MANAGERIAL ACCOUNTING

WHAT IS MANAGEMENT ACCOUNTING?

 It is the process of identifying, measuring,

accumulating, analyzing, preparing,
interpreting, and communicating information
that managers use to fulfill organizational
objectives.
MANAGERIAL ACCOUNTING BASICS

A field of accounting that provides

economic and financial information
for managers and other internal users
WHAT IS FINANCIAL ACCOUNTING?

 It refers to accounting information developed for

the use of external parties such as stockholders,
suppliers, banks, and government regulatory
agencies.
PLANNING AND CONTROLLING

The Management Process Internal Accounting System

Planning Budgets, Customer

Special Reports surveys
Corrections and Revisions

•Increase
of Plans and Actions

Competitor
Productivity analysis
Financial
Accounting Advertising
System impact
New items
Controlling report
•Actions Performance
•Evaluations Reports
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 MANAGERIAL COST CONCEPTS
MANUFACTURING COSTS

 Manufacturing consists of activities to convert raw materials into

finished goods.

 In contrast, a merchandising firm sells goods in the form in which

they were bought.

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 MANAGERIAL COST CONCEPTS

MANUFACTURING COSTS - MATERIALS

 Direct Materials
 Raw materials - basic materials used in manufacturing.

 Raw materials that can be physically and directly associated

with the finished product are called direct materials.

 Examples include
Flour in the baking of bread
Syrup in the bottling of soft drinks
Steel used in making automobiles
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MANAGERIAL COST CONCEPTS

Manufacturing Costs- Materials

 Indirect Materials

 Raw materials that cannot be easily associated with the

finished product are called indirect materials.

 Indirect materials do not physically become part of the

finished product or represent too small a part of the finished
product in terms of cost

 Considered part of manufacturing overhead

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MANAGERIAL COST CONCEPTS

Manufacturing Costs - Labor

 Direct Labor
 Work of factory employees that can be physically and
directly associated with converting raw materials into
finished goods

 Examples include
Bottlers at Coca-Cola
Bakers at Sara Lee
Typesetters at a newspaper
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 MANAGERIAL COST CONCEPTS

Manufacturing Costs - Labor

 Indirect Labor
 Work of factory workers that have no physical association
with the finished product or for which it is impractical to
trace to the goods produced

 Examples include
Wages of maintenance workers
Supervisors
Time-Keepers

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 MANAGERIAL COST CONCEPTS

Manufacturing Costs – Manufacturing Overhead

 Costs that are indirectly associated with manufacturing the product

 Examples include
Indirect materials
Indirect labor
Depreciation on factory buildings
Insurance, taxes, maintenance on factory
facilities

 Basically manufacturing overhead includes all manufacturing costs

except direct materials and direct labor.
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 PRODUCT VERSUS PERIOD COSTS

Product Costs
 Consist of the direct material cost, the direct labor cost, and the
manufacturing overhead cost

 A necessary and integral part of producing the product

 Recorded as inventory when incurred

 Do not become expenses until the finished goods inventory is sold

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 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

 Include all
 Selling expenses
 General and Administrative expenses

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PRODUCT VERSUS PERIOD COSTS

All cost

Product cost Period cost

Material
Selling and Admin
Labor
Expenses
FOH

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 MANAGERIAL ACCOUNTING TODAY

Managerial Accounting Practices

 Just-In-Time (JIT) Inventory Methods
 Inventory system in which goods are manufactured or purchased just in
time for use
 Quality
 Increased emphasis on product quality because goods are produced only
as needed
Total Quality Management (TQM) - a philosophy of zero defects
 Activity-Based Costing (ABC)
 Allocates overhead based on use of specific activities or functions of the
company (number of orders or number of machine set ups)
 Results in more accurate product costing and scrutiny of all activities in
the value chain
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 COST CONCEPT

FIXED COST That do not vary as production volume

change under relevant range

For example: Rent, depreciation, repair and maintenance

VARIABLE COST That vary as production volume change

For example: Direct material, direct labor, electricity,

indirect material
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 SEMI VARIABLE COST

Some portion of cost remains fixed and some vary

as production volume change

For example: Repair, indirect labor, supervisor salary,

telephone charges,

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RESPONSIBILITY ACCOUNTING
RESPONSIBILITY ACCOUNTING

An accounting system that

provides information . . .

Relating to the To evaluate

responsibilities of managers on
individual managers. controllable items.
DECENTRALIZATION
Decentralization
often occurs as
Top organizations
M anagem ent continue to grow.

M id d le M id d le
M anagem ent M anagem ent

S u p e r v is o r S u p e r v is o r S u p e r v is o r S u p e r v is o r

Decision Making is Pushed Down

DECENTRALIZATION
Improves
Promotes better productivity.
decision making.

Improves Develops
performance lower-level
evaluation. managers.

Advantages
Allows upper-level management to
concentrate on strategic decisions.
Responsibility Reports

Responsibility
Reports
Prepared for each
individual who st
has control over Co

revenue or
expense items
RESPONSIBILITY REPORTS

 Prepare budgets for  Measure performance of

each responsibility center. each responsibility center.

 Prepare timely performance reports

comparing actual amounts with budgeted amounts.
The Controllability Concept
Successful
Successful implementation
implementation of of responsibility
responsibility
accounting
accounting depends
depends onon clear
clear lines
lines ofof authority
authority and
and
clearly
clearly defined
defined levels
levels of
of responsibility.
responsibility.

B o a r d o f D ir e c t o r s

P r e s id e n t

V ic e P r e s id e n t V ic e P r e s id e n t V ic e P r e s id e n t
o f F in a n c e o f O p e r a t io n s o f M a r k e t in g

S to re M a n a g e r

D e p a rtm e n t M a n a g e r
MANAGEMENT BY EXCEPTION AND THE
DEGREE OF SUMMARIZATION
Amount of detail varies according
to level in organization.

Department Store manager receives summarized

manager receives detailed information from each department.
reports.
MANAGEMENT BY EXCEPTION AND THE
DEGREE OF SUMMARIZATION
Amount of detail varies according
to level in organization.
Management by exception
Upper-level management does not receive
operating detail unless problems arise.

The vice president of operations receives

summarized information from each store.
 Qualitative Reporting Features

To be of maximum benefit, responsibility reports should . . .

 Be timely.
 Be issued regularly.
 Be understandable.
 Compare budgeted
and actual amounts.
RESPONSIBILITY CENTERS

 A responsibility center is the point in an organization where the control over

revenue or expense is located, e.g. division,department or a single machine.
 A responsibility center may be divided into three categories
 cost
 profit
 investment
Types of Responsibility Centers

Cost Center
A business
segment that
incurs expenses st
but does not Co

generate revenue.
Types of Responsibility Centers

Profit Center
Revenues
A part of the business that has
control over both revenues and Sales
expenses, but no control over Interest
investment funds. Other
Expenses
Manufacturing
Commissions
Salaries
Other
Types of Responsibility Centers

Investment Center
A profit center where
management also makes
capital investment decisions.

Corporate Headquarters
MEASURING MANAGERIAL PERFORMANCE
Evaluation Measures
Cost control
Cost
Quantity and quality
Center
of services

Profit
Profitability
Center

Investment Return on investment (ROI)

Center Residual income (RI)
THANK YOU!