Accounting Principles

Fourteenth Edition
Weygandt Kimmel Mitchell

Chapter 19
Managerial Accounting
Chapter Outline
Learning Outcomes
LO 1 Identify the features of managerial accounting and the
functions of management.
LO 2 Describe the classes of manufacturing costs and the
differences between product and period costs.
LO 3 Demonstrate how to compute cost of goods manufactured
and prepare financial statements for a manufacturer.
LO 4 Discuss trends in managerial accounting.

Copyright ©2021 John Wiley & Sons, Inc. 2

Managerial Accounting Basics
LEARNING OBJECTIVE 1
Identify the features of managerial accounting and the
functions of management.

Provides economic and financial information for

managers and other internal users.

Comparing Managerial and Financial Accounting

Similarities:
• Each field deals with economic events of a business
• Both require that economic events be quantified and
communicated to interested parties

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Comparing Managerial and Financial

Differences:

Illustration 19.1
Feature Financial Accounting Managerial Accounting
Primary Users of Reports External users: stockholders, Internal users: officers and managers.
creditors, and regulators.
Types and Frequency of Reports External financial statements. Internal reports.
Quarterly and annually. As frequently as needed.
Purpose of Reports General-purpose. Special-purpose for specific decisions.
Content of Reports Pertains to business as a whole. Pertains to subunits of the business.
Highly aggregated (condensed). Very detailed.
Limited to accrual accounting and Extends beyond accrual accounting to any
cost data. relevant data.
Governed by Generally Accepted Evaluated based on relevance to decisions.
Accounting Principles (GAAP).
Verification Process Audited by CPA. No independent audits.

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Management Functions

1- Planning 2- Directing 3- Controlling

• Maximize short-term • Coordinate diverse • Keep and maintain
profit and market activities and human activities on track
share resources • Determine whether
• Commit to • Implement planned goals are met
environmental objectives • Decide changes
protection and social • Provide incentives to needed to get back
programs motivate employees on track
• Add value to the • Hire and train • May use an
business employees informal or formal
• Produce a smooth- system of
running operation evaluations

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Organizational Structure/Chart
Illustration 19.2

Organization charts show the interrelationships of activities and the delegation of

authority and responsibility within the company.

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DO IT! 1: Managerial Accounting
Part 1
Indicate whether the following statements are true or false.
1. Managerial accountants have a single role False
within an organization: collecting and
reporting costs to management.
2. Financial accounting reports are general- True
purpose and intended for external users.
3. Managerial accounting reports are special- True
purpose and issued as frequently as needed.

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DO IT! 1: Managerial Accounting
Part 2
Indicate whether the following statements are true or false.
4. Managers’ activities and responsibilities can False
be classified into three broad functions: cost
accounting, budgeting, and internal control.
5. Managerial accounting reports must now
comply with generally accepted accounting False
principles (GAAP).

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Managerial Cost Concepts
LEARNING OBJECTIVE 2
Describe the classes of manufacturing costs and the
differences between product and period costs.

Managers should ask questions such as the following:

1. What costs are involved in making a product or
providing a service?
2. If we decrease production volume, will costs change?
3. What impact will automation have on total costs?
4. How can we best control costs?

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Manufacturing Costs
Activities and processes that convert raw materials into
finished goods.

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Manufacturing Costs
Direct Materials

• Raw materials are the basic

materials and parts used in the
manufacturing process
• Raw materials that can be
physically and directly associated
with finished product during the
manufacturing process are direct
materials

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Manufacturing Costs
Indirect Materials
Have one of two characteristics:
1. Not physically part of finished product
2. Are impractical to trace to finished product because
their physical association with finished product is too
small in terms of cost

Considered part of manufacturing overhead

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Manufacturing Costs
Direct Labor
Work of factory employees that can be
physically and directly associated with
converting raw materials into finished
goods.

Indirect Labor
• Work of manufacturing-related employees that has no
physical association with the making of the finished
product or
• Costs for which it is impractical to trace to the goods
produced.
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Manufacturing Costs
Manufacturing Overhead

• Costs indirectly associated

with manufacture of the
finished product
• All manufacturing-related
costs except direct materials
and direct labor
• Also called factory overhead,
indirect manufacturing costs,
or burden

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Product Costs Versus Period Costs
Product Costs
• All manufacturing cost components:
o Direct materials
o Direct labor
o Manufacturing overhead

• Costs that are an integral part of producing product

• Recorded in “inventory” account
• Not an expense (COGS) until goods are sold

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Product Costs Versus Period Costs
Period Costs
• Nonmanufacturing costs
• Includes all selling and administrative expenses
• Charged to expense as incurred

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Product Costs Versus Period Costs
Illustration 19.3

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Illustration of Cost Concepts
Illustration: Suppose you started your own snowboard factory,
Terrain Park Boards. Here are some of the costs that your
snowboard factory would incur. Assign the following costs:
Illustration 19.4
Product Cost
(direct materials, direct
labor, or manufacturing Period Cost (non-
Cost overhead) manufacturing) Explanation
1. Wood cores, Direct materials Essential elements of finished
fiberglass, and resin product
($30 per board)
2. Labor to trim and Direct labor Physically and directly
shape boards ($40 associated with converting raw
per board) materials into finished goods
3. Factory equipment Manufacturing overhead Factory cost that is not direct
depreciation materials or direct labor
($25,000 per year)

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Illustration of Cost Concepts
Illustration 19.4
Product Cost (direct Period Cost
materials, direct labor, or (non-
Cost manufacturing overhead) manufacturing) Explanation
4. Property taxes on Manufacturing overhead Factory cost that is not direct
factory building materials or direct labor
($6,000 per year)
5. Advertising costs X Not a cost associated with
($60,000 per year) producing product

6. Sales commissions X Not a cost associated with

($20 per board) producing product
7. Factory maintenance Manufacturing overhead A factory cost, but employees are
salaries ($25,000 per not physically and directly
year) involved with converting raw
materials into finished goods
8. Salary of factory Manufacturing overhead A factory cost, but employees are
manager ($70,000 per not physically and directly
year) involved with converting raw
materials into finished goods

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Illustration of Cost Concepts

Illustration 19.4
Product Cost (direct Period Cost
materials, direct labor, or (non-
Cost manufacturing overhead) manufacturing) Explanation
9. Cost of shipping X Not a cost associated with
boards to producing product
customers ($8
per board)
10. Salary of product Manufacturing overhead A factory cost, but employees
quality inspector are not physically and directly
($20,000 per involved with converting raw
year) materials into finished goods

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Illustration of Cost Concepts
Calculation of total manufacturing costs
Assuming Terrain Park Boards produces 10,000 snowboards the
first year, what would be the total manufacturing costs?
Illustration 19.5
Cost Item Manufacturing Cost
1. Material cost ($30 × 10,000) $300,000
2. Labor cost ($40 × 10,000) 400,000
3. Depreciation on factory equipment 25,000
4. Property taxes on factory building 6,000
7. Factory maintenance salaries 25,000
8. Salary of factory manager 70,000
10. Salary of product quality inspector 20,000
Total manufacturing product costs $846,000

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DO IT! 2: Managerial Cost Concepts
Part 1
A bicycle company has these costs: tires, wages of employees
who put tires on the wheels, factory building depreciation,
advertising expenditures, factory machine lubricants, spokes,
salary of factory manager, salary of accountant, handlebars,
salaries of factory maintenance employees, and salary of
product quality inspector.

Classify each of these costs as a product cost or a period cost.

Specify direct materials, direct labor, or manufacturing
overhead for product costs.

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DO IT! 2: Managerial Cost Concepts
Part 2
Cost Product Cost Period Cost
Tires Direct materials
Wages of employees who put tires on the wheels Direct labor
Factory building depreciation Manufacturing overhead
Advertising expenditures X
Factory machine lubricants Manufacturing overhead
Spokes Direct materials
Salary of factory manager Manufacturing overhead
Salary of accountant X
Handlebars Direct materials
Salaries of factory maintenance employees Manufacturing overhead
Salary of product quality inspector Manufacturing overhead

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Manufacturing Costs in Financial Statements
LEARNING OBJECTIVE 3
Demonstrate how to compute cost of goods manufactured
and prepare financial statements for a manufacturer.

The financial statements of a manufacturer are very similar to

those of a merchandiser. Yet, the principal differences
between their financial statements occur in two places:
1. The current assets section in the balance sheet.
2. The cost of goods sold (COGS) section in the income
statement.

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Balance Sheet
Inventory accounts of a manufacturer

Illustration 19.6

The balance sheet for a merchandising company shows just one

category of inventory.

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Balance Sheet Example
Merchandiser Versus Manufacturer
Illustration 19.7

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Income Statement
Under a periodic inventory system, the income statements
of a merchandiser and a manufacturer differ in the cost of
goods sold (COGS) section.
Illustration 19.8

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Income Statement
Cost of Goods Sold Sections

Illustration 19.9

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Cost of Goods Manufactured
Total Manufacturing Costs = sum of direct material costs + direct
labor costs + and manufacturing overhead incurred in the current
year.
Total Work in Process – (1) cost of beginning work in process and
(2) total manufacturing costs for the current period.
Illustration 19.10

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Cost of Goods Manufactured Schedule
Illustration 19.11

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DO IT! 3: Cost of Goods Manufactured

The following information is available for Keystone Company.

March 1 March 31
Raw materials inventory $12,000 $10,000
Work in process inventory 2,500 4,000
Materials purchased in March $90,000
Direct labor in March 75,000
Manufacturing overhead in March 220,000

Prepare the cost of goods manufactured schedule for the month of

March 2022. (Assume that all raw materials used were direct
materials.)
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DO IT! 3: Cost of Goods Manufactured
Solution

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Managerial Accounting Today
LEARNING OBJECTIVE 4

Discuss trends in managerial accounting.

Service Industries:
• Much of U.S. economy has shifted toward an emphasis
on providing services rather than goods.
• Approximately 80% of U.S. workers are now employed
by service companies.
• Most techniques learned for manufacturing firms are
applicable to service companies.

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Focus on the Value Chain
A 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: A manufacturer’s value chain

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Techniques used in managerial
accounting:
Just-In-Time (JIT) Inventory Method
• Inventory system in which goods are manufactured or
purchased just in time for sale.

Total Quality Management (TQM)

• System implement to reduce defects in finished
products, with goal of zero defects.

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Techniques used in managerial accounting:

Theory of Constraints
• Constraints (“bottlenecks”) within the value chain that
limit company’s potential profitability.
• A specific approach to identify and manage these
constraints in order to achieve company goals.
Enterprise Resource Planning (ERP)
• Software programs designed to manage all major
business processes.

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Techniques used in managerial accounting:

Activity-Based Costing (ABC)

• Allocates overhead based on each product’s use of
activities.
• Results are more accurate when measuring the cost of
a product, because of its scrutiny and increased
efficiency when allocating costs to all activities in the
value chain.

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Balanced Scorecard
• Evaluates operations in an integrated fashion.
• Uses both financial and nonfinancial measures.
• Links performance in a cause-and-effect fashion
ensure that they all tie to the company’s overall
objectives.

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Business Ethics
• All employees are expected to act ethically.
• Many organizations have codes of business ethics.

Creating Proper Incentives

• Systems and controls sometimes create incentives for
managers to take unethical actions.
• Controls need to be effective and realistic.

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Business Ethics
Code of Ethical Standards

Sarbanes-Oxley Act (SOX)

• Clarifies management’s responsibilities.
• Requires certifications by CEO and CFO.
• Selection criteria for Board of Directors and Audit
Committee.
• Substantially increased penalties for misconduct.

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Corporate Social Responsibility
• Considers a company’s efforts to employ sustainable
business practices with regard to its employees, society,
and the environment.
• Sometimes referred to as triple bottom line because it
evaluates a company’s performance with regard to people,
planet, and profit.
• Recent reports indicate that nearly 80% of the 500 largest
U.S. companies provide sustainability reports.

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DO IT! 4: Trends in Managerial Accounting
Instructions
Match the descriptions that follow with the corresponding terms.

Terms:
a. Activity-based costing (ABC)
b. Balanced scorecard
c. Corporate social responsibility
d. Just-in-time (JIT) inventory
e. Total quality management (TQM)
f. Statement of Ethical Professional Practice
g. Value chain

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DO IT! 4: Trends in Managerial Accounting
Solution Items 1-5
1. All activities associated with providing a product g
or performing service.
2. A method of allocating overhead based on each a
product’s use of activities in making the product.
3. Systems implemented to reduce defects in finished
products with the goal of achieving zero defects.
e
4. A performance-measurement approach that uses
both financial and nonfinancial measures, tied to b
company objectives, to evaluate a company’s
operations in an integrated fashion.
5. Inventory system in which goods are manufactured d
or purchased just as they are needed for use or sale.
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DO IT! 4: Trends in Managerial Accounting
Solution Items 6-7
6. A company’s efforts to employ sustainable c
business practices with regards to its employees,
society, and the environment.

7. A code of ethical standards developed by the f

Institute of Management Accountants.

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Copyright
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Copyright ©2021 John Wiley & Sons, Inc. 45