Accounting Principles, 5e

Weygandt, Kieso, & Kimmel

Prepared by
Marianne Bradford, Ph.D.
Bryant College

John Wiley & Sons, Inc.

CHAPTER 20
MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:
1 Explain the distinguishing features of
managerial accounting.
2 Identify the 3 broad functions of management.
3 Define the 3 classes of manufacturing costs.
4 Distinguish between product and period costs.
5 Explain the difference between a
merchandising and a manufacturing income
statement.

CHAPTER 20
MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:
6 Indicate how cost of goods manufactured is
determined.
7 Explain the difference between a
merchandising and a manufacturing balance
sheet.

PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING

Managerial
Accounting Basics
Comparing

managerial and
financial accounting

Ethical

standards

Management

functions

Managerial
Cost Concepts
Manufacturing
Product

costs

versus period costs

PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING

Manufacturing Costs in
Financial Statements
Income

statement

Balance

sheet

Cost

Concepts: a review

Contemporary Developments
in Managerial Accounting
Service

industry

trends
Value

chain
management

STUDY OBJECTIVE 1

Explain
Explain the
the distinguishing
distinguishing features
features
of
of managerial
managerial accounting.
accounting.

MANAGERIAL ACCOUNTING
BASICS

Managerial accounting
(management accounting) is a field
of accounting that provides
economic and financial
information for managers and
other internal users.

MANAGERIAL ACCOUNTING
BASICS

The activities that are part of managerial

accounting are as follows:
1 Explaining manufacturing and
nonmanufacturing costs and how they are
reported in the financial statements.
2 Computing the cost of providing a service
or manufacturing a product.
3 Determining the behavior of costs and
expenses as activity levels change and
analyzing cost-volume-profit
relationships within a company.

MANAGERIAL ACCOUNTING
BASICS
4 Assisting management in profit planning and
formalizing these plans in the form of budgets.
5 Providing a basis for controlling costs and expenses by
comparing actual results with planned objectives and
standard costs.
6 Accumulating and presenting relevant data for
management decision making.

ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Primary Users of Reports
External users: stockholders, creditors, and regulatory.

Types and Frequency of Reports

Classified financial statements.
Issued quarterly and annually.

Purpose of Reports
General-purpose information for all users.

ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Content of Reports
Pertains to business as a whole and is highly aggregated (condensed).
Limited to double-entry accounting system and cost data.
Reporting standard is generally accepted accounting principles.

Verification Process
Annual independent audit by certified public accountant.

ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Primary Users of Reports
Internal users: officers, department heads, managers, and
supervisors.

Types and Frequency of Reports

Internal reports.
Issued as frequently as needed.

Purpose of Reports
Special-purpose information for a particular user for a specific decision.

ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Content of Reports
Pertains to subunits of the entity and may be very detailed.
May extend beyond double-entry accounting system to any type of
relevant data.
Reporting standard is relevance to the decision to be made.

Verification Process
No independent audits.

ETHICAL STANDARDS
FOR
MANAGERIAL ACCOUNTANTS
Managerial accountants recognize that they have an
ethical obligation to their companies and the public.
The Institute of Management Accountants (IMA)
has developed a code of ethical standards, entitled
Standards of Ethical Conduct for Management
Accountants.
This code divides the managerial accountants
responsibilities into 4 areas:
1 competence,
2 confidentiality,
3 integrity, and
4 objectivity.

STUDY OBJECTIVE 2

Identify
Identify the
the three
three broad
broad
functions
functions of
of management.
management.

MANAGEMENT
FUNCTIONS
The management of an organization
performs (3) broad functions:
1 Planning
2 Motivating and Directing
3 Controlling

MANAGEMENT FUNCTIONS
PLANNING

Planning requires management to

1 look ahead and
2 establish objectives.
A key modern management objective is to add
value to the business under its control.
Value is usually measured by
1 the trading price of the companys stock and
2 the potential selling price of the company.

MANAGEMENT FUNCTIONS
ORGANIZING AND DIRECTING
Motivating and directing involves coordinating
diverse activities and human resources to
produce a smooth-running operation.
This function relates to implementing of
planned objectives.
Most companies prepare organization charts to
show
1 the interrelationship of activities and
2 the delegation of authority and responsibility
within the company.

MANAGEMENT FUNCTIONS
CONTROLLING

Controlling is the process of keeping the firms activities on

track.
In controlling operations, managers determine
1 whether planned goals are being met and
2 when there are deviations from targeted objectives.

MANAGERIAL
COST CONCEPTS
To perform the three management functions effectively,
management needs information. One very important
type of information is related to costs.
The following questions need answering:
1 What costs are involved in making the product or
providing a service?
2 If production volume is decreased, will costs decrease?
3 What impact will automation have on total costs?
4 How can costs best be controlled?

STUDY OBJECTIVE 3

Define
Define the
the three
three classes
classes
of
of manufacturing
manufacturing costs.
costs.

MANAGERIAL
COST CONCEPTS
Manufacturing consists of activities and
processes that convert raw materials into
finished goods.
Manufacturing costs are usually classified
as follows:
1 direct materials,
2 direct labor, and
3 manufacturing overhead.

ILLUSTRATION 20-2
CLASSIFICATIONS OF
MANUFACTURING COSTS

DIRECT MATERIALS

DIRECT LABOR
MANUFACTURING
OVERHEAD

MANUFACTURING COSTS
DIRECT MATERIALS
Raw materials are the basic materials and parts
that are to be used in the manufacturing process.
Raw materials that can be physically and directly
associated with the finished product during the
manufacturing process are called direct materials.

Materials

MANUFACTURING COSTS
INDIRECT MATERIALS
Some raw materials cannot be easily
associated with the finished product. These
are considered indirect materials which
areaccounted for as part of manufacturing
overhead and
1 do not physically become part of the
finished product or
2 cannot be traced because their physical
association with the finished product is too
small in terms of cost.

MANUFACTURING COSTS
DIRECT LABOR
Direct labor is the work of factory employees that can be
physically and directly associated with converting raw
materials into finished goods.
The wages of maintenance people, timekeepers, and
supervisors are usually identified as indirect labor. Their
efforts have no physical association with the finished product.
Like indirect materials, indirect labor is
part of manufacturing overhead.
Factory
Labor

MANUFACTURING COSTS
MANUFACTURING OVERHEAD

Manufacturing overhead consists of costs that are indirectly

associated with the manufacture of the finished product.
These costs may also be manufacturing costs that cannot be
classified as direct materials or direct labor.
Manufacturing overhead includes
1 indirect materials;
2 indirect labor;
3 depreciation on factory buildings and machinesManufacturing
Overhead
4 insurance, taxes, and maintenance on
factory facilities.

STUDY OBJECTIVE 4

Distinguish
Distinguish between
between product
product and
and period
period costs.
costs.

PRODUCT COSTS VERSUS

PERIOD COSTS
Product costs include each of the manufacturing
cost elements (direct materials, direct labor, and
manufacturing overhead); they are costs that are a
necessary and integral part of producing the
finished product.
These costs are not expensed to cost of goods sold
under the matching principle until the finished
goods inventory is sold.

PRODUCT COSTS VERSUS

PERIOD COSTS
Direct materials and direct labor are often referred
to as prime costs due to their direct association with
the manufacturing of the finished product.
Direct labor and manufacturing overhead are often
referred to as conversion costs since they are
incurred in converting raw materials into finished
goods.
Period costs: a) are identifiable with a specific time
period, b) relate to nonmanufacturing
noninventoriable costs, and c) include selling and
administrative expenses.

ILLUSTRATION 20-4
PRODUCT VERSUS PERIOD COSTS
Product Costs

Direct Labor
Manufacturing
Overhead
Period Costs

Nonmanufacturing
Costs

Selling Expenses
Administrative
Expenses

{
{

Manufacturing
Costs

Direct Materials

Prime
Costs
Conversion
Costs

STUDY OBJECTIVE 5

Explain
Explain the
the difference
difference between
between aa
merchandising
merchandising and
and aa manufacturing
manufacturing
income
income statement.
statement.

COST OF GOODS SOLD

COMPONENTS
Under a periodic inventory system, the income
statements of a merchandiser and a manufacturer
differ in the cost of goods sold section.
For a merchandiser, cost of goods sold is computed
by adding the beginning merchandise inventory and
the cost of goods purchased and subtracting the
ending merchandise inventory.
For a manufacturer, cost of goods sold is computed
by adding the beginning finished goods inventory and
the cost of goods manufactured and subtracting the
ending finished goods inventory.

ILLUSTRATION 20-5
COST OF GOODS SOLD
COMPONENTS

Merchandiser
Beginning
Merchandise
Inventory

Cost of Goods
Purchased

Ending
Merchandise
Inventory

=
Cost of
Goods Sold

Manufacturer
Beginning
Finished Goods
Inventory

Cost of Goods
Manufactured

Ending
Finished Goods
Inventory

ILLUSTRATION 20-6
COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES

The cost of goods sold sections for merchandising

and manufacturing enterprises that are
presented illustrate the different presentations:

ILLUSTRATION 20-6
COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES

STUDY OBJECTIVE 6

Indicate
Indicate how
how cost
cost of
of goods
goods
manufactured
manufactured isis determined.
determined.

ILLUSTRATION 20-7
COST OF GOODS MANUFACTURED
FORMULA
The total cost of work in process for the year is equal to the sum of:
1 the cost of the beginning work in process inventory and
2 the total manufacturing costs for the current period.
To find the cost of goods manufactured, we subtract the cost of the
ending work in process inventory from the total cost of work in
process.
Beginning Work
in Process
Inventory

Total Cost of
Work in Process

Total Current
Manufacturing
Costs

Ending Work in
Process Inventory

Total Cost of
Work in Process

Cost of Goods
Manufactured

ILLUSTRATION 20-8
COST OF GOODS MANUFACTURED
SCHEDULE
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 20-7.

STUDY OBJECTIVE 7

Explain
Explain the
the difference
difference between
between
aa merchandising
merchandising and
and aa
manufacturing
manufacturing balance
balance sheet.
sheet.

CURRENT ASSETS SECTIONS

OF MERCHANDISING AND MANUFACTURING
BALANCE SHEETS

The balance sheet for a merchandiser shows just one

inventory category.
In contrast, the balance sheet of a manufacturer may
have 3 inventory accounts:
1 Finished Goods Inventory shows the cost of
completed goods on hand,
2 Work in Process Inventory shows the cost applicable
to units that have been started into production but are
only partially completed, and
3 Raw Materials Inventory shows the cost of raw
materials on hand.

ILLUSTRATION 20-10
CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS

ILLUSTRATION 20-10
CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS

ILLUSTRATION 20-11
ASSIGNMENT OF
COSTS TO COST
CATEGORIES

The manufacturing and selling costs can be

assigned to the various categories shown below.
Cost Item
1. Material cost ($10 per door)
2. Labor costs ($8 per door)
3. Depreciation on new equipment
($25,000 per year)
4. Property taxes ($6,000 per year)
5. Advertising costs ($30,000 per year)
6. Sales commissions ($4 per door)
7. Maintenance salaries ($28,000 per
year)
8. Salary of plant manager ($70,000)
9. Cost of shipping pre-hung doors
($12 per door)

Product Costs
Direct
Direct Manufacturing
Materials Labor
Overhead

Period
Costs

X
X
X
X

Prime
Costs

Conversion
Costs

X
X

X
X
X

X
X
X
X

X
X
X

ILLUSTRATION 20-12
COMPUTATION OF TOTAL
MANUFACTURING COSTS
Total manufacturing costs are the sum of the product costs
direct materials, direct labor, and manufacturing overhead
costs. Northridge Company produces 10,000 pre-hung wooden
doors the first year. The total manufacturing costs are:
Cost Number and Item
1. Material cost ($10 X 10,000)
2. Labor cost ($8 X 10,000)
3. Depreciation on new equipment
4. Property taxes
7. Maintenance salaries
8. Salary of plant manager
Total manufacturing costs

Manufacturing
Cost
$ 100,000
80,000
25,000
6,000
28,000
70,000
$ 309,000

CONTEMPORARY DEVELOPMENTS IN

MANAGERIAL ACCOUNTING
Global competition has intensified. Today,
contemporary business managers demand from
managerial accountants different and better
information than they needed just a few years
ago.
Service Industry Trends in some respects the
challenges for managerial accounting are greater
in service companies than in manufacturing
companies.

ILLUSTRATION 20-13
SERVICE INDUSTRIES AND COMPANIES
What are the questions faced by service company
managers in these industries?
Transportation
Package delivery services
Telecommunications
Professional services
Financial institutions
Health Care

CONTEMPORARY DEVELOPMENTS IN

MANAGERIAL ACCOUNTING
VALUE CHAIN
The value chain is the term that describes all
activities associated with providing a product or
service.
Activities included in the value chain include:

Research and development

Ordering raw materials
Manufacturing
Marketing
Delivery
Customer relations.

CONTEMPORARY DEVELOPMENTS IN

MANAGERIAL ACCOUNTING
VALUE CHAIN

A number of factors affect efforts to

manage the value chain and supply
chain.
Technological change
Just-in-time inventory methods
Quality
Focus on activities

COPYRIGHT

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CHAPTER 20
MANAGERIAL ACCOUNTING