1 Managerial Accounting

Learning Objectives
Identify the features of managerial accounting and the
1 functions of management.

Describe the classes of manufacturing costs and the

2
differences between product and period costs.

Demonstrate how to compute cost of goods manufactured

3
and prepare financial statements for a manufacturer.

4 Discuss trends in managerial accounting.

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LEARNING Identify the features of managerial accounting and
OBJECTIVE
1 the functions of management.

Managerial Accounting
It provides economic and financial information for
managers and other internal users.

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 Managerial Accounting Activities
Explaining manufacturing and nonmanufacturing costs and
how they are reported in the financial statements.

Computing the cost of providing a service or manufacturing a

product.

Determining the behavior of costs and expenses as activity

levels change and analyzing cost-volume-profit relationships
within a company.

Accumulating and presenting data for management decision

making.
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 Determining prices for external and internal transactions.

Assisting management in profit planning and formalizing these

plans in the form of budgets.

Providing a basis for controlling costs and expenses by

comparing actual results with planned objectives and standard
costs.

Accumulating and presenting data for capital expenditure

decisions.

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Managerial Accounting vs. Financial Accounting

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 1 Managerial Accounting

Indicate whether the following statements are true or false.

1. Managerial accountants have a single role within an

False
organization, collecting and reporting costs to
management.

True 2. Financial accounting reports are general-purpose and

intended for external users.

3. Managerial accounting reports are special-purpose and

True
issued as frequently as needed.

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 1 Managerial Accounting

Indicate whether the following statements are true or false.

4. Managers’ activities and responsibilities can be

False
classified into three broad functions: cost accounting,
budgeting, and internal control.

False 5. Managerial accounting reports must now comply with

generally accepted accounting principles (GAAP).

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 Describe the classes of manufacturing costs
LEARNING
OBJECTIVE
2 and the differences between product and
period costs.

Managers should ask questions such as the following.

1. What costs are involved in making a product or providing a

service?

2. If we decrease production volume, will costs decrease?

3. What impact will automation have on total costs?

4. How can we best control costs?

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 Manufacturing Costs
Manufacturing consists of activities and processes that
convert raw materials into finished goods.

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 Manufacturing Costs

Direct Materials
Raw Materials
Basic materials and parts used in
manufacturing process.

Direct Materials
Raw materials that can be physically and directly associated
with the finished product during the manufacturing process.

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 Manufacturing Costs

Indirect Materials
1. Not physically part of the finished product or

2. They are an impractical to trace to the finished product

because their physical association with the finished
product is too small in terms of cost.

Considered part of manufacturing overhead.

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 Manufacturing Costs

Direct Labor
Work of factory employees that can be
physically and directly associated with
converting raw materials into finished
goods.

Indirect Labor
Work of factory employees that has no physical association with
the finished product or for which it is impractical to trace costs to
the goods produced.

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 Manufacturing Costs

Manufacturing Overhead
 Costs that are indirectly associated with manufacturing
the finished product.

 Includes all manufacturing costs except direct materials

and direct labor.

 Also called factory overhead, indirect manufacturing

costs, or burden.

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 Product vs. Period Costs

Product Costs
 Direct materials
 Components:  Direct labor
 Manufacturing overhead

 Costs that are an integral part of producing the

product.

 Recorded in “inventory” account.

 Not an expense (COGS) until the goods are sold.

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 Product vs. Period Costs

Period Costs
 Charged to expense as incurred.

 Non-manufacturing costs.

 Includes all Selling and Administrative expenses.

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 Product vs. Period Costs

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 Product vs. Period Costs

Illustration: Suppose you started your own snowboard factory,

KRT Boards. Here are some of the costs that your snowboard
factory would incur. Assign the following costs:

Illustration 1-4

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 Product vs. Period Costs
Illustration 1-4

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 Product vs. Period Costs

If KRT Boards produces 10,000 snowboards the first year,

what would be the total manufacturing costs?

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 2 Managerial Cost Concepts

A bicycle company has these costs: tires, salaries of employees who

put tires on the wheels, factory depreciation, advertising expenditures,
lubricants, spokes, salary of factory manager, salary of accountant,
handlebars, and salaries of factory maintenance employees. Classify
each cost as direct materials, direct labor, overhead, or a period cost.

Direct Materials Direct Labor Overhead

 Tires.  Salaries of  Factory depreciation.

 Spokes. employees who put  Lubricants
tires on the wheels.
 Handlebars.  Factory manager
salary.
Advertising expenditures and salary  Factory maintenance
of accountant are period costs. employees salary.
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 LEARNING Demonstrate how to compute cost of goods manufactured
OBJECTIVE
3 and prepare financial statements for a manufacturer.

Income Statement
Under a periodic inventory system, the income statements of
a merchandiser and a manufacturer differ in the cost of
goods sold section.

“COGS”
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 Helpful Hint
Income Statement Assume a periodic
inventory system in
this illustration.

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 Income Statement

Cost of goods sold sections of merchandising and manufacturing

income statements

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 Cost of Goods Manufactured

Total Manufacturing Costs – sum of direct material costs, direct

labor costs, and manufacturing overhead in the current year.
Total Work in Process – (1) cost of beginning work in process and
(2) total manufacturing costs for the current period.

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 3 Cost of Goods Manufactured

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 3 Cost of Goods Manufactured

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 Balance Sheet

Inventory accounts for a manufacturer Illustration 1-10

The balance sheet for a merchandising company shows just

one category of inventory.

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 Balance Sheet

Current assets sections of merchandising and manufacturing

balance sheets

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 LEARNING
OBJECTIVE
4 Discuss trends in managerial accounting.

Service Industries
 Much of the U.S. economy has shifted toward an
emphasis on providing services rather than goods.

 Over 50% of U.S. workers are now employed by service

companies.

 Most of the techniques learned for manufacturing firms

are applicable to service companies.

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 Focus on the Value Chain

Refers to all business processes associated with providing a

product or service.
For a manufacturing firm these include the following:

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 Focus on the Value Chain

Just-In-Time (JIT) Inventory Methods

 Inventory system in which goods are manufactured or
purchased just in time for sale.

Total Quality Management (TQM)

 Reduce defects in finished products, with the goal of
zero defects.

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 Focus on the Value Chain

Theory of Constraints
 Constraints (“bottlenecks” ) limit the company’s
potential profitability.

 A specific approach to identify and manage these

constraints in order to achieve company goals.

Enterprise Resource Planning (ERP)

 Software programs designed to manage all major
business processes.

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 Focus on the Value Chain

Activity-Based Costing (ABC)

 Allocates overhead based on use of activities.

 Results in more accurate product costing and scrutiny

of all activities in the value chain.

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 Balanced Scorecard

 Evaluates operations in an integrated fashion.

 Uses both financial and non-financial measures.

 Links performance to overall company objectives.

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 Business Ethics

 All employees are expected to act ethically.

 Many organizations have codes of business ethics.

 Past financial frauds:

► Enron,

► Global Crossing,

► WorldCom

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 Business Ethics

Creating Proper Incentives

 Systems and controls sometimes create incentives
for managers to take unethical actions.

 Controls need to be effective and realistic.

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 Business Ethics

Code of Ethical Standards

Sarbanes-Oxley Act (SOX)
 Clarifies management’s responsibilities.

 Requires certifications by CEO and CFO.

 Selection criteria for Board of Directors and Audit

Committee.

 Substantially increased penalties for misconduct.

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 Corporate Social Responsibility

 Considers a company’s efforts to employ sustainable

business practices with regard to its employees,
society, and the environment.

 Is sometimes referred to as the triple bottom line

because it evaluates a company’s performance with
regard to people, planet, and profit.

 Recent reports indicate that over 50% of the 500 largest

U.S. companies provide sustainability reports.

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 4 Trends in Managerial Accounting

Match the descriptions that follow with the corresponding terms.

g All activities associated with
1. ______
providing a product or performing
service.
a A method of allocating
2. ______
overhead based on each product’s
use of activities in making the
product.

e Systems implemented to reduce defects in finished

3. ______
products with the goal of achieving zero defects.

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 4 Trends in Managerial Accounting

Match the descriptions that follow with the corresponding terms.

b A performance-
4. ______
measurement approach that uses
both financial and nonfinancial
measures, tied to company
objectives, to evaluate a company’s
operations in an integrated fashion.

d Inventory system in which goods are manufactured or

5. ______
purchased just as they are needed for use.

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 4 Trends in Managerial Accounting

Match the descriptions that follow with the corresponding terms.

c A company’s efforts to
6. ______
employ sustainable business
practices with regards to its
employees, society, and the
environment.

f
7. ______ Inventory system in which
goods are manufactured or
purchased just as they are needed
for use.

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