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Chapter 1

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University of Toronto St. George
Rotman Commerce
Michael Khan

RSM 222 – Managerial Accounting CHAPTER 1: Managerial Accounting It provides information to managers for use in planning and controlling operations as well as decision making. The essential steps include: 1. Planning 2. Directing and Motivating 3. Controlling – making sure plan is followed, give feedback like performance reports 4. Performance Evaluation Key Differences between Managerial and Financial Accounting: a. Geared towards different users: internal for M and external for F b. M is for future decisions, F is from past transactions c. Relevance is more important in M, objectivity is more important in F d. Detailed segmented reports for M, summarized data for the entire org for F A business process is a series of steps that are followed in order to carry out some task in business, and a value chain has major business functions that add value to a company’s products and services. There are different approaches to IMPROVE this process: 1. Lean Production – In a traditional push system, everyone is kept busy to produce as much as possible, but is costly because of high inventory costs. The lean approach takes 5 steps to improve flow: 1. Identify the value 2. Identify business processes that deliver this value 3. Organize work around the flow of the business process (manufacturing cell), 4. Create a pull system so production happens when there is consumer demand/orders, 5. Continue to pursue perfection. This is also called supply chain management. 2. Six Sigma – improvement method that relies on customer feedback and fact-based data. It’s often associated with ‘zero defects’. It refers to a process that generates no more than 3.4 defects per million opportunities. DMAIC framework: Define, Measure, Analyze, Improve, and Control. Non-value-added activities should be removed. Management should increase business rather than decreases costs and the labour force. 3. Enterprise Systems – a computer application designed to overcome problems in data inconsistency and duplication by integrating data across an organization into one system. (Also Enterprise Risk Management is important) Examples of Business Risks and Controls: -Assets being stolen from computer files, create firewalls -Products harming consumers, develop better product-testing system -Supplier strike halting flow of materials, establish relationship with two suppliers -Inaccurate budget estimations, implement a rigorous budget review process CHAPTER 2: Cost Terms, Concepts, and Classifications Manufacturing Costs Direct Materials – materials that become an integral part of a finished product and can be traced, such as seats in a car, or the processor in a computer. Indirect Materials – small immaterial items such as glue and nails, and are hard to trace, are part of manufacturing overhead. Raw materials are anything that goes into the final product, and do not have to be unprocessed natural resources like lumber. The finished plastics from one company can be the raw materials for another one. Direct Labour – factory labour costs that can be traced to individual units of product (touch labour), such as assembly lines, carpenters, and bricklayers. Indirect labour – hard to trace their contribution to the products, such as janitors and guards; also recorded as part of the manufacturing overhead. Manufacturing Overhead – all costs associated with manufacturing except direct materials and direct labour. It can include maintenance and repairs, heat and light, taxes, insurance, and depreciation – anything associated with OPERATING THE FACTORY. Can be called: factory overhead, factory burden, and indirect manufacturing cost. Manufacturing Overhead + Direct Labour = conversion cost. Direct Labour + Direct Materials = prime cost. Overtime Premiums – the extra hourly wage rate paid to workers who work above their normal time requirements. Job specific reasons would count as direct labour, while general management needs are overhead. Employee benefits costs for indirect labour would be indirect overhead. Non-manufacturing costs 1. Marketing or selling costs – all costs necessary to secure customer orders and get the finished good into the hands of the customer (order-getting or order-filling costs), such as shipping, sales commissions, and finished goods warehouses. 2. Administrative costs – all executive, organizational, and clerical costs associated with the general management of an org, such as exec compensation, general accounting, PR, and etc. Product Costs vs. Period Costs Product Costs – all costs involved in the purchase or manufacture of goods. In manufactured goods, these include direct materials and direct labour; also called inventoriable costs. They are treated as expenses in the period when products are SOLD. Direct material cost might be incurred in one period but not expensed until the next period when the product is sold. Period Costs – costs taken directly to the income statement as expenses in the period they are incurred, such as SG&A. Not included in product costs. Sales commissions and ads are examples.  Manufacturing companies have different financial statements then merchandising companies, who only resale goods. Manufacturing must have raw materials, work in process, and finished goods. Instead of adding purchases to beginning inventory, manufacturers add cost of goods manufactured (the costs associated with goods that are finished in the period). Schedule of Cost of Goods Manufactured: The sum of all raw materials used in production, direct labour, and manufact
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