2. CHAPTER 19

3. Managerial Accounting Basics
Managerial accounting is a field of accounting that provides economic and financial information to managers and other internal users to assist them in making decisions and evaluating the effectiveness of those decisions.
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4. Illustration 19-1: Differences between Financial and Managerial Accounting
Financial Accounting Managerial Accounting
External users such as shareholders, creditors, and regulatory agencies.
Financial statements, issued at least annually.
General-purpose information for all users.
Reports pertain to company as a whole; are highly aggregated; are limited to double-entry accounting and cost data; use standard of GAAP and/or IFRS
Annual independent audit.
Internal users such as managers and officers.
Internal reports, issued as frequently as needed.
Special-purpose information for specific decisions.
Reports pertain to subunits of the company; are very detailed; can include any relevant data; use standard of relevance to decisions.
No independent audit.
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5. Managerial Accounting Basics
Management Functions
Planning
Management looks ahead and establishes objectives
A key objective is to add value to the business
Directing
Management coordinates the company’s diverse activities and human resources to produce an operation that runs smoothly
This function relates to the implementation of planned objectives
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6. Managerial Accounting Basics
Management Functions
Controlling
The process of keeping the firm’s activities on track
Management determines whether planned objectives are being met and whether changes are necessary
Managerial accounting assists in all three management functions by providing the necessary information to management.
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7. Managerial Accounting Basics Contemporary Developments
The role of managerial accounting has expanded to meet the information needs of businesses
The following trends have contributed to this expanded role:
The Value Chain
The Supply Chain
Technological Change
Just-In-Time Inventory Methods
Product Quality Management Systems
Activity-Based Costing (ABC)
Theory of Constraints
Balanced Scorecard
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8. Managerial Cost Concepts
To perform the three managerial functions effective and reliable information is needed. Cost information is gathered by answering questions such as the following:
What costs are involved in making a product?
If production is decreased, will costs decrease?
How can costs best be controlled in the organization?
What impact will automation have on total costs?
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9. Managerial Cost Concepts
Manufacturing Costs
Manufacturing consists of activities and processes that convert raw materials into finished goods
Manufacturing costs are typically classified as follows:
Direct materials
Direct labour
Manufacturing overhead
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10. Managerial Cost Concepts
Manufacturing Costs
Raw materials represent the basic materials and parts that are to be used in the manufacturing process. They can be classified as either:
Direct Materials
Indirect Materials OR
Raw materials that can be physically and conveniently associated with the finished product during the manufacturing process.
Raw materials that cannot be easily associated with the finished product. Indirect materials are accounted for as part of manufacturing overhead.
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11. Managerial Cost Concepts
Manufacturing Costs
Direct labour
The work of factory employees that can be physically and conveniently associated with converting raw materials into finished goods.
Indirect labour
The labour costs that have no physical association with the finished product or it is impractical to trace the costs to the goods produced
Like indirect materials, indirect labour is classified as manufacturing overhead
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12. Managerial Cost Concepts
Manufacturing Costs
Manufacturing overhead costs are indirectly associated with the manufacture of the finished product such as:
Indirect materials and labour
Depreciation on factory buildings and equipment
Insurance, taxes, and maintenance on factory facilities
Allocating manufacturing overhead to specific products is a challenge faced in managerial accounting .
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13. Managerial Cost Concepts Product versus Period Costs
The three manufacturing costs are also known as product costs since they become the cost of the finished product.
Direct materials
Direct labour
Manufacturing overhead
Finished Goods Inventory
Under the matching principle, the product costs are expensed when the finished goods are sold.
Cost of Goods
Sold Expense
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14. Managerial Cost Concepts Product versus Period Costs
Non-manufacturing costs are known as period costs as they are related to a specific time period rather than to a saleable product
Period costs include operating costs that are deducted from revenues in the period incurred
Operating costs are often subdivided into:
selling expenses (e.g. delivery and promotion)
administrative expenses (e.g. accounting and personnel management)
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15. Product versus Period Costs
Illustration 19-2
Product versus Period Costs
All costs
Product costs
Manufacturing Costs
Period costs
Non-manufacturing Costs
Direct Materials
Selling Expenses
Direct Labour
Administrative
Expenses
Manufacturing
Overhead
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16. Manufacturing Company Balance Sheet (partial)
Illustration 19-4
Balance Sheet (partial)
Manufacturing Company
Balance Sheet (partial)
Current Assets
Cash
$ ,800
Accounts receivable
84,900
Inventories
Raw materials
$ ,100
Work in process
15,300
Finished Goods
41,200
74,600
Total current assets
$ ,300
A manufacturing company’s balance sheet will have three inventory accounts based on the stage of production.
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17. Cost of Goods Sold Components
Illustration 19-5
Cost of Goods Sold Components
Merchandising Company
Beginning
Merchandise
Inventory
Cost of Goods
Purchased
Ending
Merchandise
Inventory + - =
Cost of Goods
Sold
Manufacturing Company
Beginning
Finished Goods
Inventory
Cost of Goods
Manufactured
Ending
Finished Goods
Inventory + - =
Unlike a merchandise company which purchases its products, a manufacturer instead includes the cost of goods manufactured
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18. Manufacturing Company Income Statement (partial)
Illustration 19-6
Manufacturing Income Statement (partial)
Manufacturing Company
Income Statement (partial)
Cost of goods sold
Finished goods inventory, Jan 1
$ 33,800
Cost of goods manufactured
385,600
Cost of goods available for sale
419,400
Finished goods inventory, Dec 31
41,200
$ 378,200
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19. Cost of Goods Manufactured Formula
Illustration 19-7
Cost of Goods Manufactured Formula
Beginning
Work In Process
Inventory
Total Current
Manufacturing
Costs
Total Cost of
Work In Process + =
Total Cost of
Work In Process
Ending
Work In Process
Inventory
Cost of Goods
Manufactured - =
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20. Manufacturing Company Schedule of Cost of Goods Manufactured
Illustration 19-8
Cost of Goods Manufactured Schedule
Manufacturing Company
Schedule of Cost of Goods Manufactured
Year ended December 31, 2017
Work in process, January 1
$ 19,550
Direct material
Raw material inventory, January 1
$ 17,500
Raw material purchases
123,600
Total raw materials available for use
141,100
Less: Raw materials inventory, December 31
18,100
Direct materials used
$ 123,000
Direct labour
156,800
Manufacturing overhead
Indirect labour
11,400
Factory repairs
23,000
Factory utilities
27,750
Factory depreciation
29,500
Factory insurance
9,900
Total manufacturing overhead
101,550
Total manufacturing costs
381,350
Total cost of work in process
400,900
Less: Work in process, December 31
15,300
Cost of goods manufactured
$ 385,600
The Cost of Goods Manufactured Schedule – as shown on the right is an internal financial schedule that shows each of the cost elements explained in Illustration 19-7.
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