Budgets are usually prepared under the direction of the controller, who is the manager in charge of the accounting department.

In carrying out the control function, managers seek to ensure that the plan is being followed.1.    Feedback, which signals whether operations are on track, is the key to effective control.

a.     A performance report compares budgeted to actual results. It suggests where operations are not proceeding as planned and where some parts of the organization may require additional attention.

I.                  Comparison of financial and managerial accounting

Users

I.                  Comparison of financial and managerial accounting

Emphasis on the future

I.                  Comparison of financial and managerial accounting

Relevence of data

1.    Financial accounting data are expected to be objective and verifiable. Managerial accountants focus on providing relevant data even if the data are not completely objective or verifiable.

I.                  Comparison of financial and managerial accounting

emphasis on precision

I.                  Comparison of financial and managerial accounting

segments of organizaion

Financial accounting is concerned with reporting for the company as a whole. Managerial accounting focuses more on the segments of the company. Examples of segments include:

I.                  Comparison of financial and managerial accounting

GAAP

I.                  Comparison of financial and managerial accounting

Managerial Accounting

Product vs. Period Cost

Product costs (inventoriable costs)

(also called inventoriable costs) – Includes all the costs that are involved in acquiring or making a product. In the case of manufactured goods, it includes direct materials, direct labor, and manufacturing overhead.  Product costs are initially assigned to an inventory account on the balance sheet (raw material, work in progress, finished goods).  When the goods are sold, the costs are released from inventory as expenses (cost of goods sold) and matched against revenue.

Consistent with the matching principle, product costs are recognized as expenses when the products are sold

Product costs vs. Period costs

period costs

Includes all selling and administrative costs.

These costs are expensed on the income statement in the period incurred

Prime cost and conversion costs

prime cost

Prime cost and conversion costs

conversion 

I.                  Cost classifications on financial statements

A.   Merchandising vs. manufacturing companies

Merchandising companies

I.                  Cost classifications on financial statements

Manufacturing Companies

I.                  Cost classifications on financial statements

A.   The balance sheet: merchandising vs. manufacturing companies

I.                  Cost classifications on financial statements

Manufacturing companies must report these 3 things on the balance sheet

(R,W,F)

Raw Materials - all mats. used to make product

Work in process - units that are partially complete but require additional work

Finished Goods- completed but not yet sold

 I.                  Cost classifications for predicting cost behavior

Cost Behavior is

If activity changes enough, fixed costs may change. For example, if microwave production were doubled, another factory building might have to be rented.

    The relevant range is the range of activity within which the assumptions that have been made about variable and fixed costs are valid. For example, the relevant range within which total fixed factory rent is $9,000 per month might be 1 to 200 microwaves produced per month.

The direct costs of a Ford SUV would include the cost of the steering wheel purchased by Ford from a supplier, the costs of direct labor workers, the costs of the tires, and so on.

The direct costs of a hospital’s radiology department would include X-ray film used in the department, the salaries of radiologists, and the costs of radiology lab equipment.

Costs that cannot be easily and conveniently traced to a unit of product or other cost object.

Manufacturing overhead, such as the factory managers’ salary at a multi-product plant, is an indirect cost of any one product.

General hospital administration costs are indirect costs of the radiology lab.

The potential benefit that is given up when one alternative is selected over another. 

Must be considered in decision making but is not necessary for recording any records.

1.    Weyerhaeuser (paper manufacturing)

2.    Reynolds Aluminum (refining aluminum ingots)

3.    Coca-Cola (mixing and bottling beverages)

Comparing process costing and job-order costing

With job-order costing, many jobs are worked on during the period; with process costing, a single product is produced for a long period of time

With job-order costing, costs are accumulated by individual jobs; with process costing, costs are accumulated by departments

With job-order costing, average unit costs are computed by job; with process costing, average unit costs are computed for a particular operation or by department

Types of manufacturing costs that are assigned to products using a job-order costing system

Direct Costs

Direct Costs include

DM - Direct Materials - traced to each job as work is performed. 

DL - Direct Labor - traced directly as work is performed. 

Types of manufacturing costs that are assigned to products using a job-order costing system:

Indirect Costs

Workers use time tickets to record the amount of time that they spent on each job and the total cost assigned to each job

The Accounting Department records the labor costs from the time tickets on to the job cost sheet

1) It is impossible or difficult to trace these costs to particular jobs (i.e.,manufacturing overhead is an indirect cost).

2) Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary

 calculated by dividing the estimated amount of manufacturing overhead for the coming period by the estimated quantity of the allocation base (e.g., labor hours or machine hours) for the coming period

Ideally, the allocation base chosen should be the cost driver of overhead cost

Estimated MOH / Estimated quantity of allocation = predetermined overhead rate

Predetermined Overhead Rate =  Estimated total factory overhead cost  /   Estimated activity base

is used to draw direct and indirect materials from the storeroom

Direct materials are charged to specific jobs

Indirect material costs are included in manufacturing overhead

are used to quantify direct and indirect labor costs

DL- Charged to specific job

IL- included in MOH

Flow of manufacturing costs

RAW MATERIALS  è           WORK IN PROCESS   è      FINISHED GOODS    è                      COGS

Raw Materials Inventory (RM)

– consists of costs of the direct and indirect materials that have not yet entered the manufacturing process.  Material waiting to be processed

Received and inspected by the receiving department.  The receiving department personnel prepare a receiving report showing the quantity received.  Most large companies now use bar code scanners; scanners put received products directly into a perpetual inventory system.

Materials  XXXXX

Acct. Pay          XXXX

Lifo + FiFo can be used

Work in process WIP

Debit WIP 

Credit Materials

wages of personnel that are directly involved in making the product.  Time tickets are the basis of recording direct and indirect labor costs.  Remember!!!  Direct labor is posted to the job – indirect labor is posted to MOH

Debit WIP

Credit Wages Payable 

Completed jobs that have not been sold.

Once jobs are completed, the products are transferred to finished goods inventory. 

Debit Finished Goods and Credit WIP. 

Upon sale, the manufacturer will record the cost of the sale as cost of goods sold

Nonmanufacturing costs should not go into the Manufacturing Overhead account

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred.  For example:

1 -  The salary expense for employees that work in a selling or administrative capacity are expensed in the period incurred

2 - Advertising expenses are expensed in the period incurred