MODULE 1

INTRODUCTION TO
MANAGEMENT ACCOUNTING

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 Management accountability

Management
. accountability is the manager’s responsibility to
the various stakeholders of the company
Management accountability requires two forms of
accounting:-
1. Financial accounting provides financial statements that
report results of operations, financial position and cash
flows both to managers and to external stakeholders:
owners, creditors, suppliers, customers, the governments
and society.
2. Management or managerial accounting provides
information to help manager plan and control operations
as they lead the business.

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Managerial Accounting Basics

Managerial accounting is a field of accounting that

provides economic and financial information for managers
and other internal users.

Managerial accounting applies to all types of businesses.

 Corporations  Partnerships
 Proprietorships  Not-for-profit

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 Managerial Accounting Basics
Comparing Managerial and Financial
Accounting

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 Managerial Accounting Basics

Review Question
Managerial accounting:

a. Is governed by generally accepted accounting

principles.
b. Places emphasis on special-purpose information.
c. Pertains to the entity as a whole and is highly
aggregated.
d. Is limited to cost data.

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 Managerial Accounting Basics

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 smooth- evaluations.
running operation.

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 Managerial Accounting Basics

Review Question
The management of an organization performs several broad
functions. They are:

a. Planning, directing, and selling.

b. Directing, manufacturing, and controlling.
c. Planning, manufacturing, and controlling.
d. Planning, directing, and controlling.

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 Indicate whether the following statements are true or false.

1. Managerial accountants have a single role within an

False organization, collecting and reporting costs to
management.

2. Financial accounting reports are general-purpose and

True
intended for external users.

3. Managerial accounting reports are special-purpose and

True
issued as frequently as needed.

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 Managerial Accounting Basics

Business Ethics
•Business process and accounting system change.
•However the need for accountants to maintain high
ethical standards of professional conduct will never
change.
•The Institute of Management Accountants says that
ethics deals with human conduct in relation to what
is morally good and bad, right and wrong.
•It is the application of values to decision making.
•These values include honesty, fairness, responsibility,
respect and compassion
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 Managerial Accounting Basics

Business Ethics
 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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 Managerial Accounting Basics

Business Ethics
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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 Managerial Accounting Basics
IMA Code of conduct
1. Competence – maintain professional expertise by continually developing
knowledge and skills, perform professional duty accordance with
relevant laws, regulations and technical standard, provide decision
support information and recommendation that are accurate, clear,
concise and timely and recognize and communicate professional
limitations.
2. Confidentiality – keep information confidential, refrain from using the
confidential information and inform all relevant parties regarding
appropriate use of confidential information.
3. Integrity – avoid conflict of interest, refrain from engaging in conduct
that would be prejudice and abstain from engaging in or supporting
activity that might discredit the profession.
4. Credibility – communicate information fairly and objectively and
disclose all relevant information that can influence user decision
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 Manufacturing Costs

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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 Manufacturing Costs

Manufacturing Costs
Manufacturing consists of activities and processes that
convert raw materials into finished goods.

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 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.

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 Manufacturing Costs

Direct Materials
Indirect Materials
 Not physically part of the finished product or they are
an insignificant part of finished product in terms of
cost.
 Considered part of manufacturing overhead.

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 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.

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 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.

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 Manufacturing Costs

Review Question
Which of the following is not an element of manufacturing
overhead?

a. Sales manager’s salary.

b. Plant manager’s salary.
c. Factory repairman’s wages.
d. Product inspector’s salary.

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 Product Versus Period Costs
Product Costs
 Direct materials
 Components:
 Direct labor
 Manufacturing overhead
 Costs that are an integral part of producing the product.
 Recorded in “inventory” account.
 Not an expense (COGS) until the goods are sold.

Period Costs
 Charged to expense as incurred.
 Non-manufacturing costs.
 Includes all selling and administrative expenses.
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Product Versus Period Costs

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A bicycle company has these costs: tires, salaries of employees
who put tires on the wheels, factory building depreciation, wheel
nuts, spokes, salary of factory manager, handlebars, and salaries
of factory maintenance employees. Classify each cost as direct
materials, direct labor, or overhead.

Direct Materials Direct Labor Overhead

 Tires.  Salaries of  Factory depreciation.

 Spokes. employees who put  Factory manager
tires on the wheels. salary.
 Handlebars.
 Factory maintenance
employees salary.

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 Manufacturing Costs in Financial Statements

Determining the Cost of Goods Manufactured

Total Work in Process – (1) cost of beginning work in process and (2)
total manufacturing costs for the current period.
Total Manufacturing Costs – sum of direct material costs, direct labor
costs, and manufacturing overhead in the current year.
Illustration 1-6

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Indicate 24
how cost of goods manufactured is determined.
 Illustration 1-7

Illustration 1-8

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 Manufacturing Costs in Financial Statements

Any Manufacturing Company

Income Statement
For the year ended December 31, 2011
Net sales revenue $$$$$$$
Cost of goods sold:
Beginning finis he d goods inventory $$$$$$
Plus: Cos t of goods manufac ture d $$$$$
Less: Ending finis he d goods inventory ($$$$$)
Cos t of goods sold $$$$$$
Gross profit $$$$$$
Selling and administrative expense $$$$$
Operating income $$$$$$

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 Manufacturing Costs in Financial Statements

Balance Sheet
Inventory accounts for a manufacturer
Illustration 1-8

The balance sheet for a merchandising company shows just one

category of inventory.

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 Manufacturing Costs in Financial Statements

Balance Sheet
Current assets sections of merchandising and manufacturing balance
sheets Illustration 1-9

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 Manufacturing Costs in Financial Statements

Review Question
A cost of goods manufactured schedule shows beginning and
ending inventories for:
a. Raw materials and work in process only
b. Work in process only
c. Raw materials only
d. Raw materials, work in process, and finished goods

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 Manufacturing Costs in Financial Statements

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 1-10

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Manufacturing Costs in Financial Statements
Illustration 1-10

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 Managerial Accounting Today

Focus on the Value Chain

Refers to all business process associated with providing a
product or service.
For a manufacturing firm these include the following:
Illustration 1-12

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 Managerial Accounting Today

Just-In-Time Inventory Methods

 Inventory system in which goods are manufactured or
purchased just in time for sale.

Total Quality Management (TQM)

 Reduce defects in finished products, with the goal of
zero defects.

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LO 8 Identify trends in managerial accounting.
 Managerial Accounting Today

Theory of Constraints
 Constraints (“bottlenecks” ) limit the company’s potential
profitability.
 A specific approach to identify and manage these
constraints in order to achieve company goals.

Enterprise Resource Planning (ERP)

 Software programs designed to manage all major
business processes.

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LO 8 Identify trends in managerial accounting.
 Managerial Accounting Today

Activity-Based Costing (ABC)

 Allocates overhead based on use of activities.
 Results in more accurate product costing and scrutiny of
all activities in the value chain.

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LO 8 Identify trends in managerial accounting.
 Managerial Accounting Today

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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LO 8 Identify trends in managerial accounting.
 Managerial Accounting Today

Review Question
Which of the following managerial accounting techniques
attempts to allocate manufacturing overhead in a more
meaningful manner?
a. Just-in-time inventory.
b. Total-quality management.
c. Balanced scorecard.
d. Activity-based costing.

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Match the descriptions that follow with the corresponding terms.
e
1. ______ All activities associated with
providing a product or service.
a
2. ______ A method of allocating
overhead based on each product’s
use of activities in making the
product.
d
3. ______ Systems implemented to reduce defects in finished
products with the goal of achieving zero defects.

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Match the descriptions that follow with the corresponding terms.
b
4. ______ A performance-
measurement approach that uses
both financial and nonfinancial
measures, tied to company
objectives, to evaluate a
company’s operations in an
integrated fashion.
c
5. ______ Inventory system in which goods are manufactured or
purchased just as they are needed for use.

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