15

Chapter
Introduction to Managerial
Accounting

Managerial
Accounting
14e

Warren
Reeve
Duchac

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Differences Between Managerial and Financial Accounting
(slide 1 of 4)

• Accounting information is often divided into two

types:
1. Financial accounting
2. Managerial accounting

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Financial Accounting and Managerial Accounting

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Differences Between Managerial and Financial Accounting
(slide 2 of 4)

• Financial accounting information is reported at fixed

intervals (monthly, quarterly, yearly) in general-purpose
financial statements.
1. These financial statements—the income statement, retained
earnings statement, balance sheet, and statement of cash
flows—are prepared according to generally accepted
accounting principles (GAAP).
2. These statements are used by external users such as the
following:
• Shareholders
• Creditors
• Government agencies
• The general public

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Differences Between Managerial and Financial Accounting
(slide 3 of 4)

• Managerial accounting information is designed

to meet the specific needs of a company’s
management.
1. This information includes the following:
• Historical data, which provide objective measures of past
operations
• Estimated data, which provide subjective estimates about
future decisions
2. Management uses both types of information in:
• Directing daily operations
• Planning future operations
• Developing business strategies
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Differences Between Managerial and Financial Accounting
(slide 4 of 4)

• Unlike the financial statements prepared in financial

accounting, managerial accounting reports do not always
have to be:
1. Prepared according to generally accepted accounting
principles (GAAP).
• Only the company’s management uses the information.
• In many cases, GAAP are not relevant to the specific decision-
making needs of management.
2. Prepared at fixed intervals (monthly, quarterly, yearly).
• Although some management reports are prepared at fixed intervals,
most reports are prepared as management needs the information.
3. Prepared for the business as a whole.
• Most management reports are prepared for products, projects, sales
territories, or other segments of the company.
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Managerial Accounting in the Organization
(slide 1 of 3)

• In most companies, departments or similar

organizational units are assigned responsibilities
for specific functions or activities.
• The operating structure of a company can be
shown in an organization chart.
• The departments in a company can be viewed
as having either of the following:
1. Line responsibilities
2. Staff responsibilities

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Managerial Accounting in the Organization
(slide 2 of 3)

• A line department is directly involved in

providing goods or services to the customers of
the company.
• A staff department provides services,
assistance, and advice to the departments with
line or other staff responsibilities. A staff
department has no direct authority over a line
department.

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Managerial Accounting in the Organization
(slide 3 of 3)

• In most companies, the controller is the chief

management accountant.
1. The controller’s staff consists of a variety of other
accountants who are responsible for specialized
accounting functions such as the following:
• Systems and procedures
• General accounting
• Budgets and budget analysis
• Special reports and analysis
• Taxes
• Cost accounting

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The Management Process
(slide 1 of 2)

• The management process has the following

five basic phases, which interact with one
another:
1. Planning
2. Directing
3. Controlling
4. Improving
5. Decision making

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The Management Process
(slide 2 of 2)

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Planning

• Management uses planning in developing the

company’s objectives (goals) and translating
these objectives into courses of action.
• Planning may be classified as follows:
1. Strategic planning, which is developing long-term
actions to achieve the company’s objectives.
• These long-term courses of action are called strategies,
which often involve periods of 5 to 10 years.
2. Operational planning, which develops short-term
actions for managing the day-to-day operations of
the company.

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Directing

• The process by which managers run day-to-day

operations is called directing.

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Controlling

• Monitoring operating results and comparing

actual results with the expected results is
controlling.
1. This feedback allows management to isolate areas
for further investigation and possible remedial
action.
• The philosophy of controlling by comparing
actual and expected results is called
management by exception.

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Improving

• Continuous process improvement is the

philosophy of continually improving employees,
business processes, and products.
1. The objective of continuous process improvement is
to eliminate the source of problems in a process.
• In this way, the right products (or services) are delivered in
the right quantities at the right time.

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Decision Making

• Inherent in each of the preceding management

processes is decision making.
1. In managing a company, management must
continually decide among alternative actions.

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Uses of Managerial Accounting Information

• Managerial accounting provides information and reports

for managers to use in operating the business.
1. Managerial accounting provides the cost of manufacturing a
product, which can be used to determine its selling price.
2. Managerial accounting allows for comparing the costs of
manufacturing products over time and can be used to monitor
and control the cost of direct materials, direct labor, and factory
overhead.
3. Performance reports allow management to identify any large
amounts of scrap materials or employee downtime.
4. A report could analyze the potential efficiencies and dollar
savings of purchasing computerized equipment to speed up the
production process.
5. A report could analyze how many units need to be sold to cover
operating costs and expenses. Such information could be used
to set monthly selling targets and bonuses for sales personnel.
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Manufacturing Operations

• The operations of a business can be classified

as service, merchandising, or manufacturing.
1. Most of the managerial accounting concepts that
apply to manufacturing businesses also apply to
service and merchandising businesses.

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Direct and Indirect Costs
(slide 1 of 2)

• A cost is a payment of cash or the commitment

to pay cash in the future for the purpose of
generating revenues.
1. In managerial accounting, costs are often classified
according to the decision-making needs of
management.
• For example, costs are often classified by their relationship to
a segment of operations, called a cost object.
• A cost object may be a product, a sales territory, a department,
or an activity, such as research and development.

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Direct and Indirect Costs
(slide 2 of 2)

• Costs identified with cost objects are either

direct costs or indirect costs.
1. Direct costs are identified with and can be traced to
a cost object.
• For example, the cost of wood used to make guitars is a
direct cost.
2. Indirect costs cannot be identified with or traced to
a cost object.
• For example, the salaries of production supervisors are
indirect costs of producing a guitar because their salaries
cannot be identified with or traced to any individual guitar.

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Manufacturing Costs

• The cost of a manufactured product includes the

cost of materials used in making the product.
• In addition, the cost of a manufactured product
includes the cost of converting the materials into
a finished product.
• Thus, the cost of a finished product includes:
1. Direct materials cost
2. Direct labor cost
3. Factory overhead cost

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Direct Materials Cost

• Manufactured products begin with raw materials that are

converted into finished products.
• To be classified as a direct materials cost, the cost
must be both of the following:
1. An integral part of the finished product
2. A significant portion of the total cost of the product
• Examples of direct materials costs include the following:
1. The cost of the wood used in producing a guitar
2. The cost of electronic components for a television
3. Silicon wafers for microcomputer chips
4. Tires for an automobile

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Direct Labor Cost

• Most manufacturing processes use employees to convert

materials into finished products.
• The cost of employee wages that is an integral part of the
finished product is classified as direct labor cost.
• A direct labor cost must meet both of the following criteria:
1. An integral part of the finished product
2. A significant portion of the total cost of the product
• Examples of direct labor costs include the following:
1. The wages of employees who cut guitars out of raw lumber and
assemble them
2. Mechanics’ wages for repairing an automobile
3. Machine operators’ wages for manufacturing tools
4. Assemblers’ wages for assembling a laptop computer
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Factory Overhead Cost
(slide 1 of 2)

• Costs other than direct materials cost and direct labor that
are incurred in the manufacturing process are combined
and classified as factory overhead cost (sometimes
called manufacturing overhead or factory burden).
• All factory overhead costs are indirect costs of the product.
• Some factory overhead costs include the following:
1. Heating and lighting the factory
2. Repairing and maintaining factory equipment
3. Property taxes on factory buildings and land
4. Insurance on factory buildings
5. Depreciation of factory plant and equipment

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Factory Overhead Cost
(slide 2 of 2)

• Factory overhead cost also includes materials

and labor costs that do not enter directly into the
finished product.
1. Examples include the cost of oil used to lubricate
machinery and the wages of janitorial and
supervisory employees.
• Also, if the costs of direct materials or direct
labor are not a significant portion of the total
product cost, these costs may be classified as
factory overhead costs.

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Prime Costs and Conversion Costs
(slide 1 of 2)

• Direct materials, direct labor, and factory

overhead costs may be grouped together for
analysis and reporting.
1. Two such common groupings are as follows:
• Prime costs, which consist of direct materials and direct
labor costs
• Conversion costs, which consist of direct labor and factory
overhead costs
• Conversion costs are the costs of converting the materials into
a finished product.

• Direct labor is both a prime cost and a

conversion cost.
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Product Costs and Period Costs
(slide 1 of 2)

• For financial reporting purposes, costs are

classified as product costs or period costs.
1. Product costs consist of manufacturing costs: direct
materials, direct labor, and factory overhead.
2. Period costs consist of selling and administrative
costs.
• Selling expenses are incurred in marketing the product and
delivering the product to the customer.
• Administrative expenses are incurred in managing the
company and are not directly related to the manufacturing or
selling functions.

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Product Costs and Period Costs
(slide 2 of 2)

• As product costs are incurred, they are recorded

and reported on the balance sheet as inventory.
When the inventory is sold, the cost of the
manufactured product sold is reported as cost of
goods sold on the income statement.
• Period costs are reported as expenses on the
income statement in the period in which they are
incurred, and, thus, they never appear on the
balance sheet.

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Product Costs, Period Costs, and the Financial
Statements

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Sustainability

• Sustainability is the practice of operating a

business to maximize profits while attempting to
preserve the environment, economy, and needs
of future generations.
• Sustainability practices acknowledge that a
company’s long-term success requires continued
availability of natural resources and a productive
social environment.

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Sustainable Business Activities

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Eco-Efficiency Measures in
Managerial Accounting (slide 1 of 2)
• Sustainability information can provide important
feedback to guide a company’s strategic and
operational decision making.
• Managers can use this information to:
• increase revenue
• control costs
• allocate resources efficiently.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Eco-Efficiency Measures in
Managerial Accounting (slide 2 of 2)
• Eco-efficiency measures are a form of
managerial accounting information that helps
managers evaluate the savings generated by
using fewer natural resources in a company’s
operations.
• The Sustainability Accounting Standards Board
(SASB) was organized in 2011 to develop accounting
standards that help companies report decision-useful
sustainability information to external financial
statement users.

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Eco-Efficiency Measures

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Financial Statements for a Manufacturing Business

• The retained earnings and cash flow statements

for a manufacturing business are similar to those
for service and merchandising businesses.
• However, the balance sheet and income
statement for a manufacturing business are
more complex.
1. This is because a manufacturer makes the products
that it sells and, thus, must record and report
product costs.

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Balance Sheet for a Manufacturing Business

• A merchandising business reports only Merchandise

Inventory on its balance sheet.
• In contrast, a manufacturing business reports three types
of inventory on its balance sheet as follows:
1. Materials inventory (sometimes called raw materials
inventory) consists of the costs of the direct and indirect
materials that have not yet entered the manufacturing process.
2. Work in process inventory consists of the direct materials,
direct labor, and factory overhead costs for products that have
entered the manufacturing process, but are not yet completed
(in process).
3. Finished goods inventory consists of completed (or finished)
products that have not been sold.

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Income Statement for a Manufacturing Business
(slide 1 of 6)

• The income statements for merchandising and

manufacturing businesses differ primarily in the
reporting of the cost of merchandise (goods)
available for sale and sold during the period.

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Income Statements for Merchandising
and Manufacturing Businesses

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Income Statement for a Manufacturing Business
(slide 2 of 6)

• A merchandising business purchases

merchandise ready for resale to customers.
• The total cost of the merchandise available for
sale during the period is determined as follows:

• The cost of merchandise sold is:

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Income Statement for a Manufacturing Business
(slide 3 of 6)

• A manufacturer makes the products it sells, using

direct materials, direct labor, and factory overhead.
• The total cost of making products that are available
for sale during the period is called the cost of
goods manufactured.
• The cost of finished goods available for sale is
determined as follows:

• The cost of goods sold is determined as follows:

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Income Statement for a Manufacturing Business
(slide 4 of 6)

• Cost of goods manufactured is required to

determine the cost of goods sold and, thus, to
prepare the income statement.
1. The cost of goods manufactured is often determined
by preparing a statement of cost of goods
manufactured.

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Income Statement for a Manufacturing Business
(slide 5 of 6)

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Income Statement for a Manufacturing Business
(slide 6 of 6)

• The statement of cost of goods manufactured is

prepared using the following three steps:
1. Determine the cost of materials used.
2. Determine the total manufacturing costs incurred.
3. Determine the cost of goods manufactured.

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Flow of Manufacturing Costs

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