CHAPTER 1 Manufacturing operations
Main Objective of accounting = Cost accounting is more pronounced in this
= To provide financial information about an to satisfy management’s need for product cost
economic entity to different users. information.
Internal users COMPARISON OF FINANCIAL, MANAGERIAL,
= Managers for planning, controlling, and AND COST ACCOUNTING
decision making
Two Major Areas of Accounting
External users 1. Financial Accounting
= The government, those who provide funds 2. Managerial Accounting
and those who have various interests in the
operations of the entity 1. Financial Accounting
= It is the use of accounting information for reporting to
Cost accounting external parties including investors and creditors.
= An expanded phase of general or financial
accounting which informs management = Is based on historical transaction data. The information
promptly with the cost of rendering a particular may be historical, quantitative, monetary, and verifiable.
service, buying and selling a product, and
producing a product. = The data are historical and are supported by
documents (evidence)
= It is the field of accounting that measures,
records, and reports information about costs. = Information provided is usually presented in the form of
financial statements, tax returns, and other formal
= Useful for all types of activities in all types of reports distributed to various external users.
organizations. It is essential not only for profit-
seeking entities but also for not-for-profit = The same information may also be used internally to
organizations such as governmental agencies, provide a basis for financial analysis by management.
churches, and charities.
= Required for many firms organized as corporations
All types of business entities because of the requirements of SEC
1. Manufacturing
2. Merchandising THE SUPPLIERS OF FUNDS
3. Service business 1. Stockholders = Owners of the corporation
They require information systems which provide the 2. Partners = Owners of the partnership
necessary financial data. 3. Sole Proprietors
Manufacturing process Creditors
= Because of this, the information systems of = Who provide debts are also interested on the
manufacturing entities must be designed to financial statements of the entity.
accumulate detailed cost data relating to the
production process. Financial Statements
= The output from an accounting system
= It is common today for small, medium and
large manufacturing companies to have “The reports prepared under financial accounting focus
structured costs accounting systems. on the enterprise as a whole.”
= These systems should show what costs were 2. Managerial Accounting
incurred and where and how these costs were = Focuses on the needs of parties within the
utilized. organization, rather than interested parties outside the
organization.
= Involves the conversion of raw materials into
finished goods through the application of labor = Commonly addresses individual or divisional concerns
and the occurrence of various factory rather than those of the enterprise as a whole.
expenses.
= Most of all the data are futuristic and some of the costs
“The activities of a manufacturing organization are are not recorded on the accounting books of the
similar to those of a merchandising business.” organization.
Manufacturing organization and = Are tools that are available for use to management
Merchandising business “Financial accounting data are used in the managerial
= are concerned with purchasing, storing, and accounting system.”
selling goods
“Management decisions made today will affect the
= Both must have efficient management and financial statement of future periods.”
adequate sources of capital
Timing of information and Relevance to
= Both may employ hundreds or thousands of the decision
workers = Has greater significance to the internal
decision-maker.
Purchase of materials by a manufacturer
= Is only the beginning of a long, and Management
sometimes complex, chains of events that will = Is more concerned on the timeliness of the
eventually produce a finished article ready for
information so management cannot wait until
sale
tomorrow for information that is required for
“The methods of accounting for sales, cost of goods sold, today’s decision.
and selling and administrative expenses are also similar
to those of the merchandising organization.” Measuring based in managerial
accounting
= Does not necessarily have to be restricted to
pesos.
Cost Accounting
= It is the intersection between financial and
managerial accounting.
= Its information is needed and used by both
financial and managerial accounting
= Provides product cost information to external
parties, such as stockholders, creditors and
various regulatory boards for credit and
investment decisions.
= Also provides product cost information to
internal parties such as managers for planning
and controlling.
MERCHANDISING VERSUS MANUFACTURING
OPERATIONS
