Introduction to

Management
Accounting
Chapter
19
 Objectives
 Distinguish financial accounting from management
accounting
 Describe service, merchandising, and manufacturing
companies, and classify their costs by value-chain element
 Distinguish among direct costs and indirect costs; and full
product costs, inventoriable product costs, and period
costs
 Prepare the financial statements of a manufacturing
company
 Identify trends in the business environment and use cost-
benefit analysis to make business decisions
 Use reasonable standards to make ethical decisions
The Functions of Management

Planning Acting Controlling

Feedback
Management Accounting –vs-
Financial Accounting
Primary Users

MA: Internal managers of the business

FA: External - Investors, Creditors,

Government authorities (IRS, SEC, etc.)
 Management Accounting and
Financial Accounting
Purpose of Information

MA: Help managers plan and

control business operations

FA: Help investors, creditors, and others make

investment, credit, and other decisions
 Management Accounting and
Financial Accounting
Focus and Time Dimension

MA: Relevance, focus on future

FA: Reliability, objectivity, and focus on the past

 Management Accounting and
Financial Accounting
Type of Report

MA: Internal reports not restricted by GAAP,

determined by cost benefit analysis

FA: Financial statements restricted by GAAP

Management Accounting and
Financial Accounting
Verification

MA: No independent audit

FA: Annual independent audit by CPAs

Management Accounting and
Financial Accounting
Scope of Information

MA: Detailed reports on

parts of the company

FA: Summary reports primarily

on the company as a whole
Management Accounting and
Financial Accounting
Behavioral Implications

MA: Concern about how reports

will affect employees behavior

FA: Concern about adequacy of disclosure

Service, Merchandising, and
Manufacturing Companies
Service Company:
provides intangible services,
rather than tangible products

Merchandising Company:
resells products previously
bought from suppliers
Service, Merchandising, and
Manufacturing Companies
Manufacturing Company:
uses labor, plant, and equipment to convert
raw materials into finished products

Materials inventory
Work in process inventory
Finished goods inventory
 Value Chain – adds value to
product

Research and Production or

Design
Development Purchases

Customer
Marketing Distribution
Service
 Value Chain
 The value chain also adds costs to the
product
 Want to manage these costs
 Want to be able to determine the costs of
various aspects of the value chain
 Cost Objects, Direct Costs,
and Indirect Costs
 Cost objects are anything for which a
separate measurement of costs is desired.
 Cost drivers are any factors that affect
cost.
 Cost Objects, Direct Costs,
and Indirect Costs
What are examples of cost objects?
– individual products

– alternative marketing strategies

– geographic segments of the business

– departments
 Cost Objects, Direct Costs,
and Indirect Costs
 Direct vs. Indirect Costs:
 Direct costs are those costs that can be
specifically traced to the cost object.
 What are indirect costs?
 Indirect costs are costs that cannot be
specifically traced to the cost object.
 Product Costs
 What are product costs?
 They are the costs to produce (or
purchase) tangible products intended for
sale.
 There are two types of product costs:
Full Inventoriable
product product
costs costs
 Full Product Costs
 All costs throughout the value chain
 Inventoriable Product Costs
 For external reporting, merchandiser’s
inventoriable product costs include only
costs that are incurred in the purchase of
goods.
 Inventoriable costs are an asset.
 Period costs flow as operating expenses
directly to the income statement.
 Inventoriable Product Costs
 For external reporting, manufacturer’s
inventoriable product costs include raw materials
plus all other costs incurred in the
manufacturing process.
 Inventoriable product costs are incurred only in
the third element (production) of the value
chain.
 Costs incurred in other elements of the value
chain are period costs.
 Inventoriable Product Costs
Direct Direct Indirect Indirect Other
Materials Labor Labor Materials Indirect

Manufacturing Overhead
 Financial Statements for
Service Companies
 There is no inventory and thus no
inventoriable costs.
 The income statement does not include
cost of goods sold.

Revenues – Expenses = Operating income

 Financial Statements for
Merchandising Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable Sales Revenue
Costs
when deduct
Purchases of sales
occur Cost of
Inventory plus Inventory
Goods Sold
Freight-In
equals Gross Margin
deduct
Period Operating
Costs Expenses
equals Operating Income
 Financial Statements for
Manufacturing Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs Sales Revenue
when deduct
Materials Finished sales
Inventory occur Cost of
Goods
Goods Sold
Inventory
equals Gross Margin
deduct
Work in
Period Operating
Process Costs Expenses
Inventory equals Operating Income
 Manufacturing Company
Example
 Kendall Manufacturing Company:
 Beginning and ending work-in-process
inventories were $20,000 and $18,000.
 Direct materials used were $70,000.
 Direct labor was $100,000.
 Manufacturing overhead incurred was
$150,000.
 Manufacturing Company
Example
 What is the cost of goods manufactured?

Beginning work in process $

Direct labor $
Direct materials $
Mfg. overhead $ $
Ending work in process $ ________
Cost of goods manufactured $
 Manufacturing Company
Example
 Kendall Manufacturing Company’s
beginning finished goods inventory was
$60,000 and its ending finished goods
inventory was $55,000.
 How much is the cost of goods sold?
 Manufacturing Company
Example

Beg. finished goods inventory $

+ Cost of goods manufactured $________
= Cost of goods available for sale $
– Ending finished goods $________
= Cost of goods sold $
 Manufacturing Company
Example
 Kendall Manufacturing Company had sales
of $627,000 for the period.
 How much is the gross margin?

Sales $
– Cost of goods sold $________
= Gross margin $
 Manufacturing Company
Example
 Kendall Manufacturing Company had
operating expenses as follows:
 Sales salaries and commissions $
80,000 Delivery expense
10,000 Administrative expenses
30,000 Total
$120,000
 What is Kendall’s operating income?
 Manufacturing Company
Example

Gross margin $
– Operating expenses $_________
= Operating income $
 Flow of Costs through a
Manufacturer’s Accounts
 Direct Materials
Inventory
 Beginning inventory
+ Purchases and freight-in
= Direct materials
available for use
– Ending inventory
= Direct materials used
 Work in Process Inventory
 Beginning inventory
+ Direct materials used
+ Direct labor
+ Manufacturing overhead
= Total manufacturing costs
to account for
– Ending inventory
= Cost of goods manufactured
Flow of Costs through a
Manufacturer’s Accounts
Finished Goods Inventory
Beginning inventory
+ Cost of goods manufactured
= Cost of goods available for sale
- Ending inventory
= Cost of goods sold
 Trends in Today’s Business
Environment
 Service Economy
 Global Marketplace
 Time Based Competition
 Quality
Shift to a Service Economy
Service Industries Other

In the U.S., 55% of the workforce

is employed in service companies.
Competing in the Global
Marketplace
Foreign Operations Other

Foreign operations account

for over 30% of GE’s revenues.
 Enterprise Resource Planning
 Enterprise resource planning (ERP) is
software that can integrate all of the
company’s functions, departments, and
data into a single system.
 Advantages of ERP include:
Streamlined operations, quicker response
time to changes, and the replacement of
hundreds of separate software systems
 Supply Chain Management
 Companies exchange information with
suppliers and customers to reduce costs,
improve quality, and speed delivery of
goods and services from suppliers,
through the company itself, and on to
customers.
 E-commerce
 Just-in-Time
 JIT philosophy means that the company
schedules production just in time to satisfy
needs.
 Speeding up of the production process
reduces throughput time.
 Throughput time is the time between
buying raw materials and selling the
finished products.
 Total Quality Management
 The goal of total quality management (TQM) is
to please customers by providing them with
superior products and services.
 TQM emphasizes educating, training, and cross-
training employees.
 Quality improvement programs cost money
today.
 The benefits usually do not occur until later.
 Total Quality Management
Total Benefits Total Cost
Initial benefits
and costs $170 million $200 million
Additional
expected benefits 68 million

Total $238 million $200 million

 Professional Ethics for
Management Accountants
 In many situations the ethical path is not
so clear.
 The Institute of Management Accountants
(IMA) has developed standards to help
management accountants deal with these
situations.
Standards of Ethical Conduct for
Management Accountants

Competence Integrity

Confidentiality Objectivity
 Review
 Management Accounting
 Value Chain
 Cost Objects, Direct Costs, Indirect Costs
 Product Costs (full, inventoriable)
 Period Costs
 Cost of Goods Manufactured
 Today’s Business Environment
 Ethics