Managerial Accounting

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Cost & Management Accounting1. Managerial accounting is directed towards providing information to managers and employees inside the organization. 2. They need information in order to: y To determine cost of making a product or providing a service y Profit planning y Formalizing plans into budgets y Determine behavior of costs y Compare actual and budgeted costs y Providing cost and sales information for decision making Used for: 1. Controlling 2. Planning 3. Decision making 4. Directing Control

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Cost & Management Accounting
1. Managerial accounting is directed towards providing information to managers and employees inside the organization. 2. They need information in order to: y To determine cost of making a product or providing a service y Profit planning y Formalizing plans into budgets y Determine behavior of costs y Compare actual and budgeted costs y Providing cost and sales information for decision making Used for: 1. Controlling 2. Planning 3. Decision making 4. Directing Controlling: Make sure the plans are being followed and objectives are accomplished Performance reporting ± compare actual results to the budget Implement changes when objectives and goals are not being accomplished Planning: Identify objectives the company wants to accomplish which will add value to the company and increase profits. Discuss ways to accomplish the objectives Prepare budgets to accomplish the profit objective Decision Making: Use all information provided to make good business decisions Directing/Motivating: Coordinating the activities to produce a smooth running operation. Oversee day to day activities and keep the organization functioning smoothly Assign jobs/tasks ± answer questions ± solve problems MANAGERIAL ACCOUNTING: 1. Does not follow GAAP and there are no reporting regulations 2. Prepares reports only for management¶s internal use 3. Provides information to make decisions regarding the future 4. Relevance of data is emphasized over reliability 5. Focuses on timeliness of information 6. Nothing is required to be reported, reports what management needs to see 7. Reporting is focused on parts of the organization such as departments or divisions and not on the organization as a whole

Manufacturing costs: Product costs: 1) Direct Material,2) Direct Labor, 3) Manufacturing Overhead Are included as part of inventory and shown on the balance sheet until the product is sold. Product costs are often called ³inventoriable costs´ or ³manufacturing costs´.When the product is sold, the costs are ³matched´ to the sales revenue and reported on the income statement as cost of goods sold Product costs are costs that are incurred to manufacture products. They include anything that becomes part of the product, anyone who touches the product to make it, and all the costs of the facilities and management incurred to make the product. The three major categories of product costs are: Direct Materials ± raw materials that become a part of the finished product The cost is high enough that you want to keep track of what is used in each product. It is easy to track how much material is required for one product to be made. If the cost of a particular material can not be easily traced to one product, it is an indirect material and is part of manufacturing overhead. Examples of indirect materials are cheap screws, tape, glue.

Direct Labor ± workers that touch the product to make the product - also includes workers who operate the machine if the product is made by machine

Manufacturing Overhead ± all costs of manufacturing the product except direct materials and direct labor Costs associated with operating the factory that makes the product. If the cost has the word ³factory´, ³plant´, ³manufacturing´, as a descriptive word, the cost will be part of manufacturing overhead. Manufacturing overhead includes things at the manufacturing plant that have to be incurred in order to get the product made, but is not part of the actual product or touches to make the product. It is indirect. You can not easily determine how much of these costs it takes to make one product. The total dollars spent support the manufacturing of many products. Examples of manufacturing overhead costs are: ± utilities at the plant such as electricity, water, phone. Support personnel at the plant such as an accountant, human resources or computer support. Training, maintenance and repairs, rent, insurance, taxes, etc. KEY ± it has to happen at the manufacturing facility. Indirect labor and indirect material are part of manufacturing overhead.

Indirect labor ± Involved in making the product at the plant but do not touch the product to make it. example: salaries of the plant managers, supervisors, and quality inspectors Indirect Material ± low cost materials that end up in the product or are used to make the product. Examples are glue, tape, screw, marking pens, etc. It is not easy to track exactly how much is used to make one product.

Period costs: Selling and Administrative costs: These costs are reported on the income statement as they are incurred. Not part of manufacturing overhead, not related to making the product. Examples: Anything at corporate headquaters, anything related to selling the product, shipping costs, administrative salaries, executive salaries, administrative office expenses, sales commissions, advertising, research and development, etc. Warehouse costs and people who move inventory are period costs Selling Costs ± all cost associated with marketing the finished products and getting the product to the customer Administrative Costs ± costs incurred for the general administration of the organization

Classification of costs in manufacturing companies: Prime Costs ± direct materials plus direct labor Conversion Costs ± direct labor plus manufacturing overhead. What it costs to take the materials and convert them to a finished product Direct Cost ± a cost that can be easily and conveniently traced to one product. Direct costs are direct materials and direct labor Indirect Cost ± a cost that cannot be easily and conveniently traced to one product. Must be allocated inorder to be assigned to a product or department. Manufacturing overhead and period costs are indirect costs Manufacturing Cost Flows: Product costs ± Direct material, Direct labor & Manufacturing overhead are recorded in Balance sheet as Inventories (Raw material, WIP , Finished Goods) which are then recorded in Income statement as COGS. Period costs ± Selling & Administrative costs are recorded directly in Income Statement as SG&A Cash flows in Merchandising vs Manufacturing firms: There is no cost of goods manufactured(COGM) in merchandising firms. It is only COGS. Whereas in case of manufacturing, it is both COGM and COGS

Cost Classification on behavior: Variable cost: Changes in total, in direct proportion to changes in the level of activity. The total cost increases/decreases as units made increases/decreases. Variable cost is constant if expressed on a per unit basis. Direct material, direct labor and variable overhead are all variable costs. Costs that vary with sales, such as sales commission are variable costs. It is a variable cost if it costs you more if you make or sell one more. Fixed Cost:

Total cost does not change with changes in the volume of activity (within a relevant range) The cost per unit will change as the number of units change. Fixed cost will go down as activity level goes up. Rent, insurance, administrative salaries are examples of fixed costs. These costs do not change just because you make or sell one more unit as long as you stay within the relevant range Mixed Cost: One that contains both variable and fixed costs elements: Fixed ± minimum cost of having a service ready and available for use Variable ± cost incurred for actual consumption of the service Total Mixed Costs = Total Fixed Cost $ + (Variable Cost $ per activity x # of the activity) An example of a mixed cost is charges for a cell phone. The cost is $39.99 plus $0.40 for each minute used over 400 minutes An example of a mixed cost is charges for water and sanitation. The cost is $55 per month, plus $1.25 per gallon for gallons used over 250 gallons used Opportunity Cost: The potential benefit that is given up when one alternative is selected over another alternative. Opportunity costs are not recorded/reported because they do not occur. The cost is the benefit that you gave up. Example: The opportunity cost of going to college is the amount of money you would have made if you were working. Sunk Cost: Cost that is already paid for and can not be changed by a decision made now or in the future. Example: Tuition for this semester that you have already paid and will not get back for any reason.

Determining COGM: Direct material cost [Opening balance (Beginning inventory) + Net Purchases] ± Closing Balance (Ending materials inventory) Conversion Cost Direct labor cost + Manufacturing overhead Total Manufacturing Cost Direct material cost + Conversion cost COGM COGM = [Manufacturing Cost + beginning WIP inventory] ± ending WIP inventory Determining COGS: [COGM + Beginning finished goods inventory] ± ending finished goods inventory Cost of Sales: COGS + Operating expenses Gross Profit: Sales ± COGS Operating profit: Gross profit ± Operating expenses Operatinf Profit + Other income = EBIT EBIT ± Interest expenses = EBT EBT ± Tax expenses = Net income or EAT or PAT Note: Service companies would not have COGS, only revenues and expenses in the income statement

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