L

E
The Manager and
Management Accounting
C
T
An Introduction to U
Cost Terms and Purposes R
E
01
1 © 2012 Pearson Prentice Hall. All rights reserved.

The Manager and ACCOUNTING DISCIPLINE OVERVIEW

Chapter 1 Management Accounting
Accounting consists of three basic activities - it
Learning Objectives:
After studying this chapter, you should be able to:  identifies,
1. Distinguish financial accounting from management accounting
 records, and
2. Understand how management accountants help firms make strategic decisions
3. Explain the five-step decision making process and its role in management
 communicates
accounting
4. Describe three guidelines management accountants follow in supporting the economic events of an organization to interested
managers
users.
5. Understand how management accounting fits into an organization’s structure
6. Understand what professional ethics mean to management accountants.

© 2012 Pearson Prentice Hall. All rights reserved.

ACCOUNTING DISCIPLINE OVERVIEW ACCOUNTING DISCIPLINE OVERVIEW

Three Activities  Managerial accounting—measures, analyzes, and

reports financial and nonfinancial information to help
managers make decisions to fulfill organizational
goals. Managerial accounting need not be GAAP
compliant.

 Financial accounting—focus on reporting to external

users including investors, creditors, and
governmental agencies. Financial statements must be
based on GAAP.

© 2012 Pearson Prentice Hall. All rights reserved. © 2012 Pearson Prentice Hall. All rights reserved.

1
 MAJOR DIFFERENCES BETWEEN STRATEGY AND
FINANCIAL AND MANAGERIAL ACCOUNTING MANAGEMENT ACCOUNTING

Managerial Accounting Financial Accounting Strategy: specifies how an organization matches its
Communicate financial own capabilities with the opportunities in the
Purpose Decision making
position to outsiders marketplace to accomplish its objectives
Primary Users Internal managers External users

Focus/Emphasis Future-oriented Past-oriented

Strategic cost management: focuses specifically on
the cost dimension within a firm’s overall strategy
Do not have to follow GAAP compliant;
Rules
GAAP; cost vs. benefit CPA audited
Ultra current to very long Historical monthly,
Time Span
time horizons quarterly reports
Designed to influence Indirect effects on
Behavioral Issues
employee behavior employee behavior

© 2012 Pearson Prentice Hall. All rights reserved. © 2012 Pearson Prentice Hall. All rights reserved.

STRATEGY AND
MANAGEMENT ACCOUNTING AND VALUE
MANAGEMENT ACCOUNTING
Creating value is an important part of planning and
Management accounting helps answer important implementing strategy.
questions such as:
 Who are our most important customers, and how do
Value is the usefulness a customer gains from a
we deliver value to them?
company’s product or service.
 What substitute products exist in the marketplace,
and how do they differ from our own?
Value chain is the sequence of business functions in
 What is our critical capability? which customer usefulness is added to products or
 Will we have enough cash to support our strategy or services.
will we need to seek additional sources?

© 2012 Pearson Prentice Hall. All rights reserved. © 2012 Pearson Prentice Hall. All rights reserved.

THE VALUE CHAIN ILLUSTRATED PLANNING AND CONTROL SYSTEMS

Planning selects goals, predicts results, decides how

to attain goals, and communicates this to the
organization.
Budget—the most important planning tool

Control takes actions that implement the planning

decision, decides how to evaluate performance, and
provides feedback to the organization.

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2
A FIVE-STEP DECISION MAKING PROCESS MANAGEMENT ACCOUNTING GUIDELINES
IN PLANNING AND CONTROL

1. Identify the problem and uncertainties.  Cost–benefit approach is commonly used: benefits
generally must exceed costs as a basic decision
2. Obtain information. rule.
3. Make predictions about the future.  Behavioral and technical considerations—people
4. Make decisions by choosing between alternatives. are involved in decisions, not just dollars and cents.
5. Implement the decision, evaluate performance,  Managers use alternative ways to compute costs in
and learn. different decision-making situations.

© 2012 Pearson Prentice Hall. All rights reserved. © 2012 Pearson Prentice Hall. All rights reserved.

A T YPICAL ORGANIZATIONAL STRUCTURE

PROFESSIONAL ETHICS
AND THE MANAGEMENT ACCOUNTANT

The four standards of ethical conduct for management

accountants as advanced by the Institute of
Management Accountants:
 Competence
 Confidentiality
 Integrity
 Objectivity

© 2012 Pearson Prentice Hall. All rights reserved. © 2012 Pearson Prentice Hall. All rights reserved.

An Introduction to Cost BASIC COST TERMINOLOGY

Chapter 2 Terms and Purposes
Learning Objectives: No Cost term Definition

After studying this chapter, you should be able to: 1 Cost sacrificed resource to achieve a
specific objective
1. Define and illustrate a cost object
2 Actual cost cost that has occurred
2. Distinguish between direct costs and indirect costs
3 Budgeted cost a predicted cost
3. Explain variable costs and fixed costs
4. Interpret unit costs cautiously 4 Cost object anything of interest for which a cost
is desired
5. Distinguish inventoriable costs from period costs

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 COST OBJECT EXAMPLES AT BMW BASIC COST TERMINOLOGY

Cost Object Illustration Cost accumulation: a collection of cost data in an

organized manner
Product BMW X 5 sports activity vehicle
Cost assignment: a general term that includes
Service Dealer-support telephone hotline gathering accumulated costs to
R&D project on DVD system a cost object. This includes:
Project  Tracing accumulated costs with a direct relationship
enhancement
to the cost object and
Herb Chambers Motors, a dealer  Allocating accumulated costs with an indirect
Customer that purchases a broad range of relationship to a cost object
BMW vehicles
Activity Setting up production machines
Department Environmental, Health and Safety

BASIC COST TERMINOLOGY DIRECT AND INDIRECT COSTS

Direct costs can be conveniently and economically

Cost Cost traced (tracked) to a cost object.
accumulation assignment
Indirect costs cannot be conveniently or economically
traced (tracked) to a cost object. Instead of being
traced, these costs are allocated to a cost object in a
rational and systematic manner.

Allocating Tracing

Indirect costs Direct costs

BMW: ASSIGNING COSTS TO A COST

OBJECT COST EXAMPLES

 Direct Costs
 Parts
 Assembly line wages
 Indirect Costs
 Electricity
 Rent
 Property taxes

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 FACTORS AFFECTING DIRECT/INDIRECT
COST BEHAVIOR
COST CLASSIFICATION
Variable costs—changes in total in proportion to
changes in the related level of activity or volume

 Cost materiality Fixed costs—remain unchanged in total regardless of

 Availability of information-gathering technology changes in the related level of activity or volume
 Operational design
Costs are fixed or variable only with respect to a
specific activity or a given time period.

COST BEHAVIOR COST BEHAVIOR SUMMARIZED

 Variable costs are constant on a per-unit basis. If a

Total Dollars Cost per Unit
product takes 5 pounds of materials each, it stays the
same per unit regardless if one, ten, or a thousand Change in
Unchanged in
units are produced. Variable Costs proportion with
relation to output
output (1)
 Fixed costs change inversely with the level of
Unchanged in Change inversely
production. As more units are produced, the same Fixed Costs
relation to output with output (2)
fixed cost is spread over more and more units,
reducing the cost per unit.
(1) More output = More cost

(2) More output = Lower cost per unit

COST BEHAVIOR VISUALIZED OTHER COST CONCEPTS

 Cost driver—a variable that causally affects costs over

a given time span
 Relevant range—the band of normal activity level (or
volume) in which there is a specific relationship
between the level of activity (or volume) and a given
cost
 For example, fixed costs are considered fixed only
within the relevant range.

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 RELEVANT RANGE VISUALIZED A COST CAVEAT

Unit costs should be used cautiously. Because unit

costs change with a different level of output or volume,
it may be more prudent to base decisions on a total
dollar basis.
 Unit costs that include fixed costs should always
reference a given level of output or activity.
 Unit costs are also called average costs.
 Managers should think in terms of total costs rather
than unit costs.

MULTIPLE CLASSIFICATION OF COSTS,

SUM UP VISUALIZED

Costs may be classified as:

 Direct/Indirect, and
 Variable/Fixed
These multiple classifications give rise to important
cost combinations:
 Direct and variable
 Direct and fixed
 Indirect and variable
 Indirect and fixed

DIFFERENT T YPES OF FIRMS T YPES OF MANUFACTURING INVENTORIES

Manufacturing-sector companies purchase materials Direct materials:

and components and convert them into finished
products.
Merchandising-sector companies purchase and then
sell tangible products without changing their basic
form.
Ser vice-sector companies provide services (intangible
products).
resources in-stock and available for use
Work-in-process (or progress):
products started but not yet completed,
often abbreviated as WIP
Finished goods:
products completed and ready for sale

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T YPES OF PRODUCT COSTS
Also known as inventoriable costs:
 Direct materials—acquisition costs of all materials that
will become part of the cost object.
 Direct labor—compensation of all manufacturing labor
that can be traced to the cost object.
 Indirect manufacturing—factory costs that are not
traceable to the product in an economically feasible
way. Examples include lubricants, indirect
manufacturing labor, utilities, and supplies.
ACCOUNTING DISTINCTION
BETWEEN COSTS
Inventoriable costs—product manufacturing costs.
These costs are capitalized as assets (inventory)
until they are sold and transferred to Cost of Goods
Sold.
Period costs—have no future value and are expensed
in the period incurred.

COST FLOWS COST FLOWS VISUALIZED

The Cost of Goods Manufactured and the Cost of Goods

Sold section of the Income Statement are accounting
representations of the actual flow of costs through a
production system.
 Note the importance of inventory accounts in the
following accounting reports, and in the cost flow
chart.

MULTIPLE-STEP INCOME STATEMENT COST OF GOODS MANUFACTURED

STEP 1

STEP 4

STEP 2

STEP 3

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 OTHER COST CONSIDERATIONS

 Prime cost is a term referring to all direct

manufacturing costs (materials and labor).

 Conversion cost is a term referring to direct labor and

indirect manufacturing costs.

 Overtime labor costs are considered part of indirect

overhead costs.