Introduction to

Management Accounting
Chapter 19
 The Functions of Management

Planning Acting Controlling

Feedback
 Objective 1

Distinguish between
financial
accounting and management
accounting.
Management Accounting and
Financial Accounting
Primary Users

Internal managers of the business

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

Help managers plan and

control business operations

Help investors, creditors, and others make

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

Relevance

Reliability, objectivity, and focus on the past

Management Accounting and
Financial Accounting
Type of Report

Internal reports not restricted by GAAP

Financial statements restricted by GAAP

Management Accounting and
Financial Accounting
Verification

No independent audit

Annual independent audit by CPAs

Management Accounting and
Financial Accounting
Scope of Information

Detailed reports on
parts of the company

Summary reports primarily

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

Concern about how reports

will affect employees behavior

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
 Objective 2

Describe the value

chain
and classify costs by
value-chain functions.
 Value Chain

Research and Production or

Design
Development Purchases

Customer
Marketing Distribution
Services
 Objective 3

Distinguish direct costs

from indirect costs.
 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
■ What are direct 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.
 Objective 4

Distinguish among full product

costs, inventoriable product
costs, and period costs.
 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
 External Reporting

Inventoriable
Period
product
costs
costs
 Inventoriable Product Costs

■ For external reporting, merchandisers’

inventoriable product costs include only
costs that are incurred in the purchase of
goods.
■ Inventoriable costs are an asset.
■ Period costs flow as expenses directly to the
income statement.
 Inventoriable Product Costs

■ For external reporting, manufacturers’

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 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

Manufacturing Overhead
 Inventoriable Product Costs

Direct Direct
Materials Labor

Prime Costs = Direct Materials + Direct Labor

 Inventoriable Product Costs

Direct Indirect Indirect

Other
Labor Labor Materials

Conversion Costs = Direct Labor

+ Manufacturing Overhead
 Objective 5

Prepare the financial statements

of a manufacturing company.
 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 $ 20,000

Direct labor $100,000
Direct materials 70,000
Mfg. overhead 150,000 320,000
Ending work in process 18,000
Cost of goods manufactured $322,000
 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 $ 60,000

+ Cost of goods manufactured 322,000
= Cost of goods available for sale $382,000
– Ending finished goods 55,000
= Cost of goods sold $327,000
 Manufacturing Company
Example
■ Kendall Manufacturing Company had sales
of $627,000 for the period.
■ How much is the gross margin?

Sales $627,000
– Cost of goods sold 327,000
= Gross margin $300,000
 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 $300,000

– Operating expenses 120,000
= Operating income $180,000
 Flow of Costs through a
Manufacturer’s Accounts
■ Direct Materials Inventory ■ Work in Process Inventory
■ Beginning inventory ■ Beginning inventory
+ Purchases and freight-in + Direct materials used
+ Direct labor
+ Manufacturing overhead
= Direct materials available = Total manufacturing costs
for use to account for
– Ending inventory – Ending inventory
= Direct materials used = 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
 Objective 6

Identify major trends in the

business environment, and use
cost-benefit analysis to make
business decisions.
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.
 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

 Objective 7

Use reasonable standards

to
make ethical judgments.
 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
End of Chapter 19