Management s Accountability to Stakeholders Stakeholders Provide Management is accountable for: Owners Operating activities Government Creditors

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1 Chapter 15 Distinguish management accounting from financial accounting Management Management s Accountability to Stakeholders Stakeholders Owners Government Provide Management is accountable for: Operating activities Creditors Suppliers Products & services Employees Time & expertise Customers Cash Long-term assets Investing activities Suppliers Customers Suppliers Managers 3 4 Management Management s Accountability to Stakeholders Stakeholders Provide Management is accountable for: For external reporting Financing activities Owners Cash or other assets Creditors Cash For internal planning and control Actions that affect society Governments Permission to operate Communities Human and physical resources Financial Accounting 5 Management Accounting 6

2 Management versus Financial Accounting Management Accounting Financial Accounting Primary users Internal the company s managers External investors and creditors Purposes of information Help managers plan and control operations Help with investment and credit decisions Focus and time dimension Relevance of information; focus on the future Relevance and reliability of information; focus on the past Type of report Internal reports No audit needed Financial statements prescribed by GAAP Audit by CPAs Scope of information Detailed reports on a weekly or daily basis Summarized reports quarterly and/or annually Behavioral Concern about how reports affect employee behavior Concern about adequate disclosure Identify trends in the business environment and the role of management accountability 7 Shift toward a service economy Global competition Time-based competition Total Quality Management Classify costs and prepare an income statement for a service company 9 Seek to provide services Simplest accounting All costs are period costs Net income Revenues 11 Expenses 12

3 Resell products purchased from suppliers Keep an of products Cost of goods sold is a major expense Classify costs and prepare an income statement for a merchandising company 14 Includes cost to purchase goods plus freight-in Beginning Plus: Purchases, net Plus: Freight-in Less: Ending Equals: Cost of goods sold 15 Net sales revenue Cost of goods sold: Beginning Plus: Purchases Less: Ending Cost of goods sold Gross profit Selling and administrative expense Net income $ $ $$ 16 Gonzales Brush Company Income Statement Any Company Income Statement Net sales revenue Cost of goods sold Gross profit Operating expenses Operating income Other income (expense) Net income 17 $128,500 $7,400 62,800 (6,000) 64,200 64,300 45,400 $18,900 18

4 Cost of goods sold Units sold Unit cost of one brush $64,200 5,700 units sold $ Classify costs and prepare an income statement and statement of cost of goods manufactured for a manufacturing company 19 Cost object: Anything for which managers want a separate measurement of cost Use labor, plant, supplies and facilities to convert raw materials into finished products Three kinds of Finished goods Work in process Materials Direct costs 21 Indirect costs 22 Includes only indirect costs related to manufacturing Examples: Indirect materials Indirect labor 23 24

5 Other costs related to the manufacturing facility and plant assets Any Manufacturing Company Income Statement Repairs & maintenance Utilities Rent & insurance Property taxes Depreciation Net sales revenue Cost of goods sold: Beginning finished goods Plus: Cost of goods manufactured Less: Ending finished goods Cost of goods sold Gross profit Selling and administrative expense Operating income 25 $ $$ ($$) $$ 26 BALANCE SHEET Type of company Inventoriable product costs Period costs (Expenses) Service company None Salaries, depreciation, utilities, advertising, insurance, property taxes Merchandising company Purchases plus freight in Salaries, depreciation, utilities, advertising, insurance, property taxes and delivery expense Manufacturing company Direct materials, Direct labor and manufacturing overhead Office salaries, depreciation, utilities, advertising, insurance, property taxes on office, selling expenses Purchases of materials Direct labor & manufacturing overhead Work in Process Inventory INCOME STATEMENT Sales When sales occur 27 Operating Expenses = Operating Income Period Costs Beginnin g Work in process Beginning Work in process Add: Direct materials used Beginning direct materials Plus: Direct materials purchased Less: Ending direct materials () Direct materials used Direct labor Manufacturing overhead Total manufacturing costs incurred during the year Total manufacturing costs to account for Less: Ending Work in process Cost of goods manufactured Cost of Goods Sold - Finished Goods Inventory Any Manufacturing Company Schedule of Cost of Goods Manufactured Materials Inventory Total manufacturing costs Direct materials used 28 Ending Work in process Direct labor Cost of goods manufactured Manufacturing overhead 29 30

6 Direct materials Work in process Finished goods Beginning Beginning Beginning + Purchases and freight-in + Direct materials used + Cost of goods manufactured = Direct materials available for use + Direct labor = Cost of goods available for sale - Ending - Ending - Ending = Direct materials used = Cost of goods manufactured = Cost of goods sold + Manuf. overhead Max-Fli Golf Company Schedule of Cost of Goods Manufactured For the year ended December 31, 2010 Beginning Work in process Add: Direct materials used Direct labor Manufacturing overhead Total manufacturing costs incurred during the year Total manufacturing costs to account for Less: Ending Work in process Cost of goods manufactured 31 $6,000 15,000 7,000 18,000 40,000 46,000 (3,000) $ 43, Institute of Management Accountants (IMA) developed standards to help meet ethical challenges Use reasonable standards to make ethical judgments 34