2. Accounting Principles, Ninth Edition
Chapter 19
Managerial
Accounting
Accounting Principles, Ninth Edition

3. Study Objectives
Explain the distinguishing features of managerial accounting.
Identify the three broad functions of management.
Define the three classes of manufacturing costs.
Distinguish between product and period costs.
Explain the difference between a merchandising and a manufacturing income statement.
Indicate how cost of goods manufactured is determined.
Explain the difference between a merchandising and a manufacturing balance sheet.
Identify trends in managerial accounting.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Managerial Accounting
Managerial Accounting Basics
Managerial Cost Concepts
Manufacturing Costs in Financial Statements
Managerial Accounting Today
Compare Managerial and Financial Accounting
Management Functions
Business Ethics
Manufacturing Costs
Product vs. Period Costs
Income Statement
Balance Sheet
Cost Concepts – A Review
Service Industry Trends
Managerial Accounting Practices
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

5. Managerial Accounting Basics
Definition of Managerial Accounting
A field of accounting that provides economic and financial information for managers and other internal users.
Also called Management Accounting

6. Managerial Accounting Basics
Managerial Accounting Activities
Explain manufacturing and nonmanufacturing costs and how they are reported. (Chapter 19)
Compute cost of providing a service or manufacturing a product. (Chapters 20 and 21)
Determine behavior of costs and expenses as activity changes. (Chapter 22)

7. Managerial Accounting Basics
Managerial Accounting Activities (continued)
Assist management in profit planning and formalizing these plans in the form of budgets. (Chapter 23)
Help to control costs by comparing actual results with planned objectives and standard costs. (Chapters 24 and 25)
Accumulate and present data for making decisions. (Chapter 26)

8. Managerial Accounting Basics
Distinguishing Features
Applies to all types of business -
Service, Merchandising, and Manufacturing
Applies to all forms of businesses –
Proprietorships, Partnerships, and Corporations
Applies to not-for-profit and profit oriented companies

9. Managerial Accounting Basics
Distinguishing Features: Continued
More responsible for strategic cost management
Teams with people from production, marketing, engineering, etc.
Aid in making critical decisions

10. Comparing Managerial and Financial Accounting
Similarities
Both deal with economic events of a business –
Thus, interests overlap
Both require that economic events be
quantified and communicated to
interested parties –
Determining unit cost is part of
managerial accounting,
Reporting cost of goods manufactured
is a part of financial accounting
SO 1 Explain the distinguishing features of managerial accounting.

11. Comparing Managerial and Financial Accounting
Differences
Illustration 19-1
SO 1 Explain the distinguishing features of managerial accounting.

12. Comparing Managerial and Financial Accounting
Review Question
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.
SO 1 Explain the distinguishing features of managerial accounting.

13. SO 2 Identify the 3 broad functions of management.
Management Functions
Management Functions
Management’s activities and responsibilities can be classified into the following three broad functions:
Planning
Directing
Controlling
SO 2 Identify the 3 broad functions of management.

14. SO 2 Identify the 3 broad functions of management.
Management Functions
Planning
Look ahead and establish objectives such as –
Maximize short-term profit
Commit to environmental protection
Key Objective: Add value to the business
Value measured by trading price of stock
and by potential selling price of the company
SO 2 Identify the 3 broad functions of management.

15. SO 2 Identify the 3 broad functions of management.
Management Functions
Directing
Coordinate diverse activities and human resources
Implement planned objectives
Provide incentives to motivate employees
Hire and train employees including
executives, managers, and supervisors
Produce smooth-running operation
SO 2 Identify the 3 broad functions of management.

16. SO 2 Identify the 3 broad functions of management.
Management Functions
Controlling
Keep activities on track
Determine whether goals are met
Decide changes needed to get back on track
May use an informal or formal system of evaluations
Good decision making is the outcome of good judgment in planning, directing, and controlling.
SO 2 Identify the 3 broad functions of management.

17. Review Question Management Functions
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.
SO 2 Identify the 3 broad functions of management.

18. Good Ethics – Good Business
Business Ethics
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
Aka financial reporting fraud
Most costly to companies
SO 2 Identify the 3 broad functions of management.

19. Good Ethics – Good Business
Creating Proper Incentives
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.
SO 2 Identify the 3 broad functions of management.

20. Good Ethics – Good Business
Code of Ethical Standards
Sarbanes-Oxley Act of 2002
Clarifies management’s responsibilities.
Certifications by CEO and CFO -
fairness of financial statements and
adequacy of internal control
Selection criteria for Board of Directors and Audit Committee
Substantially increased penalties for misconduct
IMA Statement of Ethical Professional Practices
SO 2 Identify the 3 broad functions of management.

21. Managerial Cost Concepts
Manufacturing Costs
Manufacturing consists of activities to convert raw materials into finished goods.
In contrast, a merchandising firm sells goods in the form in which they were bought.
Categories of manufacturing costs include:
Illustration 19-2
SO 3 – Define the three classes of manufacturing costs.

22. Manufacturing Costs Materials Raw Materials
Basic materials used in manufacturing
Direct Materials
Raw materials that can be physically and directly associated with the finished product
SO 3 Define the three classes of manufacturing costs.

23. Manufacturing Costs Materials Indirect Materials
Raw materials that cannot be easily associated with the finished product
Not physically part of the finished product or they are an insignificant part of finished product in terms of cost
Considered part of manufacturing overhead
SO 3 Define the three classes of manufacturing costs.

24. Manufacturing Costs 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 for which it is impractical to trace to the goods produced
SO 3 Define the three classes of manufacturing costs.

25. Manufacturing Overhead
Manufacturing Costs
Manufacturing Overhead
Costs that are indirectly associated with manufacturing the product
Includes all manufacturing costs except direct materials and direct labor
SO 3 Define the three classes of manufacturing costs.

26. Review Question Manufacturing Costs
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.
SO 3 Define the three classes of manufacturing costs.

27. Product Versus Period Costs
Product Costs
Components: direct material cost, direct labor cost, and manufacturing overhead
A 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
SO 4 Distinguish between product and period costs.

28. Product Versus 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
SO 4 Distinguish between product and period costs.

29. Product Versus Period Costs
Illustration 19-3
SO 4 Distinguish between product costs and period costs.

30. Manufacturing Costs in Financial Statements
Income Statement
The income statement for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section.
CGS
SO 5 Explain the difference between a merchandising and a manufacturing income statement.

31. Manufacturing Costs in Financial Statements
Cost of Goods Sold Components
Merchandiser versus Manufacturer
Illustration 19-4
SO 5 Explain the difference between a merchandising and a manufacturing income statement.

32. Manufacturing Costs in Financial Statements
Cost of Goods Sold Section of the Income Statement
Illustration 19-5
SO 5 Explain the difference between a merchandising and a manufacturing income statement.

33. Manufacturing Costs in Financial Statements
Determining the Cost of Goods Manufactured
Illustration 19-6
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
SO 6 Indicate how cost of goods manufactured is determined.

34. Manufacturing Costs in Financial Statements
Illustration 19-7
SO 6 Indicate how cost of goods manufactured is determined.

35. Manufacturing Costs in Financial Statements
Balance Sheet - Inventories
Manufacturing Company
May have three inventories:
Raw Materials
Work in Process
Finished Goods
Merchandising Company
One category of inventory:
Merchandise Inventory
Illustration 19-8
SO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

36. Manufacturing Costs in Financial Statements
Balance Sheet - Inventories
Illustration 19-9
SO 7 Explain the difference between a merchandising and a manufacturing balance sheet

37. Manufacturing Costs in Financial Statements
Review Question
Direct Materials are a:
Product Manufacturing Period
Cost Overhead Cost
a. Yes Yes No
b. Yes No No
c. Yes Yes Yes
d. No No No

38. Managerial Accounting Today
Service Industry Trends
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
SO 8 Identify trends in management accounting.

39. Managerial Accounting Today
Managerial Accounting Practices
Value Chain
Refers to all activities associated with providing a product or service
For a manufacturing firm these include the following:
Illustration 19-12
SO 8 Identify trends in management accounting.

40. Managerial Accounting Today
Managerial Accounting Practices
Just-In-Time (JIT) Inventory Methods
Inventory system in which goods are manufactured or purchased just in time for use
Quality
Increased emphasis on product quality because goods are produced only as needed
Total Quality Management (TQM)
- a philosophy of zero defects -
SO 8 Identify trends in management accounting.

41. Managerial Accounting Today
Managerial Accounting Practices
Activity-Based-Costing (ABC)
Allocates overhead based on use of activities
Results in more accurate product costing and scrutiny of all activities in the value chain
Balanced Scorecard
Evaluates operations in an integrated fashion
Uses both financial and non-financial measures
Links performance measures to overall company objectives
SO 8 Identify trends in management accounting.

42. Managerial Accounting Today
Review Question
Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner?
Just-in-time inventory.
Total-quality management.
Balanced scorecard.
Activity-based costing.
SO 8 Identify trends in management accounting.

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