Managerial Accounting Weygandt, Kieso, & KimmelJohn Wiley & Sons, Inc.

Chapter 1Managerial Accounting

Chapter 1Managerial AccountingAfter studying this chapter, you should be able to:1 Explain the distinguishing features of managerial accounting.2 Identify the three broad functions of management.3 Define the three classes of manufacturing costs.4 Distinguish between product and period costs.5 Explain the difference between a merchandising and a manufacturing income statement.

Chapter 1Managerial AccountingAfter studying this chapter, you should be able to:6 Indicate how cost of goods manufactured is determined.7 Explain the difference between a merchandising and a manufacturing balance sheet.

Preview of Chapter 1Managerial Accounting BasicsComparing managerial and financial accountingEthical standardsManagement functionsManagerial Cost ConceptsManufacturing costsProduct versus period costsMANAGERIAL ACCOUNTING

Preview of Chapter 1Manufacturing Costs in Financial StatementsIncome statementBalance sheetCost Concepts: a reviewContemporary Developments in Managerial AccountingTechnological changeQualityFocus on activitiesService industry needsMANAGERIAL ACCOUNTING

Managerial Accounting BasicsManagerial accounting (management accounting) is a field of accounting that provides economic and financial information for managers and other internal users.

Managerial Accounting BasicsThe activities that are part of managerial accounting are as follows:1Explaining manufacturing and nonmanufacturing costs and how they are reported in the financial statements.2Computing the cost of rendering a service or manufacturing a product.3Determining the behavior of costs and expenses as activity levels change and analyzing cost-volume-profit relationships within a company.

Managerial Accounting BasicsThe activities that are part of managerial accounting are as follows:4Assisting management in profit planning and formalizing the plans in the form of budgets.5Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard costs.6Accumulating and using relevant data for management decision making.

Study Objective 1Explain the distinguishing features of managerial accounting.

Differences Between Financial and Managerial AccountingIllustration 1-1a

FINANCIAL ACCOUNTING

MANAGERIAL ACCOUNTING

Primary Users of Reports

External users, who are stockholders, creditors, and regulatory agencies.

Internal users, who are officers, department heads, managers, and supervisors in the company.

Types and Frequency of Reports

Classified financial statements.

Issued quarterly and annually.

Internal reports

Issued as frequently as needed.

Purpose of Reports

To provide general-purpose information for all users.

To provide special-purpose information for a particular user for a specific decision.

Differences Between Financial and Managerial AccountingIllustration 1-1b

FINANCIAL ACCOUNTING

MANAGERIAL ACCOUNTING

Content of Reports

Pertains to entity as a whole and is highly aggregated (condensed).

Limited to double-entry accounting system and cost data.

Reporting standard is generally accepted accounting principles.

Pertains to subunits of the entity and may be very detailed.

May extend beyond double-entry accounting system to any type of relevant data.

Reporting standard is relevance to the decision to be made.

Verification Process

Annual independent audit by certified public accountant.

No independent audits.

Ethical Standards for Managerial AccountantsManagerial accountants recognize that they have an ethical obligation to their companies and the public.To provide guidance for managerial accountants in the performance of their duties, the Institute of Management Accountants (IMA) has developed a code of ethical standards, entitled Standards of Ethical Conduct for Management Accountants.This code divides the managerial accountants responsibilities into 4 areas:competence,confidentiality,integrity, andobjectivity.

Study Objective 2Identify the three broad functions of management.

Management FunctionsThe management of an organization performs three broad functions:PlanningDirecting and motivatingControlling

Management Functions: PlanningPlanning requires management tolook ahead, andestablish objectives. These objectives are usually quite diverse, but a key modern management objective appears to be to add value to the business under its control.Value is usually measured bythe trading price of the companys stock andthe potential selling price of the company.

Management Functions:Directing and MotivatingDirecting and motivating involves coordinating diverse activities and human resources to produce a smooth-running operation.This function relates to the implementation of planned objectives.Most companies prepare organization charts to showthe interrelationship of activities, andthe delegation of authority and responsibility within the company.

Management Functions: ControllingControlling is the process of keeping the firms activities on track.In controlling operations, management determineswhether planned goals are being met, andwhat changes are necessary when there are deviations from targeted objectives.

Managerial Cost ConceptsTo perform the three management functions effectively, management needs information. One very important type of information is related to costs. For example, questions such as the following need answering:What costs are involved in making the product?If production volume is decreased, will costs decrease?What impact will automation have on total costs?How can costs best be controlled in the organization?

Management Functions ReviewPage 7

Study Objective 3Define the three classes of manufacturing costs.

Managerial Cost ConceptsManufacturing consists of activities and processes that convert raw materials into finished goods. Manufacturing costs are usually classified as follows:Direct MaterialsDirect LaborManufacturing Overhead

Manufacturing Costs:Direct MaterialsRaw materials represent the basic materials and parts that are to be used in the manufacturing process.Raw materials that can be physically and conveniently associated with the finished product during the manufacturing process are termed direct materials.

Manufacturing Costs:Indirect MaterialsSome raw materials cannot be easily associated with the finished product. These are considered indirect materials. Indirect materialsdo not physically become part of the finished product, orcannot be traced because their physical association with the finished product is too small in terms of cost.Indirect materials are accounted for as part of manufacturing overhead.

Manufacturing Costs:Direct Labor

Direct labor is the work of factory employees that can be physically and conveniently associated with converting raw materials into finished goods.DIRECT LABOR

Manufacturing Costs:Indirect LaborThe wages of maintenance people, timekeepers, and supervisors are normally categorized as indirect labor because their efforts have no physical association with the finished product or it is impractical to trace the costs to the goods provided..Like indirect materials, indirect labor is part of manufacturing overhead.

Manufacturing Costs: Manufacturing OverheadManufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product.These costs may also be defined as manufacturing costs that cannot be classified as either direct materials or direct labor.Manufacturing overhead includesindirect materials;indirect labor;depreciation on factory buildings and machinery; andinsurance, taxes, and maintenance on factory facilities.

Study Objective 4Distinguish between product and period costs.

Product CostsProduct costs (also called inventoriable costs) include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead). They are the costs that are a necessary and integral part of producing the finished product.These costs are not expensed (as cost of goods sold) under the matching principle until the finished goods inventory is sold.

Product Costs:Prime and ConversionDirect materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product.Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods.

Period CostsPeriod costs are identifiable with a specific time period rather than a salable product.Period costs are deducted from revenues in the period in which they are incurred.Period costs relate to nonmanufacturing, (thus, noninventoriable) costs, and include selling and administrative expenses.

Product Versus Period CostsAll CostsDirect MaterialsDirect LaborManufacturing OverheadSelling ExpensesAdministrative ExpensesPrime CostsConversion CostsProduct Costs Manufacturing Costs (Go to Balance Sheet before Income Statement)Period Costs Nonmanufacturing Costs (Go straight to Income Statement)Illustration 1-4

Study Objective 5Explain the difference between a merchandising and a manufacturing income statement.

Merchandising versus Manufacturing Income StatementsUnder a periodic inventory system, the income statements of a merchandising company and a manufacturing company differ in the cost of goods sold section. For a merchandising company, cost of goods sold is calculated by adding the beginning merchandise inventory and the cost of goods purchased, and subtracting the ending merchandise inventory. For a manufacturing company, cost of goods sold is calculated by adding the beginning finished goods inventory and the cost of goods manufactured, and subtracting the ending finished goods inventory.

Cost of Goods Sold ComponentsCost of Goods SoldIllustration 1-5

Cost of Goods Sold Sections of Merchandising and Manufacturing CompaniesThe following cost of goods sold sections for merchandising and manufacturing enterprises highlight the different presentations:

Cost of Goods Sold Sections of Merchandising and Manufacturing Companies

Study Objective 6Indicate how cost of goods manufactured is determined.

Cost of Goods Manufactured FormulaThe total cost of work in process for the year is equal to the sum of:the cost of the beginning work in process inventory andthe total manufacturing costs for the current period.To find the cost of goods manufactured, we subtract the cost of the ending work in process inventory from the total cost of work in process.

Cost of Goods Manufactured ScheduleTo eliminate excessive detail, it is customary to present only the total cost of goods manufactured in the Income Statement. An internal financial schedule called a Cost of Goods Manufactured Schedule (as shown on the right) shows each of the cost elements.

Study Objective 7Explain the difference between a merchandising and a manufacturing balance sheet.

Merchandising versus Manufacturing Balance SheetsUnlike the balance sheet for a merchandising company, which shows just one inventory category, the balance sheet of a manufacturing company may have three inventory accounts:Finished Goods Inventory, which shows the cost of completed goods on hand; Work in Process Inventory, which shows the cost applicable to units that have been started into production but are only partially completed; and Raw Materials Inventory, which shows the cost of raw materials on hand.

Current Assets Sections of Merchandising and Manufacturing Balance SheetsThe following current assets sections of balance sheets contrast the presentation of inventories of a merchandising company with those of a manufacturing company. The remainder of the balance sheet is similar for the two types of companies.

Current Assets Sections of Merchandising and Manufacturing Balance SheetsManufacturing inventories are generally listed in the order of liquidity their expected realization in cash. Thus, finished goods inventory is listed first.

Cost Concepts: A ReviewAssignment of Costs to Cost CategoriesIllustration 1-11

Sheet1

Product Costs

Cost ItemDirectDirectManufacturingPeriodPrimeConversion

MaterialsLaborOverheadCostsCostsCosts

Material cost ($10 per door)XX

Labor costs ($8 per door)XXX

Depreciation on new equipment ($25,000 per year)XX

Property taxes ($6,000 per year)XX

Advertising costs ($30,000 per year)X

Sales commissions ($4 per door)X

Maintenance salaries ($28,000 per year)XX

Salary of plant manager ($70,000)XX

Cost of shipping pre-hung doors ($12 per door)X

Sheet2

Sheet3

Sheet1

Product Costs

Cost ItemDirectDirectManufacturingPeriodPrimeConversion

MaterialsLaborOverheadCostsCostsCosts

Material cost ($10 per door)XX

Labor costs ($8 per door)XXX

Depreciation on new equipment ($25,000 per year)XX

Property taxes ($6,000 per year)XX

Advertising costs ($30,000 per year)X

Sales commissions ($4 per door)X

Maintenance salaries ($28,000 per year)XX

Salary of plant manager ($70,000)XX

Cost of shipping pre-hung doors ($12 per door)X

Sheet2

Sheet3

Sheet1

Product Costs

Cost ItemDirectDirectManufacturingPeriodPrimeConversion

MaterialsLaborOverheadCostsCostsCosts

Material cost ($10 per door)XX

Labor costs ($8 per door)XXX

Depreciation on new equipment ($25,000 per year)XX

Property taxes ($6,000 per year)XX

Advertising costs ($30,000 per year)X

Sales commissions ($4 per door)X

Maintenance salaries ($28,000 per year)XX

Salary of plant manager ($70,000)XX

Cost of shipping pre-hung doors ($12 per door)X

Sheet2

Sheet3

Cost Concepts: A ReviewComputation of Manufacturing CostTotal manufacturing costs are the sum of the product costs direct materials, direct labor, and manufacturing overhead costs. Northridge Company produces 10,000 pre-hung wooden doors the first year. The total manufacturing costs are:

Contemporary Developments in Managerial AccountingDue to increased global competition from such countries as Japan and Germany, contemporary business managers demand different and better information than they needed just a few years ago.The factors on the following slides contribute to the expanding role of managerial accounting as we look toward the next century.

Contemporary Developments in Managerial AccountingTechnological Change Through computer-integrated manufacturing (CIM), many companies can now manufacture products that are untouched by human hands. Also, the widespread use of computers has greatly reduced the cost of accumulating, storing, and reporting managerial accounting information.

Contemporary Developments in Managerial AccountingQuality Many companies have installed a total quality control (TQC) system to reduce defects in finished products. More emphasis is now put on nonfinancial measures such as customer satisfaction, number of service calls, and time to generate reports. Attention to these measures, which employees can control, leads to increased profitability. In addition, many companies have begun using just-in-time inventory methods (JIT), under which goods are manufactured or purchased just in time for use. This lowers the costs of holding and storing inventory.

Contemporary Developments in Managerial AccountingFocus on Activities In order to obtain more accurate product costs, many companies are accounting for overhead costs by the activities used in making the product. Activities include purchasing materials, handling raw materials, and production order scheduling. This development is called activity based costing (ABC).

Contemporary Developments in Managerial AccountingService Industry Needs In some respects, the challenges for managerial accounting are greater in service enterprises than in manufacturing companies. In some companies, it may be necessary for the managerial accountant to develop new systems for measuring the cost of serving individual customers and new operating controls to improve the quality and efficiency of specific services.

Contemporary Developments in Managerial AccountingA Final Comment Not long ago, the managerial accountant was primarily engaged in cost accounting collecting and reporting manufacturing costs to management. Today, the managerial accountants responsibilities extend to cost management providing managers with data on the efficient use of company resources in both manufacturing and service industries.

Appendix 1AAccounting Cycle for a Manufacturing Company

Appendix 1AStudy Objective 8Prepare a worksheet and closing entries for a manufacturing company.

Appendix 1AAccounting Cycle for a Manufacturing CompanyThe accounting cycle for a manufacturing company is the same as for a merchandising company when a periodic inventory system is used.Except for additional manufacturing inventories and cost accounts, the journalizing and posting of transactions and adjustments, and the preparation of a trial balance are the same.There are some changes in the preparation of the work sheet and closing entries.

Appendix 1AAccounting Cycle for a Manufacturing CompanyTwo additional columns are needed in the work sheet for the cost of goods manufactured. In these columns, the beginning inventories of raw materials and work in process are entered as debits, and the ending inventories are entered as credits; all manufacturing costs are entered as debits. To close all of the accounts that appear in the cost of goods manufactured schedule, a Manufacturing Summary account is used.

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Chapter 1Managerial Accounting

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