Chapter 16 — Managerial Accounting Concepts and Principles
1. What are the major differences between managerial accounting and financial
accounting?
Managerial accounting is presented internally for managers to make decisions according
the day-to-day operations of a business. It is based not on past performance, but on current
and future trends, which is not comprises with exact numbers. In contrast, financial
accounting is meant for external patrons of the business. Although financial management is
important in the decisions taken by current and potential investors; whereas, managerial
accounting is necessary for managers to make current and future financial decisions.
Financial accounting is precise and must adhere to Generally Accepted Accounting
Principles (GAAP); managerial accounting is often on estimates and accuracy, since most
managers do not have time for exact numbers when a decision needs to be made.
2.
1) Differentiate between a department with line responsibility and a department with staff
responsibility.
The line department has the formal power to direct and control immediate subordinates,
whereas the staff department is granted to staff specialists in their areas of expertise; thus,
having a more parameterized line authority. This department is a conduit to management.
Its influences derive indirectly from line authority at higher levels.
2) In an organization that has a Sales Department and a Personnel Department, among
others, which of the two departments has (1) line responsibility and (2) staff
responsibility?
Personnel department has line responsibility, while sales department has staff
responsibility.
3. Define and Differentiate between:
a) Direct materials versus indirect materials
Direct materials are those materials which are easily identified, conveniently measured and
directly charged to the cost of production.
Indirect materials are the materials used in the production process that cannot be linked to
a specific product or job. These may be used in such minute quantities on a per-product
basis that they are not tracked as direct materials (cf. this including them in the bill of
materials).
b) Direct labor versus indirect labor
Direct labor is associated directly with the production of specific units of finished goods
(i.e. an assembly line worker’s labor installing windows on automobiles, for instance, is
direct labor applied to specific vehicles.)
Indirect labor, on the other hand, usually refers to production support labor costs not so
easily associated with specific units (i.e. the mechanic repairing assembly line machinery
is viewed as indirect labor and classified as a manufacturing overhead cost.)
4. Distinguish between prime costs and conversion costs.
