Chapter 1

Chapter 1
An Overview of Managerial Accounting

Chapter 1: An Overview of Managerial Accounting
 Managerial Accounting: An Introduction
The Importance of Managerial Accounting
Managerial Accounting and the Management Process
What Is a Cost? An Introduction to Cost Management
The Value Chain
Product Costs and Period Costs
Inventory Systems and Costs
Managerial Accounting and Ethics
Copyright © 2018 AME Learning Inc. 2

Managerial Accounting: An Introduction
The Institute of Managerial Accountants (IMA)
defines managerial accounting as “a profession
that involves partnering in management
decision-making, devising planning and
performance management systems and
providing expertise in financial reporting and
control to assist management in the
formulation and implementation of an
organization’s strategy.”

Managerial Accounting: An Introduction (Continued)
The differences between financial and managerial accounting
Financial Accounting Managerial Accounting
Financial statements and the accompanying notes

Managerial reports are primarily prepared for
are primarily prepared for external users, such as
internal use. They help management make informed
stockholders and creditors, so that they can make
operational decisions.
informed financial or investment decisions.
Financial reports are about the entire organization
Reports are often very detailed and provide a wealth
and can be less detailed. Figures are often rounded
of information about a part of the organization.
for external report users.
Financial statements of publicly traded companies Managerial reports do not require independent
must be audited. examination.
Financial accounts follow Generally Accepted
Accounting Principles (GAAP) or International Managerial accountants have more flexibility in what
Financial Reporting Standards (IFRS) set by information is reported and how it is displayed.
professional bodies.
Managerial accounting statements and reports are
For public companies, financial statements must,
not a legal requirement and can be prepared for
by law, be prepared at the end of a fiscal year.
shorter or longer periods than one year.
Managerial accounting is forward-looking in nature
Financial accounting is concerned with collecting and largely concerned with forecasting future sales
data of historical nature. and cash flows, calculating costs and preparing
budgets.

Which of the following describes managerial accounting?
a. Reports are primarily used by external
users
b. Reports are forward-looking, such as
preparing budgets
c. Financial statements must be audited
d. Reports can be less detailed and figure
are often rounded

Which of the following describes managerial accounting?
b. Reports are forward-looking, such as preparing budgets
Correct answer is b. Managerial accounting is forward-looking in nature and largely concerned
with forecasting future sales and cash flows, calculating costs and preparing budgets.

 Managerial Accounting: An Introduction
 The Importance of Managerial Accounting
The Value Chain

The Importance of Managerial Accounting
The accounting profession provides safeguards

that allow individuals to rely on the
information to make better decisions for two
major purposes:
1. The internal management of the
organization.
2. External funding from creditors and
investors. Think about how remarkable it
is, that people give their money to total
strangers based on the information from
financial reports. It happens every day on
the stock market.

The Importance of Managerial Accounting (Continued)
Strategic Stakeholder Management

Stakeholder management identifies major groups and classifies their relationship with the
organization. For example, customers are stakeholders who have a primary relationship with
the sales and marketing function of a business.
A chief managerial accountant, called a controller in most organizations, provides important
information that facilitates interactions between the company’s employees and external
stakeholders.

The Importance of Managerial Accounting (Continued)
Relevance of Managerial Accounting to Different Careers

Managerial accounting is relevant to every business career. Let us illustrate how managerial
accounting is applicable to a few selected occupations.
Controllers Sales Professionals Project Managers Entrepreneurs

True or False. Managerial accounting uses different accounting information than
financial accounting
a. True
b. False

True or False. Managerial accounting uses different accounting information than financial accounting
b. False
Correct answer is b. Managerial and financial accounting uses the same accounting
information systems.

 The Importance of Managerial Accounting
 Managerial Accounting and the Management Process
The Value Chain

The management of any business or organization makes decisions every day that will
determine whether that organization is successful. Examples of typical management decisions
include: What products or services should we make? How should we make them? What price
should we charge for them?

Managerial Accounting and the Management Process (Continued)
Management accounting concepts, such as cost management, job order costing and process
costing, provide a foundation to then analyze the costs of making a product or service.
Planning Processes: Control Processes:

Looking Towards the Learning from
Future Feedback
Planning Processes: Looking Towards the Future

Business planning processes compel the organization to look to the future. They are
particularly important because they serve as tools to make sure that everyone understands and
agrees with the goals, the plans to achieve them and the expected forecast of the results. There
are three major interrelated planning processes, including the strategic plan, the budget and
capital investment analysis. All three processes guide management decision-making.

Strategic goals establish the priorities for broad

plans and forecasts for the next three to seven
years. Examples of strategic goals include:
• Developing a new product to capitalize on an
emerging opportunity
• Building a stronger technical competence
with employees and processes
• Pursuing strategic sustainability to build
relationships with new customers and reduce
costs

Control Processes: Learning from feedback

Control processes are the final aspect of managerial accounting decision-making, using
feedback from actual results to measure whether the business is on track with the plans. Actual
results are compared with budgets and standards for the whole organization as well as the
segments to learn why there is a difference, or variance.

Control Processes: Feedback Loops Measure whether the Business is on Track

The Big Picture: Unifying Framework for

Successful Managerial Accounting Decision-
Making
The Unifying Framework for Managerial
Accounting Decision-Making is a giant loop,
reflecting that it is a continuous process with
no beginning or end. Better actual results are
gained from the integration of planning
processes, learning from control feedback and
implementing better decisions every day.

What does the budget of the planning process encompass?
a. Priorities for the next three to seven
years
b. Major projects that require large
capital investment
c. Financial forecasts for the upcoming
year
d. Actual results

What does the budget of the planning process encompass?
c. Financial forecasts for the upcoming year
Correct answer is c. Budgets are usually prepared for one year for the total organization, built
from the many segments comprising operating departments, locations and products or services
sold.

 Managerial Accounting and the Management Process
 What Is a Cost? An Introduction to Cost Management
The Value Chain

A cost is a broad term used in cost and managerial accounting to define the value paid for
either an asset or an expense. For a merchandising business, the cost of a product is simply the
price the business paid to the supplier
in order to purchase and receive the product.

What Is a Cost? An Introduction to Cost Management (Continued)
Cost Object Hierarchy Examples

Merchandising Manufacturing Service
Industry
(website sales and logistics) (wooden chair manufacturer) (accounting company)
Company E-Furniture, Inc. Pine Furniture Manufacturer, Inc. Morton & Gallow, CPAs, LLC
the total number of Classic

the total number of Classic Dining Room auditing services performed in all five office
Product Chairs produced in three
sets sold to all customers locations
factories
the entire office in Baltimore
Chicago factory making six
Location Fresno Distribution Center including Auditing, Tax Advisory and
styles of chairs
Consulting
cutting department in the the auditing department in the Baltimore
Department shipping
Chicago factory Office
an order of two Classic Dining Room
an order of 120 Classic Chairs for E- Pine Furniture Manufacturer, Inc. (auditing
Job sets for Morton & Gallow’s Baltimore
Furniture, Inc. and tax advisory client)
office
one Classic Dining Room set (one 15 Classic Chairs produced at the number of hours one
Batch
table and six chairs) the same time accountant works in one week
Unit one Classic Chair one Classic Chair one audit program completed
one hour worked by one

Component packing material for one chair wood for one chair
accountant

What is a cost driver?
a. An activity that causes a cost to be
incurred
b. An object for which cost data is
required
c. A value paid for an asset or expense
d. The amount an expense is worth

What is a cost driver?
a. An activity that causes a cost to be incurred
Correct answer is a. A cost driver is any activity that drives a cost, or causes a cost to be
incurred.

 What Is a Cost? An Introduction to Cost Management
 The Value Chain

The Value Chain
An organization’s value chain outlines the steps required to bring products or services to the
market. As a product or service passes each phase, more value is added.
Generally, a manufacturing organization's value chain includes six phases. They are research,
design, manufacturing, marketing, distribution and customer service.

The Value Chain (Continued)
Pine Furniture Manufacturer is a small company that makes pine chairs. They produce one
type of chair, which can be painted in different colors. Using Pine Furniture Manufacturer, let
us look more closely at each phase of a value chain.
Research Design Manufacturing
Marketing Distribution Customer Service

Which part of the value chain is responsible for making the product or service that
the company sells?
a. Research
b. Design
c. Manufacturing
d. Distribution

Which part of the value chain is responsible for making the product or service that the company sells?
c. Manufacturing
Correct answer is c. The manufacturing phase includes all the activities required to produce the
goods.

 The Value Chain
 Product Costs and Period Costs

There are two types of costs associated with the value chain: product costs and period costs.
Classifying costs into one of these two categories is in accordance with GAAP. Product costs
are the costs related to the manufacturing phase of a product. These costs are classified as
Inventory on the balance sheet when the costs are incurred. When the product is sold, the cost
of inventory is expensed through the income statement as Cost of Goods Sold.
Product Cost Period Cost

Product Costs and Period Costs (Continued)
All other costs that are not classified as manufacturing (i.e. research, design, marketing,
distribution and customer service) are called period costs. These types of costs are usually
expensed in the accounting period in which they are incurred, and do not go through the
Inventory account.

Product Costs: Direct and Indirect

Product costs include direct costs and indirect costs. Direct costs are costs that can be directly
traced to the product or service provided. For example, the amount of wood that Pine Furniture
Manufacturer
used in the production of chairs can be easily traced directly to each chair. Therefore, the cost
of wood is a direct cost.

Product Costs: Direct and Indirect Continued

Indirect costs are costs that cannot be tied directly to the product or service in a practical or
economical way. For example, it can be very time-consuming to trace the proportionate
amount of electricity used to produce each chair. Therefore, electricity costs are an indirect
cost.
The three categories of product cost that an organization will incur during the manufacturing
phase
are:
1. Direct Materials
2. Direct Labor
3. Manufacturing Overhead

All costs are classified into product and period costs. Product costs are further classified into
direct and indirect costs. The cost classification decision tree.

What type of costs does manufacturing overhead include?
a. Easily traceable materials used to make a product

b. Materials that are not easily traced to a product
c. Easily traceable labor used to convert materials
into the final product
d. Rent for the head office
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What type of costs does manufacturing overhead include?
b. Materials that are not easily traced to a product
Correct answers is b. Manufacturing overhead includes all indirect manufacturing costs such
as indirect materials, salaries paid to indirect labor, rental fees for the plant and depreciation of
machinery.

 The Value Chain
 Product Costs and Period Costs
 Inventory Systems and Costs

All businesses, whether they are in the

merchandising, manufacturing or service
industry, must know how much it costs to
produce their services or goods. For each type
of industry, inventory or service costs can be
tracked as follows.
Cost of Goods Sold—Merchandising
Company
In merchandising companies (retail, website
and wholesale), products are purchased from
manufacturing suppliers or wholesale
companies, who represent a variety of
manufacturers.

Inventory Systems and Costs (Continued)
Merchandising companies begin each period (day, week, month, year) with the inventory that
was there at the end of the last period.
An easy way to remember this formula is to remember the word “BASE”: Beginning
inventory, Add purchases, Subtract COGS, equals Ending inventory.

Cost of Goods Manufactured—Manufacturing Company

You have just learned how to use the BASE method to calculate COGS for a merchandising
company, which is quite straightforward. Calculating the cost of goods manufactured, and
ultimately COGS, for a manufacturing company is a little more involved. Manufacturing
companies take into account three
production stages as a product moves through manufacturing. These three production stages
are:
1. Raw Materials
2. Work-in-Process
3. Finished Goods Inventory

Cost of Sales or Services—Service

For a service company, these basic principles of the cost flow from inventory to cost of goods
sold still hold. However, a service company uses terms such as “cost of sales” or “cost of
services” in place of “cost of goods sold” on the income statement.
Income Statement
Merchandising Company

Income Statement (Continued)

Merchandising Company (Continued)
Here is an example of Merchandising Company

Manufacturing Company
A manufacturing company must prepare a schedule of cost of goods manufactured before it
can prepare its operating income statement. A schedule of cost of goods manufactured is used
to determine the total cost of goods that were completed during the period. Here is an example
of Manufacturing Company.

Service Company
Morton & Gallow, CPAs is neither a merchandiser nor a manufacturer—it is a service provider.
As a result, it does not purchase or produce physical inventory; however, the business records
its costs in an accounting system so that it can bill its clients for the services rendered.

Service Company (Continued)

Here is an example of Service Company

Balance Sheet and Inventory Management

Inventory is an asset; it is purchased or produced by merchandising, manufacturing and service
businesses that intend to sell it to customers. Merchandisers, including retail and online
businesses, hold merchandise inventory, which they purchased as finished goods from
manufacturers. Hete is an example of Balance Sheet.

Example Continued

What is work-in-process?
a. Material before it has been put into
production
b. Products that have been completed and
are ready to sell
c. Labor used to manufacture the product
d. Partially completed products still in the
production process

What is work-in-process?
d. Partially completed products still in the production process
Correct answer is d. Work-in-process is partially completed products inside the factory
location cost object. The name is easy to remember because it is used for the cost of work as it
is being done in the production process.

 The Value Chain
 Product Costs and Period Costs
 Inventory Systems and Costs
 Managerial Accounting and Ethics

Internal and external stakeholders place significant trust in the accuracy of financial records to
enable them to make informed decisions about a business. Management accountants are
primarily responsible for internal stakeholders and must prepare accounting information
legally and ethically. IMA is a worldwide association for accounting and financial
professionals. It awards the Certified Management Accountant (CMA) designation. Part of
IMA’s objective is to ensure that professionals are properly qualified and ethically sound to
work in businesses.

Managerial Accounting and Ethics (Continued)
Principles
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in accordance with these
principles and shall encourage others within their organizations to adhere to them.
Standards
A member’s failure to comply with the following standards may result in disciplinary action.
I. Competence
Each member has a responsibility to:
1. Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.
3. Provide decision support information and recommendations that are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitations or other constraints that would preclude responsible
judgment or successful performance of an activity.
II. Confidentiality
1. Keep information confidential except when disclosure is authorized or legally required.
2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’
activities to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.
III. Integrity
1. Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent
conflicts of interest. Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit the profession.
IV. Credibility
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably be expected to influence an intended user’s
understanding of the reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance
with organization policy and/or applicable
Institute of Management Accountants

Which of the following is not one of the 4Rs of trust and ethical behavior?
a. Reputations
b. Reduced Costs
c. Risks Managed
d. Recognition

Which of the following is not one of the 4Rs of trust and ethical behavior?
d. Recognition
Correct answer is d. The 4Rs are Reputations, Relationships, Reduced Costs and Risks
Managed.

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Chapter 1

An Overview of Managerial Accounting

Copyright © 2018 AME Learning Inc. 2

Copyright © 2018 AME Learning Inc. 3

Financial statements and the accompanying notes

Copyright © 2018 AME Learning Inc. 4

Copyright © 2018 AME Learning Inc. 5

Copyright © 2018 AME Learning Inc. 6

Copyright © 2018 AME Learning Inc. 7

The accounting profession provides safeguards

Copyright © 2018 AME Learning Inc. 8

Strategic Stakeholder Management

Copyright © 2018 AME Learning Inc. 9

Relevance of Managerial Accounting to Different Careers

Controllers Sales Professionals Project Managers Entrepreneurs

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Copyright © 2018 AME Learning Inc. 11

Copyright © 2018 AME Learning Inc. 12

Copyright © 2018 AME Learning Inc. 13

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Planning Processes: Control Processes:

Planning Processes: Looking Towards the Future

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Strategic goals establish the priorities for broad

Copyright © 2018 AME Learning Inc. 17

Control Processes: Learning from feedback

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Control Processes: Feedback Loops Measure whether the Business is on Track

Copyright © 2018 AME Learning Inc. 19

The Big Picture: Unifying Framework for

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Cost Object Hierarchy Examples

the total number of Classic

one hour worked by one

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Research Design Manufacturing

Marketing Distribution Customer Service

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Product Cost Period Cost

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Product Costs: Direct and Indirect

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Product Costs: Direct and Indirect Continued

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a. Easily traceable materials used to make a product

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All businesses, whether they are in the

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Cost of Goods Manufactured—Manufacturing Company

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