1. Financial and Managerial Accounting
Wild, Shaw, and Chiappetta
Fifth Edition
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 1

2. Managerial Accounting Concepts and Principles
Chapter 14
Managerial Accounting Concepts and Principles
Previous chapters focused on the financial accounting system, whose main purpose is to prepare general-purpose financial statements. However, this information is incomplete for internal decision makers who manage organizations. This chapter discusses the purpose of managerial accounting, cost concepts, and reporting of manufacturing activities. We also look at how these concepts help managers gather, organize, and use this information.
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3. Conceptual Learning Objectives
C1: Explain the purpose and nature of, and the role of ethics in, managerial accounting.
C2: Describe accounting concepts useful in classifying costs.
C3: Define product and period costs and explain how they impact financial statements.
C4: Explain how the balance sheets and income statements for manufacturing and merchandising companies differ.
C5: Explain manufacturing activities and the flow of manufacturing costs.
C6: Identify trends in managerial accounting.
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4. Analytical Learning Objectives
A1: Assess raw materials inventory management using raw materials inventory turnover and days’ sales in raw materials inventory.
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5. Procedural Learning Objectives
P1: Compute cost of goods sold for a manufacturer.
P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.
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6. Managerial and Financial Accounting
Managerial accounting provides financial and
nonfinancial information
to an organization’s
managers and other
internal decision makers
Financial accounting provides general
purpose financial
information to those who are outside the organization.
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7. Nature of Managerial Accounting
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8. Managerial Cost Concepts
Behavior
Traceability
Controllability
Relevance
Function
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9. Classification by Behavior
Cost behavior refers to a costs reaction to changes in the level of business activity.
A fixed cost does not change with changes in the volume of activity.
A variable cost changes in proportion to changes in the volume of activity.
A mixed cost refers to a combination of fixed and variable costs.
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10. Classification by Traceability
Direct costs
Costs traceable to a single cost object.
Examples: material and labor cost for a product.
Indirect costs
Costs that cannot be traced to a single cost object.
Example: maintenance expenditures benefiting two or more departments.
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11. Classification by Controllability
The degree of control depends on the level of management in the organization.
More control
More control
Very little control
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12. Classification by Relevance:
All costs incurred in the past that cannot be avoided or changed.
Sunk costs should not be considered in decisions.
Out-of-pocket costs require a future outlay of cash and should be considered in decisions.
Opportunity costs are the potential benefits lost by choosing a specific action from two or more alternatives
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13. Classification by Function: Product Costs
Direct Material
Direct Labor
Manufacturing Overhead
The Product
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14. Period and Product Costs in Financial Statements
2013 Income
Statement
Period costs (expenses)
Operating
expenses
Cost of
goods sold
2014 Income
Statement
2013 Costs incurred
Inventory sold in 2013
Cost of
goods sold
Raw Materials
Goods in Process
Finished Goods
2013 Balance
Sheet inventory –
(3 accounts)
Product
costs (inventory)
Inventory not sold until 2014
Inventory sold in 2014
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15. Balance Sheet of a Manufacturer Three Inventory Accounts
Goods in Process
Inventory
Raw Materials
Inventory
Finished Goods
Inventory
Partially complete products.
Material to which some labor and/or overhead have been added.
Materials waiting to be processed.
Can be direct
or indirect.
Completed products for sale.
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16. Income Statement of a Manufacturer
Merchandiser
Manufacturer
Beginning Finished Goods Inventory
Beginning Merchandise Inventory + +
The major difference
Cost of Goods Purchased
Cost of Goods
Manufactured _ _
Ending Merchandise Inventory
Ending
Finished Goods Inventory
Cost of Goods Sold = =
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17. Flow of Manufacturing Activities
Production Activity
Sales Activity
Materials Activity
Finished Goods Beginning Inventory
Goods in Process Beginning Inventory
Raw Materials
Beginning Inventory
Direct Labor Used
Cost of Goods Manufactured
Raw Materials Purchases
Factory Overhead Used
Finished Goods Ending Inventory
Cost of Goods Sold
Raw Materials Used
Raw Materials Ending Inventory
Goods in Process Ending Inventory
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18. Manufacturing StatementP2
Manufacturing Statement
Summarizes the types and amounts of costs
Incurred in a company’s manufacturing process.
Direct Materials Used
+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Goods in Process
– Ending Goods in Process
= Cost of Goods Manufactured
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19. End of Chapter 14
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