Learning Objective 1

Chapter 18
Define managerial
Introduction to
accounting and understand
Managerial how it is used
Accounting

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Why Is Managerial Accounting Financial Versus Managerial

Important? Accounting
• Financial accounting:
– Financial statements are used by investors,
creditors, and government authorities.
• Managerial accounting:
– Reports are generated for planning.
• One planning tool is the budget.
– Controlling involves evaluating the plan and
comparing the actual results to the budget.
– Weighing the costs against the benefits is
called cost/benefit analysis.

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Financial Versus Managerial
Management Accountability
Accounting
• Management accountability is the
manager’s responsibility to the various
stakeholders to wisely manage the
organization’s resources.
• Stakeholders have an interest in the
business and include the following:
– Customers
– Creditors
– Suppliers
– Investors

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Management Accountability Today’s Business Environment

• Shift toward a service economy.

• Global competition.
• Time-based competition:
– Enterprise Resource Planning (ERP)
systems integrate companies data.
– E-commerce allows companies to sell
products to customers around the world.
– Just-in-Time (JIT) Management is an
inventory management tool.

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 Today’s Business Environment Ethical Standards

• Total Quality Management (TQM) is a • Principles IMA’s overarching ethical principles include: Honesty,
Fairness, Objectivity, and Responsibility. Members shall act in
philosophy of continuous improvement in accordance with these principles and shall encourage others
products and processes. within their organizations to adhere to them.
– Creates a culture of cooperation.
– Each step adds value to the end product, and this • Standards IMA members have a responsibility to comply with and
is referred to as the value chain. uphold the standards of Competence, Confidentiality, Integrity,
and Credibility. Failure to comply may result in disciplinary action.
• The economic, social, and environmental
impact of doing business is referred to as the
triple bottom line, which includes:
– Profits
– People
– Planet

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Ethical Standards Ethical Standards

I. COMPETENCE III. INTEGRITY

1. Maintain an appropriate level of professional leadership and expertise by 1. Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any
enhancing knowledge and skills. potential conflicts of interest.
2. Perform professional duties in accordance with relevant laws, regulations, 2. 2. Refrain from engaging in any conduct that would prejudice carrying
and technical standards. out duties ethically.
3. Provide decision support information and recommendations that are 3. 3. Abstain from engaging in or supporting any activity that might
discredit the profession.
accurate, clear, concise, and timely. Recognize and help manage risk. 4. 4. Contribute to a positive ethical culture and place integrity of the
II. CONFIDENTIALITY profession above personal interests.
1. Keep information confidential except when disclosure is authorized or IV. CREDIBILITY
legally required. 1. Communicate information fairly and objectively.
2. Inform all relevant parties regarding appropriate use of confidential 2. Provide all relevant information that could reasonably be expected to
influence an intended user’s understanding of the reports, analyses, or
information. Monitor to ensure compliance. recommendations.
3. Refrain from using confidential information for unethical or illegal 3. Report any delays or deficiencies in information, timeliness, processing,
advantage. or internal controls in conformance with organization policy and/or
applicable law.
4. Communicate professional limitations or other constraints that would
preclude responsible judgment or successful performance of an activity

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 How Do Service, Merchandising, and
Learning Objective 2
Manufacturing Companies Differ?

• Service companies sell their time, skill,

and knowledge.
Describe the differences – All of their costs are period costs and are
expensed in the period incurred.
between service,
merchandising, and • Merchandising companies resell
products they previously bought from
manufacturing companies
suppliers.
– Cost of goods sold is an inventoriable product
cost, also called a product cost.
• Manufacturing companies create
products customers want.
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How Do Service, Merchandising, and Manufacturing

Manufacturing Companies Companies Differ?

• Manufacturing companies convert raw

materials into finished products.
• The three types of inventory are:
– Raw Materials Inventory (RM)
• Materials used to manufacture a product.
– Work-in-Process Inventory (WIP)
• Goods that have been started but are not compete.
– Finished Goods Inventory (FG)
• Completed goods that have not yet been sold.

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 Learning Objective 3 How Are Costs Classified?

Product Costs
Classify costs for service,
merchandising, and Indirect
Direct costs
manufacturing companies costs
Not traced to
Traced to a cost object
a cost object

Direct Manufacturing
Direct labor
materials overhead

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Product Costs Product Costs

• Direct materials (DM)

• Raw materials used in production
• Direct labor (DL)
• Labor of employees working on the products
• Manufacturing overhead (MOH)
• The indirect product costs associated with
production, including:
• Indirect materials
• Indirect labor
• Factory costs for rent, utilities, insurance, etc.

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 Prime and Conversion Costs Learning Objective 4
• Prime costs combine direct costs of direct
materials and direct labor.
• Conversion costs are the costs to convert
raw materials into finished goods: direct Prepare an income statement
labor plus manufacturing overhead. and schedule of cost of goods
manufactured for a
manufacturing company and
calculate cost per item

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How Do Manufacturing Companies

Determine the Cost of Calculating Cost of Goods Sold
Manufactured Products?
• Income statement
– Calculating cost of goods sold
• The Finished Goods Inventory account provides
information for the cost of goods sold section of the
income statement.
– Gross profit
• Gross profit = Net Sales Revenue – Cost of Goods
Sold
– Operating income
• Operating income = Gross profit – sales and
administrative expenses

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 Calculating Cost of Goods Calculating Cost of Goods
Manufactured Manufactured
• Cost of goods manufactured is the
manufacturing costs of the goods that
finished the production process in a given
accounting period.
– Costs are determined from activities that took
place in the past.

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Calculating Cost of Goods Flow of Costs Through the

Manufactured Inventory Accounts

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 Calculating Unit Product Cost Learning Objective 5

• Managers make decisions on pricing products

based on unit cost.
– Cost per unit is found by dividing cost of goods
manufactured by total units produced. Calculate cost per service for a
– The cost per unit is used to determine the Cost of service company and cost per
Goods Sold for the units sold to customers. item for a merchandising
company

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How Is Managerial Accounting

Used in Service and Merchandising
Companies?

Managers of service and merchandising

organizations make decisions on pricing
based on cost per service or cost per
item.

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