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– Second level
Managerial Accounting
• Third level
Concepts
» Fifth level and Principles
– Fourth level

Student Version
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Describe managerial
accounting and the role of
managerial accounting in
a business.

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The Difference Between Managerial

and Financial Accounting
Financial accounting information is
reported at fixed intervals in general-
purpose financial statements. These
financial statements are prepared
according to GAAP.

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Managerial Accounting
Managerial accounting information
is designed to meet the specific
needs of a company’s management,
such as historical data and
subjective estimates about future
decisions.

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Planning

Management uses planning

in developing the company’s
objectives (goals) and
translating these objectives
into courses of action.

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Strategic Planning
Strategic planning is developing
long-range actions to achieve the
company’s objectives. Long-range
courses of action, called strategies,
can often involve periods ranging
from five to ten years.

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Operational planning develops

short-term actions for
managing the day-to-day
operations of the company.

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Directing
The process by which managers
run day-to-day operations is
called directing.

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Controlling
Monitoring operating results
and comparing actual results
with the expected results is
controlling. This feedback
allows management to isolate
areas for further investigation
and possible remedial action.

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Improving
Continuous process improvement
is the philosophy of continually
improving employees, business
processes, and products.

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Decision Making
Inherent in each of the preceding
management processes is decision
making. Management must
continually decide among
alternative actions.

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Describe and illustrate the following

costs: 1. direct and indirect costs;
2. direct materials, direct labor, and
factory overhead costs; 3. product
and period costs.

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 Type of Business
• The operations of a business can be
classified as service, merchandising, or
manufacturing.

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 Example of Manufacturing Business

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Direct and Indirect Costs

Costs are often classified in terms of how they
relate to an object or segment of operations,
called a cost object. It may be a product, a
sales territory, a department, or some activity.
Direct costs are identified with and can be
traced to a cost object. Indirect costs cannot
be identified with or traced to a cost object.

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The cost of wood (materials) used by

Legend Guitars in manufacturing a
guitar is a direct cost of the guitar.

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A production supervisor’s salary is

an indirect cost because it cannot
be traced to any individual guitar.

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Direct Materials Cost

To be classified as a direct materials
cost, the cost must be both of the
following:
1. An integral part of the finished
product
2. A significant portion of the total
cost of the product

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Direct Labor Cost

The cost of employee wages that is an
integral part of the finished product is
classified as direct labor cost. A direct
labor cost must be both of the following:
1. An integral part of the finished
product
2. A significant portion of the total
cost of the product

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Factory Overhead Cost

Costs, other than direct materials cost
and direct labor cost, that are incurred
in the manufacturing process are
combined and classified as factory
overhead cost (sometimes also called
manufacturing overhead or factory
burden).

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Examples of Factory Overhead Cost

• Heating and lighting the factory
• Repairing and maintaining
factory equipment
• Property taxes
• Insurance
• Depreciation of factory plant and
equipment

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Prime Costs and Conversion Costs

Prime costs consist of direct materials and
direct labor costs. Conversion costs consist
of direct labor and factory overhead.
Conversion costs are the costs of converting
the materials into a finish product.

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Product Costs
Product costs consist of the three
elements of manufacturing cost:
direct materials, direct labor, and
factory overhead.

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Period Costs
Period costs are generally classified into
two categories:
1. Selling expenses are incurred in
marketing the product and delivering
the sold product to the customer.
2. Administrative expenses are incurred
in managing the company and are not
directly related to the manufacturing
or selling functions.
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Describe and illustrate the following

statements for a manufacturing business:
1. balance sheet
2. statement of cost of goods
manufactured
3. income statement.

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A Manufacturing Firm’s Inventories

Materials inventory:
• Sometimes called raw materials
inventory
• Consists of the costs of the direct
and indirect materials that have not
yet entered the manufacturing
process

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A Manufacturing Firm’s Inventories

Work in process inventory:
• Consists of the direct materials
costs, the direct labor costs, and
the factory overhead costs that
have entered the manufacturing
process but are associated with
products that have not been
completed.
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A Manufacturing Firm’s Inventories

Finished goods inventory:
• Consists of completed (or
finished) products that have not
been sold.

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 Balance Sheet

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Income Statement for a

Manufacturing Company
Income statements for a merchandising
and manufacturing business differ
primary in the reporting of the cost of
merchandise (goods) available for sale
and sold during the period.

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Merchandising Business
Sales $XXX
Beginning merchandise inventory $XXX
Plus net purchases XXX
Merchandise available for sale $XXX
Less ending merchandise inventory XXX
Cost of merchandise sold XXX
Gross profit $XXX
Manufacturing Business
Sales $XXX
Beginning finished goods inventory $XXX
Plus cost of goods manufactured XXX
Cost of finished goods available for sale $XXX
Less ending finished goods inventory XXX
Cost of goods sold XXX
Gross profit $XXX
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Determining the Cost of Goods

Manufactured (Legend Guitar)
STEP 1:
Materials inventory, December 1, 2010 $ 65,000
Add: Materials purchased during December 100,000
Cost of materials available for use $165,000
Less: Materials inventory, Dec. 31, 2010 35,000
Cost of direct materials used $130,000
to total
manufacturing
cost

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Determining the Cost of Goods

Manufactured (Legend Guitar)
STEP 2:
Cost of direct materials used $130,000
Direct labor 110,000
Factory overhead 44,000
Total manufacturing costs added $284,000

to cost of goods
manufactured
section

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Determining the Cost of Goods

Manufactured (Legend Guitar)
STEP 3:
Work in process inventory, December . 1, 2010 $ 30,000
Add: total manufacturing costs incurred 284,000
Total manufacturing costs $314,000
Less work in process inventory, Dec. 31, 2010 24,000
Cost of goods manufactured $290,000

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Manufacturing Company—
Exhibit 10 Income Statement with Statement
of Cost of Goods Manufactured

from
statement of
cost of goods
manufactured

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Describe the uses of

managerial accounting
information.

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Uses of Managerial Accounting

Managerial accounting provides the

cost of manufacturing a product,
which can be used to determine the
selling price.

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Uses of Managerial Accounting

Managerial accounting allows for

comparing the costs of manufacturing
and can, over time, be used to monitor
and control the cost of direct materials,
direct labor, and factory overhead.

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Uses of Managerial Accounting

Performance reports allow

management to identify any
large amounts of scrap materials
or employee downtime.

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Uses of Managerial Accounting

A report could analyze how many
units need to be sold to cover
operating costs and expenses.
Such information could be used
to set monthly selling targets and
bonuses for sales personnel.

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