1. Managerial Accounting Concepts and Principles1
Managerial Accounting Concepts and Principles

2. The Difference Between Managerial and Financial Accounting
1-1
Financial accounting information is reported in statements that are useful for persons or institutions who are “outside” or external to the organization. Management also uses these financial statements in directing current operations and planning future operations.

3. 1-1
Managerial accounting information is provided to meet the specific needs of a company’s management, such as historical data and subjective estimates about future decisions.

4. Users of Accounting Information
Example of Users
1-1
Financial Accounting
Managerial Accounting
Users of Accounting Information
Shareholders
Creditors
Government Agencies
General Public
Management
Management 7

5. Planning
1-1
Planning is used by management to develop the organization’s objectives (goals) and to translate these objectives into courses of action.

6. 1-1
Strategic planning is developing long-range courses of action to achieve goals. Long-range courses of action, called strategies, can often involve periods ranging from five to ten years.

7. Directing
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Directing is the process by which managers, given their assigned level of responsibilities, run day-to-day operations.

8. Controlling
1-1
Controlling, sometimes called management by exception, consists of monitoring the operating results of implemented plans and comparing the actual results with the expected results.

9. 1-1
Comparing actual results with expected results (feedback) allows management to isolate significant departures from plans for further investigation and possible remedial action.

10. Improving
1-1
Continuous process improvement is the philosophy of continually improving employees, business processes, and products.

11. Direct and Indirect Costs
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Costs are often classified in terms of how they relate to some object or segment of operations, called a cost object. It may be a product, a sales territory, a department, or some activity. Costs are identified with cost objects as either direct costs or indirect costs.

12. Direct Materials Cost
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The cost of any material that is an integral part of the final product is classified as a direct materials cost.

13. Direct Labor Cost
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The wages of each employee who is directly involved in converting materials into the final product are classified as direct labor cost.

14. Factory Overhead Cost
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Costs, other than direct materials cost and direct labor costs, that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes also called manufacturing overhead or factory burden).

15. Heating and lighting the factory
Examples of Factory Overhead Cost
1-2
Heating and lighting the factory
Repairing and maintaining factory equipment
Property taxes
Insurance
Depreciation of factory plant and equipment

16. Prime Costs Conversion Costs
Prime Costs and Conversion Costs
1-2
Prime Costs
Factory
Overhead
Direct
Materials
Labor
Conversion Costs 29

17. Product Costs
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Product costs consist of the three elements of manufacturing cost: direct materials, direct labor, and factory overhead.

18. Direct Materials Product Costs Direct Labor Factory Overhead
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The cost of materials that are an integral part of the product.
Direct
Materials
The cost of labor directly involved in converting material into the product.
Product
Costs
Direct
Labor
Manufacturing costs other than direct materials and direct labor.
Factory
Overhead 34

19. Period costs are generally classified into two categories:
Period Costs
1-2
Period costs are generally classified into two categories:
Selling expenses are incurred in marketing the product and delivering the sold product to the customer.
Administrative expenses are incurred in the administration of the business.

20. Sometimes called raw materials inventory
A Manufacturing Firm’s Inventories
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Materials inventory:
Sometimes called raw materials inventory
Consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process

21. Work in process inventory:
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Work in process inventory:
Consists of the direct materials costs, the direct labor costs, and the factory overhead costs that have entered the manufacturing process but are associated with products that have not been completed.

22. Finished goods inventory:
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Finished goods inventory:
Consists of completed (or finished) products that have not been sold. 44

23. Uses of Managerial Accounting
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Managerial accounting, as mentioned earlier, provides information and reports that help managers run the day-to-day operations of their business.

24. 1-4
Managerial reports provide data that help managers evaluate the performance of a company’s operations.

25. 1-4
Companies use managerial accounting information to support long-term planning decisions, such as investment decisions.

26. 1-4
Managerial accounting data can be used to help managers understand how many units need to be sold in a month to cover recurring monthly costs.