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Chapter 4 Study Notes

Management accounting involves preparing financial and statistical information for internal decision-making, focusing on timely reports and performance evaluation. It differs from financial accounting, which is mandatory and externally focused, while cost accounting tracks and controls costs. Key concepts include cost classification, product vs. period costs, and the manufacturing cost flow process.

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22 views5 pages

Chapter 4 Study Notes

Management accounting involves preparing financial and statistical information for internal decision-making, focusing on timely reports and performance evaluation. It differs from financial accounting, which is mandatory and externally focused, while cost accounting tracks and controls costs. Key concepts include cost classification, product vs. period costs, and the manufacturing cost flow process.

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hanose
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 4: Introduction to Management

Accounting
1. What is Management Accounting?
Management accounting is the process of preparing and providing accurate and timely
financial and statistical information for internal use by managers to make decisions.

Key Features:

 Generates reports on a weekly or monthly basis.


 Provides information such as:
o Available cash
o Sales revenue
o Accounts payable and receivable
o Outstanding debts
o Raw materials and inventory

Importance of Management Accounting:

1. Supports planning and decision-making.


2. Helps monitor, evaluate, and reward performance.
3. Clarifies authority over assets.

2. Financial Accounting vs. Management Accounting


Financial Accounting

 Mandatory for most companies.


 Follows GAAP (Generally Accepted Accounting Principles).
 Focuses on past performance.
 Reports are general-purpose for external users (investors, regulators).
 Provides high-level summaries and monetary information only.

Management Accounting

 Optional and customized to internal needs.


 No GAAP compliance required.
 Forward-looking, focusing on estimates and predictions.
 Reports are detailed and tailored for internal use by managers.
 Includes non-financial performance indicators such as production data.
3. Cost Accounting and Management Accounting
Cost Accounting

 Records income and expenditure for cost control and periodic reports.
 Focuses on tracking and controlling costs.

Management Accounting

 Analyzes and interprets all financial information to support management decisions.

4. Cost Classification
By Behavior:

 Fixed Costs: Do not change with the level of activity (e.g., rent).
 Variable Costs: Change in proportion to activity levels (e.g., raw materials).

By Traceability:

 Direct Costs: Directly traceable to a product or department (e.g., labor, materials).


 Indirect Costs: Cannot be directly traced; benefit multiple cost objects (e.g.,
maintenance).

By Relevance:

1. Opportunity Costs: Potential benefits given up when choosing one alternative over
another.
o Example: Not working to attend college results in an opportunity cost of the
salary you could have earned.
2. Sunk Costs: Costs already incurred that cannot be changed by future decisions.
o Example: The $15,000 you paid for a car two years ago is a sunk cost.

5. Product Costs vs. Period Costs


Product Costs (Inventoriable Costs):
 Costs required to produce a product (Direct Materials, Direct Labor, Manufacturing
Overhead).
 Recorded as inventory on the balance sheet until sold, then expensed as Cost of Goods
Sold (COGS).

Period Costs:

 Non-manufacturing costs such as selling and administrative expenses.


 Recorded as expenses in the period they occur.

6. Manufacturing Cost Flows


Steps in the Manufacturing Process:

1. Buy Raw Materials


2. Convert to Finished Goods
3. Sell Finished Goods

Types of Inventories:

1. Raw Materials – Materials available for production.


2. Work in Process (WIP) – Partially completed goods.
3. Finished Goods – Completed goods awaiting sale.

7. Example of Cost Flow in Manufacturing


Scenario:

 Beginning raw materials inventory: $80,000


 Raw materials purchased during the year: $600,000
 Ending raw materials inventory: $90,000

Solution:
Direct materials used in production = $680,000 − $90,000 = $590,000

8. Product Cost Components


1. Direct Materials – Materials that are part of the finished product.
o Example: Fabric for clothing manufacturing.
2. Direct Labor – Wages of employees who work directly on the product.
o Example: Assembly line workers' wages.
3. Manufacturing Overhead – All indirect costs related to production.
o Includes indirect materials, indirect labor, machinery costs, and compliance costs.

Calculating Manufacturing Overhead Rate:

Overhead Application Rate=Estimated Overhead CostsEstimated Activity Units\text{Overhead


Application Rate} = \frac{\text{Estimated Overhead Costs}}{\text{Estimated Activity
Units}}Overhead Application Rate=Estimated Activity UnitsEstimated Overhead Costs

Example:
Estimated Overhead Costs = $2,000,000
Estimated Machine Hours = 100,000 hours
Overhead Application Rate = $2,000,000 ÷ 100,000 = $20/hour

9. Balance Sheet for Manufacturing vs. Merchandising


Companies
Merchandiser’s Inventory:

 Current Assets: Cash, Receivables, Merchandise Inventory

Manufacturer’s Inventory:

 Current Assets: Cash, Receivables, Inventories (Raw Materials, WIP, Finished Goods)

10. Cost of Goods Manufactured (COGM) and Income


Statement
COGM Formula:

Cost of Goods Manufactured=Direct Materials Used+Direct Labor+Manufacturing Overhead+B


eginning WIP−Ending WIP\text{Cost of Goods Manufactured} = \text{Direct Materials Used} +
\text{Direct Labor} + \text{Manufacturing Overhead} + \text{Beginning WIP} − \text{Ending
WIP}Cost of Goods Manufactured=Direct Materials Used+Direct Labor+Manufacturing Overhe
ad+Beginning WIP−Ending WIP

Income Statement for Manufacturer:


1. Sales Revenue
2. Less: COGS
o Beginning Finished Goods Inventory
o Add: COGM
o Less: Ending Finished Goods Inventory
3. Gross Profit
4. Operating Expenses
5. Net Profit

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