Chapter 12 Module 1. AMIS 310 Foundations of Accounting

Transcription

1 Chapter 12, Module 1 AMIS 310: Foundations of Accounting Slide 1 CHAPTER 1 MODULE 1 AMIS 310 Foundations of Accounting Professor Marc Smith Hi everyone, welcome back. For the remainder of our course, we re going to switch gears and we are going to put to rest the discussion on financial accounting which is what we ve been talking about up until this point. And like I said we are going to change gears and we are going to focus the rest of the quarter on what is called managerial accounting. I d like to use this module to lay a framework or foundation to do this discussion. Now, let s ahead and get started. Move to the next slide with me. AMIS 310 Professor Marc Smith

2 Slide 2 AMIS 310: Foundations of Accounting : Managerial Accounting Managerial accounting provides information for managers inside an organization who direct and control its operations. Financial accounting provides information to stockholders, creditors and others who are outside the organization. And what we have dealt with up until this point in this class has been financial accounting which is all about providing information to outside users such as our stockholders and creditors. And the way in which we provide the information to them is through a set of accounting reports called financial statements. We re going to move away from that. The remainder of the course will focus on managerial accounting. In one sense, managerial accounting is similar to financial accounting in that it is all about providing information. However, with managerial accounting, the information that is provided is provided to our inside workers, our managers, who use that managerial accounting information to direct and control the operations of the business. They make decisions about what paths or avenues the business should pursue. AMIS 310 Professor Marc Smith

3 So we are no longer going to talk about provide information to outsiders. The rest of this quarter, we will be focused on providing information to our managers for internal decision making. Now, please go to the next slide with me. Slide 3 : Managerial Accounting Financial Accounting Managerial Accounting 1. Users External persons who Managers who plan for make financial decisions and control an organization 2. Time focus Historical perspective Future emphasis 3. Verifiability Emphasis on Emphasis on relevance versus relevance verifiability for planning and control 4. Precision versus Emphasis on Emphasis on timeliness precision timeliness 5. Subject Primary focus is on Focuses on segments the whole organization of an organization 6. Requirements Must follow GAAP Need not follow GAAP and prescribed formats or any prescribed format And let s just take a minute to compare and contrast financial and managerial accounting on several different points. We ve already seen the comparison in terms of the users. Financial accounting our users are the outsiders, the owners and the creditors. Managerial accounting on the other hand our users are the inside managers of the company we are reporting on. The second point of comparison, the time focus. AMIS 310 Professor Marc Smith

4 The financial accounting reports, remember the historical cost concept are all based on historical data. So the data contained within the financial statements has a very historical perspective. And managerial accounting is the exact opposite. The information provided to the managers has an emphasis on the future. And that is important because our managers are using this information to make decisions that will impact the future of the company. So the reports that we provide them to make those decisions must have an emphasis on the future. Another crucial characteristic or comparison between the two is verifiability versus relevance. In financial accounting, it is incredibly important that the information in the financial statements be objective. Thus it must be able to be verified. And it must be precise. We don t want to have any wiggle room. We want it to be an exact number. Both of those characteristics are different for management accounting information. And managerial accounting, the emphasis is on relevance. We need relevant information in order to plan as to what is going to happen in the future. And we need that relevant information yesterday. AMIS 310 Professor Marc Smith

5 We need it as timely as possible so it doesn t have to be exactly precise because the idea is the managers will use to make decisions about what path the company should follow in the future. So we don t expect it to be precise. We are willing to give up a little bit of accuracy in order to get timely data. So, management accounting, not looking to be 100% accurate versus we need it as soon as possible. The subject matter that is being reported on, the financial accounting, the financial statements, reports on the entire organization. The financial statement should present the profitability and financial position of the entire company. The management accounting reports that we provide to managers on the other hand are focused on specific segments of the company. For example, you give the sales manager reports on that particular department. Sales manager would not be interested in a report on the production of a good. So the focus is on specific segments of the company. Finally, one other characteristic that is different would be the rules that need to be followed. In preparing financial statements, financial accounting, we need to follow GAAP, Generally Accepted Accounting Principles. Managerial Accounting on the other hand has no set of standard rules. The only folks that will ever see this information would be our internal managers. AMIS 310 Professor Marc Smith

6 We re not sharing it with outsiders so if we want to cheat so to speak, the only folks we are going to cheat is ourselves. Nobody else would ever see the information. Nobody else would ever rely on the information to make decisions. So our focus like I said the rest of the term will be on managerial accounting. And you can see the key characteristics of managerial accounting as compared to financial accounting here on the slide. Now please go to the next slide with me. Slide 4 : Managerial Accounting In managerial accounting, we look at issues from the perspective of a manufacturer. Merchandising Company Buy finished goods. Sell finished goods. Manufacturing Company Buy raw materials. Produce and sell finished goods. MegaLoMart In managerial accounting, our focus would be on a manufacturing company. So the focus we are going to deal with would be on a manufacturer. AMIS 310 Professor Marc Smith

7 And a manufacturing company is one that purchases raw materials and then uses the raw materials to produce a good that is then sold to customers. In financial accounting, even though we never made this point, the focus was always on a merchandising company. A merchandising company is one that buys its inventory from somebody else and then sticks the already put together inventory on their shelf to sell to customers. So our focus will deal with those companies that produce their own product. They are called manufacturing companies. Now please go to the next slide with me. Slide 5 : Manufacturing Costs Manufacturing costs are the costs incurred in the production (manufacture) of a product Direct Materials Direct Labor Manufacturing Overhead The Product And in order to produce the product, you need to incur various costs. Manufacturing costs are the costs that we incur in order to produce a good. AMIS 310 Professor Marc Smith

8 And just to use an example, let s say the product we produce is a vehicle. And there is an automobile here on the slide. There are 3 different costs that we incur to make this vehicle. We incur the direct materials, the costs of the raw materials that go into making a product. We incur the direct labor costs, the cost of the workers. And we have what is called a manufacturing overhead cost. Those are our 3 manufacturing costs. Those are the costs that we incur in order to build a product. Now go ahead to the next slide with me. Slide 6 : Manufacturing Costs 3 Manufacturing Costs: 1. Direct (Raw) Materials materials used in the production of inventory 2. Direct Labor labor costs incurred in the production of inventory 3. Manufacturing Overhead all other costs incurred in manufacturing a product (overhead includes many different types of costs) And let s talk a little bit about each of these manufacturing costs. AMIS 310 Professor Marc Smith

9 In the next chapter, we will focus on these in a lot more depth but let s give each of these just a basic definition for now. Direct materials these are the materials that we use in producing our inventory. The different materials that we have to go purchase that we then put together to build a good. The direct labor would be the costs associated with the workers to work on producing the inventory. It is the salaries that we pay to those folks who actually make the good. And then the manufacturing overhead is basically everything else. All other manufacturing costs that we incur within our manufacturing facility other than our direct materials and our direct labor. Ike I said, the next chapter we will focus in depth on the manufacturer of a product and the different costs that we incur. But we are going to deal with these different costs in this chapter as well so we want to have a basic working definition as to what they are. AMIS 310 Professor Marc Smith