in Perform~once Evaluation and Rewards’ The assets over which managers have decision-making authority do not belong to these managers. The corporation owns these assets, and the returns from these assets belong to the corporation. To make sure the assets are earning a good return, the corporation monitors the outcomes of the decisions made by the managers. When the corporation is “owned by shareholders, the external financial statements. discussed in previous chapters serve this monitoring role for the corporation as a whole.
Parallel monitoring systems are designed to serve similar functions inside corporations. For example, many companies prepare. plant-level income statements, Headquarters’ executives use these plant level financial statements by comparing them with their budgets to monitor the decisions made by plant managers. Frequently, managerial rewards and bonuses are related to the outcomes of these internally prepared financial statements.
Notice that the accounting system must be designed to fulfill all of the three roles just described, simultaneously. The system must clearly allocate decision-making Accounting Systems: A businesslike. Partner Creating accounting information systems that can satisfy the demands of both external users (shareholders. creditors, IRS, SEe) and internal users (plant managers. marketing managers, humane)encl, CPOEO) is very’ challenging. The exhibit on page 7h.
.malformation systems. Users w.a~t accounting conflicting, realism. Information necessary to be future. oriented, and information for janitorial like}eat Solders and ·the IRS do not . expect !information lager,) let the Same glamorous system sun serves . multiplexer Use· it. across .A internationalization ” and job Tuition .over radiotelegraph area with different cultures, language Scotties .such as Berenice betterment they; were IO.years:ago cost-efficient ‘accounting transformations to One of the primary reasons for better’ accounting information systems’ is the advance in systems’ technological capabilities. Due till rapidly evolving changes in technology.and information needs, business managers study management accounting through.
professional carers. In fact. accompanies require employees to complete training in variety of accounting- techniques. Professional certification is available to individuals who plan to make their career in’ management accounting. The Institute of Certified Management Accountants sponsors ‘two certification exams, .the Certified Management Accountant(CA) exam and the Certified in Financial Management (CFM) exam. To become either . a CMA or a CFM. an individual must meet educational and expedience requirements as well as pass a rigorous examination.As ) our proctors through the remaining chapters.
in mind. the three principles of managerial accounting systems: assigning decisions authority, making and supporting: decision “and I valuating and rewarding performance. Most of the procedures and tee iniquitous SSt Jill the remaining chapters are aimed at one of these principles. In additions, encounter many familiar terms and concepts because of the over-lap of management and financial accounting. After all, a single accounting system serves both sets of users. It is common for managers to use information about revenues, expenses, and assets in their daily decision making. Ma nagers alter the accounting information (for example, by product line or customer) as needed to make decisions.
product costs are those costs incurred to manufacture inventory. Thus, until the related goods are sold, product costs represent inventory. As such, they are reported on the balance sheet as an asset. When the goods are ultimately sold, product costs are transferred from the balance sheet to the income statement, where they are deducted from revenue as the cost of goods sold.
Operating expenses that are associated with time periods, rather than with the production of inventory, are referred to as period costs. Period costs are charged directly to expense accounts on the assumption that their benefit is recognized entirely in the period
when the cost is incurred. Period costs include all selling expense, general and ad- . ministrative expenses, interest expense, and income tax expense. In short, period costs are classified on the income statement separately from cost of goods sold, as deductions
from a company’s gross profit. The flow of product costs and period costs through the financial statements is shown in the diagram above. To further illustrate the distinction between product and period costs, consider two .
.costs that, on the surface, appear quite similar: the depreciation of a warehouse used to store raw materials versus depreciation of a warehouse used to store finished goods. Depreciation of the raw materials warehouse is considered a product cost (a component of manufacturing overhead) because the building is part of the manufacturing process. Once the manafacturing process is complete and the finished goods are available for sale. all
costs associated with their storage are considered selling expenses. Thus the depreciation of the finished goods warehouse is a period cost. “, Product Costs and the Matching Principle, , , Underlying the distinction between product ‘costs and period costs is a familiar accounting ” concept-the matching principle. In short, .product costs should be reported on the Income statement only when they can be matched against product’ revenue. To illustrate, consider a real estate developer who starts a tract of 10 homes in .May of the current year. During the year, the developer incurs material, labor, and overhead costs amounting to $1 million (assume $100,000 per house). By the end of December, none of ‘the houses has been sold. How much of the $1 million in construction costs should appear on the developer’s income statement for the’ current year?
The answer is none. These costs are not related to any revenue earned by the developer during the current year. Instead, they are related to future revenues the developer will earn when the houses are eventually sold. Therefore, at the end of the current year, the $1 million of product costs should appear in the developer’s balance sheet as inventory.
As each house is sold, $100,000 will be deducted from sales revenue as cost of goods sold. This way, the developer’s income statements in future periods will properly match sales revenue with the cost of each sale Inventories of a Manufacturing Business In the preceding example, all 10 houses were completed by, the end of the year. Thus the developer’s inventory consisted only of finished goods. Most manufacturing companies, however, typically account for three types of inventory:
1. Materials inventory-raw materials on hand and available for use in the manufacturing process.
2. Work in process inventory-partially completed goods on Which production activities have been started but not yet completed.
3. Finished goods inventory-unsold finished products available for sale to customers. All three of these inventories are classified on the balance sheet as current assets. The cost of the materials inventory is based on its purchase price. The work in process and finished goods inventories are based on the costs of direct material, direct labor, and manufacturing overhead assigned to them. ‘ , Manufacturing companies may use either a perpetual or a periodic inventory system. Perpetual systems have many advantages, however, such as providing managers with upto-date information about the amounts of inventory on hand and the per-unit costs of
manufacturing products. For these reasons, virtually all large manufacturing companies use perpetual inventory systems. Also. the flow of manufacturing costs through the inventory accounts and into the cost of goods sold is most easily illustrated in a perpetual inventory system. Therefore, we will assume the use of a perpetual inventory system in our discussion of manufacturing activities The Flow of Costs Parallels the Flow of Physical Goods. Where a perpetual inventory system is in use, the flow of manufacturing costs through the company’s general ledger accounts closely parallels the of goods through the production process. This relationship is illustrated below. The boxes in the bottom portion of the diagram represent six general ledger accounts used by manufacturing companies to account for their production activities: (1) Materials Inventory,
(2) Direct Labor,
(3) Manufacturing Overhead,
(4) Process Inventory,
Goods Inventory, and
(6) Cost of Goods Sold.Describe how manufacturing costs flow through perpetual Inventory accounts. Accounting for Manufacturing Costs: An Illustration To illustrate accounting for manufacturing costs, we will assume that Conquest, manufactures high-quality mountain bikes in Bend, Oregon. The compariy relies on cost information to monitor its production efficiency, set prices, and maintain control over its inventories. Conquest carefully tracks the flow of manufacturing costs through its .general ledger accounts as illustrated on the facing page: The figures shown represent all of Conquest’s manufacturing costs for 200 1.The debit and credit entries summarize the numerous transactions recorded by the company throughout the year.
Our use of several colors in this illustration will help you follow the flow of manufacturing costs through these accounts. The beginning balances in the three .inventory accounts are shown in black. Manufacturing costs, and the arrows showing the transfer of these costs from one account to another, are shown in red. Account balances at year-end, which will appear in the company’s financial statements, are shown in blue. Let us now look more closely at exactly how the company’s manufacturing costs flow through these general ledger accounts.