MANAGEMENT ACCOUNTING:

A BUSINESS PARTNER
Lecture # 1

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THE NEED FOR COST ACCOUNTING

Cost accounting provides the detailed cost

data that management needs to control
current operations and plan for the future.
Companies must control costs in order to
keep prices competitive.
In todays global environment, cost
information is more crucial than ever in
remaining competitive.

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MANAGEMENT ACCOUNTING:
BASIC FRAMEWORK

M a n a g e m e n t a c c o u n tin g a n d
a s s ig n in g d e c is io n - m a k in g a u t h o r it y .
A c c o u n t in g s y s t e m s h e lp to id e n t ify
w h o h a s a u th o r ity o v e r a s s e ts .
A c c o u n tin g in f o r m a t io n s u p p o r ts
p la n n in g a n d d e c is io n - m a k in g .
A c c o u n tin g r e p o r ts p r o v id e a m e a n s o f
m o n ito r in g , e v a lu a tin g , a n d r e w a r d in g p e r fo r m a n c e .

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MANAGEMENT ACCOUNTING
SYSTEMS FRAMEWORK
Top
Top Management
Management

Budget:
Budget:
Future
Future Plans
Plans

Assign
Assign
Decision-Making
Decision-Making

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Actual
Actual Results:
Results:
Current
Current

Support
Support
Decision-Making
Decision-Making

Performance
Performance
Evaluation:
Evaluation: Past
Past

Evaluate
Evaluate
Decision-Making
Decision-Making

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16-5

COMPARING FINANCIAL ACCOUNTING AND

MANAGEMENT ACCOUNTING
Financial Accounting
Management Accounting
Provide information about the
Provide information for
Purpose
financial position and
planning, evaluating, and
performance of the company.
rewarding performance.
Balance sheet, income
Types of
statement, and statement of Various, non-standard reports.
Reports
cash flows.
Standards
GAAP
None
Reporting Usually, the company taken
A component of the
Entity
as a whole.
company's value chain.
Time
Usually a year, quarter, or a
Any period.
Periods
month.
Investors, creditors, and other Management, customers, and
Users
external parties.
others in the value chain.

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TYPES OF BUSINESSES THAT USE COST ACCOUNTING

Manufacturers (Ford, General Motors)

Merchandisers (WalMart, Kmart)
Wholesalers (Beverage Distributors)
For-profit Service Businesses (CPAs,
Attorneys)
Not-for-profit Service Agencies (United
Way, Red Cross)

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THE BALANCED SCORECARD

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ACCOUNTING FOR
MANUFACTURING OPERATIONS

The
The cost
cost to
to
produce
produce aa unit
unit of
of
product
product includes:
includes:

Direct
Direct material
material

Direct
Direct labor
labor

Manufacturing
Manufacturing
overhead
overhead

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16-9

DIRECT MATERIALS
Raw materials
& component
parts that
become an
integral part
of finished
products.

Can be traced
directly and
conveniently
to products.

IfIfmaterials
materialscannot
cannot be
betraced
traced directly
directlyto
to products,
products,
the
thematerials
materialsare
areconsidered
considered indirect
indirect and
and are
arepart
part
of
of manufacturing
manufacturingoverhead.
overhead.

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DIRECT LABOR
Includes
Includes the
the payroll
payroll cost
cost of
of direct
direct workers.
workers.

Direct labor
Wage

hours
rate

Those
Those employees
employees
who
who work
workdirectly
directly
on
on the
thegoods
goodsbeing
being
manufactured.
manufactured.

The
Thecost
cost of
of employees
employees who
who do
do not
not work
work
directly
directlyon
onthe
the goods
goodsis
isconsidered
considered indirect
indirect
labor
labor and
andis
ispart
partof
ofmanufacturing
manufacturingoverhead.
overhead.

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16-11

MANUFACTURING OVERHEAD
All
All manufacturing
manufacturing costs
costs other
other than
than direct
direct
materials
materials and
and direct
direct labor.
labor.

Includes:
Includes:

Indirect
Indirect materials.
materials.

Indirect
Indirect labor.
labor.

Machinery
Machinery and
and

equipment
equipment costs.
costs.

Cost
Cost of
of regulatory
regulatory
compliance.
compliance.

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Does
Doesnot
not include
include
selling
selling or
or general
general and
and
administrative
administrative
expenses.
expenses.

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16-12

FLOW OF PHYSICAL
GOODS IN PRODUCTION
Direct
Direct
Materials
Materials
Purchased
Purchased

Direct
Direct
Materials
Materials
Used
Used
Finished
Finished
Goods
Goods

Direct
Direct
Labor
Labor

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Manufacturing
Manufacturing
Overhead
Overhead

Goods
Goods
Sold
Sold
MegaLoMart

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16-13

ACCOUNTING FOR
MANUFACTURING OPERATIONS

Manufacturing
Manufacturing costs
costs are
are often
often
combined
combined as
as follows:
follows:
Direct
Direct
Materials
Materials

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Direct
Direct
Labor
Labor

Prime
Cost

Manufacturing
Manufacturing
Overhead
Overhead

Conversion
Cost

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16-14

PRODUCT COSTS VERSUS PERIOD COSTS

Product Costs
(manufacturing
costs)

Balance
BalanceSheet
Sheet

as
incurred

Period Costs
(operating
expenses and
income taxes.)

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as
incurred

Current
Current assets
assets
and
and inventory
inventory
Income
Income
Statement
Statement
Revenue
Revenue
COGS
COGS
Gross
Grossprofit
profit
Expenses
Expenses
Net
Net income.
income.

When
When goods
goods
are
aresold.
sold.

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INVENTORIES OF A
MANUFACTURING BUSINESS

Raw
Raw materials
materials-- inventory
inventoryon
on
hand
handand
andavailable
availablefor
foruse.
use.

Finished
Finished
goodsgoodscompleted
completed
goods
goodsawaiting
awaiting
sale.
sale.

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Work
Work in
in
process
process-partially
partially
completed
completed
goods.
goods.

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