC o s tB u d g e t i n gD i r e c t o r o f B u d g e t i n gD i r e c t o r o f T a x a t i o nC h i e f F i n a n c i a l O f f i c e rC E OC h i e f E x e x c u t i v e O f f i c e rACG 2071Module 4: Managerial Accounting Concepts Is the process of setting goals and making plans to achieve them- Strategic planning – developing long range courses of action to achieve goals- Operational planning – develop short-term courses of action to manage the day to day operations of a businesso Directing Is the process by which managers, given theirassigned level of responsibilities, run day-to-day operations.o Controlling Is the process of monitoring planning decisions and evaluating an organization’s activities and employees. It includes the measurement and evaluation of actions, processes, and outcomes.o Improving Feedback is used by managers to support continuous process improvement. CPI is the philosophy of continually improvingemployees, business processes, and products.o Decision making is inherent in each of the four management processes described.Manufacturing operations:Created by M. MariFall 2007-1Page 3 of 8ACG 2071Module 4: Managerial Accounting ConceptsSites to visit for virtual factory tours:Porsche: www.porsche.com/uk/aboutporsche/virtualfactorytour/ - 8k -Bubble Gum: www.dubblebubble.com/tour.htmlCameroon Balloon Factory: http://www.bized.co.uk/virtual/cb/tour/index.htmJust Born Camdy: www.justborn.com/about/factory.htmlBMW: http://www.bmwusfactory.com/build/Avon: http://www.avoncompany.com/tour/index.htmlWaterford: http://www.waterfordvisitorcenter.com/tor_intro.shtmlFerrari : http://uk.sports.yahoo.com/050309/39/9k37.htmlTypes of Cost Classificationo Cost object – is a product, process, department, or customer to which costs are assigned. Direct cost – traceable to a cost object- Material- Labor Indirect cost – are incurred for the benefit of more than one cost object- Maintenance- UtilitiesManufacturing costs: Direct MaterialsCreated by M. MariFall 2007-1Page 4 of 8ACG 2071Module 4: Managerial Accounting Conceptso Are tangible components of a finished producto Used directly in the production of the good Direct Laboro Labor used directly in the production of the goodo On the assembly line Factory Overheado Involves components or activities that support the manufacturing process but are not direct materialsand direct laboro Indirect materials Rags oilo Indirect labor Supervisors inspectorso Utilitieso Insuranceo Property taxeso Depreciation on factory equipmentCreated by M. MariFall 2007-1Page 5 of 8ACG 2071Module 4: Managerial Accounting Conceptso Repair and maintenance on factory equipmentManufacturing Formulas:Prime Costs = Direct Material + Direct LaborConversion Costs = Direct Labor + Factory OverheadExample: Suppose that direct materials are $5,000, direct labor is $4,000 and factory overhead is $3,000, what are prime costs and conversion costs?Prime costs = direct material + direct labor = $5,000 + 4,000 = $9,000Conversion costs = direct labor + factory overhead = $4,000 + $3,000= $7,000Example: Suppose the direct materials are $3,000, prime costs are $5,000, conversion costs are $9,000, and factory overhead is $7,000. What are direct labor costs?Prime costs = Direct materials + Direct Labor$5,000 = $3,000 + DL$2,000 = DLConversion costs = Direct labor + Factory overhead$9,000 = $2,000 + FO$7,000 = FO Another cost classification is capitalization as inventory or to expense as incurred.o Product costs Expenditures necessary and integral to finished products.Created by M. MariFall 2007-1Page 6 of 8KnowACG 2071Module 4: Managerial Accounting Concepts Direct materials Direct labor Overhead costso Period costs Refer to expenditures identified more with a time period than with finished products. Selling and administrative expensesManufacturing Accounts Raw materials inventoryo Refers to the goods a company acquires to use in making productso Direct and indirect material costso Asset account Work in process inventoryo Consists of products in the process of being manufactured but not yet complete.o Consists of direct materials, direct labor and factory overhead costs Finished goods inventoryo Consists of completed products ready for


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