Intro To MA - Chapter 1

Chapter 1
 Managerial Accounting
1
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Management Accounting
What is Management Accounting?

It is the process of identifying, measuring,
accumulating, analyzing, preparing,
interpreting, and communicating
information that managers use to
fulfill organizational objectives.
2
MANAGERIAL ACCOUNTING BASICS
A field of accounting that provides

economic and financial information
for managers and other internal users
3
Financial Accounting
What is Financial Accounting?

It refers to accounting information
developed for the use of external parties
such as stockholders, suppliers, banks,
and government regulatory agencies.
4
Objectives of Management
accounting
 Formulation of polices
 Planning and controlling the activities
of the enterprise
 Decision making on alternative
courses of actions
 Safeguarding assets
 Disclosure to those employees share
holder and other
Distinction between financial and
Management accounting
S.No Points Management accounting Financial accounting
1 User group Internal Managers Share holder director
decision Makers share investors creditors public
holder government agencies etc
2 Information Future oriented different Historic cost profit and loss

generation statement like budget and balance sheet
performance report
marginal costing
3 Legal NO such legal Published accounts statutory
requirement requirements requirements
s
Distinction between financial
and Management accounting
S.No Points Management accounting Financial accounting
4 Classification Cost is classified in various Capital expenditure and
ways direct indirect fixed revenue expenditure
variable relevant irrelevant
5 Taxation Cost statements are not Historic cost statement
accepted for taxation profit and loss needed
purpose for taxable income
6 Quantitative Both quantitative and Only monetary

information monetary information is information is prepared
prepared
Planning and Controlling
What is decision making?

It is the purposeful choice from among
a set of alternative courses of action
designed to achieve some objective.
This is the core of the management process.
8
Planning and Controlling
The Management Process Internal Accounting System
Planning Budgets, Customer

Special Reports surveys
Corrections and Revisions
•Increase
of Plans and Actions
Competitor
Productivity analysis
Financial
Accounting Advertising
System impact
New items
Controlling report
•Actions Performance
•Evaluations Reports
9
Role of Budgets
 A budget is a quantitative expression

of a plan of action and is an aid to
coordinating and implementing the
plan.
 Budgets are the chief devices for
compelling and disciplining
management planning.
10
Role of
Performance Reports
Performance reports formalize controls and

provide feedback by comparing results with
plans and by highlighting variances.
Variances are deviations from the plan.
11
Performance Report
Budgeted Actual Variance

Amount Amount Amount
Revenues 25,000 19,000 6,000
U
Expenses 20,000 15,000 5,000 F
Net Income 5,000 4,000 1,000 U
 F = Favorable
 U = Unfavorable
12
MANAGERIAL COST 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.
13
Manufacturing Costs - Materials
 Direct Materials
 Raw materials - basic materials used in
manufacturing.
 Raw materials that can be physically and directly

associated with the finished product are called
direct materials.
 Examples include
Flour in the baking of bread
Syrup in the bottling of soft drinks
Steel used in making automobiles
14
Manufacturing Costs- Materials
 Indirect Materials
 Raw materials that cannot be easily associated
with the finished product are called indirect
materials.
 Indirect materials do not physically become part

of the finished product or represent too small a
part of the finished product in terms of cost
 Considered part of manufacturing overhead

15
Manufacturing Costs - Labor
 Direct Labor
 Work of factory employees that can be physically
and directly associated with converting raw
materials into finished goods
Bottlers at Coca-Cola
Bakers at Sara Lee
Typesetters at a newspaper
16
Manufacturing Costs - Labor
 Indirect Labor
 Work of factory workers that have no physical
association with the finished product or for which
it is impractical to trace to the goods produced
Wages of maintenance workers
Supervisors
Time-Keepers
17
Manufacturing Costs – Manufacturing
Overhead
 Costs that are indirectly associated with manufacturing
the product
 Examples include
Indirect materials
Indirect labor
Depreciation on factory buildings
Insurance, taxes, maintenance on
factory facilities
 Basically manufacturing overhead includes all

manufacturing costs except direct materials and direct
labor.
18
PRODUCT VERSUS PERIOD
COSTS
Product Costs
 Consist of the direct material cost, the direct labor
cost, and the manufacturing overhead cost
 A necessary and integral part of producing the

product
 Recorded as inventory when incurred
 Do not become expenses until the finished goods

inventory is sold
19
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
 Include all
 Selling expenses
 General and Administrative expenses
20
COSTS
All cost
Product cost Period cost
Material
Selling and Admin
Labor
Expenses
FOH
21
MANAGERIAL ACCOUNTING TODAY
Managerial Accounting Practices
 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
 Activity-Based Costing (ABC)
 Allocates overhead based on use of specific activities
or functions of the company (number of orders or
number of machine set ups)
 Results in more accurate product costing and scrutiny
of all activities in the value chain
22
Raw material used
Raw material beginning 50,000
Net Purchases of raw material-

(return and discount) 300,000
Carriage in 5000
Raw material available for use 355,000
Raw material ending -40,000
Raw material used 395,000

23
Prime cost
Direct labor 200,000
Direct expenses or cost 45,000
Prime cost 640,000

24
Conversion cost
Factory overhead 160,000
Conversion cost 360,000

25
Total manufacturing cost
Direct material used
Direct labor
+
Direct expenses
Factory overhead
26
Direct expense 45,000
Total manufacturing cost 800,000

27
Cost of goods manufactured
+
Work In Process- beginning
-
Work In Process-ending
28
Cost of goods manufactured
Add: Work-in-process-beg 56,000
Less: Work-in-process-end 75,000
Cost of goods manufactured 781,000

29
COST OF GOODS SOLD of Trading activities

Opening Stock 50,000
Purchases-net 400,000
Goods available for sale 450,000
Less: Ending stock (80,000)
Cost of goods sold 370,000

30
Cost of Goods Sold of Manufacturing concern

Finished goods-opening 125,000
Less: Finished goods-ending 37800

31
STATEMENT OF COST OF GOODS MANUFACTURED
Raw material used
Raw material beginning 50,000
Purchases 300,000
Carriage in 5000
available for use 355,000
Raw material ending -40,000
Direct expenses or cost 45,000
Prime cost 640,000
Add: Work-in-process-beg 56,000
Less: Work-in-process-end 75,000
Cost of goods
32 manufactured 781,000
INCOME STATEMENT
Sales revenue 1500000
less: Sales return 20,000
Sales discount 15000
Net Sales 1,465,000
Less: Cost of goods sold
Finished goods-opening 125,000
Less: Finished goods-ending 37800
Gross Profit 596,800
Less: Operating expense
Administrative expense 75,000
Selling expense 60,000
Total expense
33 135,000
SALES - COST OF GOODS SOLD
=
GROSS PROFIT
34
COST CONCEPT
That do not vary as production volume

FIXED COST
change under relevant range
For example: Rent, depreciation, repair and maintenance
that vary as production volume change

VARIABLE COST
For example: Direct material, direct labor, electricity,

indirect material
35
SEMI VARIABLE COST
Some portion of cost remains fixed and some vary

as production volume change
For example: Repair, indirect labor, supervisor salary,

telephone charges,
36

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Chapter 1

What is Management Accounting?

A field of accounting that provides

What is Financial Accounting?

2 Information Future oriented different Historic cost profit and loss

6 Quantitative Both quantitative and Only monetary

What is decision making?

This is the core of the management process.

The Management Process Internal Accounting System

Planning Budgets, Customer

 A budget is a quantitative expression

Performance reports formalize controls and

Variances are deviations from the plan.

Budgeted Actual Variance

 In contrast, a merchandising firm sells

 Raw materials that can be physically and directly

 Indirect materials do not physically become part

 Considered part of manufacturing overhead

 Basically manufacturing overhead includes all

 A necessary and integral part of producing the

 Recorded as inventory when incurred

 Do not become expenses until the finished goods

 Deducted from revenues in period incurred to determine net

Product cost Period cost

Raw material beginning 50,000

Net Purchases of raw material-

Raw material available for use 355,000

Raw material ending -40,000

Raw material used 395,000

Raw material used 395,000

Direct labor 200,000

Direct expenses or cost 45,000

Prime cost 640,000

Direct labor 200,000

Factory overhead 160,000

Conversion cost 360,000

Direct material used

Raw material used 395,000

Direct expense 45,000

Direct labor 200,000

Factory overhead 160,000

Total manufacturing cost 800,000

Total manufacturing cost

Total manufacturing cost 800,000

Add: Work-in-process-beg 56,000

Less: Work-in-process-end 75,000

Cost of goods manufactured 781,000

Opening Stock 50,000

Goods available for sale 450,000

Less: Ending stock (80,000)

Cost of goods sold 370,000

Finished goods-opening 125,000

Cost of goods manufactured 781,000

Goods available for sale 906,000

Less: Finished goods-ending 37800

Cost of goods sold 868,200

That do not vary as production volume

For example: Rent, depreciation, repair and maintenance

that vary as production volume change

For example: Direct material, direct labor, electricity,

Some portion of cost remains fixed and some vary

For example: Repair, indirect labor, supervisor salary,

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