CHAPTER19

Managerial
Accounting

Acct202
19-1
 PreviewofCHAPTER19

19-2
 Managerial Accounting Basics

Managerial accounting, a field of accounting that provides

economic and financial information for managers and other
internal users. Activities include:

1. Explaining manufacturing and nonmanufacturing costs

(Chapter 19).

2. Computing cost of providing a service or manufacturing a

product (Chapters 20 and 21).

3. Determining the behavior of costs and expenses as activity

levels change and analyzing cost–volume–profit relationships
within a company (Chapter 22).

19-3
 Managerial Accounting Basics

Managerial accounting, a field of accounting that provides

economic and financial information for managers and other
internal users. Activities include:

4. Assisting management in profit planning and formalizing

these plans in the form of budgets

5. Providing a basis for controlling costs and expenses by

comparing actual results with planned objectives and
standard costs

6. Accumulating and presenting data for management decision

making

19-4
 Managerial Accounting Basics

Comparing Managerial and Financial

Accounting
Illustration 19-1

19-5 SO 1 Explain the distinguishing features of managerial accounting.

 Managerial Accounting Basics

Question
Managerial accounting:
a. Pertains to the entity as a whole and is highly
aggregated.

b. Places emphasis on special-purpose information.

c. Is limited to cost data.

d. Is governed by generally accepted accounting

principles.

19-6 SO 1 Explain the distinguishing features of managerial accounting.

 Managerial Accounting Basics

Management Functions
Three broad functions:

1. Planning. Requires managers to look ahead and to

establish objectives.
2. Directing.  maximizing short-term profits
and market share,
3. Controlling.
 maintaining a commitment to
environmental protection, and
 contributing to social programs.

19-7 SO 2 Identify the three broad functions of management.

 Managerial Accounting Basics

Management Functions
Three broad functions: Involves coordinating diverse activities and
human resources to produce a smooth-
1. Planning. running operation. This function relates to

2. Directing.  implementing planned objectives,

 providing necessary incentives to

3. Controlling. motivate employees,

 selecting executives,

 appointing managers and

supervisors, and

 hiring and training employees.

19-8 SO 2 Identify the three broad functions of management.

 Managerial Accounting Basics

Management Functions
Three broad functions:

1. Planning.
Process of keeping the company’s
2. Directing. activities on track.

 Managers determine whether

3. Controlling.
planned goals are being met.

 When there are deviations from

targeted objectives, managers must
decide what changes are needed to
get back on track.

19-9 SO 2 Identify the three broad functions of management.

 Managerial Accounting Basics

Question
The management of an organization performs several
broad functions. They are:
a. Planning, directing, and selling.

b. Directing, manufacturing, and controlling.

c. Planning, manufacturing, and controlling.

d. Planning, directing, and controlling.

19-10 SO 2 Identify the three broad functions of management.

 Managerial Accounting Basics

Organizational
Structure

Illustration 19-2

19-11 SO 2
 Managerial Accounting Basics

Business Ethics
 Business scandals caused massive investment losses
and employee layoffs.

 Corporate fraud has increased 13% in last 5 years.

 Employee fraud – 60% of all fraud.

 Intentional misstatement of financial reports.

► Enron, Global; Crossing, WorldCom.

► Most costly to companies.

19-12 SO 2 Identify the three broad functions of management.

 Managerial Accounting Basics

Business Ethics
Creating Proper Incentives
 Systems to monitor and evaluate employees may
produce incentives for unethical actions.

 Employees may feel that they must succeed no

matter what.

 Ineffective and unrealistic controls may result in

declining product quality.

19-13 SO 2 Identify the three broad functions of management.

 Managerial Accounting Basics

Business Ethics
Code of Ethical Standards
 Sarbanes-Oxley Act of 2002
► Clarifies management’s responsibilities.
► Certifications by CEO and CFO.
► Selection criteria for Board of Directors and Audit
Committee.
► Substantially increased penalties for misconduct.

 IMA Statement of Ethical Professional Practices

19-14 SO 2 Identify the three broad functions of management.

 Managerial Cost Concepts

Manufacturing Costs
Activities and processes that convert raw materials into
finished goods.
Illustration 19-3

19-15 SO 3 Define the three classes of manufacturing costs.

 Manufacturing Costs

Direct Materials
Raw materials purchased that will be converted into finished
product.

 Direct materials can be physically and directly

associated with the finished product.

 Indirect materials:
1. Do not become part of the finished product, or
2. Cannot be traced directly to the product.
3. Part of manufacturing overhead.

19-16 SO 3 Define the three classes of manufacturing costs.

 Manufacturing Costs

Direct Labor
Direct Labor - Work of factory employees that

 can be physically and directly associated with converting

raw materials into finished goods.

Indirect Labor - Work of factory employees that

 has no physical association with the finished product or

 for which it is impractical to trace to the goods produced.

19-17 SO 3 Define the three classes of manufacturing costs.

 Manufacturing Costs

Manufacturing Overhead
 Costs that are indirectly associated with manufacturing
the product.

 Includes all manufacturing costs except direct materials

and direct labor.

19-18 SO 3 Define the three classes of manufacturing costs.

 Manufacturing Overhead

 Includes only indirect costs related to manufacturing

 Does NOT include costs for selling, general, or administrative
functions
 Examples:
 Indirect materials
 Become part of finished product, but cannot be conveniently or cost-
effectively traced
 Indirect labor
 Manufacturing wages not easily traced to products
 Plant managers & maintenance

 Other costs related to the manufacturing facility and plant assets

 Repairs & maintenance
 Utilities
 Rent & insurance
 Property taxes
 Depreciation
19-19
19-20
 Manufacturing Costs

Question
Which of the following is not an element of manufacturing
overhead?
a. Sales manager’s salary.

b. Plant manager’s salary.

c. Factory repairman’s wages.

d. Product inspector’s salary.

19-21 SO 3 Define the three classes of manufacturing costs.

 Manufacturing Costs

Product versus Period Costs

Product Costs
 Components: direct material cost, direct labor cost,
and manufacturing overhead.

 Necessary and integral part of producing the product.

 Recorded as inventory when incurred.

 Not an expense until the finished goods inventory is

sold, then record as cost of goods sold.

19-22 SO 4 Distinguish between product and period costs.

 Manufacturing Costs

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.

 Includes all selling and administrative expenses.

19-23 SO 4 Distinguish between product and period costs.

 Product versus Period Costs
Illustration 19-4

19-24 SO 4 Distinguish between product and period costs.

 Product versus Period Costs
Product costs include (in the case of manufactured goods) direct materials, direct labor,
and manufacturing overhead. Period costs include all selling and administrative costs.

Balance Income
Manufacturing Costs Sheet Statement
Direct Materials Work in
Direct Labor Process
Inventory
Manufacturing
Overhead Cost of
Finished Goods
Goods Sold
Inventory
Nonmanufacturing Costs
Selling and Expensed During Period
Administrative Period Incurred Expenses
19-25
Slide 25
 Example

19-26
 Manufacturing Costs

Income Statement
Illustration 19-5

SO 5 Explain the difference between a merchandising

19-27
and a manufacturing income statement.
 Manufacturing Costs
Illustration 19-6
Income Statement Cost of goods sold sections of
merchandising and manufacturing
income statements

SO 5 Explain the difference between a merchandising

19-28
and a manufacturing income statement.
 Manufacturing Costs

Cost of Goods Manufactured

Illustration 19-7

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
period.
19-29 SO 6 Indicate how cost of goods manufactured is determined.
 Manufacturing Costs

Illustration 19-8
Cost of goods
manufactured
schedule

19-30
SO 6
 Manufacturing Costs
Illustration 19-9
Balance Sheet Inventory accounts for
a manufacturer

SO 7 Explain the difference between a merchandising

19-31
and a manufacturing balance sheet.
 Manufacturing Costs
Illustration 19-10
Balance Sheet Current assets sections of
merchandising and
manufacturing balance sheets

SO 7 Explain the difference between a merchandising

19-32
and a manufacturing balance sheet.
 Manufacturing Costs

Product Costing for Service Industries

 U.S. economy has shifted toward an emphasis on
providing services rather than goods.

 Over 50% of U.S. workers are now employed by service

companies.

 Trend is expected to continue in the future.

 Most of the techniques learned for manufacturing firms

are applicable to service companies.

SO 7 Explain the difference between a merchandising

19-33
and a manufacturing balance sheet.
 Managerial Accounting Today

The Value Chain

All activities associated with providing a product or service.

Illustration 19-13
A manufacturer’s value chain

19-34 SO 8 Identify trends in management accounting.

 Managerial Accounting Today

Technological Change
Enterprise Resource Planning (ERP) systems provide a
comprehensive, centralized, integrated source of information that
companies can use to manage all major business processes, from
purchasing to manufacturing to human resources.

Computer-Integrated Manufacturing (CIM) allows companies to

manufacture products that are untouched by human hands.

Business-to-Business (B2B) e-commerce on the Internet.

19-35 SO 8 Identify trends in management accounting.

 Managerial Accounting Today

Just-In-Time Inventory Methods

 Goods are manufactured or purchased just in time for
use.

Quality
 JIT inventory system requires increased emphasis on
product quality.

 Companies have installed total quality management

(TQM) systems to reduce defects in finished products.

19-36 SO 8 Identify trends in management accounting.

 Managerial Accounting Today

Activity-Based Costing
 Allocates overhead based on use of activities.

 Results in more accurate product costing and scrutiny of

all activities in the value chain.

Theory of Constraints
 A specific approach used to identify and manage
constraints in order to achieve the company’s goals.

19-37 SO 8 Identify trends in management accounting.

 Managerial Accounting Today

Balanced Scorecard
 Evaluates operations in an integrated fashion.

 Uses both financial and non-financial measures.

 Links performance measures to overall company

objectives.

19-38 SO 8 Identify trends in management accounting.

 Managerial Accounting Today

Question
Which of the following managerial accounting techniques
attempts to allocate manufacturing overhead in a more
meaningful manner?

a. Just-in-time inventory.

b. Total-quality management.

c. Balanced scorecard.

d. Activity-based costing.

19-39 SO 8 Identify trends in management accounting.