Please enable JavaScript.

Coggle requires JavaScript to display documents.

The Role of Managerial Accounting - Coggle Diagram

- - - - After factory workers complete the work-in-process, it graduates to become finished goods inventory. Finished goods are completed products that are ready for sale.
        
        The cost of all completed factory output, known as cost of goods manufactured, includes all the costs associated with the products: direct materials, direct labor, and overhead.
    - - When a retailer or manufacturer sells goods, those goods become an expense called cost of goods sold. Cost of goods sold includes all the direct materials, direct labor, and overhead associated with the items sold during the year; it’s usually the largest expense on a manufacturer’s or retailer’s income statement.
        
        Don’t confuse cost of goods sold with cost of goods manufactured. Cost of goods sold is measured as the cost of goods that were actually sold during the period regardless of when they were completed. It goes onto the income statement. Cost of goods manufactured is measured as the cost of goods that were actually completed during a period regardless of whether they were sold.
    - - Work-in-process inventory involves materials that have gone into production but haven’t yet been finished.
    - - You can use a single powerful formula to compute both the flow and cost of inventory as the inventory is manufactured and sold:
        
        Computing direct materials put into production
    - - Figure 4-1: The retailer’s product flow.
      - Manufacturers go through basically the same process as retailers, except with a few more-involved steps necessary to actually make the products (see Figure 4-2).
  - - - direct materials are usually added at the beginning of production, while conversion costs are added evenly throughout production.
    - - When you need to choose between two alternatives, incremental costs change depending on which alternative you choose. Accountants sometimes refer to incremental costs as relevant costs. Other costs don’t change — you can just treat these expenses as irrelevant.
    - - direct costs = easily trace certain costs to individual products that you make
        
        Direct costs fall into two categories: direct materials and direct labor.
        
        Direct materials are raw materials that you can directly trace to the manufactured product.
        
        Direct labor is the cost of paying employees to make your products.
      - indirect costs = don’t easily trace to an individual product
        
        You still need to keep track of indirect costs, even though you can’t easily trace them to individual manufactured products. Keep track of these indirect costs and include them in overhead, the miscellaneous costs of doing business. (Accountants sometimes refer to overhead in a factory as manufacturing overhead.)
        
        Overhead consists of:
        
        Indirect labor: The cost of labor that you need to make products but that you can’t easily trace to the finished products
        
        Other costs needed for operations
        
        Indirect materials: The cost of raw materials needed to make products that you can’t easily trace to the finished products.
        
        The terms direct materials and raw materials aren’t exactly interchangeable. As I explain in Chapter 3, direct materials are the cost of raw materials that can be easily traced directly to the actual products made. Raw materials, therefore, may include both direct materials and indirect materials, materials that you can’t easily trace directly to individual products. Indirect materials are included in overhead.
    - - Such costs incurred in the past are called sunk costs. When making decisions, you can ignore sunk costs because they can’t be changed.
  - - - Return on sales asks how much profit your company can squeeze out of its sales.
        
        Even though both companies earned the same amount of net income, Plain Jeans’ low return on sales reflects its low-profit-margin/high-volume strategy. Designer Jeans’ high return on sales results from its high-profit-margin/low-volume strategy
        
        People also refer to return on sales as profit margin or net profit margin.
    - - Productivity, on the other hand, considers how to maximise sales and profits while using as few assets as possible.
        
        managers must take special care to spend valuable capital on those assets that will probably yield the highest productivity. To estimate the cost of money, companies compute a percentage called the cost of capital
      - The difference between efficiency and productivity? Efficiency tries to reduce waste, while productivity tries to use assets to generate more revenues and net income.
      - Efficiency measures how little waste is created when producing and selling a product.
    - - Retailers: These companies sell products.
      - Manufacturers: These companies make products.
      - Service companies: These companies do things for their customers.
      - Figure 2-1 illustrates how manufacturers, retailers, and service companies make and sell physical products and provide services for end-user customers.
    - - Putting Profitability and Productivity Together: Return on Assets
        
        The following formula explains how profit margin and asset turnover feed off of each other to deliver return on assets:
        
        Return on assets provides a simple measure of investment performance that can be applied to many different types of financial investments and even to companies’ own investments in factories, equipment, and other income-producing assets. The formula is
      - Asset turnover measures a company’s productivity. To calculate asset turnover, divide sales revenue by average assets:
        
        The higher the asset turnover, the more productive the company. Many companies improve turnover by taking care to utilize their scarce assets very carefully.
        
        e.g.
        
        Here the numbers tell a fascinating story. Plain Jeans’ low prices result in lower return on sales. The company’s high volume management style, however, gives the company a high asset turnover. On the other hand, Designer Jeans’ high return on sales reflects its high profit margin approach. Its low asset turnover reflects its low volume strategy.