Managerial Accounting

Weygandt • Kieso • Kimmel

Managerial Accounting
Tool for Business Decision Making
Third Edition

Prepared by
Dan R. Ward
Suzanne P. Ward
University of Louisiana at Lafayette
John Wiley & Sons, Inc. © 2005
 CHAPTER 1
MANAGERIAL ACCOUNTING
Study Objectives
 Explain the distinguishing features of
managerial accounting.
 Identify the 3 broad functions of
management.
 Define the 3 classes of manufacturing costs.
 Distinguish between product and period
costs.
Study Objectives: Continued
 Explain the difference between
a merchandising and a
manufacturing income
statement.
 Indicate how cost of goods
manufactured is determined.
 Explain the difference between
a merchandising and a
manufacturing balance sheet.
 Identify trends in managerial
accounting.
MANAGERIAL ACCOUNTING 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

MANAGERIAL ACCOUNTING BASICS
Managerial Activities
 Explain manufacturing and
nonmanufacturing costs and how they are
reported (Chapter 1).

 Compute cost of providing a service or

manufacturing a product (Chapters 2, 3, and 4).

 Determine behavior of costs and expenses as

activity changes (Chapter 5).
MANAGERIAL ACCOUNTING BASICS

Managerial Activities: Continued

 Gather and present relevant data for

management decision making (Chapter 6).

 Evaluate effect of alternative ways to cost

inventory (Chapter 7).

 Determine prices for external and internal

transactions (Chapter 8).
MANAGERIAL ACCOUNTING BASICS

Managerial Activities: Continued

 Assist in profit planning and formalizing
plans in the form of budgets (Chapter 9).

 Help to control costs by comparing actual

results with planned objectives and standard
costs (Chapters 10 and 11).

 Collect and present data for capital

expenditure decisions (Chapter 12).
MANAGERIAL ACCOUNTING BASICS

Distinguishing Features

 Applies to all types of businesses –

service, merchandising, and manufacturing

 Applies to all forms of businesses –

proprietorships, partnerships, and corporations

 Applies to not-for-profit and profit-oriented

companies
MANAGERIAL ACCOUNTING BASICS
Distinguishing Features: Continued

 More responsible for strategic cost

management.
 Team includes members from
production, marketing, engineering,
etc.
 Aid in making
critical decisions.
 COMPARING MANAGERIAL AND
FINANCIAL ACCOUNTING
Study Objective 1

Similarities

 Both deal with economic events of a business.

 Both require that economic events be
quantified and communicated
to interested parties.
COMPARING MANAGERIAL AND
FINANCIAL ACCOUNTING
Differences
MANAGEMENT FUNCTIONS
Study Objective 2

Management’s activities and

responsibilities can be classified into
the following three broad functions:

Planning
Directing
Controlling
 MANAGEMENT FUNCTIONS
Planning
 Look ahead
 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
 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
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 a formal system of
evaluation

Good decision making is the outcome of good

judgment in planning, directing, and
controlling.
ORGANIZATIONAL STRUCTURE
Organizational Chart

 Assists in carrying out management’s functions

 Prepared by most companies
 Organizational charts show:
 The interrelationships of activities
 The delegation of authority
 The delegation of responsibility
 A TYPICAL COMPANY’S
ORGANIZATIONAL CHART
GOOD ETHICS - GOOD BUSINESS
Business Ethics

 Business scandals caused massive investment

losses and employee layoffs.
 Corporate fraud has increased 13 percent in last
five years.
 Employee fraud - 60% of all fraud
expense account abuse, theft of assets, etc.
 Intentional misstatement of financial reports, or
financial reporting fraud, - most costly to
companies.
GOOD ETHICS - GOOD BUSINESS
Creating Proper Incentives
 Monitoring and evaluating employees may
produce incentives to act unethically
For example, overly ambitious budgets may produce
unethical management actions to meet targets

 Employees may feel that they must succeed no

matter what
 Ineffective and unrealistic controls may result in
declining quality of product
GOOD ETHICS - GOOD BUSINESS
New Legislation – Sarbanes Oxley Act of 2002

 Clarifies management’s responsibilities

 CEO and CFO must certify fairness of financial
statements and adequacy of internal control
 Board of Directors, especially the Audit Committee,
must meet certain criteria
 Penalties for misconduct are substantially increased
 Codes of Ethics are now required
 MANAGERIAL COST CONCEPTS
Manufacturing Costs
Study Objective 3

 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.

Typical Classification of Manufacturing Costs

 MANAGERIAL COST CONCEPTS
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
 MANAGERIAL COST CONCEPTS
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

 MANAGERIAL COST CONCEPTS
Manufacturing Costs - Labor
 Direct Labor
 Work of factory employees that can be physically and
directly associated with converting raw materials into
finished goods

 Examples include
Bottlers at Coca-Cola
Bakers at Sara Lee
Typesetters at a newspaper
 MANAGERIAL COST CONCEPTS
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

 Examples include
Wages of maintenance workers
Supervisors
Time-Keepers
 MANAGERIAL COST CONCEPTS
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.
PRODUCT VERSUS PERIOD COSTS
Study Objective 4

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
 PRODUCT VERSUS PERIOD 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
FOR RENT
 Include all
 Selling expenses
 General and Administrative expenses
PRODUCT VERSUS PERIOD COSTS
 MANUFACTURING COSTS IN
FINANCIAL STATEMENTS
Study Objective 5

Income Statement

The income statement for a manufacturer

is similar to that of a merchandiser
except for the cost of goods sold section.
MANUFACTURING COSTS IN
FINANCIAL STATEMENTS
Cost of Goods Sold Components
Merchandiser versus Manufacturer
 MANUFACTURING COSTS IN
FINANCIAL STATEMENTS

Cost of Goods Sold Section of the Income Statement

 DETERMINING THE
COST OF GOODS MANUFACTURED
Study Objective 6

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 year
COST OF GOODS MANUFACTURED SCHEDULE
 BALANCE SHEET - Inventories
Study Objective 7

 Merchandising Company  Manufacturing Company

 One category of  May have three
inventory: inventory accounts:
Raw Materials
Merchandise Work in Process
Inventory Finished Goods
BALANCE SHEET - Inventories
 Let’s Review
Direct Materials are a:
Product Manufacturing Period
Cost Overhead Cost
a. Yes Yes No
b. Yes No No
c. Yes Yes Yes
d. No No No
 Let’s Review
Direct Materials are a:
Product Manufacturing Period
Cost Overhead Cost
a. Yes Yes No
b. Yes No No
c. Yes Yes Yes
d. No No No
MANAGERIAL ACCOUNTING TODAY
Study Objective 8

Service Industry Trends

 U.S economy in general has shifted toward an
emphasis on providing services

 Today over 50 percent of U.S. workers are employed

by service companies

 Trend is expected to continue in future

 Most of the techniques learned for manufacturing

firms are applicable to service companies
 MANAGERIAL ACCOUNTING 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:
MANAGERIAL ACCOUNTING TODAY
Managerial Accounting Practices
 Technological Change
 Computerization and automation
 Enterprise resource planning (ERP) - software
systems that manage the value chain
In large companies an ERP system might replace as many
as 200 individual software packages

 Computer-integrated manufacturing (CIM) - make

products untouched by human hands
 Internet and business-to-business (B2B) e-commerce
 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
MANAGERIAL ACCOUNTING TODAY
Managerial Accounting Practices
 Theory of Constraints
 Used to identify and manage constraints or “bottlenecks”
 Helps achieve overall goals of the company, particularly
profits

 Balanced Scorecard
 A performance-measurement approach to evaluate
operations in an integrated fashion
Uses both financial and non-financial measures
 Links performance measures to overall company
objectives
 Summary of Study Objectives
 Explain the distinguishing features of
managerial accounting
The primary users of reports are internal users
such as officers, department heads in the
company
The internal reports are issued as needed
Special-purpose reports
 Provide information for a particular user for a
particular decision
 Pertain to subunits of the business
 May be very detailed and extend beyond the
double-entry accounting system
The reporting standard is the relevance of the
information to the decision being made
 Summary of Study Objectives
 Identify the three broad functions of management
Planning
Directing
Controlling
 Define the three classes of manufacturing costs
Direct Materials
Direct Labor
Manufacturing Overhead
 Distinguish between product and period costs
Product costs are
 an integral part of producing the product
 also called inventoriable costs
 do not become expenses until the product is sold.
Period costs are
 identified with a specific time period rather than a product
 selling and administrative expenses.
 Summary of Study Objectives
 Explain the difference between a merchandising and a
manufacturing income statement
Income statements are similar except for the cost of goods sold section.
 CGS section shows beginning and ending finished goods
inventories and the cost of goods manufactured

 Indicate how cost of goods manufactured is determined

Beginning work-in-process + total manufacturing costs for the period
– ending work-in-process = cost of goods manufactured

 Explain the difference between a merchandising and a

manufacturing balance sheet
The difference is in the current asset section
Manufacturing firm - three inventories: finished
goods, work-in-process, and raw materials
Merchandising firm - only one inventory account:
merchandise inventory
 Summary of Study Objectives

 Identify trends in managerial accounting

Shift toward the addressing the needs of service companies
Improving practices to better meet the needs of managers
Managing the value chain
Just-in-time inventory (JIT)
Enterprise resource planning (ERP)
Theory of Constraints
Activity based costing (ABC)
The balanced scorecard for a
comprehensive view of operations
 Let’s Review
Which of the following is not an element
of manufacturing overhead?

a. Plant manager’s salary

b. Sales manager’s salary
c. Factory repairman’s wages
d. Product inspector’s salary
 Let’s Review
Which of the following is not an element
of manufacturing overhead?

a. Plant manager’s salary

b. Sales manager’s salary
c. Factory repairman’s wages
d. Product inspector’s salary
 Appendix
Accounting Cycle
for a Manufacturing Company

 Accounting cycle for a manufacturer is the same as for a

merchandiser when a periodic inventory system is
used.

 Journalizing and posting transactions are the same with

the manufacturer having additional manufacturing
inventories and manufacturing cost accounts.

 Preparation of a trial balance and adjusting entries are

also the same for both types of companies.
 Appendix
Accounting Cycle
for a Manufacturing Company
 Changes occur in the use of a work sheet and in
preparation of closing entries.
 Worksheet has an additional set of columns between
those for the adjusted trial balance and the income
statement; these columns are for the Cost of Goods
Manufactured.
 In closing, a Manufacturing Summary account is
used to close all accounts that appear in the cost of
good manufactured schedule. The balance of the
Manufacturing Summary account is then closed to
Income Summary.
Closing Entries
Closing Entries
 Closing Entries

After posting the summary accounts will show the following:

 COPYRIGHT

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