Managerial Accounting

By
Dr. Imran Ramzan

19-1
 LEARNING Identify the features of managerial accounting and
OBJECTIVE
1 the functions of management.

Managerial accounting provides economic and financial

information for managers and other internal users.

19-2 LO 1
 Comparing Managerial and Financial
Accounting

19-3
 Management Functions

Planning Directing Controlling

 Maximize short-term  Coordinate diverse  Keeping activities on

profit and market activities and human track.
share. resources.  Determine whether
 Commit to  Implement planned goals are met.
environmental objectives.  Decide changes
protection and social  Provide incentives to needed to get back
programs. motivate employees. on track.
 Add value to the  Hire and train  May use an informal
business. employees. or formal system of
 Produce a smooth- evaluations.
running operation.

19-4
 Organizational Structure

Organization charts show

the interrelationships of
activities and the delegation
of authority and
responsibility within the
company.

Illustration 19-2
A typical corporate
organization chart

19-5
 Manufacturing Costs

Manufacturing consists of activities and processes that

convert raw materials into finished goods.

19-6 LO 2
 Manufacturing Costs

DIRECT MATERIALS
Raw Materials
Basic materials and parts used in
manufacturing process.

Direct Materials
Raw materials that can be physically and directly associated
with the finished product during the manufacturing process.

19-7 LO 2
 Manufacturing Costs

INDIRECT MATERIALS
1. Not physically part of the finished product or

2. they are an impractical to trace to the finished

product because their physical association with the
finished product is too small in terms of cost.

Considered part of manufacturing overhead.

Tools for the Maintenance of Machinery or personal

protection.

19-8 LO 2
 Manufacturing Costs

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
costs to the goods produced.

19-9 LO 2
 Manufacturing Costs

MANUFACTURING OVERHEAD
 Costs that are indirectly associated with manufacturing
the finished product.

 Includes all manufacturing costs except direct materials

and direct labor.

 Also called factory overhead, indirect manufacturing

costs, or burden.

19-10 LO 2
 Direct Versus Indirect Costs

Direct Costs
 Cost incurred for producing a particular product. i.e.,
direct material, direct labor, and manufacturing
supplies.
Indirect Costs
 Cost that related to a product but are not traceable in
feasible manner. i.e., Rent, utilities, general office
expenses.

19-11 LO 2
 Product Versus Period Costs

Period Costs
 Charged to expense as incurred.

 Non-manufacturing costs.

 Includes all selling and administrative expenses.

Product Costs
 Charged to produce a product.

 Manufacturing costs.

 Includes all direct material, direct labor and FOH.

19-12 LO 2
 Product Versus Period Costs
Illustration 19-3
Product versus period costs

19-13 LO 2
 Product Versus Period Costs

Illustration: Suppose you started your own snowboard factory,

KRT Boards. Here are some of the costs that your snowboard
factory would incur. Assign the following costs:

Illustration 19-4
Assignment of costs to cost categories
19-14 LO 2
 Product Versus Period Costs Illustration 19-4
Assignment of costs
to cost categories

19-15 LO 2
 DO IT! 2 Managerial Cost Concepts

A bicycle company has these costs: tires, salaries of employees who

put tires on the wheels, factory depreciation, advertising expenditures,
lubricants, spokes, salary of factory manager, salary of accountant,
handlebars, and salaries of factory maintenance employees. Classify
each cost as direct materials, direct labor, overhead, or a period cost.

Direct Materials Direct Labor Overhead

 Tires.  Salaries of  Factory depreciation.

 Spokes. employees who put  Lubricants
tires on the wheels.
 Handlebars.  Factory manager
salary.
Advertising expenditures and salary  Factory maintenance
of accountant are period costs. employees salary.
19-16 LO 2
 LEARNING Demonstrate how to compute cost of goods manufactured
OBJECTIVE 3 and prepare financial statements for a manufacturer.

Income Statement
Under a periodic inventory system (Physical count), the
income statements of a merchandiser and a manufacturer
differ in the cost of goods sold section.

“COGS”
19-17 LO 3
 Helpful Hint
Income Statement Assume a periodic
inventory system in
this illustration.

Illustration 19-6
Cost of goods sold components
19-18 LO 3
 Cost of Goods Manufactured

Total Manufacturing Costs – sum of direct material costs, direct

labor costs, and manufacturing overhead in the current year.
Total Work in Process – (1) cost of beginning work in process and
(2) total manufacturing costs for the current period.

Illustration 19-8
19-19 Cost of goods manufactured formula LO 3
 Fixed Cost vs Variable Cost

 Variable Cost: A variable cost varies, in total, in

direct proportion to changes in the level of
activity. i.e., direct materials, direct labor, and
indirect materials.
 Fixed Cost: A fixed cost is a cost that remains
constant, in total, regardless of changes in the
level of activity. i.e., depreciation, insurance,
property taxes, and rent.
Total Cost (Mixed cost) = Fixed Cost + Variable Cost

19-20
 Opportunity Cost vs Sunk Cost

 Sunk Cost: A sunk cost is a cost that has

already been incurred and that cannot be
changed by any decision made now or in the
future.
 Opportunity Cost: Opportunity cost is the
potential benefit that is given up when one
alternative is selected over another.

19-21
 Period Cost Product Cost

Selling & Admin Direct Direct Manufacturing Sunk Opportunity

Particulars Variable Cost Fixed Cost
Expenses Materials Labor Overhead Cost Cost

Wood used in a table

(PKR100 per table)

Labor cost to
assemble
a table (PKR 40 per
table)

Salary of the factory

supervisor (PKR
120,000/Year)
Cost of electricity
(PKR 40 per
machine-hour)

Machine Depreciation

Salary of the
Company's CEO
(PKR250,000/Year)

Rental Income
Forgone on factory
space (100,000 per
year)

19-22
 Period Cost Product Cost

Selling & Admin Direct Direct Manufacturing Sunk Opportunity

Particulars Variable Cost Fixed Cost
Expenses Materials Labor Overhead Cost Cost

Wood used in a table x x

(PKR100 per table)

Labor cost to
assemble x x
a table (PKR 40 per
table)

Salary of the factory x x

supervisor (PKR
120,000/Year)
Cost of electricity
(PKR 40 per x x
machine-hour)

x x x
Machine Depreciation

Salary of the x x
Company's CEO
(PKR250,000/Year)

Rental Income
Forgone on factory x
space (100,000 per
year)

19-23