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, 2005
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MANAGEMENT
ACCOUNTING: A
BUSINESS PARTNER
Chapter
16
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Accounting systems help to identify
who has authority over assets.
Accounting information supports
planning and decision-making.
Accounting reports provide a means of
monitoring, evaluating, and rewarding performance.
Management accounting and
assigning decision-making authority.
Management Accounting:
Basic Framework
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Management Accounting
Systems Framework
Budget:
Future Plans
Actual Results:
Current
Performance
Evaluation: Past
Top Management
Assign
Decision-Making
Support
Decision-Making
Evaluate
Decision-Making
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Financial Accounting Management Accounting
Purpose
Provide information about the
financial position and
performance of the company.
Provide information for
planning, evaluating, and
rewarding performance.
Types of
Reports
Balance sheet, income
statement, and statement of
cash flows.
Various, non-standard reports.
Standards GAAP None
Reporting
Entity
Usually, the company taken
as a whole.
A component of the
company's value chain.
Time
Periods
Usually a year, quarter, or a
month.
Any period.
Users
Investors, creditors, and other
external parties.
Management, customers, and
others in the value chain.
Comparing Financial Accounting and
Management Accounting
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The cost to
produce a unit of
product includes:
Direct material
Direct labor
Manufacturing
overhead
Accounting for
Manufacturing Operations
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Raw materials
& component
parts that
become an
integral part
of finished
products.
Can be traced
directly and
conveniently
to products.
Direct Materials
If materials cannot be traced directly to products,
the materials are considered indirect and are part
of manufacturing overhead.
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Includes the payroll cost of direct workers.
Direct Labor
Those employees
who work directly
on the goods being
manufactured.
Direct labor
hours

Wage
rate
The cost of employees who do not work
directly on the goods is considered indirect
labor and is part of manufacturing overhead.
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All manufacturing costs other than direct
materials and direct labor.
Includes:
Indirect materials.
Indirect labor.
Machinery and
equipment costs.
Cost of regulatory
compliance.
Manufacturing Overhead
Does not include
selling or general and
administrative
expenses.
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Direct
Materials
Purchased
Direct
Materials
Used
Direct
Labor
Manufacturing
Overhead
Finished
Goods
Goods
Sold
MegaLoMart
Flow of Physical
Goods in Production
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Direct
Materials
Direct
Labor
Prime
Cost
Conversion
Cost
Manufacturing costs are often
combined as follows:
Manufacturing
Overhead
Accounting for
Manufacturing Operations
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Balance Sheet
Current assets
and inventory
Product Costs
(manufacturing
costs)
Income
Statement
Revenue
COGS
Gross profit
Expenses
Net income.
When goods
are sold.
as
incurred
Period Costs
(operating
expenses and
income taxes.)
as
incurred
Product Costs Versus Period Costs
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Raw materials - inventory on
hand and available for use.
Work in
process -
partially
completed
goods.
Finished
goods-
completed
goods awaiting
sale.
Inventories of a
Manufacturing Business
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Direct
materials
purchased
Materials
Inventory
$$$ $$$
Flow of Costs Associated
With Production
Direct
materials
used
Work in Process
Inventory
$$$ $$$
Direct labor &
Manufacturing Overhead
Cost of goods
manufactured
Finished Goods
Inventory
$$$ $$$
Cost of
Goods Sold
$$$
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Pure-Ice Inc. had $52,000 of inventory in
direct materials inventory on January 1,
2005. During the year, Pure-Ice
purchased $586,000 of additional direct
materials. At December 31, 2005, $78,000
of the direct materials were still on hand.
How much direct material was
placed into production during 2005?
Flow of Costs Associated
With Production
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Beginning materials
inventory 52,000 $
+ Materials purchased 586,000
=
Materials available to be
placed into production 638,000

Materials placed into
production ?
=
Ending materials
inventory
78,000 $
?
Flow of Costs Associated
With Production
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Beginning materials
inventory 52,000 $
+ Materials purchased 586,000
=
Materials available to be
placed into production 638,000

Materials placed into
production 560,000
=
Ending materials
inventory
78,000 $
!
Flow of Costs Associated
With Production
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In addition to the direct materials, Pure-
Ice incurred $306,000 of direct labor cost
during 2005. Manufacturing overhead for
2005 was $724,000.
Pure-Ice started 2005 with $132,000 in
work in process. During 2005, units
costing $1,480,000 were transferred to
finished goods inventory.
What is the ending balance in work
in process at December 31, 2005?
Flow of Costs Associated
With Production
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Beginning work in
process inventory 132,000 $
+ Manufacturing costs
added 1,590,000
= Total costs in process
during the year 1,722,000
Cost of goods
completed during the
year (1,480,000)
=
Ending work in
process inventory
?
Direct Materials 560,000 $
Direct Labor 306,000
Manufacturing
Overhead 724,000
Total costs added
during the year
1,590,000 $
Flow of Costs Associated
With Production
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Beginning work in
process inventory 132,000 $
+ Manufacturing costs
added 1,590,000
= Total costs in process
during the year 1,722,000
Cost of goods
completed during the
year (1,480,000)
=
Ending work in
process inventory
242,000 $
!
Flow of Costs Associated
With Production
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A schedule of the cost
of finished goods
manufactured is
prepared to provide
managers with an
overview of
manufacturing
activities during a
period.
Determining the Cost of Finished
Goods Manufactured
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CONQUEST, INC.
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31, 2005
Work in process inventory, beg. 30,000 $
Manufacturing cost assigned to
production:
Direct materials 150,000 $
Direct labor 300,000
Manufacturing overhead 360,000
Total manufacturing costs 810,000
Total cost of all work in process
during the year 840,000
Less: Work in process
inventory, end of year (40,000)
Cost of finished goods manufactured 800,000 $
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CONQUEST, INC.
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31, 2005
Work in process inventory, beg. 30,000 $
Manufacturing cost assigned to
production:
Direct Materials 150,000 $
Direct Labor 300,000
Manufacturing overhead 360,000
Total manufacturing costs 810,000
Total cost of all work in process
during the year 840,000
Less: Work in process
inventory, end of year (40,000)
Cost of finished goods manufactured 800,000 $
Beginning finished goods
inventory 150,000 $
Add: Cost of finished goods
manufactured during the year 800,000
Cost of finished goods
available for sale 950,000
Less: Ending finished goods
inventory 168,000
Cost of goods sold
782,000 $
The cost of goods
completed during
the period is used
to compute COGS
for the period.
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CONQUEST, INC.
Income Statement
For the Year Ended December 31, 2005
Sales 1,300,000 $
Cost of goods sold 782,000
Gross profit on sales 518,000 $
Operating expenses 400,000
Income from operations 118,000 $
Less: Interest expense 18,000
Income before income
taxes 100,000 $
Income tax expense 30,000
Net income
70,000 $
The income
statement is
prepared
using
established
financial
accounting
procedures.
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End of Chapter 16