CONCEPTUAL
The purpose of managerial accounting is to
provide useful information to management and other internal decision
makers. It does this by collecting, managing, and reporting
both monetary and nonmonetary information in a manner useful to
internal users. Major characteristics of managerial accounting
include (1) focus on internal decision makers, (2) emphasis on
planning and control, (3) flexibility, (4) timeliness, (5) reliance on
forecasts and estimates, (6) focus on
segments and projects, and (7) reporting both monetary and nonmonetary
information. Ethics are beliefs that distinguish right from wrong. Ethics can
be important in reducing fraud in business
operations.
We can classify costs as
(1) fixed vs. variable, (2) direct vs. indirect, and (3) product vs.
period. A cost can be classified in more than one way, depending on
the purpose for which the cost is being
determined. These classifications help us understand cost
patterns, analyze performance, and plan operations.
Costs that are capitalized because
they are expected to have future value are called product costs; costs that are expensed are called period costs. This classification
is important because it affects the amount of costs expensed
in the income statement and the amount of costs assigned to
inventory on the balance sheet. Product costs are commonly made up of direct materials,
direct labor, and overhead. Period costs include selling and
administrative expenses.
The main difference is that
manufacturers usually carry three inventories on their balance sheets—raw
materials, work in process, and finished goods—instead of one
inventory that merchandisers carry. Service company balance
sheets do not include inventories of items for sale. The main
difference between income statements of manufacturers and
merchandisers is the items making up cost of
goods sold. A merchandiser uses merchandise inventory and the cost of goods
purchased to compute cost of goods sold; a manufacturer uses
finished goods inventory and the cost of goods manufactured to compute
cost of goods sold. A service company’s income statement does not include
cost of goods sold.
Manufacturing activities
consist of materials, production, and sales activities. The materials activity consists
of the purchase and issuance of materials to production. The production activity
consists of converting materials into finished goods. At this stage
in the process, the materials, labor, and overhead costs
have been incurred and the schedule of cost of goods manufactured
is prepared. The sales activity consists of selling some or all of
finished goods available for sale. At this stage,
the cost of goods sold is determined.
Important trends
in managerial accounting include an increased focus on satisfying customers,
the impact of a global economy, and the growing presence of
e-commerce and service-based businesses. The lean business
model, designed to eliminate waste and satisfy customers, can be
useful in responding to recent trends. Concepts such as total
quality management, just-in-time production, and the value chain often
aid in application of the lean business model.
ANALYTICAL
A high raw materials inventory turnover suggests
a business is more effective in managing its raw materials
inventory. We use days’ sales in raw materials inventory to assess
the likelihood of production being delayed due to inadequate levels of raw
materials. We prefer a high raw materials inventory turnover ratio and a small number of days’ sales in raw
materials inventory, provided that raw materials inventory levels are adequate
to keep production steady.
PROCEDURAL
A manufacturer adds beginning finished goods
inventory to cost of goods manufactured and then subtracts ending
finished goods inventory to get cost of goods sold. A merchandiser adds
beginning merchandise inventory to cost of goods purchased and then
subtracts ending merchandise inventory to get cost of goods sold.
This schedule reports the
computation of cost of goods manufactured for the period. It begins by
showing the period’s costs for direct materials, direct labor, and overhead and then adjusts these numbers
for the beginning and ending inventories of the work in process to yield cost
of goods manufactured.
Guidance Answers to Decision
Maker and Decision Ethics
Production Manager
It appears that all three friends want to pay the bill with someone
else’s money. David is using money belonging
to the tax authorities, Denise is taking money from her company, and Derek is defrauding the client. To
prevent such practices, companies have internal audit mechanisms. Many companies also
adopt ethical codes of conduct to help guide employees. We must recognize that some
entertainment expenses are justifiable and even encouraged. For example, the tax law allows
certain deductions for
entertainment that have a business purpose. Corporate policies also
sometimes allow and encourage reimbursable spending for social activities, and contracts
can include entertainment as allowable costs. Nevertheless, without further details, payment for this bill should be
made from personal accounts.
Entrepreneur
Tracing all costs directly to cost objects is always
desirable, but you need to be able to do so in an economically feasible manner. In this case,
you are able to trace 90% of the assembly department’s direct costs. It may not be
economical to spend
more money on a new software to
trace the final 10% of costs.
You need to make a cost-benefit trade-off. If the software offers benefits beyond tracing
the remaining 10% of the assembly department’s
costs, your decision should consider this.
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