1. Accounting, Fifth Edition14
MANAGERIAL ACCOUNTING
Accounting, Fifth Edition

2. Learning Objectives
After studying this chapter, you should be able to:
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.

3. Preview of Chapter 14

4. Managerial Accounting Basics
Managerial accounting is a field of accounting that provides economic and financial information for managers and other internal users.
Managerial accounting applies to all types of businesses.
Corporations
Proprietorships
Partnerships
Not-for-profit

5. Managerial Accounting Basics
Comparing Managerial and Financial Accounting
Illustration 14-1
LO 1 Explain the distinguishing features of managerial accounting.

6. Managerial Accounting Basics
Review Question
Managerial accounting:
a. Is governed by generally accepted accounting principles.
b. Places emphasis on special-purpose information.
c. Pertains to the entity as a whole and is highly aggregated.
d. Is limited to cost data.
LO 1 Explain the distinguishing features of managerial accounting.

7. Managerial Accounting Basics
Management Functions
Planning
Directing
Controlling
Maximize short-term profit and market share.
Commit to environmental protection and social programs.
Add value to the business.
Coordinate diverse activities and human resources.
Implement planned objectives.
Provide incentives to motivate employees
Hire and train employees.
Produce smooth-running operation.
Keeping 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.
LO 2 Identify the three broad functions of management.

8. Managerial Accounting Basics
Organizational Structure
Illustration 14-2
Organization charts show the interrelationships of activities and the delegation of authority and responsibility within the company.
LO 2 Identify the three broad functions of management.

9. Managerial Accounting Basics
Business Ethics
All employees are expected to act ethically.
Many organizations have codes of business ethics.
Past financial frauds:
Enron,
Global Crossing,
WorldCom
LO 2 Identify the three broad functions of management.

10. Managerial Accounting Basics
Business Ethics
Creating Proper Incentives
Systems and controls sometimes create incentives for managers to take unethical actions.
Controls need to be effective and realistic.
LO 2 Identify the three broad functions of management.

11. Managerial Accounting Basics
Business Ethics
Code of Ethical Standards
Sarbanes-Oxley Act (SOX)
Clarifies management’s responsibilities.
Requires certifications by CEO and CFO.
Selection criteria for Board of Directors and Audit Committee.
Substantially increased penalties for misconduct.
LO 2 Identify the three broad functions of management.

12. Managerial Accounting Basics
Review Question
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.
LO 2 Identify the three broad functions of management.

13. Indicate whether the following statements are true or false.
Managerial accountants have a single role within an organization, collecting and reporting costs to management.
Financial accounting reports are general-purpose and intended for external users.
Managerial accounting reports are special-purpose and issued as frequently as needed.
False
True
True
LO 2 Identify the three broad functions of management.

14. Indicate whether the following statements are true or false.
Managers’ activities and responsibilities can be classified into three broad functions: cost accounting, budgeting, and internal control.
As a result of the Sarbanes-Oxley Act, managerial accounting reports must now comply with generally accepted accounting principles (GAAP).
Top managers must certify that a company maintains an adequate system of internal controls.
False
False
True
LO 2 Identify the three broad functions of management.

15. Managerial Cost Concepts
Managers should ask questions such as the following:
What costs are involved in making a product or providing a service?
If we decrease production volume, will costs decrease?
What impact will automation have on total costs?
How can we best control costs?

16. Managerial Cost Concepts
Manufacturing Costs
Manufacturing consists of activities and processes that convert raw materials into finished goods.
LO 3 Define the three classes of manufacturing costs.

17. Managerial Cost Concepts
Raw Materials
Basic materials and parts used in manufacturing process.
Example: Steel or Fiber Glass used to manufacture automobile.
LO 3 Define the three classes of manufacturing costs.

18. Managerial Cost Concepts: Raw Materials
Direct Materials
Raw materials that can be physically and directly associated with or traced to the finished product during the manufacturing process.
Indirect Materials
Not physically part of the finished product or they are an insignificant part of finished product in terms of cost. EXAMPLE: Cleaning Supplies
Considered part of manufacturing overhead.
LO 3 Define the three classes of manufacturing costs.

19. Managerial Cost Concepts
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 costs to the goods produced. EXAMPLE: Maintenance Worker
LO 3 Define the three classes of manufacturing costs.

20. Managerial Cost Concepts
Manufacturing Overhead
aka Factory Overhead
Costs that are indirectly associated with manufacturing the finished product.
Includes all manufacturing costs except direct materials and direct labor.
Also called factory overhead, indirect manufacturing costs, or burden.
Example: Factory utility costs; Supervisory costs
LO 3 Define the three classes of manufacturing costs.

21. Product Costs & Period Cost –Capitalized in Inventory
Direct Labor
Direct Material
Manufacturing Overhead
The Product
Product costs are incurred to manufacture a product. Product costs are not expensed as they are incurred. Instead, they are assigned to inventory and do not become expenses until the product is sold. Inventory is reported at cost as an asset on the balance sheet.

22. Managerial Cost Concepts
Review Question
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.
LO 3 Define the three classes of manufacturing costs.

23. Product Versus Period Costs
Product Costs
Direct materials
Direct labor
Manufacturing overhead
Components:
Costs that are an integral part of producing the product. Identifiable with the product => Manufacturing Process!!
Recorded in “inventory” account of the Balance Sheet
Expensed as COGS on Income Statement WHEN the goods are sold.

24. Product Versus Period Costs
Charged to expense (Income Statement) as incurred.
Non-manufacturing costs.
Includes all selling and administrative expenses.
LO 4 Distinguish between product and period costs.

25. Product Versus Period Costs
Illustration 14-3
LO 4 Distinguish between product and period costs.

26. Period and Product Costs in Financial Statements
2010 Income
Statement
Period Costs (Expenses)
Operating
Expenses
2010 Costs Incurred
Cost of
Goods Sold
Inventory Sold in 2010
Period costs are expensed in the period incurred. They are non-manufacturing costs usually grouped into two broad categories: selling and administrative.
Starting on the left side of this flow chart of costs, we see that costs incurred are categorized as either period costs or product costs. Period costs flow directly to the current year’s income statement as they are expensed in the period incurred. Product costs are first assigned to the inventory account. Later, when the inventory is sold, product costs flow from the inventory account to cost of goods sold on the income statement for the year in which the products are sold.
Product Costs (Inventory)
2010 Balance
Sheet Inventory
2011 Income
Statement
Raw Materials
Goods in Process
Finished Goods
Inventory Not Sold in 2010
Cost of
Goods Sold

27. A bicycle company has these costs: tires, salaries of employees who put tires on the wheels, factory building depreciation, wheel nuts, spokes, salary of factory manager, handlebars, and salaries of factory maintenance employees. Classify each cost as direct materials, direct labor, or overhead.
Direct Materials
Direct Labor
Overhead
Tires.
Spokes.
Handlebars.
Salaries of employees who put tires on the wheels.
Factory depreciation.
Factory manager salary.
Factory maintenance employees salary.
LO 4 Distinguish between product and period costs.

28. Exercise 3
Exercise 4

29. “COGS” Manufacturing Costs in Financial Statements Income Statement
Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
“COGS”
LO 5 Explain the difference between a merchandising and a manufacturing income statement.

30. Flow of Manufacturing Activities
Materials activity
Production activity -WIP Inventory
Sales activity
Finished Goods Beginning Inventory
Raw Materials
Beginning Inventory
Goods in Process Beginning Inventory
Direct Labor
Cost of Goods Manufactured
Raw Materials Purchases
Factory Overhead
Finished Goods Ending Inventory
Cost of Goods Sold
Starting on the left side of this flow chart, we see that material purchases are combined with the materials beginning inventory. Materials are then either used or they remain in inventory. In the center portion of the flow chart, we see the materials being used are combined with labor, overhead, and the goods in process beginning balance. As goods are finished, they are transferred out of the goods in process inventory account into the finished goods inventory account. The cost of the goods finished in the period is called cost of goods manufactured. Finished goods are either sold, called cost of goods sold, or they remain in the finished goods inventory account.
Raw Materials Used
Raw Materials Ending Inventory
Goods in Process Ending Inventory

31. Balance Sheet of a Manufacturer
Goods in Process
Raw Materials
Finished Goods
Partially complete products.
Material to which some labor and/or overhead have been added.
Completed products for sale.
Materials waiting to be processed.
Can be direct
or indirect.
Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials.

32. Income Statement of a ManufacturerP1
Merchandiser
Manufacturer
Beginning Merchandise Inventory
Beginning Finished Goods Inventory + +
The major difference
Cost of Goods Purchased
Cost of Goods
Manufactured _ _
The finished goods inventory of a manufacturer is the equivalent of a merchandiser’s merchandise inventory account. Items in this inventory account are complete and awaiting sale. The major difference is that the manufacturer manufactures the items in the finished goods account, while the merchandiser buys the items in the merchandise inventory account. When items are sold from these inventory accounts, the cost of inventory, whether purchased or manufactured, becomes cost of goods sold on the income statement.
Ending Merchandise Inventory
Ending
Finished Goods Inventory
Cost of Goods Sold = =

33. Manufacturing Costs in Financial Statements
Cost of goods sold (FG) sections of merchandising and manufacturing income statements
Illustration 14-5

34. Review Question Manufacturing Costs in Financial Statements
For the year, Red Company has cost of goods manufactured (FG) of $600,000, beginning finished goods inventory of $200,000, and ending finished goods inventory of $250,000. The cost of goods sold is ???
a. $450,000.
b. $500,000.
c. $550,000.
d. $600,000.
Beg. Inventory (FG) $200,000
+ COGs Manufactured (FG) 600,000
Goods Available for Sale (FG) 800,000
End. Inventory (FG) 250,000
Cost of Goods Sold $550,000

35. Flow of Manufacturing Activities
Materials activity
Production activity -WIP Inventory
Sales activity
Finished Goods Beginning Inventory
Raw Materials
Beginning Inventory
Goods in Process Beginning Inventory
Direct Labor
Cost of Goods Manufactured
Raw Materials Purchases
Factory Overhead
Finished Goods Ending Inventory
Cost of Goods Sold
Starting on the left side of this flow chart, we see that material purchases are combined with the materials beginning inventory. Materials are then either used or they remain in inventory. In the center portion of the flow chart, we see the materials being used are combined with labor, overhead, and the goods in process beginning balance. As goods are finished, they are transferred out of the goods in process inventory account into the finished goods inventory account. The cost of the goods finished in the period is called cost of goods manufactured. Finished goods are either sold, called cost of goods sold, or they remain in the finished goods inventory account.
Raw Materials Used
Raw Materials Ending Inventory
Goods in Process Ending Inventory

36. Manufacturing ScheduleP2
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 Work in Process
– Ending Work in Process
= Cost of Goods Manufactured
The production activities in the center portion of the preceding flow chart can be summarized in a manufacturing statement. The three product costs are totaled and added to the beginning balance of the goods in process inventory account. Subtracting the ending balance of the goods in process account from this total results in the cost of goods manufactured for the period.

37. Illustration 14-7

38. LO 6 Indicate how cost of goods manufactured is determined.

39. LO 6 Indicate how cost of goods manufactured is determined.

40. Exercise 7
Exercise 8
Exercise 9

41. Manufacturing Costs in Financial Statements
Balance Sheet
Inventory accounts for a manufacturer
Illustration 14-8
The balance sheet for a merchandising company shows just one category of inventory.
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

42. Manufacturing Costs in Financial Statements
Balance Sheet
Current assets sections of merchandising and manufacturing balance sheets
Illustration 14-9
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

43. Review Question Manufacturing Costs in Financial Statements
A cost of goods manufactured schedule shows beginning and ending inventories for:
a. Raw materials and work in process only
b. Work in process only
c. Raw materials only
d. Raw materials, work in process, and finished goods
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

44. Manufacturing Costs in Financial Statements
Illustration: Suppose you started your own snowboard factory, KRT Boards. Here are some of the costs that your snowboard factory would incur. Assign the following costs:
Illustration 14-10
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

45. Manufacturing Costs in Financial Statements
Illustration 14-10

46. Manufacturing Costs in Financial Statements
If KRT Boards produces 10,000 snowboards the first year, what would be the total manufacturing costs?
Illustration 14-11
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

47. Manufacturing Costs in Financial Statements
Product Costing For Service Industries
U.S. economy, in general, 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.
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.

48. Managerial Accounting Today
Focus on the Value Chain
Refers to all business process associated with providing a product or service.
For a manufacturing firm these include the following:
Illustration 14-12
LO 8 Identify trends in managerial accounting.

49. Managerial Accounting Today
Just-In-Time Inventory Methods
Inventory system in which goods are manufactured or purchased just in time for sale.
Total Quality Management (TQM)
Reduce defects in finished products, with the goal of zero defects.
LO 8 Identify trends in managerial accounting.

50. Managerial Accounting Today
Theory of Constraints
Constraints (“bottlenecks” ) limit the company’s potential profitability.
A specific approach to identify and manage these constraints in order to achieve company goals.
Enterprise Resource Planning (ERP)
Software programs designed to manage all major business processes.
LO 8 Identify trends in managerial accounting.

51. Managerial Accounting Today
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.
LO 8 Identify trends in managerial accounting.

52. Managerial Accounting Today
Balanced Scorecard
Evaluates operations in an integrated fashion.
Uses both financial and non-financial measures.
Links performance to overall company objectives.
LO 8 Identify trends in managerial accounting.

53. 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.
LO 8 Identify trends in managerial accounting.

54. e a d Match the descriptions that follow with the corresponding terms.
1. ______ All activities associated with providing a product or service.
2. ______ A method of allocating overhead based on each product’s use of activities in making the product. e a
3. ______ Systems implemented to reduce defects in finished products with the goal of achieving zero defects. d
LO 8 Identify trends in managerial accounting.

55. b c Match the descriptions that follow with the corresponding terms.
4. ______ A performance-measurement approach that uses both financial and nonfinancial measures, tied to company objectives, to evaluate a company’s operations in an integrated fashion. b
5. ______ Inventory system in which goods are manufactured or purchased just as they are needed for use. c
LO 8 Identify trends in managerial accounting.

56. Copyright
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