19-1
CHAPTER
19
Managerial
Accounting
19-3
Managerial accounting, a field of accounting that provides economic and financial information for managers and other internal users. Activities include:
Managerial Accounting Basics
1. Explaining manufacturing and nonmanufacturing costs
(Chapter 19).
2. Computing cost of providing a service or manufacturing a product (Chapters 20 and 21).
3. Determining the behavior of costs and expenses as activity levels change and analyzing cost–volume–profit relationships within a company (Chapter 22).
Managerial accounting, a field of accounting that provides economic and financial information for managers and other internal users. Activities include:
Managerial Accounting Basics
4. Assisting management in profit planning and formalizing these plans in the form of budgets
5. Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard costs
6. Accumulating and presenting data for management decision making
19-5
Managerial Accounting Basics
Comparing Managerial and Financial
Accounting
Illustration 19-1
Managerial accounting:
a. Pertains to the entity as a whole and is highly aggregated.
b. Places emphasis on special-purpose information. c. Is limited to cost data.
d. Is governed by generally accepted accounting principles.
Question
19-7
Managerial Accounting Basics
SO 2 Identify the three broad functions of management.
Management Functions
Three broad functions: 1. Planning.
2. Directing. 3. Controlling.
Requires managers to look ahead and to establish objectives.
maximizing short-term profits and market share,
maintaining a commitment to
environmental protection, and
Managerial Accounting Basics
Management Functions
Three broad functions: 1. Planning.
2. Directing. 3. Controlling.
Involves coordinating diverse activities and human resources to produce a smooth-running operation. This function relates to
implementing planned objectives,
providing necessary incentives to motivate employees,
selecting executives,
appointing managers and
19-9
Managerial Accounting Basics
SO 2 Identify the three broad functions of management.
Management Functions
Three broad functions: 1. Planning.
2. Directing. 3. Controlling.
Process of keeping the company’s activities on track.
Managers determine whether
planned goals are being met.
When there are deviations from
targeted objectives, managers must decide what changes are needed to get back on track.
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.
Managerial Accounting Basics
19-11
Managerial Accounting Basics
SO 2
Organizational
Structure
Business scandals caused massive investment losses and employee layoffs.
Corporate fraud has increased 13% in last 5 years.
Employee fraud – 60% of all fraud.
Intentional misstatement of financial reports.
► Enron, Global; Crossing, WorldCom.
► Most costly to companies.
Business Ethics
19-13
Systems to monitor and evaluate employees may produce incentives for unethical actions.
Employees may feel that they must succeed no matter what.
Ineffective and unrealistic controls may result in declining product quality.
Managerial Accounting Basics
Business Ethics
Creating Proper Incentives
Sarbanes-Oxley Act of 2002
► Clarifies management’s responsibilities.
► Certifications by CEO and CFO.
► Selection criteria for Board of Directors and Audit Committee.
► Substantially increased penalties for misconduct.
IMA Statement of Ethical Professional Practices
Managerial Accounting Basics
Business Ethics
19-15 SO 3 Define the three classes of manufacturing costs.
Managerial Cost Concepts
Manufacturing Costs
Activities and processes that convert raw materials into finished goods.
Manufacturing Costs
Direct Materials
Raw materials purchased that will be converted into finished
product.
Direct materials can be physically and directly associated with the finished product.
Indirect materials:
1. Do not become part of the finished product, or 2. Cannot be traced directly to the product.
19-17 SO 3 Define the three classes of manufacturing costs.
Manufacturing Costs
Direct Labor
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
Manufacturing Costs
Manufacturing Overhead
Costs that are indirectly associated with manufacturing the product.
Includes all manufacturing costs except direct materials and direct labor.
19-19
Includes only indirect costs related to manufacturing
Does NOT include costs for selling, general, or administrative functions
Examples:
Indirect materials
Become part of finished product, but cannot be conveniently or cost-effectively traced
Indirect labor
Manufacturing wages not easily traced to products
Plant managers & maintenance
Other costs related to the manufacturing facility and plant assets
Repairs & maintenance
Utilities
Rent & insurance
Property taxes
Depreciation
19-21
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.
Manufacturing Costs
Question
Product Costs
Components: direct material cost, direct labor cost, and manufacturing overhead.
Necessary and integral part of producing the product.
Recorded as inventory when incurred.
Not an expense until the finished goods inventory is sold, then record as cost of goods sold.
Manufacturing Costs
19-23
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.
Includes all selling and administrative expenses.
Manufacturing Costs
Product versus Period Costs
Product versus Period Costs
19-25
Slide 25
Product versus Period Costs
Product costs include (in the case of manufactured goods) direct materials, direct labor, and manufacturing overhead. Period costs include all selling and administrative costs.
Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead Work in Process Inventory Direct Labor
Income
Statement
Direct MaterialsManufacturing Costs
Balance
Sheet
Period Expenses Selling and AdministrativeNonmanufacturing Costs
Expensed During
Period Incurred
19-27 SO 5 Explain the difference between a merchandising and a manufacturing income statement.
Manufacturing Costs
Income Statement
Manufacturing Costs
Income Statement
Illustration 19-6Cost of goods sold sections of merchandising and manufacturing income statements19-29 SO 6 Indicate how cost of goods manufactured is determined. Work in Process – partially completed units of product.
Total Manufacturing Costs – sum of direct material costs, direct
labor costs, and manufacturing overhead; all incurred in the current period.
Illustration 19-7
Manufacturing Costs
Manufacturing Costs
Illustration 19-8 Cost of goods manufactured schedule
19-31 SO 7 Explain the difference between a merchandising and a manufacturing balance sheet.
Manufacturing Costs
Balance Sheet
Illustration 19-9Inventory accounts for a manufacturer
Manufacturing Costs
Balance Sheet
Illustration 19-10Current assets sections of merchandising and19-33
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.
Trend is expected to continue in the future.
Most of the techniques learned for manufacturing firms are applicable to service companies.
Manufacturing Costs
Product Costing for Service Industries
SO 7 Explain the difference between a merchandising and a manufacturing balance sheet.
All activities associated with providing a product or service.
Managerial Accounting Today
The Value Chain
Illustration 19-13
19-35 SO 8 Identify trends in management accounting.
Enterprise Resource Planning (ERP) systems provide a
comprehensive, centralized, integrated source of information that companies can use to manage all major business processes, from purchasing to manufacturing to human resources.
Computer-Integrated Manufacturing (CIM) allows companies to manufacture products that are untouched by human hands.
Business-to-Business (B2B) e-commerce on the Internet.
Managerial Accounting Today
Goods are manufactured or purchased just in time for use.
Managerial Accounting Today
Just-In-Time Inventory Methods
JIT inventory system requires increased emphasis on product quality.
Companies have installed total quality management (TQM) systems to reduce defects in finished products.
Quality
19-37 SO 8 Identify trends in management accounting.
Allocates overhead based on use of activities.
Results in more accurate product costing and scrutiny of all activities in the value chain.
Managerial Accounting Today
Activity-Based Costing
A specific approach used to identify and manage constraints in order to achieve the company’s goals.
Theory of Constraints
Evaluates operations in an integrated fashion.
Uses both financial and non-financial measures.
Links performance measures to overall company objectives.
Managerial Accounting Today
19-39
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.
SO 8 Identify trends in management accounting.
