Documente Academic
Documente Profesional
Documente Cultură
Prepared by
Karleen Nordquist..
The College of St. Benedict...
and St. Johns University...
with contributions by
Marianne Bradford..
The University of Tennessee...
Gregory K. Lowry.
Macon Technical Institute..
Chapter 1
Managerial Accounting
Chapter 1
Managerial Accounting
After 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 1
Managerial Accounting
After 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 1
Managerial Accounting Basics
financial accounting
Ethical standards
Management functions
Manufacturing costs
Product versus period costs
Preview of Chapter 1
Manufacturing Costs in
Financial Statements
MANAGERIAL
ACCOUNTING
Income statement
Balance sheet
Cost Concepts: a review
Contemporary Developments in
Managerial Accounting
Technological change
Quality
Focus on activities
Service industry needs
Study Objective 1
MANAGERIAL
ACCOUNTING
MANAGERIAL
ACCOUNTING
Content of Reports
Pertains to entity as a whole
Pertains to subunits of the
and is highly aggregated
entity and may be very
(condensed).
detailed.
Limited to double-entry
May extend beyond doubleaccounting system and cost
entry accounting system to
data.
any type of relevant data.
Reporting standard is generally Reporting standard is relevance
accepted accounting
to the decision to be made.
principles.
Verification Process
Annual independent audit by
No independent audits.
certified public accountant.
Illustration 1-1b
Study Objective 2
Management Functions
The management of an organization performs
three broad functions:
Planning
Directing and motivating
Controlling
Management Functions:
Planning
Planning requires management to
Management Functions:
Directing and Motivating
Directing 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 show
the interrelationship of activities, and
the delegation of authority and responsibility
within the company.
Management Functions:
Controlling
Controlling is the process of keeping the
firms activities on track.
In controlling operations, management
determines
whether planned goals are being met, and
what changes are necessary when there are
deviations from targeted objectives.
Management Functions
Review
Pla
nn
ing
&
g
n
i
t
c
e
r
i
g
n
D
i
r
ito
n
Decision
o
M
Making
Controlling
Page 7
Study Objective 3
Manufacturing Costs:
Direct Materials
Raw 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.
DIRECT MATERIALS
Manufacturing Costs:
Indirect Materials
Some raw materials cannot be easily associated with the
finished product. These are considered indirect materials.
Indirect materials
do not physically become part of the finished product,
or
cannot 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 Labor
The 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 Overhead
Manufacturing 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 includes
indirect materials;
indirect labor;
machinery; and
depreciation on factory buildings and
MANUFACTURING
facilities.
insurance, taxes, and maintenance on factory
OVERHEAD
Study Objective 4
Product Costs
Product 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 Conversion
Direct 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 Costs
Period 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 Costs
All Costs
Product Costs
Period Costs
Manufacturing Costs
Nonmanufacturing Costs
Direct Materials
Direct Labor
Manufacturing
Overhead
Prime
Costs
Conversion
Costs
Selling
Expenses
Administrative
Expenses
Illustration 1-4
Study Objective 5
Merchandising versus
Manufacturing Income Statements
Under 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
Purchased
Ending
Merchandise
Inventory
Cost of
Goods Sold
Manufacturing Company
Beginning
Finished Goods
Inventory
Cost of Goods
Manufactured
Ending
Finished
Goods
Inventory
=
Illustration 1-5
$ 70,000
650,000
720,000
400,000
$ 320,000
Illustration 1-6a
$ 90,000
370,000
460,000
80,000
$ 380,000
Illustration 1-6b
Study Objective 6
Cost of Goods
Manufactured Formula
The total cost of work in process for the year is equal to the sum of:
the cost of the beginning work in process inventory and
the 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.
Beginning
Work in Process
Inventory
Total Cost of
Work in Process
Total Current
Manufacturing
Costs
Total Cost of
Work in Process
Ending
Work in Process
Inventory
Cost of Goods
Manufactured
Illustration 1-7
Cost of Goods
Manufactured Schedule
To 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.
Illustration 1-8
Study Objective 7
Merchandising versus
Manufacturing Balance Sheets
Unlike 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.
$ 100,000
210,000
400,000
22,000
$ 732,000
Illustration 1-10a
Manufacturing Company
Balance Sheet
December 31, 1999
Current assets
Cash
Receivables (net)
Inventories:
Finished goods
Work in process
Raw materials
Prepaid expenses
Total current assets
$ 180,000
210,000
$ 80,000
25,200
22,800
128,000
18,000
$ 536,000
Illustration 1-10b
Cost Item
Product Costs
Direct
Direct Manufacturing
Materials Labor
Overhead
Period
Costs
X
X
X
X
Prime
Costs
Conversion
Costs
X
X
X
X
X
X
X
X
X
X
X
X
Illustration 1-11
Illustration 1-12
Manufacturing
Cost
$ 100,000
80,000
25,000
6,000
28,000
70,000
$ 309,000
Contemporary Developments
in Managerial Accounting
Due 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 Accounting
Technological Change Through computerintegrated 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 Accounting
Quality 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 Accounting
Focus 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 Accounting
Service 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 Accounting
A 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 1A
Accounting Cycle for a
Manufacturing Company
Appendix 1A
Study Objective 8
Prepare a worksheet and closing
entries for a manufacturing company.
Appendix 1A
Appendix 1A
Copyright
Copyright 1999 John Wiley & Sons, Inc. All rights
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contained herein.
Chapter 1
Managerial Accounting