Managerial Accounting

Differences between Financial And Managerial Accounting.

Financial Accounting

1. Concerned with, compliance with GAAP & GAAS

2. End product is the financial statements prepared for external use and
relied upon by outside 3rd parties (investors, auditors, bankers, SEC,
governmental agency, customers etc.)
3. Deals with reporting on activity after the transactions have occurred.
The decision has been made and the transaction must be recorded on
the books.

Managerial Accounting

1. Used by managers of a business to evaluate operating performance

and to formulate decisions relating to the operating activities of the
business.
2. Financial statements do not comply with GAAP
3. Financial statements are used for internal purposes to evaluate
operations (revenue, cost control, profit margins, departmental or
product line reporting)
4. Information is needed quarterly & on a timely basis so as to change
current operating strategies.
5. Useful in make or buy decisions, Cost-Volume-Profit (CVP) analysis,
present value concepts etc.

Cost terms, Concepts and Classifications

1. Manufacturing costs – (Inventoriable or product costs involved with

the conversion of raw material into work-in-process and ultimately to
finished goods inventory.

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 2. Basic elements of the cost of a manufactured product

(a) Direct material

(1) raw material
(2) Materials that become an integral part of the product
being manufactured & can be directly traced to it

(b) Direct labor

(1) Costs of labor directly traceable to the product being
manufactured (ex: assembly line workers, workers
who work directly on the product being made)

(c) Manufacturing overhead (factory overhead or factory burden)

(1) All other costs excluding direct materials & direct
labors, that relate to the operation of the factory
Includes:
1. Indirect materials: material not directly
traceable to the product being manufactured (glue
welding materials, factory supplies, nails,
lubricating, oil)
2. Indirect labor: labor not directly traceable to the
product being manufactured (janitor, supervisors,
security, guards, etc)
3. Heat, light, property taxes, depreciation on factory
facilities (building + equipment) insurance on
factory facilities.

NOTE: The costs in (c) above only relate to the operation of the factory.
Excludes: Similar costs: which relate to the office are not included as
manufacturing overhead, but are strictly period non-manufactory costs,
expensed when incurred.

Methods of accounting for additional labor costs:

(1) Idle time – cost of direct labor workers who are unable to
perform their assignments due to machine breakdowns,
material shortages, etc.
The cost of idle time is part of factory overhead.

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 (2) Overtime premium – considered part of factory overhead
regardless if payment was made to direct or indirect labor
employees.

(3) Labor fringe benefits –

- Method 1:
All such costs are treated as indirect labor add to factory
Overhead.

- Method 2:
Fringe benefits related to direct labor employees are classified
as additional direct labor cost.

Prime costs = Direct materials + direct labor

Conversion costs = direct labor + manufacturing overhead

3. Period Costs vs. Product Costs

Period Costs – matched against revenues on a time period basis when

incurred. All selling & administrative expenses are classified as period
costs. (Office rent, commissions, etc). Non-manufacturing costs
incurred which are not connected to the manufacturing process.

(1) Selling Costs

Costs necessary to service the customers and to bring the finished
product into the hands of the customers.
Examples: Advertising, Shipping, sales salaries etc.

(2) General & Administrative Costs

Costs that are incurred which relate to the general administration
and support of the company as a whole.
Examples: executive salaries, general accounting salaries
secretarial costs etc.

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Product Costs (also called inventoriable costs).
The products costs remain with the inventory produced as an asset and are
not expensed until the product (inventory) is sold (COGS), and they are
matched against revenues at the point of sale.

4. Comparison of Income Statements (Cost of Goods Sold Section)

(a) Merchandise Company

Cost of Goods Sold:

Beginning Inventory 50,000
Add net purchases 600,000
Goods available for sale 650,000
Less: Ending inventory <250,000>
COGS 400,000

(b) Manufactory Company

Cost of Goods Sold:

Beginning finished goods inventory 110,000
Add ➀ costs of goods manufactured 850,000
Goods available for sale 960,000
Less: Ending finished goods inventory <150,000>
COGS 810,000

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 (c) ➀ Schedule of Cost of Goods Manufactured

MANUFACTURING COMPANY

Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2001
Direct materials:
Beginning raw materials inventory* $70,000
Add: Purchases of raw materials 390,000
Raw materials available for use 460,000
Deduct: Ending raw materials inventory 50,000
Raw materials used in production $410,000
Direct Labor 60,000
Manufacturing Overhead: (Costs that relate to the factory)
Insurance. Factory 6,000
Indirect labor 100,000
Machine rental 50,000
Utilities, factory 75,000
Supplies 21,000
Depreciation, factory 90,000
Property taxes, factory 8,000
Total overhead costs 350,000
Total manufacturing costs 820,000
Add: Beginning work in process inventory 90,000
(Costs already put into process in the prior periods)
Total Goods in Process 910,000
Deduct: Ending work in process inventory 60,000
Costs of goods manufactured (COGM) ➀ $850,000

The amount of COGM is transferred to the COGS section of the income

statement in (b) above.

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5. Comparisons of Balance Sheets

(a) Merchandise Company

One class of inventory (merchandise inventory) is only its finished

state no work is performed on the inventory
(b) Manufacturing Company - Three classes of inventory exist:

• Raw material – the integral part of the product being

manufactured.
• Work-in-process – goods partially completed at the end
of the period. This inventory will include material, labor,
and factory overhead.
• Finished goods – Completed units of product awaiting
shipment to customers in the ordinary course of business.

6. Just in time inventory system – company only purchases enough

material each day to meet that day’s needs. All material is received
and completed just in time to be shipped and sold the same day.
Therefore in theory, there is no ending inventory that exists.

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 Cost Flows and Classifications in a Manufacturing Company

Costs
Product Costs

Raw Materials Raw Materials

Purchase Inventory
Direct materials used in production
Direct Labor
Work in Income Statement
Process Sheet
Balanced
inventory Goods completed (cost of
Manufacturing goods manufactured)
Cost of goods
Overhead
sold
Finished Goods
Goods Sold
Period Costs Inventory

Selling and
Selling and
administrative
administrative
expenses