ch19, Accounting Principles

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
19-1
19 Managerial
Accounting
Learning Objectives
After studying this chapter, you should be able to:
[1] Explain the distinguishing features of managerial accounting.
[2] Identify the three broad functions of management.
[3] Define the three classes of manufacturing costs.
[4] Distinguish between product and period costs.
[5] Explain the difference between a merchandising and a manufacturing
income statement.
[6] Indicate how cost of goods manufactured is determined.
[7] Explain the difference between a merchandising and a manufacturing
balance sheet.
[8] Identify trends in managerial accounting.
19-2
Preview of Chapter 19
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
19-3
Managerial Accounting Basics
Managerial accounting provides economic and financial

information for managers and other internal users.
Crucial activities for companies would include:

The need for accurate information about the cost of each
product to know whether the company is making a profit
(Chapters 20 and 21).
The need to adjust the quantity it produces in light of changes in
economic conditions and consumer tastes. The need to
understand how changes in the quantity produced impacts its
production costs and profitability (Chapter 22).
19-4 LO 1 Explain the distinguishing features of managerial accounting.

Crucial activities for companies would include:

The need for managers to consider alternative courses of
action (Chapter 26).
The preparation of budgets in order to plan for the future
(Chapter 23).
Comparing budgeted numbers with actual results to evaluate
performance and identify areas that need to change (Chapters
24 and 25).
The need to make substantial investment decisions, such as
the building of a new plant or the purchase of new equipment
(Chapter 26).

Comparing Managerial and Financial

Accounting Illustration 19-1

Question
Managerial accounting:
a. Is governed by generally accepted accounting
principles.
b. Places emphasis on special-purpose information.
c. Pertains to the entity as a whole and is highly
aggregated.
d. Is limited to cost data.

Management Functions
Planning Directing Controlling
Maximize short-term Coordinate diverse Keeping activities on

profit and market activities and human track.
share resources. Determine whether
Commitment to Implement planned goals are met.
environmental objectives. Decide changes
protection Provide incentives to needed to get back
Contributing to social motivate employees on track.
programs. Hire and train May use an informal
Add value to the employees. or formal system of
business. Produce smooth- evaluations.
running operation.
19-8 LO 2 Identify the three broad functions of management.

19-9
Organizational Illustration 19-2
Structure
Organization charts show the
interrelationships of activities and
the delegation of authority and
responsibility within the company.
19-10 LO 2
Business Ethics
All employees are expected to act ethically.
Many organizations have codes of business ethics.
Past financial frauds:

Enron,
Global Crossing,
WorldCom

Business Ethics
Creating Proper Incentives
Systems and controls sometimes create incentives for
managers to take unethical actions.
Controls need to be effective and realistic.
Boeing
Boeing Plagued
Plagued by
by aa series
series Schering-Plough
Schering-Plough
of
of scandals
scandals attributed
attributed to
to an
an Pharmaceutical
Pharmaceutical manufacturer,
manufacturer,
evaluation
evaluation system
system that
that gave
gave found
found that
that employees
employees were
were so so
employees
employees thethe impression
impression that
that concerned
concerned with
with meeting
meeting production
production
they
they needed
needed to to succeed
succeed no
no quantity
quantity standards
standards that
that they
they failed
failed
matter
matter what
what actions
actions were
were to
to monitor
monitor the
the quality
quality of
of the
the
required
required to
to do
do so.
so. product,
product, and
and as
as aa result
result the
the
dosages
dosages were
were often
often wrong.
wrong.
19-12 LO 2
Business Ethics
Code of Ethical Standards
Sarbanes-Oxley Act (SOX)
Clarifies top managements responsibilities.
Requires certifications by CEO and CFO.
Selection criteria for Board of Directors and Audit
Committee.
Substantially increased penalties for misconduct.

Question
The management of an organization performs several broad
functions. They are:
a. Planning, directing, and selling.
b. Directing, manufacturing, and controlling.
c. Planning, manufacturing, and controlling.
d. Planning, directing, and controlling.

> DO IT!
Indicate whether the following statements are true or false.
1. Managerial accountants have a single role within an

False organization, collecting and reporting costs to
management.
2. Financial accounting reports are general-purpose and

True
intended for external users.
3. Managerial accounting reports are special-purpose and

True
issued as frequently as needed.

> DO IT!
Indicate whether the following statements are true or false.
4. Managers activities and responsibilities can be classified

False into three broad functions: cost accounting, budgeting,
and internal control.
5. As a result of the Sarbanes-Oxley Act, managerial

False accounting reports must now comply with generally
accepted accounting principles (GAAP).
6. Top managers must certify that a company maintains an

True
adequate system of internal controls.

Managerial Cost Concepts
Managers should ask questions such as the following.
1. What costs are involved in making a product or performing

a service?
2. If we decrease production volume, will costs decrease?
3. What impact will automation have on total costs?
4. How can we best control costs?
To answer these questions, managers need reliable and

relevant cost information.
19-17 LO 3 Define the three classes of manufacturing costs.

Manufacturing Costs
Manufacturing consists of activities and processes that
convert raw materials into finished goods.
Classified as:

Direct Materials
Raw Materials
Basic materials and parts used in manufacturing
process.
Direct Materials
Raw materials that can be
physically and directly associated
with the finished product during
the manufacturing process.

Direct Materials
Raw Materials
Basic materials and parts used in manufacturing
process.
Indirect Materials
Not physically part of the finished product or they are
an insignificant part of finished product in terms of
cost.
Considered part of manufacturing overhead.

Direct Labor
Work of factory employees that can be
physically and directly associated with
converting raw materials into finished
goods.
Indirect Labor
Work of factory employees that has no physical
association with the finished product or for which it is
impractical to trace costs to the goods produced.

Manufacturing Overhead
Costs indirectly associated with the
manufacture of the finished product.
Includes manufacturing costs that cannot be classified as
direct materials and direct labor.
Includes indirect materials, indirect labor, depreciation on

factory buildings and machines, and insurance, taxes,
and maintenance on factory facilities.

19-23
Question
Which of the following is not an element of manufacturing
overhead?
a. Sales managers salary.
b. Plant managers salary.
c. Factory repairmans wages.
d. Product inspectors salary.

Product versus Period Costs
Product Costs
Direct materials
Components: Direct labor
Manufacturing overhead
Costs that are a necessary and integral part of

producing the product.
Alternative
Alternative Terminology
Terminology
Recorded in inventory account. Product
Product costs
costs are
are also
also
called
called inventoriable
inventoriable costs.
costs.
Not an expense (COGS) until
the goods are sold.
19-25 LO 4 Distinguish between product and period costs.

Period Costs
Charged to expense as incurred.
Non-manufacturing costs.
Includes all selling and administrative expenses.

Illustration 19-3

> DO IT!
A bicycle company has these costs: tires, salaries of employees who
put tires on the wheels, factory building depreciation, lubricants, spokes,
salary of factory manager, handlebars, and salaries of factory
maintenance employees. Classify each cost as direct materials, direct
labor, or overhead.
Direct Materials Direct Labor Overhead
Tires Salaries of Lubricants

Spokes employees who put Factory depreciation
tires on the wheels
Handlebars Factory manager
salary
Factory maintenance
employees salary
19-28 LO 4
Manufacturing Costs in Financial Statements
Income Statement
Under a periodic inventory system, the income statements
of a merchandiser and a manufacturer differ in the cost of
goods sold section.
Cost of Goods Sold
LO 5 Explain the difference between a merchandising

19-29 and a manufacturing income statement.
Cost of Goods Manufactured

Cost of Goods Sold Components (Periodic Inventory System)
Illustration 19-4
19-30 LO 5
Cost of goods sold sections of merchandising and

manufacturing income statements
Illustration 19-5

Question
For the year, Red Company has cost of goods manufactured
of $600,000, beginning finished goods inventory of $200,000,
and ending finished goods inventory of $250,000. The cost of
goods sold is
Beginning Inventory $200,000
a. $450,000.
+ COGs Manufactured 600,000
b. $500,000.
Goods Available for Sale 800,000
c. $550,000. - Ending Inventory 250,000
d. $600,000. Cost of Goods Sold $550,000

Cost of Goods Manufactured

Total Work in Process (1) cost of beginning work in process and (2)
total manufacturing costs for the current period.
Total Manufacturing Costs sum of direct material costs, direct labor
costs, and manufacturing overhead in the current year.
Illustration 19-6
19-33 LO 6 Indicate how cost of goods manufactured is determined.

Illustration 19-7
Illustration 19-8
19-34
> DO IT!
19-35 LO 6 Indicate how cost of goods manufactured is determined.

19-36 Advance slide in presentation mode to reveal answers. LO 6

Balance Sheet
Inventory accounts for a manufacturer
Illustration 19-8
The balance sheet for a merchandising company shows just one category
of inventory.

19-37
and a manufacturing balance sheet.
Balance Sheet
Current assets sections of merchandising and manufacturing
balance sheets
Illustration 19-9

19-38 and a manufacturing balance sheet.
Question
A cost of goods manufactured schedule shows beginning and
ending inventories for:
a. Raw materials and work in process only

b. Work in process only
c. Raw materials only
d. Raw materials, work in process, and finished goods

Illustration: Suppose you started your own snowboard factory,

Diamond Snowboards. Here are some of the costs that your
snowboard factory would incur. Assign the following costs:
Illustration 19-10
Advance slide in presentation LO 7 Explain the difference between a merchandising

19-40 mode to reveal answers. and a manufacturing balance sheet.
Illustration 19-10
19-41
LO 7
If Diamond produces 10,000 snowboards the first year, what

would be the total manufacturing costs?
Illustration 19-11
Advance slide in
presentation mode to LO 7 Explain the difference between a merchandising
19-42 reveal answers.
and a manufacturing balance sheet.
Product Costing for Service Industries

Much of the U.S. economy has shifted toward an
emphasis on providing services.
Over 50% of U.S. workers are now employed by service
companies.
Like a manufacturer, service companies need to keep
track of the costs of its services in order to know whether
it is generating a profit.

19-44
Focus on the Value Chain

Refers to all business processes associated with providing
a product or performing a service.
For a manufacturing firm these include the following:
Illustration 19-12
19-45 LO 8 Identify trends in managerial accounting.

Just-In-Time Inventory Methods

Inventory system in which goods are manufactured or
purchased just in time for sale.
Total Quality Management (TQM)

Reduce defects in finished products, with the goal of
zero defects.
Theory of Constraints
Identification of bottlenecksconstraints within the
value chain that limit a companys profitability.

Enterprise Resource Planning (ERP) systems

A comprehensive, centralized, integrated source of
information to manage all major business processes
from purchasing, to manufacturing, to sales, to human
resources.
Activity-Based Costing (ABC)

Allocates overhead based on use of activities in making
the product.

Balanced Scorecard
Uses both financial and non-financial measures to
evaluate all aspects of a companys operations in an
integrated fashion.
Links performance to overall company objectives.

Question
Which of the following managerial accounting techniques
attempts to allocate manufacturing overhead in a more
meaningful manner?
a. Just-in-time inventory.
b. Total-quality management.
c. Balanced scorecard.
d. Activity-based costing.

> DO IT!
Match the descriptions that follow with the corresponding terms.
1. ______
e All activities associated
with providing a product or
performing a service.
a A method of allocating
2. ______
overhead based on each
products use of activities in
making the product.
3. ______
d Systems implemented to reduce defects in finished
products with the goal of achieving zero defects.

> DO IT!
Match the descriptions that follow with the corresponding terms.
4. ______
b A performance-
measurement approach that uses
both financial and nonfinancial
measures, tied to company
objectives, to evaluate a
companys operations in an
integrated fashion.
5. ______
c Inventory system in which goods are manufactured or
purchased just as they are needed for use.

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Copyright 2013 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
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programs or from the use of the information contained herein.
19-52

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Managerial accounting provides economic and financial

Crucial activities for companies would include:

19-4 LO 1 Explain the distinguishing features of managerial accounting.

Crucial activities for companies would include:

19-5 LO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial

19-6 LO 1 Explain the distinguishing features of managerial accounting.

19-7 LO 1 Explain the distinguishing features of managerial accounting.

Maximize short-term Coordinate diverse Keeping activities on

19-8 LO 2 Identify the three broad functions of management.

Organizational Illustration 19-2

Many organizations have codes of business ethics.

Past financial frauds:

19-11 LO 2 Identify the three broad functions of management.

Controls need to be effective and realistic.

19-13 LO 2 Identify the three broad functions of management.

a. Planning, directing, and selling.

b. Directing, manufacturing, and controlling.

c. Planning, manufacturing, and controlling.

d. Planning, directing, and controlling.

19-14 LO 2 Identify the three broad functions of management.

Indicate whether the following statements are true or false.

1. Managerial accountants have a single role within an

2. Financial accounting reports are general-purpose and

3. Managerial accounting reports are special-purpose and

19-15 LO 2 Identify the three broad functions of management.

Indicate whether the following statements are true or false.

4. Managers activities and responsibilities can be classified

5. As a result of the Sarbanes-Oxley Act, managerial

6. Top managers must certify that a company maintains an

19-16 LO 2 Identify the three broad functions of management.

Managers should ask questions such as the following.

1. What costs are involved in making a product or performing

2. If we decrease production volume, will costs decrease?

3. What impact will automation have on total costs?

4. How can we best control costs?

To answer these questions, managers need reliable and

19-17 LO 3 Define the three classes of manufacturing costs.

19-18 LO 3 Define the three classes of manufacturing costs.

19-19 LO 3 Define the three classes of manufacturing costs.

19-20 LO 3 Define the three classes of manufacturing costs.

19-21 LO 3 Define the three classes of manufacturing costs.

Includes indirect materials, indirect labor, depreciation on

19-22 LO 3 Define the three classes of manufacturing costs.

a. Sales managers salary.

b. Plant managers salary.

c. Factory repairmans wages.

d. Product inspectors salary.

19-24 LO 3 Define the three classes of manufacturing costs.

Costs that are a necessary and integral part of

19-25 LO 4 Distinguish between product and period costs.

Includes all selling and administrative expenses.

19-26 LO 4 Distinguish between product and period costs.

19-27 LO 4 Distinguish between product and period costs.

Direct Materials Direct Labor Overhead

Tires Salaries of Lubricants

Cost of Goods Sold

LO 5 Explain the difference between a merchandising

Cost of Goods Manufactured

Cost of goods sold sections of merchandising and

LO 5 Explain the difference between a merchandising

LO 5 Explain the difference between a merchandising

Cost of Goods Manufactured