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ACCT 202: Managerial Accounting

Chapter 1
Managerial Accounting

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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
(3) manufactured and prepare financial statements for a
manufacturer.

(4) Discuss trends in managerial accounting.

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Key Features of Managerial Accounting

• Managerial accounting provides economic and financial information
for managers and other internal users.

• Similarities and differences between managerial and financial

accounting
▫ Similarities:
 Both deal with the economic events of a business.
 Both require that a company’s economic event be quantified.

Key Features of Managerial Accounting (cont’d)

▫ Differences:
Financial Accounting Managerial Accounting

Users  External users: stockers,  Internal users: officers

creditors, and regulators. and managers.
Frequency  Financial statements.  Internal reports. As
Quarterly and Annually. frequently as needed.
Purpose  General-purpose.  Special-purpose for
special decisions.
Contents  Pertains to business as  Pertains to subunits of
a whole. the business.
 Highly aggregated.  Very detailed.
 Limited to double-entry  Extended beyond
accounting and cost double-entry accounting
data. to relevant data.
 Follow GAAP  Standard is relevance to
decisions.

Verification process  Audited by CPA.  No independent audits.

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Management Functions

Planning Directing Controlling

 Maximize short-term  Coordinate diverse  Keeping activities on

profit and market activities and human track.
share. resources.  Determine whether
 Commit to  Implement planned goals are met.
environmental objectives.  Decide changes
protection and social  Provide incentives to needed to get back
programs. motivate employees. on track.
 Add value to the  Hire and train  May use an informal
business. employees. or formal system of
 Produce a smooth- evaluations.
running operation.

True False
Managerial accountants have a single role within
an organization, collecting and reporting costs to
management.
Financial accounting reports are general-purpose
and intended for external users.
Managerial accounting reports are special-
purpose and issued as frequently as needed.
Managers’ activities and responsibilities can be
classified into three broad functions: cost
accounting, budgeting, and internal control.
Managerial accounting reports must now comply
with generally accepted accounting principles
(GAAP).

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True 7
False
1. Financial accounting focuses on providing information to internal users.

2. Staff positions are directly involved in the company’s primary revenue-

generating activities.
3. Preparation of budgets is part of financial accounting.
4. Managerial accounting applies only to merchandising and
manufacturing companies.
5. Both managerial accounting and financial accounting deal with many
of the same economic events.
6. Managerial accounting reports are prepared only quarterly and
annually.

7. Financial accounting reports are general-purpose reports.

8. Managerial accounting reports pertain to subunits of the business.

9. Managerial accounting reports must comply with generally accepted
accounting principles.
10. The company treasurer reports directly to the vice president of
operations.

Stockholders

Board of
Directors

Chief Executive
Officer and
President

General Vice President Vice President

Counsel/ Vice President Finance/Chief Vice President Human
marketing Operations
Secretary Finance Officer Resources

Treasurer Controller

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Exercise 3

Classification of Manufacturing Costs

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

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Classification of Manufacturing Costs (cont’d)

• Direct materials (DM)
▫ Raw materials: basic materials and parts used in manufacturing process.
▫ Raw materials that can be physically and directly associated with the
finished product during the manufacturing process are classified as
direct materials.
▫ Example: seats installed in a car made by Toyota.

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Classification of Manufacturing Costs (cont’d)

• Direct labor (DL)
▫ Work of factory employees that can be physically and directly associated
with converting raw materials into finished goods.
▫ Example: wages paid to automobile assembly workers at Toyota.

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Classification of Manufacturing Costs (cont’d)

• Manufacturing overhead (MOH)
▫ Costs that are indirectly associated with manufacturing the finished
product.
▫ Includes all manufacturing costs except direct materials and direct labor.
▫ Example: indirect materials, indirect labor, depreciation and insurance on
manufacturing facilities.

▫ Also called factory overhead, indirect manufacturing costs, or burden.

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Product versus Period Costs (cont’d)

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Exercise 4
• Your Boat, Inc., is a small company that assembles custom
sailboats from components supplied by various manufacturers. Its
assembly shop and retail sales store are housed in a small
boathouse.

Cost DM DL MOH Selling Admin.

Wages of employees who build sailboats.

Advertising in newspaper.
Aluminum mast installed in sailboat.
Wages of company’s bookkeeper.
Depreciation on power tools.

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Exercise 5
Your company manufactures radar sets for commercial aircraft. You want
to borrow money from a bank and the bank requests financial data. This
requires you to classify costs as either product or period costs.

Cost Product Period

Memory chips used in radar sets.
Factory heating costs.
Training costs for new administrative
employees.
Costs of shipping radar sets to
customers.
Telephone expenses incurred by
factory management.

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Financial Statements for a Manufacturer

• Difference in balance sheet
▫ The balance sheets of a merchandiser and a manufacturer differ in the
inventory section.
• The balance sheet for a manufacturing company shows three
categories of inventory:

• The balance sheet for a merchandising company shows just one

category of inventory – Finished Goods.
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Financial Statements for a Manufacturer (cont’d)

• The balance sheets of a merchandiser and a manufacturer

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Financial Statements for a Manufacturer (cont’d)

• Difference in income statement
▫ The income statements of a merchandiser and a manufacturer differ in
the cost of goods sold section.

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Financial Statements for a Manufacturer (cont’d)

• Calculation of cost of goods manufactured (COGM)
▫ Total manufacturing costs - Total DM/DL/MOH added in production line.
▫ Total work in process - (1) cost of beginning work in process and (2) total
manufacturing costs for the current period.

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Financial Statements for a Manufacturer (cont’d)

• Cost of goods manufactured schedule

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Exercise 6
• Black Company has the following cost data. Compute cost of goods
manufactured:
Manufacturing overhead:
Property taxes, factory $3,000
Utilities, factory 5,000
Indirect labor 10,000
Depreciation, factory 24,000
Insurance, factory 8,000
Total MOH $50,000
Other costs:
Purchase of raw materials $32,000
Direct labor cost 40,000
Inventories:
Raw materials, beginning $8,000
Raw materials, ending 7,000
Work in process, beginning 6,000
Work in process, ending 7,500

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Trends in Managerial Accounting

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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Trends in Managerial Accounting (cont’d)

Focus on the Value Chain

• Just-In-Time (JIT) Inventory Method
• System in which goods are manufactured or purchased just in time for
sale
• Total Quality Management (TQM)
• Reduce defects in finished products, with goal of zero defects
• Theory of Constraints
• A specific approach to identify and manage constraints in order to
achieve company goals
• Activity-Based Costing (ABC)
• Allocates overhead based on use of activities

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Trends in Managerial Accounting (cont’d)

• Balanced Scorecard
• Evaluates operation in an integrated fashion
• Uses both financial and non-financial measures
• Links performance to overall company objectives
• All employees are expected to act ethically.
▫ Many organizations have codes of business ethics.
• Corporate social responsibility (CSR)
▫ Extend beyond legal compliance to include voluntary actions that satisfy
stakeholder expectations.

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