Process Costing Fifo Method Discussion

Chapter 1 Managerial Accounting Managerial Accounting Tools for Business Decision-Making Fifth Canadian Edition Weygandt Kimmel Kieso Aly Prepared by Angela Davis, CPA, CA, CFE, MSc Learning Objectives 1. Explain the distinguishing features of managerial accounting. 2. Identify the three broad functions of management and the role of management accountants in an organizational structure. 3. Explain the importance of business ethics. 4. Identify changes and trends in managerial accounting. Managerial Accounting Basics (1 of 7) Definition of Managerial Accounting: A field of accounting that provides economic and financial information for managers and other internal users. Also called Management Accounting. Managerial Accounting Basics (2 of 7) • Managerial Activities • Explain the field and substance of managerial accounting (Chapter 1). • Explaining various managerial cost concepts that are useful in planning, directing, and controlling. We also present cost flows and the process of cost accumulation in a manufacturing environment and costs and how they are reported in the financial statements (Chapter 2). Managerial Accounting Basics (3 of 7) Managerial Activities • Calculate the cost of providing a service or manufacturing a product (Chapters 3, 4 and 5). • Analyzing the effects of volume changes on the cost and profit relationship within a company (Chapter 6). • Accumulating and presenting relevant data for management decision-making (Chapter 7). Managerial Accounting Basics (4 of 7) • Managerial Activities: (continued) • Evaluating the impact on decision-making of alternative approaches for costing inventory (Chapter 8). • Determining prices for external and internal transactions (Chapter 9). Managerial Accounting Basics (5 of 7) • Managerial Activities: (continued) • Assisting management in profit planning and formalizing these plans in budgets (Chapter 10). • Providing a basis for controlling costs and expenses by comparing actual results with budgeted numbers (Chapters 11 and 12). • Accumulating and presenting data for capital investment decisions (Chapter 13). Managerial Accounting Basics (6 of 7) • Distinguishing Features • Applies to all types of businesses – service, merchandising, and manufacturing • Applies to all forms of businesses – proprietorships, partnerships, and corporations • Applies to not-for-profit and profit-oriented companies Managerial Accounting Basics (7 of 7) • Distinguishing Features • More responsible for strategic cost management • Team includes members from production, marketing, engineering, etc. • Aid in making critical decisions Comparing Managerial and Financial Accounting (1 of 2) Similarities: • Both deal with economic events of a business • Both require that economic events be quantified and communicated to interested parties Comparing Managerial and Financial Accounting (2 of 2) Differences between financial and managerial accounting Let’s Review 1 All of the following are distinguishing features of managerial accounting except: a. b. c. d. internal users. independent audits. reports pertaining to subunits of the entity. to provide special-purpose information. Let’s Review 1: Solution All of the following are distinguishing features of managerial accounting except: a. b. c. d. internal users. independent audits. reports pertaining to subunits of the entity. to provide special-purpose information. Management Functions Management’s activities and responsibilities can be classified into the following three broad functions: 1. Planning 2. Directing 3. Controlling Management Functions: Planning • Future Oriented – Looking ahead • Establish objectives such as • Maximize short-term profit and market share • Commit to environmental protection • Contributing to social programs • Key Objective: Add value to the business • Value measured by trading price of stock and by potential selling price of the company Management Functions: Directing • Coordinate diverse activities and human resources • Implement planned objectives • Provide incentives to motivate employees • Hire and train employees including executives, managers, and supervisors Management Functions: Controlling • Keep activities on track • Determine whether goals are met • Decide on the changes needed to get back on track • Typically use a formal system of evaluation Good decision-making is the outcome of good judgment in planning, directing, and controlling. Organizational Structure: Organizational Chart • Prepared by most companies • Organizational charts identify the interrelationships of activities, the delegation of authority and the delegation of responsibility • Responsibilities within the company are frequently classified as either line or staff positions • line positions are directly involved in the company’s main revenue-generating operating activities • staff positions are involved in activities that support the efforts of the line employees A Typical Company’s Organizational Chart Corporation organizational chart Let’s Review 2 The officer responsible for all of the accounting and finance issues a company faces is the: a. b. c. d. Chief executive officer. Chief financial officer. Controller. Treasurer. Let’s Review 2: Solution The officer responsible for all of the accounting and finance issues a company faces is the: a. b. c. d. Chief executive officer. Chief financial officer. Controller. Treasurer. Good Ethics – Good Business (1 of 2) • • • • Business Ethics Business scandals cause massive investment losses and employee layoffs Corporate fraud has increased 13% in last five years Employee fraud makes up 60% of all fraud, expense account abuse, theft of assets, etc. Intentional misstatement of financial reports, or financial reporting fraud, is the most costly to companies Good Ethics – Good Business (2 of 2) Creating Proper Incentives • Monitoring and evaluating employees may produce incentives to act unethically; for example, overly ambitious budgets may produce unethical management actions to meet targets • Employees may feel that they must succeed no matter what • Ineffective and unrealistic controls may result in declining quality of product • Good ethics add value to a company’s image Statement of Ethical Professional Practice • Competence • Confidentiality • Integrity • Objectivity Corporate Social Responsibility • Considers not only profitability but also the company’s efforts to employ sustainable business practices regarding its employees and the environment • Often referred to as the triple bottom line • People • Planet • Profits Let’s Review 3 Which of the following is not one of the categories in Standards of Ethical Professional Practice? a. b. c. d. Confidentiality Competence Integrity Independence Let’s Review 3: Solution Which of the following is not one of the categories in Standards of Ethical Professional Practice? a. b. c. d. Confidentiality Competence Integrity Independence Managerial Accounting Today: Service Industry Trends (1 of 2) • North American economy in general has shifted toward an emphasis on providing services • Today, over 50% of U.S. and Canadian workers are employed by service companies • Trend is expected to continue in the future Managerial Accounting Today: Service Industry Trends (2 of 2) • Managerial accounting has responded to the need for new systems to measure the cost of services • New operating controls have been designed to improve the quality and efficiency of specific services • Many of the techniques developed for manufacturing firms have been applied to service companies Managerial Accounting Today Service industries and companies and the managerial accounting questions they face Managerial Accounting Today: Managerial Accounting Practices (1 of 7) Value Chain Refers to all activities associated with providing a product or service: For a manufacturing firm, these include: A manufacturer’s value chain Managerial Accounting Today: Managerial Accounting Practices (2 of 7) Technological Change • Enterprise resource planning (ERP) • Software systems that manage the value chain • In large companies, an ERP system might replace as many as 200 individual software packages • Computer-integrated manufacturing (CIM) • Makes products untouched by human hands • Business-to-business (B2B) e-commerce via internet Managerial Accounting Today: Managerial Accounting Practices (3 of 7) • Just-In-Time (JIT) Inventory Methods • Inventory system in which goods are manufactured or purchased just in time for use • Quality/TQM • Increased emphasis on product quality because goods are produced only as needed • Total Quality Management (TQM) – a philosophy of zero defects; all employees participate in managing quality Managerial Accounting Today: Managerial Accounting Practices (4 of 7) • Activity-Based Costing (ABC) • Overhead is allocated based on each product’s use of economic resources as it undergoes various activities (number of orders or number of machine set ups) • Results in more accurate product costing and scrutiny of all activities in the value chain • Theory of Constraints • Used to identify and manage constraints or “bottlenecks” • Helps achieve overall goals of the company, particularly profits Managerial Accounting Today: Managerial Accounting Practices (5 of 7) Lean manufacturing • Today most products require little direct labour to complete, due in large part to advancements in automation. Customers now dictate requirements to suppliers and often look for smaller quantities of individualized products. Lean manufacturing was developed in response to this changing manufacturing environment. Managerial Accounting Today: Managerial Accounting Practices (6 of 7) Lean manufacturing: (continued) • Researchers have highlighted five basic principles that are crucial to the lean thinking process: 1. 2. 3. 4. 5. Define value Identify the value stream Make the value stream flow Implement a pull system Strive for perfection Managerial Accounting Today: Managerial Accounting Practices (7 of 7) Balanced Scorecard • A performance-measurement approach to evaluate operations in an integrated fashion • Uses both financial and non-financial measures • Links performance measures to overall company objectives Let’s Review 4 All activities associated with providing a product or service is referred to as: a. b. c. d. the value chain. total quality management systems. just-in-time inventory methods. activity-based costing. Let’s Review 4: Solution All activities associated with providing a product or service is referred to as: a. b. c. d. the value chain. total quality management systems. just-in-time inventory methods. activity-based costing. Copyright Copyright © 2018 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make backup copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. Chapter 2 Managerial Cost Concepts and Cost Behaviour Analysis Managerial Accounting Tools for Business Decision-Making Fifth Canadian Edition Weygandt Kimmel Kieso Aly Prepared by Angela Davis, CPA, CA, CFE, MSc Learning Objectives 1. Define the three classes of manufacturing costs and differentiate between product costs and period costs. 2. Explain variable, fixed, and mixed costs and the relevant range. 3. Apply the high-low method to determine the components of mixed costs. 4. Demonstrate how to calculate the cost of goods manufactured and prepare financial statements for a manufacturer. Managerial Cost Concepts Manufacturing Costs Manufacturing consists of activities to convert raw materials into finished goods. Typical Classification of Manufacturing Costs • In contrast, a merchandising firm sells goods in the form in which they are purchased. Managerial Cost Concepts Manufacturing Costs – Direct Materials • Raw materials are basic materials and parts used in manufacturing. • Raw materials that can be physically and directly associated with the finished product are called direct materials. • Examples include: • • • Flour in the baking of bread Syrup in the bottling of soft drinks Steel used in making automobiles Managerial Cost Concepts Manufacturing Costs – Direct Labour • Work of factory employees that can be physically and directly associated with converting raw materials into finished goods is direct labour • Examples include • Bottlers at Coca-Cola • Bakers at Sara Lee • Typesetters at a newspaper Managerial Cost Concepts Manufacturing Overhead – Indirect Materials (1 of 2) • Raw materials that cannot be easily associated with the finished product are called indirect materials • Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost Managerial Cost Concepts Manufacturing Overhead – Indirect Materials (2 of 2) • Considered part of manufacturing overhead • Examples include: • lubricants • cleaning supplies • Polishing compounds Managerial Cost Concepts Manufacturing Costs – Manufacturing Overhead • Costs that are indirectly associated with manufacturing of finished goods • All manufacturing costs that cannot be classified as direct material and direct labour • Examples include: • Indirect materials • Indirect labour • Amortization on factory buildings, Insurance, taxes, maintenance on factory facilities Managerial Cost Concepts Manufacturing Overhead – Indirect Labour • Work of factory workers that have no physical association with the finished product, or for which it is impractical to trace to the goods produced, is indirect labour • Examples include: • Wages of maintenance workers, janitors, and, security guards • Supervisors • Time-Keepers Prime Costs and Conversion Costs (1 of 2) • Prime costs are the sum of all direct materials costs and direct labour costs. These are all direct manufacturing costs. • Conversion costs are the sum of all direct labour costs and manufacturing overhead costs, which together are the costs of converting raw materials into a final product. Prime Costs and Conversion Costs (2 of 2) Prime costs and conversion costs Product versus Period Costs (1 of 3) Product Costs • Consist of the direct material cost, the direct labour cost, and the manufacturing overhead cost • A necessary and integral part of producing the product • Recorded as inventory when incurred • Do not become expenses until the finished goods inventory is sold Product versus Period Costs (2 of 3) Period Costs • Matched with revenue of a specific time period and charged to expense as incurred • Non-manufacturing costs • Deducted from revenues in period incurred to determine net income • Include all • Selling expenses • General and Administrative expenses Product versus Period Costs (3 of 3) Product versus period costs Let’s Review 1 Which of the following is not an element of manufacturing overhead? a. b. c. d. Sales manager’s salary Plant manager’s salary Factory repairman’s wages Product inspector’s salary Let’s Review 1: Solution Which of the following is not an element of manufacturing overhead? a. b. c. d. Sales manager’s salary Plant manager’s salary Factory repairman’s wages Product inspector’s salary Cost Behaviour Analysis (1 of 3) • Definition: The study of how specific costs respond to changes in the level of business activity • Some costs change; others remain the same • Helps management plan operations and make decisions • Applies to all types of businesses and entities Cost Behaviour Analysis (2 of 3) • Starting point is measuring key business activities • Activity levels may be expressed in terms of • • • • Sales dollars (in a retail company) Kilometers driven (in a trucking company) Room occupancy (in a hotel) Dance classes taught (by a dance studio) • For an activity level to be useful, changes in the level or volume of activity should be correlated with changes in cost Cost Behaviour Analysis (3 of 3) • The activity level selected is called the activity (or volume) index • Identifies the activity that causes changes in the behaviour of costs • Allows costs to be classified according to their response to changes in activity as: Variable Cost Fixed Cost Mixed Cost Cost Behaviour Analysis: Variable Costs (1 of 4) • Costs that vary in total directly and proportionately with changes in the activity level • If the activity level increases 10%, total variable costs increase 10%; If the activity level decreases by 25%, total variable costs will decrease by 25% Cost Behaviour Analysis: Variable Costs (2 of 4) • Variable costs also remain constant per unit at every level of activity • Examples of variable costs include: • Direct material and direct labour for a manufacturer • Sales commissions for a merchandiser • Gasoline in airlines and trucking companies Cost Behaviour Analysis: Variable Costs (3 of 4) Example: • Damon Company manufactures tablets that contain a $10 camera • Activity index is the number of tablets produced • For each tablet produced, the total cost of the cameras increases by $10 • If 2,000 tablets are made, the total cost of the cameras is $20,000 (2,000 X $10) • If 10,000 tablets are made, the total cost of the cameras is $100,000 (10,000 X $10) Cost Behaviour Analysis: Variable Costs (4 of 4) Example (continued) Behaviour of total and unit fixed costs Cost Behaviour Analysis: Fixed Costs (1 of 3) • Costs that remain the same in total within the relevant range regardless of changes in the activity level. • Per unit cost varies inversely with activity: • As volume increases, unit cost decline, and vice versa • Examples include: • • • • Property taxes Insurance Rent Deprecation on buildings and equipment Cost Behaviour Analysis: Fixed Costs (2 of 3) Example: • Damon Company leases its productive facilities for $10,000 per month • Total fixed costs of the facilities remain constant at all levels of activity – $10,000 per month • On a per unit basis, the cost of rent decreases as activity increases and vice versa • At 2,000 tablets, the unit cost is $5 ($10,000 ÷ 2,000 units) • At 10,000 tablets, the unit cost is $1 ($10,000 ÷ 10,000 units) Cost Behaviour Analysis: Fixed Costs (3 of 3) Example (continued) Behaviour of total and unit fixed costs Distinguish Between Variable and Fixed Costs • Variable costs are costs that vary in total directly and proportionately with changes in the activity level. These costs remain the same per unit at every level of activity. • Fixed costs are costs that remain the same in total within the relevant range regardless of changes in the activity level. Fixed costs per unit vary inversely with activity—in other words as volume increases, unit costs decrease and vice versa. Cost Behaviour Analysis: Relevant Range (1 of 3) • Throughout the range of possible levels of activity, a straight-line relationship usually does not exist for either variable costs or fixed costs • The relationship between variable costs and changes in activity level is often curvilinear • For fixed costs, the relationship is nonlinear � …