11 Managerial Accounting Accounting Principles

CHAPTER 19
MANAGERIAL
ACCOUNTING
Accounting Principles, Eighth Edition

Chapter
19-1
Study
Study Objectives
Objectives
1. Explain the distinguishing features of managerial

accounting.
2. Identify the 3 broad functions of management.
3. Define the 3 classes of manufacturing costs.
4. Distinguish between product and period costs.
5. Explain the differences between a merchandising
and a manufacturing income statement.
Chapter
19-2
Study
Study Objectives
Objectives
6. Indicate how cost of

goods manufactured is
determined.
7. Explain the difference
between a merchandising
and a manufacturing
balance sheet.
8. Identify trends in
managerial accounting.
Chapter
19-3
Preview
Preview of
of Chapter
Chapter
Managerial Accounting Basics
Compare managerial and financial accounting
Management functions and Business Ethics
Managerial Cost Concepts

Manufacturing costs
Product vs. period costs
Manufacturing Costs in Financial Statements

Income Statement and Balance Sheet
Cost concepts – A review
Managerial Accounting Today

Service industry trends
Chapter Managerial accounting practices
19-4
Managerial
Managerial Accounting
Accounting
Manufacturing
Manufacturing
Managerial
Managerial
Managerial
Managerial Costs
Costs in
in Managerial
Managerial
Cost
Cost
Accounting Financial
Financial Accounting
Concepts
Basics
Basics Statements
Statements Today
Today
Compare Manufacturing Income Service

Managerial and Costs Statement Industry
Financial Product vs Balance Sheet Trends
Accounting Period Costs Managerial
Cost Concepts
Management – A Review Accounting
Functions Practices
Business Ethics
Chapter
19-5
Managerial
Accounting Basics
Basics
Definition of Managerial Accounting
A field of accounting that provides economic and

financial information for managers and other
internal users.
Also called Management Accounting
Chapter
19-6
Managerial
Accounting Basics
Basics
Managerial Accounting Activities
Explain manufacturing and nonmanufacturing costs and

how they are reported (Chapter 19)
Compute cost of providing a service or manufacturing

a product. (Chapters 20 and 21)
Determine behavior of costs and expenses as activity

changes. (Chapter 22)
Chapter
19-7
Managerial
Accounting Basics
Basics
Managerial Activities: Continued
Assist management in profit planning and formalizing

these plans in the form of budgets. (Chapter 23)
Help to control costs by comparing actual results with

planned objectives and standard costs. (Chapters 24 and 25)
Accumulate and present data for making decisions.

(Chapter 26)
Chapter
19-8
Managerial
Accounting Basics
Basics
Distinguishing Features
Applies to all types of business -

Service, Merchandising, and Manufacturing
Applies to all forms of businesses –

Proprietorships, Partnerships, and Corporations
Applies to not-for-profit and profit oriented companies
Chapter
19-9 LO 1 Explain the distinguishing features of managerial accounting.
Managerial
Accounting Basics
Basics
Distinguishing Features: Continued
More responsible for strategic

cost management
Teams with people from production,

marketing, engineering, etc.
Aid in making critical decisions
Chapter
Comparing
Comparing Managerial
Managerial and
and Financial
Accounting
Similarities
Both deal with economic events of a business –

Thus, interests overlap
Both require that economic events be

quantified and communicated to
interested parties –
Determining unit cost is part of
managerial accounting,
Reporting cost of goods manufactured
is a part of financial accounting
Chapter
Comparing
Comparing Managerial
Managerial and
and Financial
Accounting
Differences
Chapter
19-12 LO 1 Explain the distinguishing features of managerial accounting .
Managerial
Accounting Basics
Basics
Management Functions
Management’s activities and responsibilities can be

classified into the following three broad functions:
Planning
Directing
Controlling
Chapter
19-13 LO 2 Identify the 3 broad functions of management.
Management
Functions
Planning
Look ahead and establish objectives such as –

Maximize short-term profit
Commit to environmental protection
Key Objective: Add value to the business

Value measured by trading price of stock
and by potential selling price of the company
Chapter
Management
Functions
Directing
Coordinate diverse activities and human resources
Implement planned objectives
Provide incentives to motivate employees
Hire and train employees including

executives, managers, and supervisors
Produce smooth-running operation
Chapter
Management
Functions
Controlling
Keep activities on track
Determine whether goals are met
Decide changes needed to get back on track
May use an informal or formal system of evaluations
Good decision making is the outcome of good judgment

in planning, directing, and controlling.
Chapter
Managerial
Managerial Cost
Cost Concepts
Concepts
Manufacturing Costs
Manufacturing consists of activities to convert raw
materials into finished goods.
In contrast, a merchandising firm sells goods in the
form in which they were bought.
Categories of manufacturing costs include:
Chapter
19-17 LO 3 – Define the three classes of manufacturing costs.
Manufacturing
Manufacturing Costs
Costs
Materials
Raw Materials
Basic materials used in manufacturing
Direct Materials
Raw materials that can be physically and
directly associated with the finished product
Chapter
19-18 LO 3 Define the three classes of manufacturing costs.
Manufacturing
Manufacturing Costs
Costs
Materials
Indirect Materials
Raw materials that cannot be easily associated
with the finished product
Not physically part of the finished product or

they are an insignificant part of finished
product in terms of cost
Considered part of manufacturing overhead
Chapter
Manufacturing
Manufacturing Costs
Costs
Labor
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 to the goods
produced
Chapter
Manufacturing
Manufacturing Costs
Costs
Manufacturing Overhead
Costs that are indirectly associated

with manufacturing the product
Includes all manufacturing costs except

direct materials and direct labor
Chapter
Product
Product Versus
Versus Period
Period Costs
Costs
Product Costs
Components: direct material cost,

direct labor cost, and manufacturing
overhead
A necessary and integral part of
producing the product
Recorded as inventory when incurred
Not an expense until the finished goods

inventory is sold then cost of goods sold
Chapter
19-22 LO 4 Distinguish between product and period costs.
Product
Product Versus
Versus Period
Period Costs
Costs
Period Costs
Matched with revenue of a specific

time period and charged to expense as
incurred
Non-manufacturing costs
Deducted from revenues in period

incurred to determine net income
Includes all selling and administrative

expenses
Chapter
19-23 LO 4 Distinguish between product and period costs.
Product
Product Versus
Versus Period
Period Costs
Costs
Chapter
19-24 LO 4 Distinguish between product costs and period costs .
Manufacturing
Manufacturing Costs
Costs in
in Financial
Financial Statements
Statements
Income Statement
The income statement for a manufacturer is

similar to that of a merchandiser except
for the cost of goods sold section.
Chapter
LO 5 Explain the difference between a merchandising
19-25 and a manufacturing income statement.
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Cost of Goods Sold Components
Merchandiser versus Manufacturer
Chapter
19-26 and a manufacturing income statement.
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Cost of Goods Sold Section of the Income Statement
Chapter
19-27 and a manufacturing income statement .
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Determining the Cost of Goods Manufactured
Work in Process – partially completed units of product
Total Manufacturing Costs – sum of direct material costs,

direct labor costs, and manufacturing overhead; all
incurred in the current period
LO 6 Indicate how cost of goods manufactured is determined .

Chapter
19-28
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Chapter
LO 6 Indicate how cost of goods manufactured is determined .
19-29
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Balance Sheet - Inventories
Merchandising Company Manufacturing Company

One category of May have three
inventory: inventories:
Merchandise Inventory Raw Materials
Work in Process
Finished Goods
Chapter
19-30
LO 7 Explain the difference between a merchandising and a
manufacturing balance sheet.
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Balance Sheet - Inventories
Chapter
LO 7 Explain the difference between a merchandising and a
19-31 manufacturing balance sheet
Managerial
Accounting Today
Today
Service Industry Trends
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
Trend is expected to continue in the future
Most of the techniques learned for manufacturing

firms are applicable to service companies
Chapter
19-32 LO 8 Identify trends in management accounting.
Managerial
Accounting Today
Today
Managerial Accounting Practices
Value Chain
Refers to all activities associated with providing a product or
service
For a manufacturing firm these include the following:
Chapter
Managerial
Accounting Today
Today
Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured
or purchased just in time for use
Quality
Increased emphasis on product quality because
goods are produced only as needed
Total Quality Management (TQM)
- a philosophy of zero defects -
Chapter
Managerial
Accounting Today
Today
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
Balanced Scorecard
Evaluates operations in an integrated fashion
Uses both financial and non-financial measures
Links performance measures to overall company
objectives
Chapter
Chapter
19-36
CLASSIFICATION OF COSTS
Cost Accaounting, by Hammer, Carter, Usry
 The most commonly used classifications are

based on the relationship of costs to the
following:
1. The product
2. The volume of production
3. The manufacturing departments, process, cost
centers, other subdivisions.
Chapter
19-37
Cost in Relation to the Product
 In a manufacturing concern, total operating
cost consists of two elements: manufacturing
cost and commercial expenses (Fig 2-1)
Chapter
19-38
Figure 2-1
Chapter
19-39
 Manufacturing cost, also called production
cost, or factory cost – is usually defined as
the sum of three cost elements: direct
materials, direct labor, and factory overhead.
 Direct materials and direct labor together
are called prime cost.
 Direct labor and factory overhead together
are called conversion cost.
Chapter
19-40
 Direct materials are materials that form an
integral part of the finished product and that
are included explicitly in calculating the cost of
product.
 Direct labor is labor that converts direct
materials into the finished product and can be
assigned feasibly to a specific product.
 Factory overhead – also called manufacturing
overhead, manufacturing expenses, consists of
all manufacturing costs not traced directly to
specific output. Simply stated, factory
overhead includes all manufacturing costs
except direct materials and direct labor
.
Chapter
19-41
 Indirect materials are those materials
needed for completion of a product but are
not classified as direct materials because
they do not become part of the product.
 Indirect labor is labor not directly traced to
the construction or composition of the
finished product.
.
Chapter
19-42
 Commercial Expenses, fall into two large
classifications: marketing expenses and
administrative expenses (also called general
and administrative expenses).
 Marketing expenses begin at the point at
which the factory costs end, they include
expenses of promotion, selling and delivery.
 Administrative expenses include expenses
incurred in directing and controlling the
organization.
.
Chapter
19-43
Costs in Relation to the Volume of Production
 Variable Costs – The total amounts of

variable costs changes in activity within a
relevant range.
 Fixed Costs – are constan in total amount
within a relevant range of activity.
 Semivariable costs – Some costs contain
both fixed and variable elements. For
example, the cost of electricity is usually
semi variable.
Chapter
19-44

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CHAPTER 19

Accounting Principles, Eighth Edition

1. Explain the distinguishing features of managerial

6. Indicate how cost of

Managerial Cost Concepts

Manufacturing Costs in Financial Statements

Managerial Accounting Today

Compare Manufacturing Income Service

Definition of Managerial Accounting

A field of accounting that provides economic and

Also called Management Accounting

Managerial Accounting Activities

Explain manufacturing and nonmanufacturing costs and

Compute cost of providing a service or manufacturing

Determine behavior of costs and expenses as activity

Managerial Activities: Continued

Assist management in profit planning and formalizing

Help to control costs by comparing actual results with

Accumulate and present data for making decisions.

Applies to all types of business -

Applies to all forms of businesses –

Applies to not-for-profit and profit oriented companies

Distinguishing Features: Continued

More responsible for strategic

Teams with people from production,

Aid in making critical decisions

Both deal with economic events of a business –

Both require that economic events be

Management’s activities and responsibilities can be

Look ahead and establish objectives such as –

Key Objective: Add value to the business

Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including

Produce smooth-running operation

Keep activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or formal system of evaluations

Good decision making is the outcome of good judgment

Not physically part of the finished product or

Considered part of manufacturing overhead

Costs that are indirectly associated

Includes all manufacturing costs except

Components: direct material cost,

Recorded as inventory when incurred

Not an expense until the finished goods

Matched with revenue of a specific

Deducted from revenues in period

Includes all selling and administrative

The income statement for a manufacturer is

Cost of Goods Sold Section of the Income Statement

Determining the Cost of Goods Manufactured

Work in Process – partially completed units of product

Total Manufacturing Costs – sum of direct material costs,

LO 6 Indicate how cost of goods manufactured is determined .

Merchandising Company Manufacturing Company

Balance Sheet - Inventories

Service Industry Trends

U.S. economy has shifted toward an emphasis on

Trend is expected to continue in the future

Most of the techniques learned for manufacturing

Managerial Accounting Practices