MANAGEMENT ACCOUNTING:

A BUSINESS PARTNER

Lecture # 1
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THE NEED FOR COST ACCOUNTING

 Cost accounting provides the detailed cost data that
management needs to control current operations and
plan for the future.
 Companies must control costs in order to keep prices
competitive.
 In today’s global environment, cost information is
more crucial than ever in remaining competitive.

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MANAGEMENT ACCOUNTING:
BASIC FRAMEWORK

Management accounting and

assigning decision-making authority.

Accounting systems help to identify

who has authority over assets.

Accounting information supports

planning and decision-making.

Accounting reports provide a means of

monitoring, evaluating, and rewarding performance.
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MANAGEMENT ACCOUNTING
SYSTEMS FRAMEWORK
Top Management

Budget: Actual Results: Performance

Future Plans Current Evaluation: Past

Assign Support Evaluate

Decision-Making Decision-Making Decision-Making
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COMPARING FINANCIAL ACCOUNTING AND

MANAGEMENT ACCOUNTING
Financial Accounting Management Accounting
Provide information about the Provide information for
Purpose financial position and planning, evaluating, and
performance of the company. rewarding performance.
Balance sheet, income
Types of
statement, and statement of Various, non-standard reports.
Reports
cash flows.
Standards GAAP None
Reporting Usually, the company taken A component of the
Entity as a whole. company's value chain.
Time Usually a year, quarter, or a
Any period.
Periods month.
Investors, creditors, and other Management, customers, and
Users
external parties. others in the value chain.

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TYPES OF BUSINESSES THAT USE COST

ACCOUNTING
 Manufacturers (Ford, General Motors)
 Merchandisers (WalMart, Kmart)

 Wholesalers (Beverage Distributors)

 For-profit Service Businesses (CPAs, Attorneys)

 Not-for-profit Service Agencies (United Way, Red

Cross)

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THE BALANCED SCORECARD

Financial Perspective
Goals Measures

Internal Operations
Customer Perspective Perspective Goals
Goals Measures Measures

Innovation and
Leaning Perspective
Goals Measures

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ACCOUNTING FOR
MANUFACTURING OPERATIONS

The cost to
produce a unit of
product includes:
Direct material
Direct labor
Manufacturing
overhead

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DIRECT MATERIALS

Raw materials
& component Can be traced
parts that directly and
become an conveniently
integral part to products.
of finished
products.

If materials cannot be traced directly to products,

the materials are considered indirect and are part
of manufacturing overhead.

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DIRECT LABOR

Includes the payroll cost of direct workers.

Those employees
Direct labor Wage who work directly
×
hours rate on the goods being
manufactured.

The cost of employees who do not work

directly on the goods is considered indirect
labor and is part of manufacturing overhead.
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MANUFACTURING OVERHEAD

All manufacturing costs other than direct

materials and direct labor.

Includes:
 Indirect materials.
 Indirect labor.
 Machinery and
equipment costs. Does not include
 Cost of regulatory selling or general and
compliance. administrative
expenses.
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FLOW OF PHYSICAL
GOODS IN PRODUCTION
Direct Direct
Materials Materials
Purchased Used

Finished
Goods

Direct Manufacturing
Labor Overhead Goods
Sold
MegaLoMart

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ACCOUNTING FOR
MANUFACTURING OPERATIONS

Manufacturing costs are often

combined as follows:

Direct Direct Manufacturing

Materials Labor Overhead

Prime Conversion
Cost Cost

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PRODUCT COSTS VERSUS PERIOD COSTS

Balance Sheet
Product Costs
(manufacturing Current assets
costs) as and inventory
incurred
When goods
Income are sold.
Statement
Period Costs Revenue
(operating COGS
expenses and Gross profit
income taxes.) Expenses
as Net income.
incurred
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INVENTORIES OF A
MANUFACTURING BUSINESS

Raw materials - inventory on

hand and available for use.

Finished Work in
goods- process -
completed partially
goods awaiting completed
sale. goods.
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