Chapter 15

Distinguish management accounting from financial

accounting
 Owners

Government Creditors

Suppliers Customers

Managers

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Management’s Accountability to Stakeholders
Stakeholders Provide Management is accountable
for:
Operating activities
Suppliers Products & services ?

Employees Time & expertise ?

Customers Cash ?
Investing activities
Suppliers Long-term assets ?

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Management’s Accountability to Stakeholders
Stakeholders Provide Management is
accountable for:
Financing activities
Owners Cash or other assets ?
Creditors Cash ?
Actions that affect society
Governments Permission to ?
operate
Communities Human and physical ?
resources

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 For external reporting  For internal planning and
control

Financial Accounting Management Accounting

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 Management versus Financial Accounting
Management Accounting Financial Accounting
Primary users Internal – the company’s External – investors and
managers creditors
Purposes of information Help managers plan and control Help with investment and
operations credit decisions
Focus and time Relevance of information; Relevance and reliability of
dimension focus on the future information; focus on the
past

Type of report Internal reports Financial statements

No audit needed prescribed by GAAP
Audit by CPAs

Scope of information Detailed reports on a weekly or Summarized reports

daily basis quarterly and/or annually
Behavioral Concern about how reports Concern about adequate
affect employee behavior disclosure

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Identify trends in the business environment and the role
of management accountability
 Shift toward a service economy
 Global competition
 Time-based competition
 Total Quality Management

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Classify costs and prepare an income statement for a
service company
 Seek to provide services
 Simplest accounting
 All costs are period costs

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 Net income

Revenues Expenses

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Classify costs and prepare an income statement for a
merchandising company
 Resell products purchased from suppliers
 Keep an inventory of products
 Cost of goods sold is a major expense

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 Includes cost to purchase goods plus freight-in

Beginning inventory
Plus: Purchases, net
Plus: Freight-in
Less: Ending inventory
Equals: Cost of goods sold

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Copyright (c) 2009 Prentice Hall. All rights reserved. 16
 Any Compa ny
Income S ta te me nt
For the ye a r e nde d De ce mbe r 31, 2011
Ne t s a le s re ve nue $$$$
Cos t of goods s old $$$$
Gros s profit $$$
Ope ra ting e xpe ns e s $$$
Ope ra ting income $$$
Othe r income (e xpe ns e ) $$
Ne t income $$$

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 Gonza le s Brus h Compa ny
Income S ta te me nt
For the ye a r e nde d De ce mbe r 31, 2011
Ne t s a le s re ve nue $128,500
Cos t of goods s old:
Be ginning inve ntory $7,400
P lus : P urcha s e s 62,800
Le s s : Ending inve ntory (6,000)
Cos t of goods s old 64,200
Gros s profit 64,300
S e lling a nd a dminis tra tive e xpe ns e 45,400
Ne t income $18,900

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Cost of goods Unit cost of
Units sold
sold one brush

5,700 units
$64,200 $?
sold

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Classify costs and prepare an income statement and
statement of cost of goods manufactured for a
manufacturing company
 Use labor, plant, supplies and facilities to convert raw
materials into finished products
 Three kinds of inventory
Finished goods
inventory
Work in process
inventory
Materials
inventory

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 Cost object: Anything for which managers want a
separate measurement of cost

Direct costs Indirect costs

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Copyright (c) 2009 Prentice Hall. All rights reserved. 23
 Includes only indirect costs related to manufacturing
 Examples:

◦ Indirect materials
◦ Indirect labor

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 Other costs related to the manufacturing facility and
plant assets
◦ Repairs & maintenance
◦ Utilities
◦ Rent & insurance
◦ Property taxes
◦ Depreciation

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 Any Manufacturing Company
Income Statement
For the year ended December 31, 2011
Net sales revenue $$$$$$$
Cost of goods sold:
Beginning finis he d goods inventory $$$$$$
Plus: Cos t of goods manufac ture d $$$$$
Less: Ending finis he d goods inventory ($$$$$)
Cos t of goods sold $$$$$$
Gross profit $$$$$$
Selling and administrative expense $$$$$
Operating income $$$$$$

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Type of company Inventoriable product Period costs (Expenses)
costs

Service company None Salaries, depreciation,

utilities, advertising,
insurance, property taxes

Merchandising company Purchases plus freight in Salaries, depreciation,

utilities, advertising,
insurance, property taxes
and delivery expense

Manufacturing company Direct materials, Direct Office salaries,

labor and manufacturing depreciation, utilities,
overhead advertising, insurance,
property taxes on office,
selling expenses
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 BALANCE SHEET

Purchases
of materials Materials
Inventory INCOME STATEMENT

Sales
Direct labor & Work in
manufacturing
Process -
overhead
Inventory When
sales Cost of
occur Goods Sold
Finished -
Goods Operating
Period
Inventory Costs Expenses
=
Operating Income
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 Any Ma nufa cturing Compa ny
S che dule of Cos t of Goods Ma nufa cture d
For the ye a r e nde d De ce mbe r 31, 2011
Be ginning Work in proce s s inve ntory $$$
Add: Dire ct ma te ria ls us e d
Be ginning dire ct ma te ria ls inve ntory $$$
P lus : Dire ct ma te ria ls purcha s e d $$$
Le s s : Ending dire ct ma te ria ls inve ntory ($$$)
Dire ct ma te ria ls us e d $$$
Dire ct la bor $$$
Ma nufa cturing ove rhe a d $$$
Tota l ma nufa cturing cos ts incurre d during the ye a r $$$
Tota l ma nufa cturing cos ts to a ccount for $$$
Le s s : Ending Work in proce s s inve ntory $$$
Cos t of goods ma nufa cture d $$$

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Beginning Direct Ending
Work in materials Work in
process used process

Total Direct
manufacturing labor
costs
Cost of goods
manufactured
Manufacturing
overhead
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Direct materials Work in process Finished goods
inventory inventory inventory
Beginning inventory Beginning inventory Beginning inventory

+ Purchases and freight- + Direct materials used + Cost of goods

in manufactured
= Direct materials + Direct labor = Cost of goods
available for use available for sale
+ Manuf. overhead

- Ending inventory - Ending inventory - Ending inventory

= Direct materials used = Cost of goods = Cost of goods sold

manufactured

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 Max-Fli Golf Company
S chedule of Cos t of Goods Manufactured
For the year ended December 31, 2010
Beginning Work in proces s inventory $6,000
Add: Direct materials us ed 15,000
Direct labor 7,000
Manufacturing overhead 18,000
Total manufacturing cos ts incurred during the year 40,000
Total manufacturing cos ts to account for 46,000
Les s : Ending Work in proces s inventory (3,000)
Cos t of goods manufactured $ 43,000

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Use reasonable standards to make ethical judgments
 Institute of Management Accountants (IMA) developed
standards to help meet ethical challenges

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