1. Managerial Accounting
Weygandt • Kieso • Kimmel
Managerial Accounting
Tool for Business Decision Making
Third Edition
Prepared by
Dan R. Ward
Suzanne P. Ward
University of Louisiana at Lafayette
John Wiley & Sons, Inc. © 2005

2. MANAGERIAL ACCOUNTING
CHAPTER 1
MANAGERIAL ACCOUNTING
Study Objectives
Explain the distinguishing features of managerial accounting.
Identify the 3 broad functions of management.
Define the 3 classes of manufacturing costs.
Distinguish between product and period costs.

3. Study Objectives: Continued
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.

4. 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

5. MANAGERIAL ACCOUNTING BASICS
Managerial Activities
Explain manufacturing and nonmanufacturing costs and how they are reported (Chapter 1).
Compute cost of providing a service or manufacturing a product (Chapters 2, 3, and 4).
Determine behavior of costs and expenses as activity changes (Chapter 5).

6. MANAGERIAL ACCOUNTING BASICS
Managerial Activities: Continued
Gather and present relevant data for management decision making (Chapter 6).
Evaluate effect of alternative ways to cost inventory (Chapter 7).
Determine prices for external and internal transactions (Chapter 8).

7. MANAGERIAL ACCOUNTING BASICS
Managerial Activities: Continued
Assist in profit planning and formalizing plans in the form of budgets (Chapter 9).
Help to control costs by comparing actual results with planned objectives and standard costs (Chapters 10 and 11).
Collect and present data for capital expenditure decisions (Chapter 12).

8. MANAGERIAL ACCOUNTING BASICS Distinguishing Features
Applies to all types of businesses –
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.
Team includes members from production, marketing, engineering, etc.
Aid in making
critical decisions.

10. COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING Study Objective 1 Similarities
Both deal with economic events of a business.
Both require that economic events be quantified and communicated to interested parties.

11. COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING Differences

12. MANAGEMENT FUNCTIONS Study Objective 2
Management’s activities and responsibilities can be classified into the following three broad functions:
Planning
Directing
Controlling

13. MANAGEMENT FUNCTIONS Planning
Look ahead
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

14. 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

15. 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 a formal system of evaluation
Good decision making is the outcome of good judgment in planning, directing, and controlling.

16. ORGANIZATIONAL STRUCTURE
Organizational Chart
Assists in carrying out management’s functions
Prepared by most companies
Organizational charts show:
The interrelationships of activities
The delegation of authority
The delegation of responsibility

17. A TYPICAL COMPANY’S ORGANIZATIONAL CHART

18. GOOD ETHICS - GOOD BUSINESS
Business Ethics
Business scandals caused massive investment losses and employee layoffs.
Corporate fraud has increased 13 percent in last five years.
Employee fraud - 60% of all fraud
expense account abuse, theft of assets, etc.
Intentional misstatement of financial reports, or financial reporting fraud, - most costly to companies.

19. GOOD ETHICS - GOOD BUSINESS
Creating Proper Incentives
Monitoring and evaluating employees may produce incentives to act unethically
For example, overly ambitious budgets may produce unethical management actions to meet targets
Employees may feel that they must succeed no matter what
Ineffective and unrealistic controls may result in declining quality of product

20. GOOD ETHICS - GOOD BUSINESS
New Legislation – Sarbanes Oxley Act of 2002
Clarifies management’s responsibilities
CEO and CFO must certify fairness of financial statements and adequacy of internal control
Board of Directors, especially the Audit Committee, must meet certain criteria
Penalties for misconduct are substantially increased
Codes of Ethics are now required

21. MANAGERIAL COST CONCEPTS Manufacturing Costs Study Objective 3
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.
Typical Classification of Manufacturing Costs

22. MANAGERIAL COST CONCEPTS Manufacturing Costs - Materials
Direct Materials
Raw materials - basic materials used in manufacturing.
Raw materials that can be physically and directly associated with the finished product are called direct materials.
Examples include
Flour in the baking of bread
Syrup in the bottling of soft drinks
Steel used in making automobiles

23. MANAGERIAL COST CONCEPTS Manufacturing Costs- Materials
Indirect Materials
Raw materials that cannot be easily associated with the finished product are called indirect materials.
Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost
Considered part of manufacturing overhead

24. MANAGERIAL COST CONCEPTS Manufacturing Costs - Labor
Direct Labor
Work of factory employees that can be physically and directly associated with converting raw materials into finished goods
Examples include
Bottlers at Coca-Cola
Bakers at Sara Lee
Typesetters at a newspaper

25. MANAGERIAL COST CONCEPTS Manufacturing Costs - Labor
Indirect Labor
Work of factory workers that have no physical association with the finished product or for which it is impractical to trace to the goods produced
Examples include
Wages of maintenance workers
Supervisors
Time-Keepers

26. MANAGERIAL COST CONCEPTS Manufacturing Costs – Manufacturing Overhead
Costs that are indirectly associated with manufacturing the product
Examples include
Indirect materials
Indirect labor
Depreciation on factory buildings
Insurance, taxes, maintenance on factory facilities
Basically manufacturing overhead includes all manufacturing costs except direct materials and direct labor.

27. PRODUCT VERSUS PERIOD COSTS Study Objective 4 Product Costs
Consist of the direct material cost, the direct labor cost, and the manufacturing overhead cost
A necessary and integral part of producing the product
Recorded as inventory when incurred
Do not become expenses until the finished goods inventory is sold

28. PRODUCT VERSUS PERIOD COSTS 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
Include all
Selling expenses
General and Administrative expenses
FOR RENT

29. PRODUCT VERSUS PERIOD COSTS

30. MANUFACTURING COSTS IN FINANCIAL STATEMENTS Study Objective 5
Income Statement
The income statement for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section.
CGS

31. MANUFACTURING COSTS IN FINANCIAL STATEMENTS Cost of Goods Sold Components Merchandiser versus Manufacturer

32. MANUFACTURING COSTS IN FINANCIAL STATEMENTS Cost of Goods Sold Section of the Income Statement

33. DETERMINING THE COST OF GOODS MANUFACTURED Study Objective 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 year

34. COST OF GOODS MANUFACTURED SCHEDULE

35. BALANCE SHEET - Inventories Study Objective 7
Merchandising Company
One category of inventory:
Merchandise
Inventory
Manufacturing Company
May have three inventory accounts:
Raw Materials
Work in Process
Finished Goods

36. BALANCE SHEET - Inventories

37. Let’s Review Direct Materials are a: Product Manufacturing Period
Cost Overhead Cost
Yes Yes No
Yes No No
Yes Yes Yes
No No No

38. Let’s Review Direct Materials are a: Product Manufacturing Period
Cost Overhead Cost
Yes Yes No
Yes No No
Yes Yes Yes
No No No

39. MANAGERIAL ACCOUNTING TODAY Study Objective 8 Service Industry Trends
U.S economy in general has shifted toward an emphasis on providing services
Today over 50 percent of U.S. workers are employed by service companies
Trend is expected to continue in future
Most of the techniques learned for manufacturing firms are applicable to service companies

41. 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:

42. MANAGERIAL ACCOUNTING TODAY Managerial Accounting Practices
Technological Change
Computerization and automation
Enterprise resource planning (ERP) - software systems that manage the value chain
In large companies an ERP system might replace as many as 200 individual software packages
Computer-integrated manufacturing (CIM) - make products untouched by human hands
Internet and business-to-business (B2B) e-commerce

43. 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
Activity-Based Costing (ABC)
Allocates overhead based on use of specific activities or functions of the company (number of orders or number of machine set ups)
Results in more accurate product costing and scrutiny of all activities in the value chain

44. MANAGERIAL ACCOUNTING TODAY Managerial Accounting Practices
Theory of Constraints
Used to identify and manage constraints or “bottlenecks”
Helps achieve overall goals of the company, particularly profits
Balanced Scorecard
A performance-measurement approach to evaluate operations in an integrated fashion
Uses both financial and non-financial measures
Links performance measures to overall company objectives

45. Summary of Study Objectives
Explain the distinguishing features of managerial accounting
The primary users of reports are internal users such as officers, department heads in the company
The internal reports are issued as needed
Special-purpose reports
Provide information for a particular user for a particular decision
Pertain to subunits of the business
May be very detailed and extend beyond the double-entry accounting system
The reporting standard is the relevance of the information to the decision being made

46. Summary of Study Objectives
Identify the three broad functions of management
Planning
Directing
Controlling
Define the three classes of manufacturing costs
Direct Materials
Direct Labor
Manufacturing Overhead
Distinguish between product and period costs
Product costs are
an integral part of producing the product
also called inventoriable costs
do not become expenses until the product is sold.
Period costs are
identified with a specific time period rather than a product
selling and administrative expenses.

47. Summary of Study Objectives
Explain the difference between a merchandising and a manufacturing income statement
Income statements are similar except for the cost of goods sold section.
CGS section shows beginning and ending finished goods inventories and the cost of goods manufactured
Indicate how cost of goods manufactured is determined
Beginning work-in-process + total manufacturing costs for the period – ending work-in-process = cost of goods manufactured
Explain the difference between a merchandising and a manufacturing balance sheet
The difference is in the current asset section
Manufacturing firm - three inventories: finished goods, work-in-process, and raw materials
Merchandising firm - only one inventory account: merchandise inventory

48. Summary of Study Objectives
Identify trends in managerial accounting
Shift toward the addressing the needs of service companies
Improving practices to better meet the needs of managers
Managing the value chain
Just-in-time inventory (JIT)
Enterprise resource planning (ERP)
Theory of Constraints
Activity based costing (ABC)
The balanced scorecard for a
comprehensive view of operations

49. Let’s Review
Which of the following is not an element of manufacturing overhead?
Plant manager’s salary
Sales manager’s salary
Factory repairman’s wages
Product inspector’s salary

50. Let’s Review
Which of the following is not an element of manufacturing overhead?
Plant manager’s salary
Sales manager’s salary
Factory repairman’s wages
Product inspector’s salary

51. Appendix Accounting Cycle for a Manufacturing Company
Accounting cycle for a manufacturer is the same as for a merchandiser when a periodic inventory system is used.
Journalizing and posting transactions are the same with the manufacturer having additional manufacturing inventories and manufacturing cost accounts.
Preparation of a trial balance and adjusting entries are also the same for both types of companies.

52. Appendix Accounting Cycle for a Manufacturing Company
Changes occur in the use of a work sheet and in preparation of closing entries.
Worksheet has an additional set of columns between those for the adjusted trial balance and the income statement; these columns are for the Cost of Goods Manufactured.
In closing, a Manufacturing Summary account is used to close all accounts that appear in the cost of good manufactured schedule. The balance of the Manufacturing Summary account is then closed to Income Summary.

53. Closing Entries

54. Closing Entries

55. Closing Entries
After posting the summary accounts will show the following:

56. COPYRIGHT
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.