CH 11

Survey of Accounting
Second Edition
Kimmel ● Weygandt
Chapter 11
Managerial Accounting
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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 ©2020 John Wiley & Son, Inc. 2
Learning Objective 1
Identify the Features of Managerial
Accounting and the Functions of
Management
LO 1 Copyright ©2020 John Wiley & Sons, Inc. 3

Managerial Accounting Basics
Provides economic and financial information for
managers and other internal users.
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.
LO 1 Copyright ©2020 John Wiley & Son, Inc. 4

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.
Purpose of Reports General-purpose. Special-purpose for
specific decisions.
Content of Reports Pertains to business as a whole. Pertains to subunits of the
Highly aggregated (condensed). business.
Limited to double-entry Very detailed.
accounting and cost data. Extends beyond accrual
Generally accepted accounting to any relevant data.
accounting principles. Evaluated based on relevance to
decisions.
Verification Process Audited by CPA. No independent audits.

Management Functions
Planning Directing Controlling
• Maximize short-term • Coordinate diverse • Keeping activities on
profit and market activities and human track
share resources
• Determine whether
• Commitment to • Implement planned goals are met
environmental objectives
• Decide changes
protection
• Provide incentives to needed to get back
• Contribute to social motivate employees on track
programs
• Selecting executives, • May use an informal
• Add value to the appointing managers or formal system of
business and supervisors, and evaluations
hiring and training
employees
Organizational Stockholders
Structure Organization charts show

the interrelationships of
Board of activities and the
Directors delegation of authority
and responsibility within
Chief Executive the company.
Officer and
President
General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources
Treasurer Controller

DO IT! 1: Managerial Accounting
Indicate whether the following statements are true or false.
1. Managerial accountants have a single role within an 1. False.
organization: collecting and reporting costs to
management.
2. Financial accounting reports are general-purpose and 2. True.
intended for external users.
3. Managerial accounting reports are special-purpose and 3. True.
issued as frequently as needed.
4. Managers’ activities and responsibilities can be classified 4. False.
into three broad functions: cost accounting, budgeting,
and internal control.
5. Managerial accounting reports must now comply with 5. False.
generally accepted accounting principles (GAAP).

Describe the Classes of Manufacturing
Costs and the Differences Between
Product and Period Costs

Managerial Cost Concepts
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?

Manufacturing Costs
Activities and processes that convert raw materials
into finished goods.

Manufacturing Costs
Direct Materials
Raw Materials
Basic materials and parts used in manufacturing
process.
Raw materials that can be physically and directly
associated with finished are direct materials.
Examples include flour in the baking of bread, syrup
in the bottling of soft drinks, and steel in the
making of automobiles.
Manufacturing Costs
Indirect Materials are raw materials that cannot be
easily associated with the finished product.
Two characteristics:
1. Not physically part of finished product.
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.

Manufacturing Costs
Direct Labor
Work of factory employees that
can be physically and directly associated with
converting raw materials into finished goods.
Indirect Labor
a. Work of factory employees that has no association
with finished product or
b. which is impractical to trace costs to goods produced.

Manufacturing Costs
Manufacturing Overhead
a. Costs indirectly associated with manufacturing the
finished product.
b. All manufacturing costs except direct materials and
direct labor.
c. Includes indirect materials, indirect labor,
depreciation on factory buildings and machines, and
insurance, taxes, and maintenance on factory
facilities.

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

Period Costs
a. Charged to expense as incurred.
b. Nonmanufacturing costs.
c. Includes all selling and administrative expenses.

All Costs
Product Costs Period Costs

Manufacturing Costs Nonmanufacturing Costs
Direct Materials Selling Expenses
Direct Labor Administrative Expenses
Manufacturing Overhead
Indirect materials
Indirect labor
Other indirect costs

Illustration of Cost Concepts
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:
Product Costs
Direct Direct Manufacturing Period
Cost Item Materials Labor Overhead Costs
1. Material cost ($30 per board)
2. Labor costs ($40 per board)
3. Depreciation on factory
equipment ($25,000 per year)
4. Property taxes on factory
building ($6,000 per year)

Product Costs
1. Material cost ($30 per board) X
2. Labor costs ($40 per board)

Product Costs
2. Labor costs ($40 per board) X

Product Costs
equipment ($25,000 per year) X

Product Costs
equipment ($25,000 per year) X
building ($6,000 per year) X

ILLUSTRATION 19.4
Illustration of Cost Concepts Assignment of costs to

cost categories
Product Costs
5. Advertising costs ($60,000 per
year)
6. Sales commissions ($20 per
board)
7. Maintenance salaries (factory
facilities, $45,000 per year)
8. Salary of plant manager
($70,000 per year)
9. Cost of shipping boards ($8 per
board)

ILLUSTRATION 19.4

cost categories
Product Costs
year) X
board)
($70,000 per year)
board)

ILLUSTRATION 19.4

cost categories
Product Costs
year) X
board) X
($70,000 per year)
board)

ILLUSTRATION 19.4

cost categories
Product Costs
year) X
board) X
facilities, $45,000 per year) X
($70,000 per year)
board)

ILLUSTRATION 19.4

cost categories
Product Costs
year) X
board) X
($70,000 per year) X
board)

Product Costs
year) X
board) X
($70,000 per year) X
board) X

If Terrain Park Boards produces 10,000 snowboards the first year,
the total manufacturing costs would be $846,000.
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
Total manufacturing costs $846,000

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 • Factory lubricants
put tires on the
• Handlebars • Factory manager
wheels
salary
Advertising expenditures and salary of • Factory
accountant are period costs. maintenance
employees salary
Demonstrate How to Compute Cost of
Goods Manufactured and Prepare
Financial Statements for a
Manufacturer

Manufacturing Costs in Financial
Statements
Income Statement
Under a periodic inventory system, the income
statements of a merchandiser and a manufacturer differ
in the cost of goods sold section.
“COGS”
Income Statement
Merchandiser
Beginning Cost of Goods Ending

+ - =
Inventory Purchased Inventory
Cost of
Goods Sold
Manufacturer
Beginning Ending
Cost of Goods
Finished Goods + - Finished Goods =
Manufactured
Inventory Inventory

Income Statement
Cost of goods sold sections of merchandising and
manufacturing income statements.
Merchandising Company Manufacturing Company
Income Statement (partial) Income Statement (partial)
For the Year Ended December 31, 2022 For the Year Ended December 31, 2022
Cost of goods sold Cost of goods sold
Inventory, Jan. 1 $ 70,000 Finished goods inventory, Jan. 1 $ 90,000
Cost of goods purchased 650,000 Cost of goods manufactured 370,000
(see Illustration on slide 37)
Cost of goods available for sale 720,000 Cost of goods available for sale 460,000
Less: Inventory, Dec. 31 400,000 Less: Finished goods inventory, Dec. 31 80,000
Cost of goods sold $320,000 Cost of goods sold $380,000

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.
Beginning Total Total Cost of

Work in Process + Manufacturing = Work in Process
Inventory Costs
Total Cost of Ending Cost of Goods

Work in Process - Work in Process = Manufactured
Inventory

Current Designs
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2022
Work in process, January 1 $ 18,400
Direct materials
Raw materials inventory, January 1 $ 16,700
Raw materials purchases 152,500
Total raw materials available for use 169,200
Less: Raw materials inventory, December 31 22,800
Direct materials used $146,400
Direct labor 175,600
Manufacturing overhead
Indirect labor 14,300
Factory repairs 12,600
Factory utilities 10,100
Factory depreciation 9,440
Factory insurance 8,360
Total manufacturing overhead 54,800
Total manufacturing costs 376,800
Total cost of work in process 395,200
Less: Work in process, December 31 25,200
Cost of goods manufactured $370,000

Balance Sheet
Inventory accounts of a manufacturer
The balance sheet for a merchandising company shows just

one category of inventory.
Balance Sheet
Merchandising Company Manufacturing Company
Balance Sheet Balance Sheet
December 31, 2022 December 31, 2022
Current assets Current assets
Cash $100,000 Cash $180,000
Accounts receivable (net) 210,000 Accounts receivable (net) 210,000
Inventory 400,000 Inventory
Prepaid expenses 22,000 Finished goods $80,000
Total current assets $732,000 Work in process 25,200
Raw materials 22,800 128,000

Prepaid expenses 18,000
Total current assets $536,000

DO IT! 3: Cost of Goods Manufactured
The following information is available for Keystone Company.
March 1 March 31
Raw materials inventory $12,000
$10,000
Work in process inventory 2,500
4,000
Materials purchased in March $ 90,000
Direct labor in March 75,000
Manufacturing overhead in March 220,000
Prepare the cost of goods manufactured schedule for the month of
LO 3
March 2022. Copyright ©2020 John Wiley & Son, Inc. 40
Keystone Company
Cost of Goods Manufactured Schedule
For the Month Ended March 31, 2022
Work in process, March 1 $ 2,500
Direct materials
Raw materials, March 1 $ 12,000
Raw materials purchases 90,000
Total raw materials available for use 102,000
Less: Raw materials, March 31 10,000
Direct materials used $ 92,000
Direct labor 75,000
Manufacturing overhead 220,000
Total manufacturing costs 387,000
Total cost of work in process 389,500
Less: Work in process, March 31 4,000
Cost of goods manufactured $385,500

Discuss Trends in Managerial
Accounting

Managerial Accounting Today
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.
Airlines, marketing agencies, cable companies, and
governmental agencies are just a few examples of
service companies.
Focus on the Value Chain
Refers to all business processes associated with
providing a product or service.
For a manufacturing firm these include the following:
Research & Acquisition of Production Sales and Delivery Customer

development raw materials marketing relations and
and product subsequent
design services

Just-In-Time (JIT) Inventory Method
System in which goods are manufactured or
purchased just in time for sale.
Total Quality Management (TQM)
Reduce defects in finished products, with goal of
zero defects.

Theory of Constraints
Constraints (“bottlenecks” ) limit 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.

Activity-Based Costing (ABC)
Allocates overhead based on use of activities.
Results in more accurate product costing and
scrutiny of all activities in value chain.

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

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.

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.

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.

DO IT! 4: Trends in Managerial Accounting
Match the descriptions that follow with the corresponding terms.
g All activities associated with

1. ______ Terms:
providing a product or performing a. Activity-based costing
b. Balanced scorecard
service. c. Corporate social responsibility
d. Just-in-time (JIT) inventory
a A method of allocating
2. ______ e. Total quality management (TQM)
overhead based on each product’s f. Statement of Ethical Professional
use of activities in making the Practice
g. Value chain
product.
3. ______
e Systems implemented to reduce defects in finished
products with the goal of achieving zero defects.

b A performance-measurement
4. ______ Terms:
approach that uses both financial a. Activity-based costing
and nonfinancial measures, tied to c. Corporate social responsibility
company objectives, to evaluate a d. Just-in-time (JIT) inventory
company’s operations in an e. Total quality management (TQM)
f. Statement of Ethical Professional
integrated fashion. Practice
g. Value chain
d Inventory system in which
5. ______
goods are manufactured or purchased
just as they are needed for use.

c
6. ______ A company’s efforts to Terms:
employ sustainable business a. Activity-based costing
practices with regards to its c. Corporate social responsibility
employees, society, and the d. Just-in-time (JIT) inventory
environment. e. Total quality management (TQM)
f. Statement of Ethical Professional
Practice
f
7. ______ A code of ethical standards g. Value chain
developed by the Institute of
Management Accountants.

Copyright
Copyright © 2020 John Wiley & Sons, Inc.
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from the use of the information contained herein.
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Survey of Accounting

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 3

LO 1 Copyright ©2020 John Wiley & Son, Inc. 4

Verification Process Audited by CPA. No independent audits.

LO 1 Copyright ©2020 John Wiley & Son, Inc. 5

Structure Organization charts show

General Vice President Vice President

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Considered part of manufacturing overhead.

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Product Costs Period Costs

Direct Labor Administrative Expenses

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Illustration of Cost Concepts Assignment of costs to

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Illustration of Cost Concepts Assignment of costs to

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Illustration of Cost Concepts Assignment of costs to

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Illustration of Cost Concepts Assignment of costs to

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Illustration of Cost Concepts Assignment of costs to

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Cost Number and Item Manufacturing Cost

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Direct Materials Direct Labor Overhead

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Beginning Cost of Goods Ending

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Beginning Total Total Cost of

Total Cost of Ending Cost of Goods

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The balance sheet for a merchandising company shows just

Raw materials 22,800 128,000

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Research & Acquisition of Production Sales and Delivery Customer

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Creating Proper Incentives

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