Managerial Accounting

Management accounting

accounting information systems designed and used internally to support the achievement of various organizational objectives.

Three principles of designing management accounting systems

1. who has decision-making authority over company assets

2. Accounting information from the system supports planning and decision making

3. Management accounting reports provide a means by which to monitor, evaluate, and reward performance

How do employees learn their decision-making responsibilities? 

• Job descriptions

• Verbal instructions from their supervisors

• Internal accounting documents and reports.

Historical information

For example, the current equipment’s cost and productivity.

Projected information

For example, the productivity and cost of other available equipment.

A value chain

the linked set of activities and resources necessary to create and deliver the product or service to the customer.

Management Accounting System Framework

Top management are supported in assigning decision-making (future budget plans), supporting decision-making (actual current results) and evaluating decision-making (past performance evaluation)

Managerial accounting report types/reporting

Various, non-standard accounts

Are there any reporting standards in managerial accounting?

No

Who is the audience for managerial accounting reports?

Management, customers, and others in the value chain.

What are manufacturing companies?

they produce the goods that they sell.

Manufacturing companies cost of goods sold?

• Cost of raw materials

• Wages earned by production workers

Variety of other costs related to the production facility:

• Utilities

• Maintenance

• Property taxes

What do manufacturing costs tell us?

• sales price for products to earn a reasonable profit or stay competitive

• identify opportunities for cutting production costs

• whether it’s cheaper to outsource production or do it in-house

• automation needs

What are the prime costs?

Direct labour, direct materials

Conversion costs

Direct labor, manufacturing overhead

Direct materials

the raw materials and component parts used in production whose costs are directly traceable to the products manufactured.

Direct labor

Wages and other payroll costs of employees whose efforts are directly traceable to the products they manufacture.

Manufacturing overhead

includes all manufacturing costs other than the costs of direct materials and direct labor.

Examples:

• factory utilities

• supervisor salaries

• equipment repairs

• depreciation on production machinery

Flow of physical goods in production

Direct materials purchased → direct materials used → direct labor and manufacturing overhead used → Finished goods → Goods sold

Product costs

direct material, direct labor, and manufacturing overhead.

How are product costs recorded?

• as inventory until goods are sold, then transferred to cost of goods sold

• merchandise inventories on balance sheet

• cost of sales in income statement

Period costs

Includes selling expenses, general and administrative expenses, interest expense, and income tax expense.

How are period costs recorded?

• as expense on income statement in period in which incurred.

• operating expense on the income statement separate from cost of goods sold.

What is regarded as fraud?

• Incorrectly capitalising (classifying as benefits/long-term expenses such as dep.) period costs and thereby over or understating assets

What is the matching principle?

Product costs should be reported in the income statement only when they can be matched to product revenue, so unless a house has been sold, it will remain in the inventory.

Three types of inventories carried by manufacturing companies

• Manufacturing inventory: raw materials available for use

• Work in process inventory: partially completed goods

• Finished goods: ready-to-be-sold products

Flow of cost Production

1. Direct labor, direct materials and manufacturing overhead (all used) credited from materials inventory, etc. and debited in work-in-process inventory

2. cost of finished goods credited from work-in-process and debited in finished goods inventory

3. cost of finished goods credited and debited to cost of goods sold

Indirect materials

Materials used in the production process that cannot be traced conveniently or directly to the finished goods manufactured. Included as part of manufacturing overhead.

Examples:

• cleaning supplies

• tools

• safety equipment

CVP analysis

cost-volume-profit analysis

What is included in cost-volume-profit analysis?

• break-even analysis

• how many sold units until x operating income

• how is profitability affected by expanded capacity

• the effect of changing fixed salaries to sales commissions of a certain %

• x increase in expenditure needs x increase in sales volume

semivariable

a fixed cost with a variable portion, such as a base mount with an extra fee per added unit/customer

describe what happens to fixed, variable, per-unit and total costs when volume increases and decreases

the relevant range

the range over which output is expected to vary, usuallu between 45 and 80% of capacity

what does profit refer to?

operating income

contribution margin

revenue - variable costs

contribution margin per unit

unit selling price - variable cost per unit

contribution margin ratio

contribution margin per unit / unit sales price

break-even analysis

sales volume in units = (fixed costs + target operating income)/contribution margin per unit

sales mix

the contribution margins of different products sold

average contribution margin ratio

product CM ratio x percentage of sales