Managerial Accounting

Ninth Edition

Weygandt Kimmel Mitchell

Chapter 1
Managerial Accounting
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Copyright ©2021 John Wiley & Sons, Inc.

 CHAPTER 1
Managerial Accounting
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.

1-2
 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.

Comparing Managerial and Financial Accounting

Each field deals with economic events of a business
Both require that economic events be quantified and
communicated to interested parties.

1-3 LO 1
 Comparing Managerial and Financial
Accounting

ILLUSTRATION 1.1
Differences between financial and managerial accounting

1-4 LO 1
 Management Functions

Planning Directing Controlling

 Maximize short-  Coordinate diverse  Keeping activities

term profit and activities and on track.
market share. human resources.  Determine whether
 Commit to  Implement planned goals are met.
environmental objectives.  Decide changes
protection and  Provide incentives needed to get back
social programs. to motivate on track.
 Add value to the employees  May use an
business.  Hire and train informal or formal
employees. system of
 Produce a smooth- evaluations.

1-5
running operation.
LO 1
 Organizational Organization charts
Structure show the
interrelationships of
activities and the
delegation of authority
and responsibility within
the company.

ILLUSTRATION 1.2
A typical corporate
organization chart

1-6 LO 1
 Managerial Cost Concepts

LEARNING OBJECTIVE 2
Describe the classes of manufacturing costs and the differences between product
and period 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?

1-7 LO 2
 Manufacturing Costs – DM, DL, MOH

Activities and processes that convert raw materials into

finished goods (manufactured goods sold to a customer).

1-8 LO 2
 Manufacturing Costs
Raw Materials – can be DM or IM
Basic materials and parts used in manufacturing process.

Direct Materials (DM)

Raw materials that can be physically and directly associated with
the finished product during the manufacturing process.

Indirect Materials (IM) – part of manufacturing overhead

(MOH)

1. Not physically part of the finished product or

2. they are an impractical to trace the cost to the finished

product because it is too small.

1-9 LO 2
 Manufacturing Costs
Factory Labor – can be DL or IL

Direct Labor (DL)

Work of factory employees that can be physically and directly
associated with converting raw materials into finished goods.

Indirect Labor (IL) – part of manufacturing overhead (MOH)

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.
Examples – wages of factory maintenance, factory supervisors,
factory janitors, etc.
1-10 LO 2
 Manufacturing Costs

Manufacturing Overhead (MOH)

 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.

1-11 LO 2
 Product versus Period Costs
Product Costs – Manufacturing Costs
 Direct materials
 Components:  Direct labor
 Manufacturing overhead

 Costs that are an integral part of producing the

product.
 Recorded in an “inventory” account.
 Not an expense (COGS) until the finished goods are
sold.

1-12 LO 2
 Product versus Period Costs

Period Costs – NOT manufacturing costs

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

Summary – Product versus Period Costs – Important!

Product costs are part of inventory on the B/S. Expensed to
COGS when the finished good is sold.
Period costs are recorded to expense as incurred. Not related
to manufacturing process.

1-13 LO 2
 Product versus Period Costs – Important!
ILLUSTRATION 1.3
Product versus period costs

1-14 LO 2
 Product versus Period Costs

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:
Terrian Park Boards

ILLUSTRATION 1.4
Assignment of costs to cost categories
1-15 LO 2
 Product versus Period Costs ILLUSTRATION 1.4
Assignment of costs to
cost categories

1-16 LO 2
 Product versus Period Costs
If Terrain Park Boards produces 10,000 snowboards the first year,
what is the total manufacturing cost?
What is the cost per unit?

ILLUSTRATION 1.5
Computation of total manufacturing costs ($846,000/10,000 snowboards
= $84.60 per snowboard)
1-17 LO 2
 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  Lubricants
tires on the wheels.
 Handlebars.  Salary of factory
manager.
Advertising expenditures and salary  Salary of factory
of accountant are period costs. maintenance
employees.
1-18 LO 2
 Income Statement
LEARNING OBJECTIVE 3
Demonstrate how to compute cost of goods manufactured and prepare financial
statements for a manufacturer.

Under a periodic inventory system,** the income statements of a

merchandiser and a manufacturer differ in the cost of goods sold
(COGS) section.

Merchandiser – goods purchased called Cost of Goods Purchased

Manufacturer – goods made called Cost of Goods Manufactured

**Periodic Inventory System – Subtract the inventory on hand at the end of the
period from total cost of goods available for sale to determine COGS

1-19 LO 3
 Income Statement

Expanded ‘Cost of Goods Sold’ sections of merchandising and

manufacturing income statements

ILLUSTRATION 1.7
Cost of goods sold sections of merchandising and
manufacturing Income statements

1-20 LO 3
Calculating Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) is the first of three manufacturing cost
flow formulas under a periodic inventory system:
1. Cost of Goods Sold (COGS)
2. Cost of Goods Manufactured (COGM)
3. Direct Materials Used (DM Used)

COGS Formula
Beginning FG Inventory $90,000
+ Cost of Goods Manufactured (COGM) $370,000
= Cost of Goods Available for Sale (COGAFS) $460,000
- Ending FG Inventory -$80,000
COGS $380,000

1-21 Copyright ©2020 John Wiley & Sons, Inc. 21

Calculating Cost of Goods Manufactured (COGM)
Cost of Goods Manufactured (COGM) is the second of three
manufacturing cost flow formulas under a periodic inventory system:
1. Cost of Goods Sold (COGS)
2. Cost of Goods Manufactured (COGM)
3. Direct Materials Used (DM Used)
COGM Formula
Total Manufacturing Costs –
sum of direct material costs, Beginning WIP Inventory $18,400
direct labor costs, and + Total Manufacturing Costs
manufacturing overhead for the
current period (DM + DL + DM Used $146,400
MOH).
Direct Labor $175,600
Total Work in Process – sum
Manufacturing OH $54,800
of cost of beginning work in Total WIP $395,200
process and total
manufacturing costs for the -Ending WIP Inventory -$25,200
current period. COGM** $370,000
** COGM flows into the COGS formula
1-22 Copyright ©2020 John Wiley & Sons, Inc. 22
 Calculating Direct Materials Used (DM Used)
Direct Materials Used (DM Used) is the third of three manufacturing
cost flow formulas under a periodic inventory system. Sometimes
this value will be given, and if not, we solve for it using the following
formula:
1. Cost of Goods Sold (COGS)
2. Cost of Goods Manufactured (COGM)
3. Direct Materials Used (DM Used)

DM Used Formula
Beginning RM Inventory $16,700
+ RM Purchases $152,500
= RM Available $169,200
- Ending RM Inventory -$22,800
DM Used** $146,400
** DM Used flows into the COGM formula
1-23 Copyright ©2020 John Wiley & Sons, Inc. 23
Cost of Goods Manufactured Example
When calculating Cost of Goods Manufactured (COGM), it might be
easier to break it out into 2 small calculations instead of 1 from the
prior slide. Calculate ‘DM Used’ first and then calculate ‘COGM’.

Direct Materials Used

Beginning RM Inventory $16,700
+ RM Purchases $152,500 COGM
= RM Available $169,200 Beginning WIP Inventory $18,400
- Ending RM Inventory -$22,800 + Total Manufacturing Costs
DM Used $146,400 DM Used $146,400
Direct Labor $175,600
Manufacturing OH $54,800
Total WIP $395,200
-Ending WIP Inventory -$25,200
COGM $370,000

1-24 Copyright ©2020 John Wiley & Sons, Inc. 24

 Balance Sheet

Inventory accounts for a manufacturer ILLUSTRATION 1.10

The balance sheet for a merchandising company shows just

one category of inventory.

1-25 LO 3
 Balance Sheet

Current assets sections of merchandising and manufacturing

balance sheets

ILLUSTRATION 1.11
Current assets sections of merchandising and
manufacturing balance sheets

1-26 LO 3
 Microsoft – Inventories (from 2020 Form 10K)

NOTE 6 — INVENTORIES
The components of inventories were as follows:

(In millions)

2020 2019

Raw materials $ 700 $ 399

Work in process 83 53
Finished goods 1,112 1,611

Total $ 1,895 $ 2,063

1-27 Copyright ©2020 John Wiley & Sons, Inc. 27

 FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12 INVENTORIES (from 2019 Form 10K)

All inventories are stated at the lower of cost or net realizable value. Cost of our
inventories is determined by costing methods that approximate a first-in, first-out
(“FIFO”) basis. Inventories at December 31 were as follows (in millions):
2018 2019
Raw materials, work-in-process, and supplies $4,536 $4,402
Finished products 6,684 6,384
Total inventories $11,220 $10,786

1-28 Copyright ©2020 John Wiley & Sons, Inc. 28

DO IT! 3 Calculate DM Used, COGM & COGS
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
Finished goods inventory 15,000
18,000
Materials purchased in March $ 90,000
Direct labor in March 75,000
Manufacturing overhead in March 220,000
What was Keystone’s DM Used, COGM and COGS for the month of March?

1-29 LO 3
 DO IT! 3 Calculate DM Used, COGM & COGS
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
Finished goods inventory 15,000
18,000
Materials purchased in March $ 90,000
Direct labor in March 75,000 COGM
Direct overhead
Manufacturing Materials Used
in March Beginning WIP Inventory
220,000 $2,500
Beginning RM Inventory $12,000
+ Total Manufacturing Costs
What was Keystone’s DM Used, COGM and COGS for the month of March?
+ RM Purchases $90,000 DM Used $92,000
= RM Available $102,000 Direct Labor $75,000
- Ending RM Inventory -$10,000 Manufacturing OH $220,000
DM Used $92,000 Total WIP $389,500
-Ending WIP Inventory -$4,000
COGM COGM goes to COGS next
$385,500
1-30 LO 3
DO IT! 3 Calculate DM Used, COGM & COGS
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
Finished goods inventory 15,000
18,000
Materials purchased in March $ 90,000
Direct labor in March 75,000
Comes from
Manufacturing overhead in March 220,000 COGS
COGM
Formula on Beginning FG Inventory $15,000
What was Keystone’s DM Used, COGM and
prior slide
COGS for the month of March?
+ COGM $385,500
= COGAFS $400,500
- Ending FG Inventory -$18,000
COGS $382,500

1-31 LO 3
Copyright
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Copyright ©2021 John Wiley & Sons, Inc. 32