Managerial Accounting

Weygandt, Kieso, & Kimmel

Prepared by
Karleen Nordquist..
The College of St. Benedict...
and St. John’s University...

with contributions by
Marianne Bradford..
The University of Tennessee...
Gregory K. Lowry….
Macon Technical Institute…..

John Wiley & Sons, Inc.

 Chapter 1

Managerial Accounting
 Chapter 1
Managerial Accounting
After studying this chapter, you should be able to:
1 Explain the distinguishing features of managerial
accounting.
2 Identify the three broad functions of management.
3 Define the three classes of manufacturing costs.
4 Distinguish between product and period costs.
5 Explain the difference between a merchandising and a
manufacturing income statement.
 Chapter 1
Managerial Accounting
After studying this chapter, you should be able to:
6 Indicate how cost of goods manufactured is
determined.
7 Explain the difference between a merchandising and a
manufacturing balance sheet.
 Preview of Chapter 1

Managerial Accounting Basics

• Comparing managerial and
financial accounting
• Ethical standards
MANAGERIAL • Management functions
ACCOUNTING
Managerial Cost Concepts
• Manufacturing costs
• Product versus period costs
 Preview of Chapter 1

Manufacturing Costs in Financial

Statements
• Income statement
• Balance sheet
• Cost Concepts: a review
MANAGERIAL
Contemporary Developments in
ACCOUNTING Managerial Accounting
• Technological change
• Quality
• Focus on activities
• Service industry needs
 Managerial Accounting Basics

Managerial accounting (management

accounting) is a field of accounting that
provides economic and financial information
for managers and other internal users.
 Managerial Accounting Basics

The activities that are part of managerial

accounting are as follows:
1 Explaining manufacturing and nonmanufacturing
costs and how they are reported in the financial
statements.
2 Computing the cost of rendering a service or
manufacturing a product.
3 Determining the behavior of costs and expenses as
activity levels change and analyzing cost-volume-
profit relationships within a company.
 Managerial Accounting Basics
The activities that are part of managerial accounting are as follows:
4 Assisting management in profit planning and formalizing the plans in
the form of budgets.
5 Providing a basis for controlling costs and expenses by comparing
actual results with planned objectives and standard costs.
6 Accumulating and using relevant data for management decision
making.
 Study Objective 1

Explain the distinguishing features

of managerial accounting.
Differences Between Financial
and Managerial Accounting
FINANCIAL MANAGERIAL
ACCOUNTING ACCOUNTING
Primary Users of Reports
External users, who are Internal users, who are officers,
stockholders, creditors, and department heads, managers,
regulatory agencies. and supervisors in the
company.
Types and Frequency of Reports
Classified financial statements. Internal reports
Issued quarterly and annually. Issued as frequently as needed.
Purpose of Reports
To provide general-purpose To provide special-purpose
information for all users. information for a particular
user for a specific decision.
Illustration 1-1a
Differences Between Financial
and Managerial Accounting
FINANCIAL MANAGERIAL
ACCOUNTING ACCOUNTING
Content of Reports
Pertains to entity as a whole Pertains to subunits of the
and is highly aggregated entity and may be very
(condensed). detailed.
Limited to double-entry May extend beyond double-
accounting system and cost entry accounting system to
data. any type of relevant data.
Reporting standard is generally Reporting standard is relevance
accepted accounting to the decision to be made.
principles.
Verification Process
Annual independent audit by No independent audits.
certified public accountant.
Illustration 1-1b
 Ethical Standards for
Managerial Accountants
 Managerial accountants recognize that they have an ethical
obligation to their companies and the public.
 To provide guidance for managerial accountants in the performance
of their duties, the Institute of Management Accountants (IMA)
has developed a code of ethical standards, entitled Standards of
Ethical Conduct for Management Accountants.
 This code divides the managerial accountant’s responsibilities into
4 areas:
– competence,
– confidentiality,
– integrity, and
– objectivity.
 Study Objective 2

Identify the three broad functions of

management.
 Management Functions
The management of an organization performs
three broad functions:
 Planning
 Directing and motivating
 Controlling
 Management Functions:
Planning
 Planning requires management to
– look ahead, and
– establish objectives.
 These objectives are usually quite diverse, but a key
modern management objective appears to be to add
value to the business under its control.
 Value is usually measured by
– the trading price of the company’s stock and
– the potential selling price of the company.
 Management Functions:
Directing and Motivating
 Directing and motivating involves coordinating
diverse activities and human resources to produce a
smooth-running operation.
 This function relates to the implementation of
planned objectives.
 Most companies prepare organization charts to show
– the interrelationship of activities, and
– the delegation of authority and responsibility
within the company.
 Management Functions:
Controlling
 Controlling is the process of keeping the
firm’s activities on track.
 In controlling operations, management
determines
– whether planned goals are being met, and
– what changes are necessary when there are
deviations from targeted objectives.
 Managerial Cost Concepts
To perform the three management functions effectively,
management needs information. One very important type of
information is related to costs. For example, questions such
as the following need answering:
– What costs are involved in making the product?
– If production volume is decreased, will costs decrease?
– What impact will automation have on total costs?
– How can costs best be controlled in the organization?
Management Functions
Review

Pla &
nn c t i ng
ing Di r e ng
ito ri
Decision M o n
Making
Controlling

Page 7
Study Objective 3

Define the three classes of

manufacturing costs.
 Managerial Cost Concepts
Manufacturing consists of activities and
processes that convert raw materials into
finished goods. Manufacturing costs are usually
classified as follows:
– Direct Materials
– Direct Labor
– Manufacturing Overhead
 Manufacturing Costs:
Direct Materials
 Raw materials represent the basic materials
and parts that are to be used in the
manufacturing process.
 Raw materials that can be physically and
conveniently associated with the finished
product during the manufacturing process are
termed direct materials.

DIRECT MATERIALS
 Manufacturing Costs:
Indirect Materials
Some raw materials cannot be easily associated with the
finished product. These are considered indirect materials.
Indirect materials
– do not physically become part of the finished product,
or
– cannot be traced because their physical association with
the finished product is too small in terms of cost.
Indirect materials are accounted for as part of manufacturing
overhead.
 Manufacturing Costs:
Direct Labor

Direct labor is the work of factory

employees that can be physically and
conveniently associated with converting
raw materials into finished goods.

DIRECT LABOR
 Manufacturing Costs:
Indirect Labor
The wages of maintenance people, timekeepers,
and supervisors are normally categorized as
indirect labor because their efforts have no
physical association with the finished product
or it is impractical to trace the costs to the
goods provided..
Like indirect materials, indirect labor is part of
manufacturing overhead.
 Manufacturing Costs:
Manufacturing Overhead
Manufacturing overhead consists of costs that are indirectly
associated with the manufacture of the finished product.
These costs may also be defined as manufacturing costs that
cannot be classified as either direct materials or direct
labor.
Manufacturing overhead includes
– indirect materials;
– indirect labor;
MANUFACTURING
– depreciation on factory buildings and machinery; and
OVERHEAD
– insurance, taxes, and maintenance on factory facilities.
 Study Objective 4

Distinguish between product and

period costs.
 Product Costs
Product costs (also called inventoriable costs)
include each of the manufacturing cost
elements (direct materials, direct labor, and
manufacturing overhead). They are the costs
that are a necessary and integral part of
producing the finished product.
These costs are not expensed (as cost of goods
sold) under the matching principle until the
finished goods inventory is sold.
 Product Costs:
Prime and Conversion
Direct materials and direct labor are often
referred to as prime costs due to their direct
association with the manufacturing of the
finished product.
Direct labor and manufacturing overhead are
often referred to as conversion costs since
they are incurred in converting raw materials
into finished goods.
 Period Costs
Period costs are identifiable with a specific time
period rather than a salable product.
Period costs are deducted from revenues in the
period in which they are incurred.
Period costs relate to nonmanufacturing, (thus,
noninventoriable) costs, and include selling
and administrative expenses.
 Product Versus
Period Costs
All Costs
Product Costs Period Costs
Manufacturing Costs
(Go to Balance Sheet before
Nonmanufacturing Costs
Income Statement) (Go straight to Income Statement)

Direct Materials Prime Selling

Costs
Expenses
Direct Labor
Conversion Administrative
Costs Expenses
Manufacturing
Overhead Illustration 1-4
 Study Objective 5

Explain the difference between a

merchandising and a manufacturing
income statement.
 Merchandising versus
Manufacturing Income Statements
Under a periodic inventory system, the income statements
of a merchandising company and a manufacturing
company differ in the cost of goods sold section.
For a merchandising company, cost of goods sold is
calculated by adding the beginning merchandise inventory
and the cost of goods purchased, and subtracting the
ending merchandise inventory.
For a manufacturing company, cost of goods sold is
calculated by adding the beginning finished goods
inventory and the cost of goods manufactured, and
subtracting the ending finished goods inventory.
 Cost of Goods Sold
Components
Merchandising Company
Beginning Ending
Merchandise + Cost of Goods - Merchandise =
Inventory Purchased Inventory

Cost of
Goods Sold
Manufacturing Company
Beginning Ending
Cost of Goods -
Finished Goods + Manufactured
Finished =
Inventory Goods
Inventory
Illustration 1-5
 Cost of Goods Sold Sections
of Merchandising and
Manufacturing Companies
The following cost of goods sold sections for
merchandising and manufacturing enterprises
highlight the different presentations:
MERCHANDISING COMPANY
Partial Income Statement
For the Year Ended December 31, 1999

Cost of goods sold

Merchandise inventory, January 1 $ 70,000
Cost of goods purchased 650,000
Cost of goods available for sale 720,000
Merchandise inventory, December 31 400,000
Cost of goods sold $ 320,000
Illustration 1-6a
Cost of Goods Sold Sections
of Merchandising and
Manufacturing Companies
MANUFACTURING COMPANY
Partial Income Statement
For the Year Ended December 31, 1999

Cost of goods sold

Finished goods inventory, January 1 $ 90,000
Cost of goods manufactured 370,000
Cost of goods available for sale 460,000
Finished goods inventory, December 31 80,000
Cost of goods sold $ 380,000

Illustration 1-6b
Study Objective 6

Indicate how cost of goods

manufactured is determined.
 Cost of Goods
Manufactured Formula
The total cost of work in process for the year is equal to the sum of:
– the cost of the beginning work in process inventory and
– the total manufacturing costs for the current period.
To find the cost of goods manufactured, we subtract the cost of the
ending work in process inventory from the total cost of work in process.

Beginning Total Current Total Cost of

Work in Process + Manufacturing = Work in Process
Inventory Costs

Ending
Total Cost of Cost of Goods
Work in Process
- Work in Process = Manufactured
Inventory
Illustration 1-7
 Cost of Goods
Manufactured Schedule
To eliminate OLSEN MANUFACTURING COMPANY
Cost of Goods Manufactured Schedule
excessive detail, it is For the Year Ended December 31, 1999
customary to present
Work in process, January 1 $ 18,400
only the total cost of Direct materials
goods Raw materials inventory, January 1 $ 16,700
Raw materials purchases 152,500
manufactured in the
Total raw materials available for use 169,200
Income Statement. Less: Raw materials inventory, December 31 22,800
Direct materials used $ 146,400
An internal financial Direct labor 175,600
schedule called a Manufacuring overhead
Cost of Goods Indirect labor 14,300
Factory repairs 12,600
Manufactured Factory utilities 10,100
Schedule (as shown Factory depreciation 9,440
Factory insurance 8,360
on the right) shows Total manufacturing overhead 54,800
each of the cost Total manufacuring costs 376,800
elements. Total cost of work in process 395,200
Less: Work in process, December 31 25,200
Cost of goods manufactured $ 370,000
Illustration 1-8
 Study Objective 7

Explain the difference between a

merchandising and a manufacturing
balance sheet.
 Merchandising versus
Manufacturing Balance Sheets
Unlike the balance sheet for a merchandising company, which
shows just one inventory category, the balance sheet of a
manufacturing company may have three inventory accounts:
– Finished Goods Inventory, which shows the cost of
completed goods on hand;
– Work in Process Inventory, which shows the cost
applicable to units that have been started into production
but are only partially completed; and
– Raw Materials Inventory, which shows the cost of raw
materials on hand.
 Current Assets Sections of
Merchandising and Manufacturing
Balance Sheets
The following current assets sections of balance sheets contrast the
presentation of inventories of a merchandising company with those of a
manufacturing company. The remainder of the balance sheet is similar
for the two types of companies.

Merchandise Company
Balance Sheet
December 31, 1999

Current assets
Cash $ 100,000
Receivables (net) 210,000
Merchandise inventory 400,000
Prepaid expenses 22,000
Total current assets $ 732,000

Illustration 1-10a
 Current Assets Sections of
Merchandising and Manufacturing
Balance Sheets

Manufacturing Manufacturing Company

Balance Sheet
inventories are December 31, 1999
generally listed
in the order of Current assets
Cash $ 180,000
liquidity – Receivables (net) 210,000
their expected Inventories:
Finished goods $ 80,000
realization in Work in process 25,200
cash. Thus, Raw materials 22,800 128,000
finished goods Prepaid expenses 18,000
inventory is Total current assets $ 536,000
listed first.
Illustration 1-10b
 Cost Concepts: A Review
Assignment of Costs to Cost Categories

Product Costs
Cost Item Direct Direct Manufacturing Period Prime Conversion
Materials Labor Overhead Costs Costs Costs
Material cost ($10 per door) X X
Labor costs ($8 per door) X X X
Depreciation on new equipment
($25,000 per year) X X
Property taxes ($6,000 per year) X X
Advertising costs ($30,000 per
year) X
Sales commissions ($4 per door) X
Maintenance salaries ($28,000 per
year) X X
Salary of plant manager ($70,000) X X
Cost of shipping pre-hung doors
($12 per door) X

Illustration 1-11
 Cost Concepts: A Review
Computation of Manufacturing Cost
Total manufacturing costs are the sum of the product costs – direct
materials, direct labor, and manufacturing overhead costs.
Northridge Company produces 10,000 pre-hung wooden doors the
first year. The total manufacturing costs are:
Manufacturing
Cost Number and Item Cost

1. Material cost ($10 X 10,000) $ 100,000

2. Labor cost ($8 X 10,000) 80,000
3. Depreciation on new equipment 25,000
4. Property taxes 6,000
7. Maintenance salaries 28,000
8. Salary of plant manager 70,000
Total manufacturing costs $ 309,000
Illustration 1-12
Contemporary Developments
in Managerial Accounting
Due to increased global competition from such
countries as Japan and Germany, contemporary
business managers demand different and better
information than they needed just a few years
ago.
The factors on the following slides contribute to the
expanding role of managerial accounting as we
look toward the next century.
Contemporary Developments
in Managerial Accounting
 Technological Change — Through computer-
integrated manufacturing (CIM), many
companies can now manufacture products that
are untouched by human hands. Also, the
widespread use of computers has greatly reduced
the cost of accumulating, storing, and reporting
managerial accounting information.
 Contemporary Developments
in Managerial Accounting
 Quality — Many companies have installed a total quality
control (TQC) system to reduce defects in finished
products. More emphasis is now put on nonfinancial
measures such as customer satisfaction, number of service
calls, and time to generate reports. Attention to these
measures, which employees can control, leads to increased
profitability. In addition, many companies have begun
using just-in-time inventory methods (JIT), under which
goods are manufactured or purchased just in time for use.
This lowers the costs of holding and storing inventory.
Contemporary Developments
in Managerial Accounting
 Focus on Activities — In order to obtain more
accurate product costs, many companies are
accounting for overhead costs by the activities
used in making the product. Activities include
purchasing materials, handling raw materials, and
production order scheduling. This development
is called activity based costing (ABC).
Contemporary Developments
in Managerial Accounting
 Service Industry Needs — In some respects, the
challenges for managerial accounting are greater
in service enterprises than in manufacturing
companies. In some companies, it may be
necessary for the managerial accountant to
develop new systems for measuring the cost of
serving individual customers and new operating
controls to improve the quality and efficiency of
specific services.
 Contemporary Developments
in Managerial Accounting
A Final Comment — Not long ago, the
managerial accountant was primarily engaged in
cost accounting – collecting and reporting
manufacturing costs to management. Today, the
managerial accountant’s responsibilities extend
to cost management – providing managers with
data on the efficient use of company resources
in both manufacturing and service industries.
 Appendix 1A

Accounting Cycle for a

Manufacturing Company
 Appendix 1A
Study Objective 8

Prepare a worksheet and closing

entries for a manufacturing company.
 Appendix 1A
Accounting Cycle for a
Manufacturing Company
The accounting cycle for a manufacturing company
is the same as for a merchandising company
when a periodic inventory system is used.
Except for additional manufacturing inventories and
cost accounts, the journalizing and posting of
transactions and adjustments, and the preparation
of a trial balance are the same.
There are some changes in the preparation of the
work sheet and closing entries.
 Appendix 1A
Accounting Cycle for a
Manufacturing Company
Two additional columns are needed in the work
sheet for the cost of goods manufactured. In
these columns, the beginning inventories of raw
materials and work in process are entered as
debits, and the ending inventories are entered as
credits; all manufacturing costs are entered as
debits. To close all of the accounts that appear in
the cost of goods manufactured schedule, a
Manufacturing Summary account is used.