Managerial Accounting, Third Canadian Edition Class Notes

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Chapter 1Introduction to Managerial AccountingLEARNING OBJECTIVES:When your students have finished studying this chapter, they should be able to:1.Identify managers’ four primary responsibilities.2.Distinguish financialaccounting from managerial accounting.3.Describe organizational structure and the roles and skills required of management accountantswithin the organization.4.Describe the role ofCPA Canada and apply its guidelines for ethical behavior.5.Discuss and analyze the implications of regulatory and business trends.6.Describe a lean production system.7.Describe and use the costs of quality framework.OVERVIEWThis chapter provides an overview of the focus of management accounting and its role inorganizations.Section One:The chapter introduces managerial accounting along with the fundamental principleof the text, which is the importance of using managerial accounting data indecision-making. Students are introduced to the importance of cost of goods soldanddecision-making by discussing the primary responsibilities of a managerialaccountant: planning, directing, controlling, and decision-making.Section Two:To help students understand the managerial accounting focus, financial andmanagerial accounting are contrasted and compared. Managerial accounting hasinternal users relying on relevant information prepared specifically formanagement’s needs and financial accounting has external users using reliable andobjective information in the form of financial statements.Section Three:The importance of using managerial accounting for decision-making is illustratedthrough the presentation of organizational structures and the roles and skillsrequired of management accountants. In addition to their traditional costing and

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reporting roles, management accountants also play an important role in developingbudgets that influence the organization’s culture and strategy.Section Four:The importance of ethics is underscored. Ethical dilemmas are discussed and the CodeofProfessional Ethics for Management Accountants is outlined.This section alsolooks at Management accountants’ professional associations. Professionalaccountants are now represented by the Chartered Professional Accountants ofCanada (CPA Canada) in addition to the provincial associations (eg CPA Ontario).The three legacy accounting bodies in Canada arealsodiscussed.Section Five:The next section of the chapter presents the implications of regulatory and businesstrends. These include the Sarbanes-Oxley Act of 2002, IFRS, XBRL, the shifttowards a service economy, competition in the global marketplace, sustainabilityand social responsibility, time-based competition, advanced information systems,ande-commerce.Section Six:Traditional production systems are compared to lean production systems. Theadvantages and drawbacks of lean production are discussed and the concept of just-in-time inventories is introduced. Total quality management is presentedasakeyto succeeding in the global economyand ISO 9001:2008is alsodiscussed.Differences between traditional and lean production systems are presentedincluding the differences in equipment arrangement between the two systems.Section Seven:The chapter concludes with adiscussion of the costs of quality framework and thefour costs of quality: prevention, appraisal, internal failure, and external failurecosts. This framework is used to aid managers in their decision making

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CHAPTER 1:OUTLINE1.Identify managers’ four primary responsibilities{LO 1}Management accountingcan be described as the process of identifying, measuring, accumulating,analyzing,preparing,interpreting,andcommunicatinginformationthathelpsmanagersfulfillorganizational objectives.Management accounting can be further divided into processes of planning and control.Planningentails setting objectives and specifying how those objectives will be attained.Controllingentailsimplementing plans and using feedback to attain objectives.The management accountant’s role can be broken down intothe followingactivities:1.Planning:This involves setting goals and objectives for the company and determining howto achieve them.This aspect quantifies the likely results of possible courses of action andoften recommends the best course of action to follow. Problem-solving is especiallyimportant for long-range planning and special decisions.2.Directing:This means overseeing the day to day operations of a company.Involves thereporting and interpreting of information that helps managers focus on operationalproblems, imperfections, inefficiencies and opportunities.3.Controlling:This means evaluating the results of business operations against the plan andmaking adjustments to meet its goals.Scorekeeping enables both internal and externalparties to evaluate the organization’s performance and position.4.Decision Making:is central to all of the above activities. Managerial accounting gathers,summarizes, and reports cost and revenue data relevant to the decisions being made in theplanning,directing and controlling phases.TEACHING TIPS{LO1}TIP #1Exhibit 1-1highlights Managers Four Primary Responsibilities. May want to draw thistable on the board (or show on PPT) and then discuss and write the main points of each typeofresponsibility.TIP #2:After covering managers’ four primary responsibilities, consider offering the followingexample:A manager may wish to expand a company’s custodial service from only cleaning privatehomes to also cleaning corporate offices and plants. This goal is then developed into abudget (planning). That budget is analyzed thoroughly to determine both the price pointsand how to market the service (directing). After comparing the budget to the actual results,the managerial accountant determines that the expansion into the new market is somewhatslower than expected and decides to change its marketing strategy (controlling). Decision-making is the fourth responsibility and occurs at all levels of the process. For example, ifthe marketing strategy works and the corporation proceeds toward meeting its goals, themanagerial accountant focuses attention on which new services will be offered, how muchto charge for the services, and if loyalty discounts should be given to existing customerswho purchase these services (decision-making).TIP#3In teams or in partners, have students completeE1-26B Managers’ Responsibilities,which should take about five minutes. Call on a student to give the answers.

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2.Distinguish Financial Accounting fromManagerial Accounting{LO 2}At this point, the accounting student has most likely only been exposed to financial accounting.Students sometimes have a difficult time making the adjustment from financial to managerialaccounting.This is a greattime to review the role of financial accountants in our society and thenexplain the role of management accountants. In doing so, be sure to also point out some of thesimilarities between financial and management accounting, as this will help students understandthat their study of management accounting focuses on external decision-makers, whereasmanagerial accounting focuses on internal decision-makers.TEACHING TIPS:{LO 2}TIP #1:Use Exhibit 1-2 to emphasize the differences betweenfinancial and managerialaccounting.Consider presenting the followingsummarized version of the chart:Managerial AccountingFinancial AccountingUsersInternal (e.g.managers)External (e.g.banks)PurposeTo assist in management decisionmakingTo help external users makeinvesting and lending decisionsPrimaryAccountingProductAny internal accounting reportworthwhile by managementFinancial StatementsContent/FormatManagement determines what isneeded in report and how it isformattedStandards (IFRS, ASPE) must befollowedFocusFuture-orientedHistorical basisEmphasisRelevant DataReliable and Objective DataBusiness unitSegmented InformationCompany as a wholeFrequency ofReportsDependent onmanagement’s needsAnnually and quarterlyAuditrequirementNot requiredIndependent certified publicaccountants audit requiredInformationrequired byoutside groupNoYes. Each province has its ownsecurity commissionsthat requirecompanies to issue auditedfinancial statementsEmployeeBehaviouralImplicationsConsideredCarefully ConsideredFirst concern is adequacy anddisclosure; behaviouralimplications are secondary.TIP#2:Use the following example: A manager is setting the price ofitems in the store. In order tomake this decision, the manager needs to know the cost of the items, the otherorganizational costs, the sales prices for other similar items, etc. Of course, these mattersare of great importance to an internal management accountant. An external accountantwould not make the same decisions; instead, he/she would make decisions based oninformation contained in the financial statements.TIP #3:Have students completeE1-28B Identify users of accounting information(10 minutes).Point out that most decisions impact non-accountants and stress theimportance for non-accounting majors to understand managerial accounting.3.DescribeOrganizationalStructureandtheRolesandSkillsRequiredof

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ManagementAccountants within the Organization{LO 3}Describes the levels of the organization, starting with the highest level, the Board of Directors.RoleResponsibilityBoard of DirectorsElected by shareholders to oversee the companyChiefExecutive OfficerManagescompany on a daily basis.Chief Financial OfficerAll the company’s financial concernsChief Operating OfficerThe company’s operations, such as R&D, production and distributionTreasurerRaising capital (through issuing stocks and bonds) and investing funds.ControllerGeneral financial accounting, managerial accounting and tax reportingInternal Audit FunctionTo ensure that the company’s internal controls and risk managementpolicies are functioning properlyAuditCommitteeOverseesthe internalauditdepartment.Independentauditorsreportdirectly to the audit committee.ManagementAccountantsAct as internal business advisors.They provide the financial informationand in-depth analysis that managers need to make good business decisions.Managementaccountantsneeds the following skills:Solid knowledge of both financial and managerial accountingProblem-solving and decision making skillsKnowledge of how a business functionsAbility to lead and to workon a teamProfessionalism and ethical standardsOral and written communication skillsTEACHING TIPS:{LO3}Tip #1:Exhibit 1-3depicts the Typical Organization StructureTip #2:Use Exhibit 1-4to discuss The Skills Required of ManagementAccountants4.Describe the Role ofCPACanada andapply its guidelines for ethical behaviour{LO 4}Professional accountants in Canada are represented by the Chartered Professional Accountants ofCanada (CPA Ontario) in addition toprovincial accounting associations (e.g. CPA Ontario).Prior the unification process,which began in2013, there werethreeprofessionalaccountingdesignations in Canada.The purpose of unification was to bring strength of training, knowledge andpractice in one accounting bodywhich is now the CPA.There arethreelegacyprofessional accountingorganizations in Canada. TheCanadian Institute of Chartered Accountants(CICA)which regulatedChartered Accountants (CA).TheSociety ofManagement Accountants of Canada,governedCertified Management Accountants (CMAs).TheCertified General Accountants Association ofCanadaawarded members theCGA (Certified General Accountant)designation.In addition to preparing you for a position in an accounting department, studying accounting, andworking as a management accountant, can prepare you for the very highest levels of management, suchas CEO.A.Standards of ethical conductA summary ofCPA Guidelines for Ethical Behaviour inExhibit 1-5includes:Adhering to Rules ofProfessional ConductCompetencies

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Assessing the SituationIntegrityConclude/Advise/CommunicateStandards of ethical conduct have been adopted by professional accounting organizationsbecause of the reliance by so many parties on the product of accountants. Seepage 13for theCPA Canada Principles of Ethical Conductwhich includes:Professional BehaviourIntegrity and Due CareProfessional CompetenceConfidentialityObjectivityB.Ethical dilemmasCompeting obligations to shareholders, customers, suppliers, fellow managers, society, andself and family createethical dilemmas for management accountants.Many companies haveformal codes of ethical conduct that must be signed by employees. However, ethical standardsare personal and depend on the values of the individual.Four ethical dilemmas are provided inthe textbook (pages 11-12)TEACHING TIPS:{LO4}TIP #1:Many students love to discuss ethical issues. Sometimes students may have ethical issuespresented to them in a casual way.Example: A supervisor requests that you don’t record yourovertime on your timesheet.This will allow the supervisor to stay within the budget, but it doesn’t properly reflect whatis happening within the organization. You feel pressure from the supervisor. Ask studentswhat ethical issues are involved in this example.Ask students how many of them were left unsupervised when they first started a new job.How accurate was their work? Would the students feel responsible for making an error ifthey had been properly trained?TIP #2:Ask students to assume theywork for a company. In this scenario, they will have heard thattheir company is being sold. The information is confidential, and they can’t speak about it.What would they do if their best friend wanted to buy stock?TIP #3:useE1-31B Ethical dilemma(5 minutes) as a group or partner exercise.

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5.Discuss and Analyze the Implications of Regulatory and Business Trends{LO 5}1.Sarbanes-Oxley Act:Teaching Tip: Remember that many of today’s students probably don’trememberbusinesses before accounting scandals. Students have likely becomecynical about accounting practices based on news media. Ask students toidentify what would give them confidence in the accounting decisions of anorganization.2.International Financial Reporting Standards (IFRS):Teaching Tip:students may be familiar with GAAPdepending on when theytook their financial course. Explain the impact of globalization and how itcreated a need for consistent reporting standards.The securities commissions ofmany countries have recently moved to adopt IFRS for all publicly tradedcompanies.3.Extensible Business Reporting Language (XBRL):Teaching Tip:consider presenting advantages of XBRL in chart format.XBRL allows companies to release financial and business information in aformat that can be more easily analysed by different users.4.Shifting Economy:Teaching Tip:ask students if they think Apple manufactures its ownheadphones or if they are manufactured by anoutside company. Ask them whatinformation might be part of Apple’s decision: How much it would cost Appleto make the headphones? How much would it cost to have someone else makethem? If someone else made them, could that manufacturing space be used foradditional funds?5. Social Responsibility and the Triple Bottom LineSustainability–ability to meet the needs of the present without compromising theability of future generations to meet their own needs.Triple Bottom Line–company’s performance should not only be viewed in termsof its ability to generate economic profit for its owners, but also by its impact onpeople and the planet.Sustainability has three factors: profit, people, planet.Green initiatives (environmental responsibility)–companies are finding ways ofdoing business that have fewer negative consequences for the earth’s resources.6.E-Commerce:Teaching Tip:In order to survive in a competitive, globally wired economy,companies use the internet in budgeting, planning, selling and customer service.Discuss with the students how e-commerce is an important means ofsupply-chain management.Ask how many students bought their textbooks online. Why/why not?

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6.Describe a Lean Production System{LO6}Traditional Production Systems (“push systems”):once the production schedule hasbeen determined, products are pushed through the manufacturing process and thenstored infinished goods inventory until sold.LeanProduction:primarygoalistoeliminatethewasteoftimeandmoneythataccompanies large inventories.Lean companies adopt ajust-in-time(JIT)inventorysystemwhere materials are purchased just in time to be used in production and finishedgoods are made just in time for customer delivery.JIT is a demand-pull system where raw materials are ordered when the customer places theorder. Then, small batches of product are made quickly to meet the customer needs. Thequick production and low inventory maintained in a JIT system requires a quality productbe produced in order to have the product reach the customer in a timely manner.Companies that adopt lean production have several common characteristics that helpminimize the amount of inventory on hand yet enable the company to meet customer needs.Characteristics include:1.Production occurs in self-sustained cells2.Broad employee roles3.Small batchesproduced just in time4.Shortened set up times5.Shortened manufacturing cycle times6.Emphasis on quality7.Supply-chain managementWhile there are many advantages to a lean production system, companies leave themselvesvulnerable as there are no inventory buffers. If their supplier runs out of raw materials, thecompany will not be able to meet their production needs.TEACHING TIPS:TIP#1:JIT management is easily illustrated by using milk as an example. If a companybought more milk than the spaceallowed on a store shelf, where would it bekept?Can it be kept cold? Is it worth paying for the refrigeration? How longcan it be held to keep it fresh? JIT is more economical if the store does not buylarge quantities of milk, but instead buys small amounts of milk more often.TIP #2:Use Exhibit 1-8to demonstrate the differences between a traditional and lean productionsystem.TIP #3:Use Exhibit 1-9 to demonstrate the equipment arrangement in Traditional and LeanProduction Systems.TIP #4:Have students complete E1-35B Lean Production Cost-Benefit Analysis (5 minutes) inteams or partners.TIP #5:Have students complete E1-36BDifferentiate between Traditional and Lean Production(5minutes) in teams or partners.

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7.Describe and use the Costs of Quality Framework{LO 7}Lean companies strive for high-quality production as the system only produces what isneeded. As such, companies implement total quality management (TQM). The goal ofTQM is to provide customers with superior products and services.As part of TQM, companies prepare Cost of Quality Reports. These reports categorizeand list the costs incurred by the company related to quality. Quality related costs fall intofour categories:1.Prevention costs–costs incurred to avoid producing poor quality goods orservices.2.Appraisal costs–costs incurred to detect poor quality goods or services.3.Internal failure costs–costs incurred on defective units beforedelivery tocustomers.4.External failure costs–costs incurred because the defective goods or services arenot detected until after delivery to customers.TEACHING TIPS {LO7}TIP #1:Make it clear to students that the goal of total quality management (TQM) is toprovide customers with superior products and services. This is accomplished byeach business function in the value chain examining its own activities, improvingquality, and eliminating defects and waste.TIP #2:Students can betterunderstand the benefits of TQM if they understand that thequality costs and benefits are hard to measure. Explain to student that the biggestbenefit of TQM is the reduction of unhappy customers who would never return.Unhappy customers do not appear directly in the accounting records, so TQMprograms emphasize nonfinancial measures such as the number of customercomplaints.TIP #3:UseEXHIBIT1-10to provide examples of the four types of quality costs.TIP #4:Have students completeE1-37BPrepare a Cost of Quality Report(15 minutes).

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CHAPTER1:STUDENTSUMMARYHANDOUT1.Managers’ four primary responsibilitiesa. Planningb.Directingc. Controllingd.Decision-Making2.Differences between Financial AccountingandManagerialAccounting3.Organizational structure and how management accountants fit ina. Changing rolesb.Skillsrequired4.The CPA and ethical guidelinesa.Professional Behaviourb.Integrity and Due Carec.Competenced.Confidentialitye.Objectivity5.Regulatory and business trendsa.Competition in today’s global marketplace6.Describe a lean production system.7.Describe and use the costs of quality framework.

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CHAPTER1:ASSIGNMENTGRIDAssignmentTopic(s)LearningObjective(s)EstimatedTime inMinutesLevel ofDifficultyAvailable inExcelTemplatesShortExercisesS1-1Rolesofmanagers15EasyS1-2Contrastmanagerialandfinancialaccounting25EasyS1-3Accountingrolesintheorganization35EasyS1-4Roleofinternalauditfunction35EasyS1-5Importanceofethicalstandards45EasyS1-6Violationsofethicalstandards45EasyS1-7Identifycurrentcompetitivetools55EasyS1-8Understand key terms6 & 75EasyS1-9Identify lean productioncharacteristics65EasyS1-10Classify costs of quality75EasyS1-11Quality initiative decisions710MediumS1-12Categorize different costsofquality75EasyExercises(SetA)E1-13AManager'sresponsibilities15EasyXE1-14ADefinekeyterms1&25EasyE1-15AIdentifyusersofaccountingInformation310EasyE1-16AClassifyroleswithintheOrganization35EasyE1-17AProfessionalorganizationandcertification45EasyE1-18AEthicaldilemma45EasyE1-19AClassifyethicalResponsibilities410EasyE1-20ADefinekeyterms510EasyE1-21ASummarizetheSarbanes-OxleyAct510MediumE1-22ALeanproductioncost-benefitAnalysis65MediumE1-23ADifferentiate betweentraditional and leanproduction65MediumE1-24APrepare a Cost of QualityReport730DifficultE1-25AClassify costs and make aquality-initiative decision710MediumExercises(SetB)

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E1-26BManager'sresponsibilities15EasyE1-27BDefinekeyterms1&25EasyE1-28BIdentifyusersofaccountingInformation310EasyXE1-29BClassifyroleswithintheOrganization35EasyE1-30BProfessionalorganizationandcertification45EasyE1-31BEthicaldilemma45EasyE1-32BClassifyethicalresponsibilities410EasyE1-33BDefinekeyterms510EasyE1-34BSummarizetheSarbanes-510MediumAssignmentTopic(s)LearningObjective(s)EstimatedTime inMinutesLevel ofDifficultyAvailable inExcelTemplatesOxleyActE1-35BLeanproductioncost-benefitAnalysis65MediumE1-36BDifferentiate betweentraditional and leanproductionproduction610MediumE1-37BPrepare a Cost of QualityReport730DifficultE1-38BClassify cost and make aquality-initiative decision715MediumProblems(SetA)P1-39AManagementprocessesandaccountinginformation1&2P1-40AEthicaldilemmas410MediumP1-41AERP,cost-benefitanalysis515-20MediumP1-42AE-commercecost-benefitAnalysis510MediumXP1-43AContinuationofP1-42A:revisedestimates515DifficultProblems(SetB)P1-44BManagementprocessesandaccountinginformation1&210EasyP1-45BEthicaldilemmas410MediumP1-46BERPcost-benefitanalysis520MediumXP1-47BE-commercecost-benefitAnalysis510MediumP1-48BContinuationofP1-47B:revisedestimates515DifficultOtherDecisionCaseA1-49Ethicalstandards45Easy

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EthicalIssueI1-50Ethicaldilemma45-10EasyTeamProjectT1-51Interviewingalocalcompanyaboutecommerce560DifficultDiscussionandAnalysisAll60MediumApplicationandAnalysisAll30-60Medium

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NameDateSectionCHAPTER1TEN-MINUTEQUIZCircle the letter of the best response.1.Which of the following are amanager’sfour primary responsibilities?A.Budgeting, Directing, Controlling,Decision-MakingB.Budgeting, Planning,Controlling,Decision-MakingC.Planning, Directing, Controlling, Decision-MakingD.Budgeting, Planning, Directing, Controlling2.Which of the following is an example of controlling?A.Management decides to open a new storage facility in Canada.B.After comparing budget to actual,management adjusts its plan to keep thecompany on goal.C.After reviewing the daily sales,management revises its staffing schedule.D.Management sets goals tomeetin the next fiscal year.3.Which of the following is TRUE aboutmanagerial accounting vs. financial accounting?A.Bothmanagerial and financial reports are prepared quarterly and annually.B.Managerial accounting is primarily utilized by internal users, while financialaccounting is primarily utilized by external users.C.The primary information characteristics formanagerial accounting are reliabilityand objectivity, while the primary informationcharacteristicforfinancialaccounting is relevance.D.The CPA requiresmanagerial accounting reportsand the SEC requires financialaccounting reports.4. Which of the following statements is FALSE?A.Managers are concerned with the internal use of accounting information.B.Managerial accounting information relies heavily on its reliability and objectivity.C.Managerial accounting reports are not required by any authoritative body.D.Managerial accounting information must be relevant.5.Which of the following statements is FALSE?A.Thetreasurer and controllerreport directly to the CFO.B.The COO is responsible for the company’s operations.C.The board of directors hires the CEO tomanage the company on a daily basis.D.The internal audit departmentreportssolely to the CFO.6.The individual responsible formanaging all ofthe operations of the organization, such as

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product packaging, is the:A.B.C.D.COO.CFO.CEO.CPA.7.Which of the following skills is NOT required ofmanagement accountants?A.B.C.D.AnalyticalskillsAbility to work on a teamOral and written communication skillsSpeak a foreign language8.Management accountantsmust comply withallofthefollowing ethicalstandardsEXCEPT:A.Reporting ethicalbreaches to the CMA.B.Maintaining professional competence.C.Performing duties with credibility.D.Preserving confidentiality of information.10.Which of the following is NOT an important result of the Sarbanes-Oxley Act of 2002?A.Stiffer penalties and imprisonment were institutedfor whitecollar crimes.B.The audit committeemust be independent and include a financial expert.C.Employees are responsible for the financial reporting completed in theirdepartment.D.CA firms have limitations on non-audit service for audit clients.ANSWERKEYTOCHAPTER1QUIZ1.C2.B3.B4.B5.D6.A7.D8.A9.B10. C9.Which ofthe following is NOT a current business trend?A.Total Quality ManagementB.Inventoriesdeliveredinlarge quantities at a discountC.Time sensitivity for purchase, delivery, & serviceD.ISO quality standards

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Chapter 2Building Blocks of Managerial AccountingLEARNING OBJECTIVES:When your students have finished studying this chapter, they should be able to:1.Distinguish among service, merchandising, and manufacturingcompanies.2.Describe the value chain and its elements.3.Distinguish between direct and indirect costs.4.Identify the inventoriable product costs and period costs of merchandising andmanufacturing firms.5.Prepare the financialstatements for service, merchandising, and manufacturingcompanies.6.Describe costs that are relevant and irrelevant for decision making.7.Classify costs as fixed or variable and calculate total and average costs at differentvolumes.OVERVIEWThis chapter examinesdifferent cost classifications.Managers and management accountants needto have a common understanding of concepts to ensure the right type of information is provided forthe decision being made.They must have a clear understanding of the situation and the types ofcosts that are relevant.Section One:Distinguishesthethreetypesofsectors:service,manufacturingandmerchandising.Thehandling of inventories and costs for both merchandising andmanufacturing firms are covered (product and period costs). The three levels ofinventory of manufacturers are identified.Section Two:Describesthedifferentcomponentsofthevaluechainandhowthesecomponents are coordinated.Section Three:Describes a cost object and distinguishes between indirect and direct costsexplaining the difference between traced and allocated.Also,describes factorsinfluencing costs.Section Four:Describes the three manufacturing cost categories, Direct Materials, DirectLabour and Factory Overhead.Prime costs and Conversion costs are definedand explained.

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SectionFive:Describes and explains product and period costs for the preparation of financialstatements. This section also demonstrates the flow of costs through inventoryaccountsfacilitatedbypreparationofthescheduleofcostofgoodsmanufactured.SectionSix:Defines relevance and provides examples of when costs are relevant for decisionmaking. Sunk costs are also presented.SectionSeven:The behavior of variable and fixed costs is discussed.Variable costs change inproportion to changes in the cost driver, whereas fixed costs in total areunaffected by cost-driver activity.

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CHAPTER 2:OUTLINE1.Distinguishamongservice,merchandising,andmanufacturingcompanies.{LO. 1}Servicein business to sellintangible servicesGenerally,do not have inventory. If there is inventory it is generally for suppliesand used in operations (not to make profit).Example: health care, insurance, banking, consultingMerchandisingresell tangible products they buy from suppliers.Wholesalers: buy products in bulk from manufacturers, mark up the prices and thensell these products to retailers.Retailers: buys products from their suppliers and sells them to consumers (i.e. youand me)They have inventoryManufacturinguse labour, plant, and equipment to convert raw materials into new finishedproducts.Typically sell products to retailers or wholesalers at a price that is high enough tocover their costs and generate a profit.Whilemerchandisingcompanies have a single inventory item(finished goods inventory)listedon their balance sheets,manufacturingcompanies have the following categories:Direct-Materials Inventory–materials on hand and awaiting use in the production process.Work-In-Process Inventory–goods undergoing the production process but not yet fullycompleted.Costs include appropriate amounts of the three major manufacturing costs (i.e.,direct material, direct labor, and factory overhead).Finished-Goods Inventory–goods fully completed but not yet sold.TEACHING TIPS: {LO1}TIP #1:Exhibit 2-2provides a summary of the three types of companies, provides examples ofeach, and indicates thetype of inventory they have.TIP# 2:Students need to understand that manufacturing companies have a broad range ofproduction activities that require tracking in three kinds of inventory: raw materials(RM), work in process (WIP), and finishedgoods (FG). Students shouldunderstand that all three of these inventories are assets.TIP#3:Have students work in teams or with a partner and completeE2-33B Identify types ofcompanies and their inventories(5 minutes). Call on a student to report theanswers.

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2.Describe the value chain and its elements.{LO. 2}a. Research anddevelopment-researching and developing new or improved products orservices and the processes for producing them.b. Design–detailed engineering of products and services and the processes for producingthem.c. Production or purchases–resources used to produce a product or service or to purchasefinished merchandise intended for resale.d. Marketing–promotion and advertising of products or services.e. Distribution–delivery of products or services to consumers.f. Customer service–support provided for customers after sale.Coordinating activities across the value chainMost of the value chain activities occur inthe above order.However, each element is notworked on independently without considering other elements.For example, managersconsider the customer service they are able to provide to customers and how the productcould be marketed in the R & D phase.3.Distinguish between direct and indirect costs.{LO. 3}Cost-a sacrifice or giving up of resources for a particular purpose.Cost Object-is somethingforwhich managers wanta separate measurement ofthe cost of(e.g., aproduct, a department, a sales region, a program, or something else for which decisionsare made).Direct Costs–a cost that can be easily traced to the cost object;identifiedspecifically andexclusively with a given cost objective in an economically feasible way.Indirect Costs-not identified specifically and exclusively with a given cost objective in aneconomically feasible wayManagers prefer to classify manycosts as direct whenever it is "economically feasible"because it gives them greater confidence in their costs of products and services (i.e., lesssubjectivity). A particular cost can be direct for one cost objective but indirect for others.TEACHING TIPS {LO 3}TIP #1Determining if costs are direct or indirect depends on the cost object. Use Exhibit 2-4todemonstratethisconcept.Alsoconsiderthefollowingexample:ABCEntertainment Store sells DVD’s and CD’s. The store subscribes to a monthly DVDmagazine which discusses the most current titles. If the cost object is the entire DVDproduct line, the cost of the magazine subscription can be classified as a direct cost.However, if the cost object is a single DVD(pick a current popular movieto explainto students), the magazine subscription cost can no longer be directly traced to thatsingle DVD. It would be classified asanindirectcost of the single DVD.

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4.Identifytheinventoriableproductcostsandperiodcostsofmerchandising and manufacturing firms.{LO. 4}Direct-Materials Costs–the primary raw materialsthat are physically identified as a part ofthefinished productand that may be traced to the manufactured goods in an economicallyfeasible way.Direct-Labour Costs-thecost of compensating employees who physically convert rawmaterials into the finished product; the labor coststhat can be traced specifically andexclusively to the manufactured goods in an economically feasible wayManufacturingOverheadCosts(IndirectManufacturingCostsorManufacturingOverhead)-include all costs other than direct material or direct labor that are associated withthe manufacturing process (e.g., power, supplies, indirect labor, supervisory salaries, propertytaxes, rent, insurance, and depreciation); has three components: indirect materials, indirectlabour, and other indirect manufacturing costs.Product Costs-costs (e.g., direct materials, direct labor, and factory overhead) initiallyidentified with goods produced or purchased for resale (i.e., inventory) and become expenses(i.e., cost of goods sold) only when the inventory is sold.Period Costs-costs (calledoperating expenses, or selling,generalandadministrationexpenses) that are deducted as expenses during the current period without goingthrough the inventory stage.Prime costs–include Direct Materials Costs and Direct Labour Costs.Conversion costs-include Direct Labour Costs and Manufacturing Overhead Costs.TEACHING TIPS: {LO4}TIP #1:EXHIBIT 2-6 depicts total costs, inventoriable product costs, and period costs.TIP #2:EXHIBIT 2-9 summarizes the accounting treatment for inventoriable and period costs foreach type of sector.Note that manufacturing companies have three categories ofproduct costs while only one is present for merchandisers.TIP #3:Break downmanufacturing overhead into three sub-categories to help students rememberwhat types of costs are classified as overhead. The following subcategories can beused: (1) indirect materials (i.e. lubricant for machines), (2) indirect labor (i.e.factory supervisor), and (3) other (all other costs needed to run the factory such aspower).TIP #4:After discussingproduct costs (DM, DL, MOH),period costs, prime costs andconversion costs, have students completeE2-37B Classify and calculate amanufacturer’s costs(10 minutes) in teams and report their answers.5.Prepare the financial statements for service, merchandising, and

Managerial Accounting, Third Canadian Edition Class Notes - Page 22 preview image

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manufacturing companies.{LO. 5}a. Service company–simplest income statement as they do not sell products, thus there isno cost of goods sold.b. Merchandising companies–income statement includes cost of goods sold(CoGS),which is generally the largest cost on the income statement. Cost of goods sold is thecost of the the products that the company purchases from its suppliers.Cost of goods sold = beginning finished goods inventory + purchases–ending inventoryc. Manufacturing companies–income statement includes cost of goods sold, however thecalculation is different from a merchandising firm as a manufacturing company makestheir goods instead of buying them. Before the companycan determine the cost ofproducts sold (to include on the income statement), they must first determine the cost ofall the finished products during the period, referred to as cost of goods manufactured.i. Cost of goods manufactured (CoGM)–summarizes the cost of activities that takeplace in a manufacturing plant over the period.CoGM= direct materials used + direct labor + manufacturing overhead +beginningwork in process–ending work in processEssentially, CoGM is the cost of all the products that left the production factoryduring the period and were transferred to the finished goods warehouse (or retailstore).CoGS = beginning finished goods inventory + CoGM–ending finished goodsinventoryTypically,manufacturingandmerchandisingcompaniestreatsellingandadministrative expenses in the same manner, but the detail of COGS differs.ii. Flow of costs through inventory accounts–all product costs (raw materials,direct labor, and manufacturing overhead) of a manufacturing company flowfrom the balance sheet (through inventory accounts) and eventually are expensedon the income statement once the goods are sold (expensed as cost of goodssold).d. Balance sheet comparisons-whilemerchandisingcompanies have a single inventory itemlisted on their balance sheets,manufacturingcompanies have three (raw materials, work inprogress, finished goods)

Managerial Accounting, Third Canadian Edition Class Notes - Page 23 preview image

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TEACHING TIPS: {LO5}TIP #1:Students can never review too many financial statements. The coverage of themanagement accountant’s role in service, merchandising and manufacturingcompanies is a great time to review the income statement. This can be done byreviewingExhibits 2-11, 2-12, and 2-13and by contrasting the differences.Emphasize the logical flow of all three types of income statements.TIP #2:The schedule of cost of goods manufactured summarizes the activities that takeplace in a manufacturing plant over the period(Exhibit 2-15). Emphasize that theschedule of cost of goods manufactured must be prepared before the incomestatement as it’s needed to compute cost of goods sold for a manufacturer(Exhibit2-13). Work through an example(E2-26A)of a schedule and thecost of goods soldcalculationon the board.When presenting the CoGM Schedule, break it down intofour parts to help students remember the sections needed (1. Direct materials, 2.Direct Labor, 3. Factory Overhead and 4. Analysis of WIP Inventory accounts).TIP #3:UseExhibits 2-14 and 2-16to explain the logical flow of costs in a manufacturingenvironment. Point out that the first two inventories (RM and WIP) show up on theschedule, while the third inventory (FG) shows up on theincome statement(as partof the cost of goods sold calculation).It may be helpful to show the flow of coststhrough use of T-accounts (rather than using numbers, write descriptions in the T-account).This will set a good foundation when journal entries for amanufacturing company are presented in the chapter on job-costing.6.Describe costs that are relevant and irrelevant for decision making.{LO6}Controllable vs. uncontrollable costsControllable–management is able to influence or change them.Uncontrollable–costs that are “locked in”due to previous decisions.Relevant and irrelevant costsRelevant information is the predicted future costs and revenues that will differ amongalternatives. Although past data may be helpful in predicting future costs and revenues,past data isirrelevant in making future decisions.i. Differential cost–difference in cost between two alternatives (relevant cost).ii. Sunk cost–costs that have already been incurred.Future decisions cannotchange past costs.Thus, sunk costs are classified as irrelevant and not consideredin decision making.

Managerial Accounting, Third Canadian Edition Class Notes - Page 24 preview image

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7.Classify costs as fixed or variable and calculate total and averagecosts at different volumes.{LO.7}Variable and fixed costs refer to how cost behaves with respect to changes in aparticular costdriver.Fixed Costs:stay constant in total over a wide range of activity levels.Examples include real estate taxes, real estate insurance, many executive salaries, andspace rentals.SeeEXHIBIT 2-19for a graph of fixed cost behavior within the relevant range.Variable Costs:a cost that changes in direct proportion to changes in the cost driver. Each unit coststhe same, however, as activity increases, total cost increases.Examples include the costs of materials, merchandise, parts, supplies, commissions,and many types of labor.SeeEXHIBIT2-20for a graph of variable cost behavior within a relevant range.Relevant Range-the limits (i.e.time period and/or activity) of cost-driver activity withinwhich a specific relationship between costs and the cost driver is valid.TEACHING TIPS {LO7}:TIP #1:Describe variable and fixed costs with an example familiar to students.You can usethe costs required to operate their vehicle.Explain how each liter of gas costs thesame, however, the more kilometers driven, their total cost of gas will increase (giventhe same price of gas).The cost of gas is considered a variable cost.On the otherhand, their insurance company provides a yearly insurance rate.Regardless ofwhether they drive 10km, 100km or 1000km, the cost of insurance stays constant,making it a fixed cost.TIP #2:Explain the concept of relevant range and fixed costs.For example, a clothingmanufacturing company, has the capacity to make 1000 shirts each month.Therelevant range for cost classification is 0 to1000 shirts.In this range, fixed costsremain constant. However, if the company wants to double production, they will needto purchase more sewing machines and have to rent a bigger factory.Once thecompany operates outside the relevant range, total fixed costs will increase.TIP #3:Use the following chart to summarize variable and fixed costs.The understandingand ability to differentiate between these costs will remain crucial for subsequenttopics.CostIn TotalPer UnitFixed CostRemains Constant regardlessof activityInverse relationship with activity(decreases as activity increases)Variable CostIncreases as activity increasesRemains Constant

Managerial Accounting, Third Canadian Edition Class Notes - Page 25 preview image

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CHAPTER2:STUDENTSUMMARYHANDOUT1.The threemost common types of companiesa. Serviceb.Merchandisingi.Retailersii.Wholesalersc.Manufacturingi.Rawmaterialsii. Work in processiii. Finished goods2.Value Chaina. Research and Developmentb.Designc. Production or Purchasesd.Marketinge. Distributionf. Customer Service3.Cost Objectsa.DirectCostsb.Indirect Costs4.Costs for internaldecisionmaking and external reportinga. Total costs for internal decisionmakingb.Inventoriable product costsfor external reportingi.Specified inventoriable costsii. Period costs (operating expenses)5.Inventoriable ProductCostsfor Merchandising Companiesa. Cost of themerchandise itselfb.Freight-in and any import duties6.Inventoriable ProductCosts for ManufacturingCompaniesa. DirectMaterialsb.Direct Labourc. Manufacturing Overheadi.Indirectmaterialsii. Indirectlabouriii. Other indirectmanufacturing costsd.Prime and Conversion costse. Additional labour compensation costs

Managerial Accounting, Third Canadian Edition Class Notes - Page 26 preview image

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7.Income Statementsa. Service Companiesb.Merchandising Companiesc. Manufacturing Companiesi. Calculating Cost of Goods Manufacturedii. Flow of costs through the accounts8.Comparing Balance Sheets9.Other Cost Termsa. Controllable versus uncontrollable costsb.Relevant and irrelevant costsc. Fixed and variable costsd.Calculating total and average costs

Managerial Accounting, Third Canadian Edition Class Notes - Page 27 preview image

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CHAPTER2:ASSIGNMENTGRIDAssignmentTopic(s)LearningObjective(s)EstimatedTime inMinutes(s)Level ofDifficultyAvailableinExcelTemplatesShortExercisesS2-1Identifytypeofcompanyfrombalancesheets15EasyS2-2Identifytypesofcompanies&inventories15EasyS2-3Labelvaluechainfunctions25EasyS2-4Classifycostsby valuechainfunctions25EasyS2-5Classifycostsaseitherdirector indirectorindirect35EasyS2-6Classifyinventoriableproductcostsandperiodcosts45EasyS2-7Classifyamanufacturer’scost45EasyS2-8Classify costs incurredbya dairy processingcompany45EasyS2-9Determine totalmanufacturing overhead45EasyS2-10Compute Cost of GoodsSold for amerchandiser55EasyS2-11Prepare a retailer’sincome statement55EasyS2-12Calculate directmaterialsused55EasyS2-13Compute Cost of GoodsManufactured55EasyS2-14Consider relevantinformation65EasyS2-15Classify costs asfixed orvariable75EasyExercises(SetA)E2-16AIdentify types ofcompanies and theirinventories15EasyE2-17AClassify costs along thevalue chainfor a retailer210EasyE2-19AClassify costs along thevalue chain for a2&310Easy

Managerial Accounting, Third Canadian Edition Class Notes - Page 28 preview image

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AssignmentTopic(s)LearningObjective(s)EstimatedTime inMinutes(s)Level ofDifficultyAvailableinExcelTemplatesmanufacturerE2-20AClassify costs as direct orindirect35EasyXE2-21ADefine cost terms3&410EasyE2-22AClassify andcalculate amanufacturer’s costs3&410EasyE2-23APrepare the current assetssection of the balancesheet510MediumXE2-24APrepare a retailer’sincome statement510MediumXE2-25ACompute directmaterialsused and cost of goodsmanufactured510MediumE2-26ACompute cost of goodsmanufactured and cost ofgoods sold510MediumE2-27AContinuesE2-26A:Prepare income statement510MediumE2-28AWork backwards to findmissingamounts510MediumE2-29ADetermine whetherinformation is relevant65EasyE2-30ADescribeother cost terms6&75EasyE2-31AClassify costs as fixed orvariable710MediumXE2-32ACompute total andaveragecosts710MediumExercises(SetB)E2-33BIdentifytypes ofcompanies and theirinventories15EasyE2-34BClassify costs along thevalue chainfor a retailer210EasyE2-36BClassify costs along thevalue chain for amanufacturer2&310EasyE2-37BClassify costs as direct orindirect35EasyE2-38BDefine cost terms3&410EasyE2-39BClassify andcalculate amanufacturer’s costs3&410Easy

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E2-40BPrepare the current assetssection of the balancesheet510MediumE2-41BPrepare a retailer’sincome statement510MediumE2-42BCompute directmaterialsused and cost of goodsmanufactured510MediumE2-43BCompute cost of goodsmanufactured and cost ofgoods sold510MediumE2-44BContinuesE2-43B:Prepare income statement510MediumE2-45BWork backwards to findmissingamounts510MediumE2-46BDetermine whetherinformation is relevant65EasyE2-47BDescribeother cost terms6&75EasyE2-48BClassify costs as fixed orvariable710MediumE2-49BCompute total andaveragecosts710MediumProblems(SetA)P2-50AClassify costs along thevalue chain2 &410MediumP2-51APrepareincomestatements510DifficultP2-52AFill inmissing amounts515MediumP2-53AIdentify relevantinformation615-20DifficultP2-54ACalculate the totalandaveragecosts715DifficultProblems(SetB)P2-55BClassify costs along thevalue chain2 &410MediumP2-56BPrepareincomestatements510Difficult

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AssignmentTopic(s)LearningObjective(s)EstimatedTimeinMinutes(s)LevelofDifficultyAvailableinExcelTemplatesP2-57BFill inmissing amounts515MediumP2-58BIdentify relevantinformation615-20DifficultP2-59BCalculate the total andaveragecosts715DifficultOtherDecisionCaseA2-60Determineendinginventory balances515MediumDiscussionandAnalysisAll60MediumApplicationandAnalysisAll30-60Medium

Managerial Accounting, Third Canadian Edition Class Notes - Page 31 preview image

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NameDateSectionCHAPTER2TEN-MINUTEQUIZCircle the letter of the best response.1.Aportion of a company’s inventory is shown below:Sales$350,000Cost of Goods Sold:Beginning Inventory$ 15,000Purchases250,000Cost of Goods Available for Sale265,000Less: Ending Inventory13,000Cost of Goods Sold252,000Gross Profit$ 98,000What typeofcompany is illustrated?A.Service CorporationB.Merchandising CorporationC.Manufacturing CorporationD.Not-for-profit Corporation2.Which of the following is NOT a value chain activity?A.Research&DevelopmentB.ProductionC.DistributionD.Quality Control3.Which of the following is a direct cost in the production oftire jacksfor amachineshop?A.UtilitiesB.TaxesC.SteelD.Rent4.Which of the following is an indirect costin the construction cost of a home for abuildingcompany?A.InsuranceB.PaintC.LumberD.Carpeting

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