Professor Noreen has served as Associate Editor of The Accounting Review and Journal of Accounting and Economics. Professor Brewer is a member of the editorial boards of Issues in Accounting Education and the Journal of Accounting Education.
Garrison Noreen Brewerx
Constructing the Statement of Cash Flows Using Changes in Non-Cash Balance Sheet Accounts 684 An Example of a Simplified Statement of Cash Flows 686. The Need for a More Detailed Statement 688 Organizing the Full Statement of Cash Flows 689.
Managerial Accounting and the Business
Environment
The Role of Management Accounting
Learning Objectives
In contrast, financial accounting is concerned with providing information to shareholders, creditors, and others external to the organization. Financial accounting provides essential data that outsiders use to judge a company's past financial performance.
Globalization
Moreover, in recent years the movement of jobs from the United States and Western Europe to other parts of the world has been notable. For example, one study estimates that by the end of the decade, more than 825,000 financial services and high-tech jobs will have been transferred from Western Europe to cheaper labor markets such as India, China, Africa, Eastern Europe and Latin America.
Strategy
While the number of Internet users worldwide more than doubled in the first four years of the new millennium, as of 2004 more than 87% of the world's population was still not connected to the Internet. FedEx currently has 39% of the US-China express market and plans to pursue continued growth in that region of the world.
The Work of Management and the Need for Managerial Accounting Information
For example, the manager of a new store in Shanghai will be given targets for sales volume, profit and costs. Exhibit 1–2 (page 8) shows the work of management in the form of a planning and control cycle.
Comparison of Financial and Managerial Accounting
As the year progresses, performance reports will be drawn up comparing actual sales volume, profit and costs against targets. If actual results fall below targets, top management will be alerted that the Shanghai store requires more attention.
Organizational Structure
A person in a line position is directly involved in achieving the basic goals of the organization. As mentioned earlier, the head of the accounting department in the United States is often known as the controller.
Process Management
At that point, the new weakest link (i.e., the new constraint) must be identified, and improvement efforts shifted to that link. As summarized in Exhibit 1–8, the Define stage of the process focuses on defining the scope and purpose of the project, the flow of the current process, and the customer's requirements.
Technology in Business
Commerce
IndyMac Bancorp uses the Internet to connect its nationwide network of loan brokers to its central computers. Nike spent $500 million to fix the problem, and the results have been impressive: the lead time for getting new sneaker styles on store shelves has been reduced from nine to six months.
The Importance of Ethics in Business
- COMPETENCE
- CONFIDENTIALITY
- INTEGRITY
- CREDIBILITY
As everyone knows, the announcement caused investors to lower their valuation of the company. Most of the rules in the code are motivated by a very practical consideration: if these rules were not universally adhered to in business, the economy and all of us would suffer.
Corporate Governance
Third, the law places the power to hire, compensate, and fire the accounting firm that audits a company's financial reports in the hands of the audit committee of the board of directors. Collectively, these six aspects of the Sarbanes-Oxley Act of 2002 should help reduce the incidence of fraudulent financial reporting.
Enterprise Risk Management
First, it immediately recalled and destroyed 31 million bottles of Tylenol with a retail value of $100 million to reduce the risk of additional deaths. Second, it developed the tamper-proof packaging that we take for granted today to reduce the risk of the same type of crime being repeated in the future.
The Certifi ed Management Accountant (CMA)
Count physical inventory on hand to ensure it agrees with accounting records. The Sarbanes-Oxley Act of 2002 was enacted with the objective of improving the reliability of financial disclosures provided by publicly traded companies.
Summary
Controller The member of senior management who is responsible for providing relevant and timely data to managers and for preparing accounts for external users. Line A position in an organization that is directly related to the achievement of the organization's basic goals.
Glossary
The member of the top management team responsible for. providing timely and relevant data to support planning and control activities and for the preparation of financial statements for external users. Staff A position in an organization that is only indirectly related to the achievement of the organization's basic goals.
Questions
Segment Any part of an organization that can be evaluated independently of other parts and about which a manager seeks financial information. Value chain The main business functions that add value to a company's products and services, such as research and development, product design, manufacturing, marketing, distribution, and customer service.
Exercises
A job provides service or assistance to other parts of the organization and does not directly achieve the basic goals of the organization. These vice presidents are responsible for auxiliary services, admissions and records, academics, financial services (controller) and the physical plant.
Problems
For each of the three alternative courses of action outlined by Adam Williams, explain whether or not the action is appropriate according to the Statement of Ethical Professional Practice prepared by the Institute of Management Accountants. Feldon also works very closely with the Chairman of AMP, especially when it comes to matters that need to be brought to the attention of the Chairman and the Board.
RESEARCH AND APPLICATION 1–9
Ackers works with all AMP departments to recruit professional and clerical staff. Identify potential problems that might arise in each individual's position, either due to the type of position (ie line or staff) or the location of the individual's position in the organization.
Cost Terms, Concepts, and Classifi cations
Costs Add Up
A s explained in Chapter 1, the work of management focuses on (1) plan- ning, which includes setting objectives and outlining how to attain these objectives;
General Cost Classifi cations
Direct labor Direct labor consists of labor costs that can be easily (i.e., physically and conveniently) traced to individual units of product. Manufacturing overhead Manufacturing overhead, the third element of manufacturing cost, includes all manufacturing costs except direct materials and direct labor.
Product Costs versus Period Costs
We want to emphasize that product costs are not necessarily treated as expenses in the period in which they are incurred. Two more cost categories are often used in discussions of manufacturing costs—prime costs and conversion costs.
Cost Classifi cations on Financial Statements
The cost of manufactured goods consists of manufacturing costs associated with goods completed during the period. As mentioned above, the cost of manufactured goods consists of the production costs associated with the goods that have been completed during the period.
Product Cost Flows
At the end of the period, the materials, labor, and overhead costs associated with the units in the work-in-process and finished goods inventory accounts will appear on the balance sheet as assets. $1,500 is slowly moved into finished goods inventory as units of product are completed.
Cost Classifi cations for Predicting Cost Behavior
A fixed cost is a cost that remains constant in total, regardless of changes in the level of activity. Fixed costs Total fixed costs are not affected Fixed costs per unit decreases with changes in activity level as activity level increases and within the appropriate range.
Cost Classifi cations for Assigning Costs to Cost Objects
The factory manager's salary would be an indirect cost of a particular variety, such as chicken noodle soup. The factory manager's salary is called the joint cost of producing the various products of the factory.
Cost Classifi cations for Decision Making
The cost of the cheese on a taco is a production cost and, as such, would also be a product cost. Finally, the cost of the cheese in a taco is a differential cost of making and serving the taco.
Review Problem 1: Cost Terms
At the point of sale, product costs become cost of goods sold on the income statement. A particular cost, such as the cost of cheese on a taco served at Taco Bell, can be a manufacturing cost, a product cost, a variable cost, a direct cost, and a differential cost—all at the same time.
Review Problem 2: Schedule of Cost of Goods Manufactured and Income Statement
Cost of Goods Manufactured The manufacturing costs associated with the goods that were completed during the period. Schedule of Cost of Goods Manufactured A schedule showing the direct material costs, direct labor, and manufacturing overhead costs incurred during a period and the proportion of these costs allocated to work in progress and finished product.
Appendix 2A: Further Classifi cation of Labor Costs
Labor costs incurred during idle time can be treated as an overhead cost of production rather than a direct labor cost. Other companies treat the portion of the marginal benefits associated with direct labor as additional direct labor costs.
Appendix 2B: Cost of Quality
See the graph in Exhibit 2B–2 (page 68), which shows total quality costs as a function of conformance quality. The graph in Exhibit 2B–2 is drawn so that the total quality cost is minimized when the quality of conformance is less than 100%.
Quality Cost Reports
As a supplement to the cost-of-quality ratio shown in Figure 2B–3, companies often prepare quality cost information in graphical form. Second, quality cost information helps managers identify the relative importance of quality problems facing their companies.
International Aspects of Quality
Internal error costs arise from the detection of defective products before they are shipped to customers. External failure costs are the consequences (in the form of repairs, servicing and lost future business) of delivering defective products to customers.
Summary (Appendix 2B)
Appraisal costs are incurred to ensure that defective products are not shipped to customers once manufactured. The report helps managers understand the importance of quality costs, spot problem areas, and assess how quality costs are distributed.
Glossary (Appendix 2B)
These efforts had some success, reversing the downward slide in sales and growing sales from $95 million last year to $100 million this year. At this rate we will be bankrupt within a year.” The data Staci referred to is shown below:
Cases
The number of units in the finished goods inventory at the end of the year. The cost price of the units in the finished goods inventory at the end of the year.
RESEARCH AND APPLICATION 2-32
In order to submit a claim to the insurance company, Operex Products must determine the amount of costs in its inventories on the date of the accident. Determine the amount of costs in the raw materials, work in progress, and finished goods inventories on the date of the accident.
Systems Design
LO1 Distinguish between process costing and job order costing and identify companies that would use each costing method.
Job-Order Costing
Two College Students Succeeding as Entrepreneurs
Later, in Chapter 7, we look at an alternative to absorption costing, known as variable costing. Most countries—including the United States—require some form of absorption costing for both external financial reporting and tax reporting.
Process and Job-Order Costing
In addition, the vast majority of companies around the world also use absorption costing for management accounting purposes. Because absorption costing is the most common approach to product costing, we'll discuss it first and then discuss the alternatives in the following chapters.
Job-Order Costing—An Overview
See Figure 3–2 for an example of how direct labor costs are entered on the job cost sheet.). Predetermined Expenditure Rate Total Total Estimated Production Cost Estimated Total Amount of Allocation Base.
Job-Order Costing—The Flow of Costs
By applying Yost Precision Machining's $216 overhead to the job cost sheet in Exhibit 3–4, the job cost sheet is complete except for the final two steps. EXHIBIT 3–5 Document flow in a job order costing system Sales order Production order A sales order is prepared as a basis for issuing a.
Problems of Overhead Application
Closed to Cost of Goods Sold As mentioned above, closing the excess of manufacturing overhead to cost of goods sold is simpler than the allocation method. Allocation Between Accounts Allocation of unapplied or overapplied expenses to Work in Process, Finished Goods, and Cost of Goods Sold is more accurate than closing the entire balance to Cost of Goods Sold.
Job-Order Costing in Service Companies
In a multiple predetermined overhead rate system, each production department can have its own predetermined overhead rate. When multiple predetermined overhead rates are used, overhead in each department is applied at its own overhead rate as a job progresses through the department.
Use of Information Technology
This barcode is scanned to update work-in-process records for labor and other costs incurred in the manufacturing process. This barcode is then used to prepare billing information and to track packaged goods until they are placed on a carrier for delivery to the customer.
Review Problem: Job-Order Costing
The predetermined overhead rate for the year would be calculated as follows:. overhead rate Estimated total manufacturing overhead Estimated total allocation base $450,000. A credit to the Manufacturing Overhead account that occurs when the amount of overhead applied to work in process exceeds the amount of overhead actually incurred during the period.
Appendix 3A: The Predetermined Overhead Rate and Capacity
Southworth Company uses a job-order costing system and applies manufacturing overhead costs to jobs based on the cost of direct materials used in production. The balances on the inventory accounts at the beginning of the year were as follows:
RESEARCH AND APPLICATION 3-35
Process Costing
Costing the “Quicker-Picker-Upper”
As explained in Chapter 3, job order costing and process costing are two common methods of determining unit product costs. Examples of companies that would use process costing include Reynolds Aluminum (aluminum ingots), Scott Paper (toilet paper), General Mills (flour), Exxon (gasoline and lubricating oils), Coppertone (sunscreens), and Kellogg (breakfast products).
Comparison of Job-Order and Process Costing
A form of process costing can also be used in utilities that produce gas, water, and electricity. Our goal in this chapter is to explain how product costing works in a process costing system.
Cost Flows in Process Costing
A T-account model of materials, labor, and overhead cost streams in a process costing system is shown in Exhibit 4-3. Costs in Department B's Work in Process account will consist of materials, labor, and overhead costs incurred in Department B plus the costs associated with partially completed units transferred from Department A (called transferred costs.
Equivalent Units of Production
In the weighted average method, the equivalent units of production for a department are the number of units transferred to the other department (or to finished goods) plus the equivalent units in the department's ending work in process inventory. There is no need to calculate equivalent units for units transferred out of the department - they are 100% complete with respect to the work done in that department or they would not be transferred out.
Compute and Apply Costs
The cost per equivalent unit is used to value units in ending inventory and units transferred to the next department. The equivalent units for the units completed and transferred are simply the number of units transferred to the next department because they would not have been transferred unless they were complete.
Operation Costing
The balance in the Fab Base Department's Work in Process account on April 1 was $150,000; the balance in the Finishing Department's work in process account was $70,000. After posting the entries to the T accounts, find the ending balance in each department's work in process account.
Review Problem: Process Cost Flows and Costing Units
The units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department's ending work-in-process inventory. Calculate the cost of the units transferred to the next department during the period and the cost of ending work in process inventory.
