1. Chapter Eight MANAGEMENT ACCOUNTING KAL1013 Chapter Eight

3. Difference between managerial and financial accounting KAL1013 Chapter Eight 1. Users of the information Internal and external users Internal users Financial Acc. Managerial Acc.

5. KAL1013 Chapter Eight 3. Content of the reports Objective: Standard reporting format according to generally accepted accounting principles Objective and subjective flexible reporting format according to management needs Financial Acc. Managerial Acc.

6. KAL1013 Chapter Eight 4. Purpose of the reports General-purpose information for all users. Special-purpose information for a particular user for a specific decision. Financial Acc. Managerial Acc.

7. KAL1013 Chapter Eight 4. Verification Annual independent audit by certified public accountant. No independent audits Financial Acc. Managerial Acc.

8. Importance of managerial accounting information for decision making KAL1013 Chapter Eight Planning Directing Controlling Improving Decision making

9. Cost Concept KAL1013 Chapter Eight Cost : a payment of cash; or its equivalent; or the commitment to pay cash in the future for the purpose of generating revenues Classification of costs By behavior By function By period

10. Classification by behavior KAL1013 Chapter Eight 1. Fixed costs 3. Semi variable costs 2. Variable costs Does not change when the volume of activity changes. Changes in proportion with the changes in the volume of activity. A mixed of fixed and variable costs.

11. KAL1013 Chapter Eight Relationship between fixed costs and activity Costs Activity (unit) Total fixed cost 10 20 30

12. KAL1013 Chapter Eight Relationship between variable costs and activity Costs Activity (unit) Total variable cost 10 20 30

13. KAL1013 Chapter Eight Relationship between mixed costs and activity Cost Activity (unit) Total mixed costs 10 20 30

14. Classification by function KAL1013 Chapter Eight 1. Manufacturing costs 2. Administration costs 3. Selling costs Cost incurred in the process of transferring raw material to finished goods. Cost incurred and related to administration activities. Cost incurred and related to the selling and distributing activities.

15. Manufacturing Cost Concept KAL1013 Chapter Eight  Manufacturing consists of activities and processes that convert raw materials into finished goods.  Manufacturing costs are usually classified as follows:  Direct materials  Direct labor  Manufacturing overhead

16. Manufacturing Cost : Direct Materials KAL1013 Chapter Eight  Raw materials are the basic materials and parts that are to be used in the manufacturing process.  Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials .

18. Manufacturing Cost : Direct Labor KAL1013 Chapter Eight  Direct labor is the work of factory employees that can be physically and directly associated with converting raw materials into finished goods.  The wages of maintenance people, timekeepers, and supervisors are usually identified as indirect labor. Their efforts have no physical association with the finished product.  Like indirect materials, indirect labor is part of manufacturing overhead.

19. Manufacturing Cost : Overhead KAL1013 Chapter Eight  Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product.  These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor.  Manufacturing overhead includes 1 indirect materials; 2 indirect labor; 3 depreciation on factory buildings and machines 4 insurance, taxes, and maintenance on factory facilities.

20. Product Cost vs. Period Cost KAL1013 Chapter Eight  Product costs include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead); they are costs that are a necessary and integral part of producing the finished product.  These costs are not expensed to cost of goods sold under the matching principle until the finished goods inventory is sold.

21. Product Cost vs. Period Cost KAL1013 Chapter Eight  Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product.  Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods.

23. Product Cost vs. Period Cost KAL1013 Chapter Eight Direct Material Direct Labor Factory OH Prime Cost Conversion Cost Selling Expenses Admin Expenses Product Cost Period Cost Manufacturing Costs Non-manufacturing Costs

24. Financial Statement for Manufacturing Company KAL1013 Chapter Eight  Statement of Cost of Goods Manufactured  Statement of Income  Balance Sheet

25. Cost of Goods Manufactured KAL1013 Chapter Eight Total Current Manufacturing Cost Beginning Work in Progress + - Ending Work in Progress = Cost of Goods Manufactured / Total Manufacturing Cost

26. Statement of Cost of Goods Manufactured for the year ended 31/12/2001 KAL1013 Chapter Eight Opening work in progress xxx Direct material : Opening inventories xxx (+) Purchases xxx Raw material available for use xxx (-) Closing inventories (xx) Raw material consumed / used xxx Direct labor xxx Factory overhead : Indirect material xx Indirect labor xx Others xx Total factory overhead xxx Total current manufacturing cost xxx xxxx Less: Closing work in progress (xx) Total manufacturing costs xxxx

27. Income Statement for the year ended 31/12/2001 KAL1013 Chapter Eight Sales Revenue xxxx Less: Cost of Goods Sold Finished Goods Inventory 1/1/2001 xxx Cost of Goods Manufactured xxxx Cost of Goods Available for Sale xxxx (-) Finished Goods Inventory 31,12,2001 (xxx) Cost of Goods Sold (xxx) Gross Profit xxxx Less: Operating Expenses Selling Expenses Administrative Expenses xxxx Net Income xxxx

28. Balance Sheet (extracted) As at 31/12/2001 KAL1013 Chapter Eight Current Assets: Cash xxx Accounts Receivable xxx Inventories: Raw Materials xxx Work in Progress xxx Finished Goods xxx xxx Prepaid Insurance xxx Total Current Assets xxxx

29. KAL1013 Chapter Eight Thank You