Chapter 10- An Introduction to Management Accounting

Financial Accounting

not designed to satisfy all the information needs of business managers. Its scope is limited to the needs of external users such as investors and creditors

Managerial

A branch of accounting focused on the information needs of managers and others working within the business; its objective is to gather and report information that adds value to the business. Managerial accounting information is not regulated or reported to the public

Users and Types of Information- Financial Accounting

• External users- investors and creditors

• Need general economic information

Users and Types of Information- Managerial Accounting

• Internal users- executives, managers, employees

• Need information to plan, direct, and control business operations- related to an employee's job level

Financial accounting data is more _______ than managerial accounting data

aggregated

External users typically seek comprehensive information that reflects a company's overall performance

Financial accounting is designed to generate information for the:

general public

Securities and Exchange Commission

Government agency responsible for overseeing the accounting rules to be followed by companies required to be registered with it.

Financial Accounting Standards Board

Private, independent standard-setting body established by the accounting profession that has been delegated the authority by the SEC to establish most of the accounting rules and regulations for public financial reporting.

• The SEC delegated much of its authority for developing accounting rules to the private sector

Generally Accepted Accounting Principles (GAAP)

Rules and practices that accountants agree to follow in financial reports prepared for public distribution.

• Restrict the accounting procedures and practices permitted in published financial statements

Value-Added Principle

• The benefits attained (value added) from the process should exceed the cost of the process.

• Management accountants are free to engage in any information-gathering and reporting activity so long as the activity adds value in excess of its cost

• Managerial accounting can include forecasting, but under the GAAP, financial accounting cannot

More concerned with relevance and timeliness and includes more estimates and fewer facts

Managerial accounting

reports objective, historical data

financial accounting

Reported periodically, normally at the end of the year

financial accounting

reported continuously

managerial accounting

Product cost

All costs related to obtaining or manufacturing a product intended for sale to customers; are accumulated in inventory accounts and expensed as cost of goods sold at the point of sale

Cost-plus pricing

Pricing strategy that sets the price at cost plus a markup equal to a percentage of the cost

Product costing

Classification and accumulation of individual inputs (materials, labor, and overhead) for determining the cost of making a good or providing a service.

Three types of costs that are incurred in the process of making products

1. Materials

2. Labor

3. Overhead

Overhead costs

Costs associated with producing products that cannot be cost-effectively traced to products, including indirect costs such as indirect materials, indirect labor, utilities, rent, and depreciation

Finished Goods Inventory

Asset account where finished inventory is held until it is sold

Average cost

The total cost of making products divided by the total number of products made

• Material and tool usage likely varied from table to table

• Determining the exact cost of each table is virtually impossible

• Minor differences in the cost per table would make no difference in pricing or other decisions management needs to make.

Raw materials

materials used to make products.

• First recorded in an asset account (Inventory). The cost is then transferred from the Inventory account to the Cost of Goods Sold account at the time the goods are sold.

• When inventory is sold, the combined cost of materials, labor, and overhead is expensed as cost of goods sold.

Direct raw materials

Costs of raw materials that can be easily and conveniently traced to the products they are used to make

Direct labor costs

Wages paid to production workers whose efforts can be easily and conveniently traced to products

Selling, general, and administrative costs

All costs not associated with obtaining or manufacturing a product; sometimes called period costs because they are normally expensed in the period in which the economic sacrifice is incurred.

Indirect costs

Costs that cannot be easily traced to a cost object and for which the economic sacrifice to trace is not worth the informational benefits.

Manufacturing overhead

• Production costs that cannot be traced directly to products.

• ex. indirect materials, indirect labor, factory utilities, rent of manufacturing facilities, and depreciation on manufacturing assets

Raw materials inventory

Production costs that cannot be traced directly to products.

Work in Process Inventory

Asset account used to accumulate the product costs (direct materials, direct labor, and overhead) associated with incomplete products that have been started but are not yet completed.

Finished Goods Inventory

includes completed products that are ready for sale

Inventory Holding Costs

Costs associated with acquiring and retaining inventory, including the cost of storage space; lost, stolen, or damaged merchandise, insurance; personnel and management costs; and interest.

Just in Time Inventory

Inventory flow system that minimizes the amount of inventory on hand by making inventory available for customer consumption on demand, therefore eliminating the need to store inventory. The system reduces explicit holding costs including financing, warehouse storage, supervision, theft, damage, and obsolescence. It also eliminates hidden opportunity costs such as lost revenue due to the lack of availability of inventory.