Managerial Accounting

Eighth Edition

Weygandt ● Kimmel ● Kieso

Chapter 1
Managerial Accounting

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Chapter Outline
Learning Objectives
LO 1 Identify the features of managerial accounting and
the functions of management.
LO 2 Describe the classes of manufacturing costs and the
differences between product and period costs.
LO 3 Demonstrate how to compute cost of goods
manufactured and prepare financial statements for a
manufacturer.
LO 4 Discuss trends in managerial accounting.

Copyright ©2018 John Wiley & Sons, Inc. 2

Managerial Accounting Basics

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

Provides economic and financial information for

managers and other internal users.

- What is most important to you as a business owner?

- How do you get towards that objective?
- Internal factors affecting it can be?
- External factors can be?

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Internal
1. Number of units produced
2. Cost price per unit
3. Offer discount to special customer
4. Produce internally or outsource
5. Discontinue a product line
External
6. Economic conditions
7. Consumer tastes
8. Rising cost of production
9. Competition
In the end, its all about making an “informed decision” 4
Comparing Managerial and Financial Accounting
Similarities and differences:
• Each field deals with economic events of a business
• Both require that economic events be quantified and
communicated to interested parties

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Comparing Managerial and Financial
Feature Financial Accounting Managerial Accounting
Primary Users External users: stockholders, Internal users: officers and
of Reports creditors, and regulators. managers.
Types and Frequency Financial statements. Internal reports.
of Reports Quarterly and annually. As frequently as needed.
Special-purpose for
Purpose of Reports General-purpose.
specific decisions.
Pertains to subunits of the
Pertains to business as a whole.
business Very detailed.
Highly aggregated (condensed).
Extends beyond double-entry
Content of Reports Limited to double-entry accounting
accounting to any relevant
and cost data. Generally accepted
data. Evaluated based on
accounting principles.
relevance to decisions.
Verification Process Audited by CPA. No independent audits.

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What are the 3 most important
Management functions?

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Management Functions
Planning Directing Controlling
• Maximize • Coordinate diverse • Keeping activities
short-term activities and human on track
profit and resources • Determine whether
market share • Implement planned goals are met
• Commit to objectives
• Decide changes
environmental • Provide incentives to needed to get back
protection and motivate employees on track
social • Hire and train
programs • May use an informal
employees or formal system of
• Add value to • Produce a smooth- evaluations (like
the business running operation budgets)
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Each of the following fall into what kind
of management function?

1. Performance evaluation reports

2. Maximizing market share
3. Committing to environmental protection
4. Appointing supervisors
5. Reduce prices against competitors
6. Training employees

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Organizational Structure

Organization charts show the interrelationships of activities and the delegation of

authority and responsibility within the company.

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Do It! 1: Managerial Accounting (1 of 2)
Indicate whether the following statements are true or false.
1. Managerial accountants have a single role within False
an organization: collecting and reporting costs to
management.
2. Financial accounting reports are general-purpose True
and intended for external users.

3. Managerial accounting reports are special- True

purpose and issued as frequently as needed.

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Do It! 1: Managerial Accounting (2 of 2)
Indicate whether the following statements are true or false.
4. Managers’ activities and responsibilities can be False
classified into three broad functions: cost
accounting, budgeting, and internal control.
5. Managerial accounting reports must now False
comply with generally accepted accounting
principles (GAAP).

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Managerial Cost Concepts
LEARNING OBJECTIVE 2
Describe the classes of manufacturing costs and the
differences between product and period costs.
In order for managers to plan, direct and control effectively, they
need good information. An important type of information pertains
to COST.
Managers should ask questions such as the following.
1. What costs are involved in making a product or providing a
service?
2. If we decrease production volume, will costs decrease?
3. What impact will automation have on total costs?
4. How can we best control costs?

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Managerial Costs (1 of 5)
Activities and processes that convert raw materials into
finished goods. Also called as Manufacturing costs.

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Managerial Costs (2 of 5)
Direct Materials
Raw Materials
• Basic materials and parts used in
manufacturing process
• Raw materials that can be
physically and directly associated
with finished product during
manufacturing process are direct
materials

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 Examples of Direct Material
1. Flour in the baking of bread
2. Syrup in bottling of soft drinks
3. Steel in making of automobiles

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Managerial Costs (3 of 5)
Direct Materials
Indirect Materials have one of two characteristics
1. Not physically part of finished product (eg. polish done
for finishing touch)
2. Are impractical to trace to finished product because
their association with finished product is too small in
terms of cost
Considered part of manufacturing overhead
Meaning companies account for indirect
materials as part of manufacturing overhead.

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Managerial Costs (4 of 5)
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 finished product or
• which is impractical to trace costs to goods produced.
• Classified as manufacturing overhead

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 Examples of Direct Labour
1. Bottlers at Coca cola
2. Bakers at a bakery

Examples of Indirect Labour

3. Factory maintenance people
4. Factory supervisors
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Managerial Costs (5 of 5)
Manufacturing Overhead
• Costs indirectly associated with
manufacturing the finished product
• All manufacturing costs except
direct materials and direct labor
• Also called factory overhead,
indirect manufacturing costs, or
burden
• Examples can be: depreciation on
building, insurance, taxes,
maintenance on factory facilities,
indirect labour. Copyright ©2018 John Wiley & Sons, Inc. 20
LO 2
One study of manufactured goods found
the following magnitudes of 3 different
product costs as percentage of total
product cost:

• Direct materials: 54%

• Direct labour: 13%
• Manufacturing overheads: 33% (most
difficult to allocate to products)
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Product Versus Period Costs (1 of 3)
Product Costs
• Components:
o Direct materials
o Direct labor
o Manufacturing overhead
• As name suggests, product costs are costs which are
necessary and integral part of producing the finished
product.
• Companies record product costs, when incurred, in
“inventory” account
•O 2Not an expense (CCopyright
L OGS) until
©2018 goods
John Wiley & Sons, Inc. are sold 22
Product Versus Period Costs (2 of 3)
Period Costs
• Period costs are costs that are matched with the revenue
of a specific time period rather than included as part of
the cost of a salable product.
• Charged to expense as incurred
• They are Non-manufacturing costs
• Includes all selling and administrative expenses

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Product Versus Period Costs (3 of 3)

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Illustration of Cost Concepts (1 of 3)
Illustration: Suppose you started your own snowboard factory,
Terrain Park Boards. Here are some of the costs that your
snowboard factory would incur. Assign the following costs:

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Illustration of Cost Concepts (2 of 3)

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Illustration of Cost Concepts (3 of 3)
If Terrain Park Boards produces 10,000 snowboards the
first year, what would be the total manufacturing costs?
What will be the cost per unit?

Cost Number and Item Manufacturing Cost

1. Material cost ($30 × 10,000) $300,000
2. Labor cost ($40 × 10,000) 400,000
3. Depreciation on factory equipment 25,000
4. Property taxes on factory building 6,000
7. Maintenance salaries (factory facilities) 45,000
8. Salary of plant manager 70,000
$846,000 double underline
Total manufacturing costs

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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 • Factory lubricants
• Handlebars tires on the wheels • Factory manager salary
• Factory maintenance
employees salary
Advertising expenditures and salary of accountant are period
costs.
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Manufacturing Costs in Financial Statements

LEARNING OBJECTIVE 3
Demonstrate how to compute cost of goods
manufactured and prepare financial statements for a
manufacturer.

Financial statements of a manufacturer and merchandiser

are very similar. Difference occurs in COGS section of
Income Statement.

Income Statement
Under a periodic inventory system, the income
statements of a merchandiser and a manufacturer differ in
the cost of goods sold section.
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Income Statement (1 of 2)

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Income Statement (2 of 2)
Cost of goods sold sections of merchandising and
manufacturing income statements

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COST OF GOODS MANUFACTURED
How do companies determine the cost of goods manufactured?
Remember, partially completed units are called as beginning work
in process inventory.

The costs company assigns to beginning work in process inventory

are based on the manufacturing costs incurred in the prior period.
So there are essentially 2 types of costs:
1. Cost incurred to complete work in process in beginning of year
2. Manufacturing costs incurred for production of new orders.
The sum of these 2 is the total cost of work in process for the year.
The ending work in process inventory is subtracted from the total
cost of work in process to get cost of goods manufactured.
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Cost of Goods Manufactured (1 of 2)
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.

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Cost of Goods Manufactured (2 of 2)

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Balance Sheet (1 of 2)
Inventory accounts of a manufacturer – three
inventory accounts
• Raw Materials Inventory: Shows the cost of raw
materials on hand
• Work in Process Inventory: Shows the cost applicable
to units that have been started into production but are
only partially completed
• Finished Goods Inventory: Shows the cost of
completed goods on hand
The balance sheet for a merchandising company shows
just one category of inventory.

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Balance Sheet (2 of 2)

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Do It! 3: Cost of Goods
Manufactured (1 of 2)
The following information is available for Keystone Company.
blank blank March 1 March 31
Raw materials inventory blank $12,000 $10,000
Work in process inventory blank 2,500 4,000
Materials purchased in March $90,000 blank blank
Direct labor in March 75,000 blank blank
Manufacturing overhead in March 220,000 blank blank

Prepare the cost of goods manufactured schedule for the

month of March 2020.

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Do It! 3: Cost of Goods
Manufactured (2 of 2)

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Managerial Accounting Today

LEARNING OBJECTIVE 4

Discuss trends in managerial accounting.

Service Industries
• Much of 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
• Most techniques learned for manufacturing firms are
applicable to service companies

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Focus on the Value Chain (1 of 4)
Refers to all business processes associated with providing
a product or service
For a manufacturing firm these include the following:

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Focus on the Value Chain (2 of 4)
Many significant business innovations occur because of a
keen focus on value chain. HOW?

Just-In-Time (JIT) Inventory Method

• System in which goods are manufactured or purchased
just in time for sale. It lowers the invesntory levels and
related costs.
Total Quality Management (TQM)
• Reduce defects in finished products, with goal of zero
defects
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Focus on the Value Chain (3 of 4)
Theory of Constraints
• Involves identification of Constraints (“bottlenecks”)
that limit company’s potential profitability
• A specific approach to identify and manage these
constraints in order to achieve company goals
Enterprise Resource Planning (ERP)
• Technology’s role in focus on value chain. Software
programs (SAP) designed to manage all major business
processes. They provide comprehensive, integrated and
centralized source of information to manage business
processes.
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Focus on the Value Chain (4 of 4)
Activity-Based Costing (ABC)
• Because of factory automation, overhead costs have
increased.
• Allocation of this overhead cost to specific products is
important.
• ABC helps to allocate overhead based on each product’s
use of activities in making the product
• Results in more accurate product costing and scrutiny of
all activities in value chain

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Balanced Scorecard
• Evaluates operations in an integrated fashion
• Uses both financial and non-financial measures
• Links performance to overall company objectives

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Business Ethics (1 of 2)
• All employees are expected to act ethically
• Many organizations have codes of business ethics
Creating Proper Incentives
• Systems and controls sometimes create incentives for
managers to take unethical actions
• Controls need to be effective and realistic

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Business Ethics (2 of 2)
Code of Ethical Standards
Sarbanes-Oxley Act (SOX)
• Clarifies management’s responsibilities
• Requires certifications by CEO and CFO
• Selection criteria for Board of Directors and Audit
Committee
• Substantially increased penalties for misconduct

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Corporate Social Responsibility
• Considers a company’s efforts to employ sustainable
business practices
• Sometimes referred to as triple bottom line because it
evaluates a company’s performance with regard to
people, planet, and profit
• Recent reports indicate that over 50% of the 500 largest
U.S. companies provide sustainability reports

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Do It! 4: Trends in Managerial
Accounting (1 of 3)
Match the descriptions that follow with the corresponding terms.
Terms:
a. Activity-based costing
b. Balanced scorecard
c. Corporate social responsibility
d. Just-in-time (JIT) inventory
e. Total quality management (TQM)
f. Statement of Ethical Professional Practice
g. Value chain

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Do It! 4: Trends in Managerial
Accounting (2 of 3)
1. All activities associated with providing a product or g
performing service.
2. A method of allocating overhead based on each product’s a
use of activities in making the product.
3. Systems implemented to reduce defects in finished products e
with the goal of achieving zero defects.
4. A performance-measurement approach that uses both
financial and nonfinancial measures, tied to company b
objectives, to evaluate a company’s operations in an
integrated fashion.
5. Inventory system in which goods are manufactured or
purchased just as they are needed for use. d

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Do It! 4: Trends in Managerial
Accounting (3 of 3)
6. A company’s efforts to employ sustainable business c
practices with regards to its employees, society, and
the environment.

7. A code of ethical standards developed by the Institute of f

Management Accountants.

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Copyright
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Copyright ©2018 John Wiley & Sons, Inc. 51