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Accounting Concepts and Principles

Click to edit Master you should title style After studying this chapter,
be able to: 1. Describe managerial accounting, and the role of managerial accounting in a business. 2. Define and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.

Click to edit Master you should title style After studying this chapter,
be able to: 3. Describe and illustrate the financial statement elements and cost relationships for a manufacturing business. 4. Describe the various uses of managerial accounting information.
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Click to edit Master title style Objective 1


Describe managerial accounting, and the role of managerial accounting in a business.

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The Difference Between Managerial and Financial Accounting

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Financial accounting information is reported in statements that are useful for persons or institutions who are outside or external to the organization. Management also uses these financial statements in directing current operations and planning future operations.
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Managerial accounting information is provided to meet the specific needs of a companys management, such as historical data and subjective estimates about future decisions.

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Example of Users

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Managerial Accounting Users of Accounting Information

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Financial Accounting

Shareholders Creditors Government Agencies General Public Management

Management

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Financial Accounting and Managerial Accounting

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Partial Organizational Chart for Callaway Golf Company

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Planning

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Planning is used by management to develop the organizations objectives (goals) and to translate these objectives into courses of action.

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Strategic planning is developing long-range courses of action to achieve goals. Long-range courses of action, called strategies, can often involve periods ranging from five to ten years.

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Directing

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Directing is the process by which managers, given their assigned level of responsibilities, run day-today operations.

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Controlling

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Controlling, sometimes called management by exception, consists of monitoring the operating results of implemented plans and comparing the actual results with the expected results.

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Comparing actual results with expected results (feedback) allows management to isolate significant departures from plans for further investigation and possible remedial action.

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Improving

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Continuous process improvement is the philosophy of continually improving employees, business processes, and products.

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Example Exercise 1-1

Three aspects of the management process are listed below. Match each phase to the appropriate description.
Aspect of management process Description ___Planning a. Monitoring the operating ___Controlling results of implemented plans ___Continuous and comparing the actual Improvement results with expected results. (continued)
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Example Exercise 1-1 (continued) Aspect of management process Description ___Planning b. Rejects solving individual ___Controlling problems with temporary ___Continuous solutions that fail to address Improvement the root cause of the problem. c. Used by management to develop the organizations objectives.
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Follow My Example 1-1 Aspect of management process ___Planning c ___Controlling a ___Continuous Improvement b

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For Practice: PE 1-1A, PE 1-1B

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Define and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.

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Direct and Indirect Costs

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Costs are often classified in terms of how they relate to some object or segment of operations, called a cost object. It may be a product, a sales territory, a department, or some activity. Costs are identified with cost objects as either direct costs or indirect costs.

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Direct Materials Cost

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The cost of any material that is an integral part of the final product is classified as a direct materials cost.

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Direct Labor Cost

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The wages of each employee who is directly involved in converting materials into the final product are classified as direct labor cost.

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Factory Overhead Cost

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Costs, other than direct materials cost and direct labor costs, that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes also called manufacturing overhead or factory burden).

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Examples of Factory Overhead Cost

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Heating and lighting the factory Repairing and maintaining factory equipment Property taxes Insurance Depreciation of factory plant and equipment

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Identify the following costs as (a) direct materials, (b) direct labor, or (c) factory overhead for a baseball glove manufacturer. 1. _______________ Leather used to make a baseball glove 2. _______________ Coolants for machines that sew baseball gloves 3. _______________ Wages of assembly line employees 4. _______________ Ink used to print a players autograph on the baseball glove
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Follow My Example 1-2

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Identify the following costs as (a) direct materials, (b) direct labor, or (c) factory overhead for a baseball glove manufacturer. 1. _______________ Leather used to make a baseball (a) Direct materials glove (c) Factory overhead 2. _______________ Coolants for machines that sew baseball gloves (b) Direct labor 3. _______________ Wages of assembly line employees 4. _______________ Ink used to print a players autograph (c) Factory overhead on the baseball glove Left click mouse for answers. 28 For Practice: PE 1-2A, PE 1-2B

Prime Costs and Conversion Costs

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Prime Costs
Direct Materials Direct Labor Factory Overhead

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Conversion Costs
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Identify the following costs as a (a) prime cost, (b) conversion cost, or (c) both for a baseball glove manufacturer. 1. _______________ Leather used to make a baseball glove 2. _______________ Coolants for machines that sew baseball gloves 3. _______________ Wages of assembly line employees 4. _______________ Ink used to print a players autograph on the baseball glove
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Follow My Example 1-3

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Identify the following costs as a (a) prime cost, (b) conversion cost, or (c) both for a baseball glove manufacturer. 1. _______________ Leather used to make a baseball (a) Prime cost glove (b) Conversion cost 2. _______________ Coolants for machines that sew baseball gloves 3. _______________ Wages of assembly line employees (c) Both 4. _______________ Ink used to print a players autograph (b) Conversion cost on the baseball glove Left click mouse for answers. 32 For Practice: PE 1-3A, PE 1-3B

Product Costs

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Product costs consist of the three elements of manufacturing cost: direct materials, direct labor, and factory overhead.

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Direct Materials
The cost of materials that are an integral part of the product.

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Product Costs

Direct Labor Factory Overhead

The cost of labor directly involved in converting material into the product.
Manufacturing costs other than direct materials and direct labor.

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Period Costs

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Period costs are generally classified into two categories: Selling expenses are incurred in marketing the product and delivering the sold product to the customer. Administrative expenses are incurred in the administration of the business.

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(Continued)

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(Concluded)

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Product Costs and Period Costs

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Example Exercise 1-4

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Identify the following costs as a (a) product cost, or (b) period cost for a baseball glove manufacturer.
1. _______________ Leather used to make a baseball glove 2. _______________ Cost of endorsement from a professional baseball player 3. _______________ Office supplies used at the company headquarters 4. _______________ Ink used to print a players autograph on the baseball glove 39

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Follow My Example 1-4

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Identify the following costs as a (a) product cost, or (b) period cost for a baseball glove manufacturer.
1. _______________ Leather used to make a baseball (a) Product cost glove (b) Period cost 2. _______________ Cost of endorsement from a professional baseball player (b) Period cost 3. _______________ Office supplies used at the company headquarters 4. _______________ Ink used to print a players autograph (a) Product cost on the baseball glove 40
Left click the mouse to reveal answers.

For Practice: PE 1-5A, PE 1-5B

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Describe and illustrate the financial statement elements and cost relationships for a manufacturing business.

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A Manufacturing Firms Inventories

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Materials inventory: Sometimes called raw materials inventory Consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process

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Work in process inventory: Consists of the direct materials costs, the direct labor costs, and the factory overhead costs that have entered the manufacturing process but are associated with products that have not been completed.

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Finished goods inventory: Consists of completed (or finished) products that have not been sold.

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Balance Sheet Presentation of Inventory in Manufacturing and Merchandising Companies

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Flow of Manufacturing Costs

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Determining the Cost of Goods Manufactured

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STEP 1:

Materials inventory, December 1, 2008 $ 65,000 Add: materials purchased during December 100,000 Cost of materials available for use $165,000 Less: materials inventory, Dec. 31, 2008 35,000 Cost of materials placed in production $130,000
to total manufacturing cost
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Determining the Cost of Goods Manufactured

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$130,000

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STEP 2:

Cost of materials placed in production

from Step 1

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Determining the Cost of Goods Manufactured

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$130,000 110,000 44,000 $284,000

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STEP 2:

Cost of materials placed in production Direct labor Factory overhead Total manufacturing costs added

to cost of goods manufactured section


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Determining the Cost of Goods Manufactured

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$ 30,000 284,000

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STEP 3:

Work in process inventory, Dec. 1, 2008 Add: total manufacturing costs added

from Step 2

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Determining the Cost of Goods Manufactured

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$ 30,000 284,000 $314,000 24,000 $290,000

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STEP 3:

Work in process inventory, Dec. 1, 2008 Add: total manufacturing costs added Total manufacturing costs Less: work in process inv, Dec 31, 2008 Cost of goods manufactured

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Manufacturing Company Income Statement with Statement of Cost of Goods Manufactured (contd)

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to income statement
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Manufacturing Company Income Statement with Statement of Cost of Goods Manufactured

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from statement of cost of goods manufactured

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Example Exercise 1-5

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Gauntlet Company has the following information for January: Cost of materials placed in production $25,000 Direct labor 35,000 Factory overhead 20,000 Work in process inventory, January 1 30,000 Work in process inventory, January 31 25,000 Finished goods inventory, January 1 15,000 Finished goods inventory, January 31 12,000 For January, determine the (a) cost of goods manufactured, and (b) cost of goods sold.

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Follow My Example 1-5

(a) Work in process inventory, January 1 $ 30,000 Cost of materials placed in production $25,000 Direct labor 35,000 Factory overhead 20,000 Total manufacturing costs added 80,000 Total manufacturing costs 110,000 Less: Work in process inventory, Jan. 31 25,000 Cost of goods manufactured $ 85,000
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(Continued)

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Follow My Example 1-5 (continued)

(b) Finished goods inventory, January 1 Cost of goods manufactured Cost of finished goods available for sale Less: Finished goods inventory, January 31 Cost of goods sold

$ 15,000 85,000 100,000 12,000 $ 88,000

(Concluded)
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For Practice: PE 18-5A, PE 18-5B

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Describe the various uses of managerial accounting information.

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Uses of Managerial Accounting

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Managerial accounting, as mentioned earlier, provides information and reports that help managers run the day-to-day operations of their business.

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Managerial reports provide data that help managers evaluate the performance of a companys operations.

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Companies use managerial accounting information to support long-term planning decisions, such as investment decisions.

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Managerial accounting data can be used to help managers understand how many units need to be sold in a month to cover recurring monthly costs.

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