Chapter 16 introduces managerial accounting.
Managerial accounting focuses on the information needs of internal users. Generally, managerial
accounting reports provide more details so that managers have the information they need to plan and
control costs. The benefits of the managerial accounting system must outweigh its cost.
Developed economies have shifted from a manufacturing focus to a service focus. Global competition,
e-commerce, and the Internet have expedited both the need and the speed with which information
must be available to decision makers. JIT production and TQM mean producing just in time to satisfy
customer demand, while constantly improving the quality of goods and services offered to customers.
Issues where professional judgments must be made arise often. Determining the ethical action is usually
easy. Acting ethically is where integrity and credibility prevail. The excerpt from the IMA’s Statement of
Ethical Professional Practice guides managerial accountants in ethical matters.
Service companies sell their time, skills, or knowledge. All of their operating expenses are normally
considered period costs and are considered part of the cost of providing each service unit. In larger,
more advanced service companies, the operating expenses (period costs) may be split between service
costs (part of the cost per unit of service) and non-service costs (expenses unrelated to the service).
Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory of
products, and managers are accountable for the purchase, storage, and sale of the products. Inventory
is an asset until it is sold. Cost of goods sold is the total cost of merchandise inventory sold during the
period, and includes the freight to get the goods into the warehouse. COGS divided by total units sold
equals the cost per unit for the merchandiser.
The manufacturer creates a product from raw materials by adding direct labor and manufacturing
overhead. Because at any point in time products are at various stages of completion, manufacturers
have three inventory accounts: Raw materials, Work in process, and Finished goods. The schedule of
cost of goods manufactured captures these production costs to determine the cost of goods
manufactured for a period. Product cost per unit is calculated by dividing cost of goods manufactured by
the total number of units produced.
The objectives for this chapter include to:
1. Distinguish managerial accounting from financial accounting.
2. Identify trends in the business environment and the role of management accountability.
3. Apply ethical standards to decision making.
4. Classify costs and prepare an income statement for a service company.
5. Classify costs and prepare an income statement for a merchandising company.
6. Classify costs and prepare an income statement and statement of cost of goods manufactured for a
manufacturing company
The first learning objective is to distinguish managerial accounting from financial accounting.
Financial accounting focuses on preparing financial statements. Managerial (or management)
accounting focuses on the accounting tools managers use to run a business. So while the basic
accounting concepts learned in financial accounting still apply, we will need to learn how to use these
new tools.
Financial accounting is for external reporting and is responsible to:
• owners and creditors for their investment decisions.
• regulatory agencies, such as the Securities Exchange Commission, the Federal Trade
Commission, and the Internal Revenue Service.
• customers and society to ensure that the company acts responsibly.
Managerial accounting is for internal planning and control and is responsible to:
• customers for safe and defect free products and services.
• creditors for repaying principal and interest.
• employees for a safe and productive work environment.
• suppliers and vendors for timely payments.
• owners for providing a return on the owners’ investment.
• others, like governments and communities.
Planning means choosing goals and deciding how to achieve them. A common goal is to increase
operating income (profits). This is achieved by raising prices or advertising more.
A budget is a mathematical expression of the plan that managers use to coordinate the business’s
activities. It shows the expected financial impact of decisions and helps identify the resources
needed to achieve goals.
Controlling means implementing the plans and evaluating operations by comparing actual results to
the budget. Cost data helps managers make decisions.
Managerial accounting provides information to help managers plan and control operations as they lead
the business. This includes managing the company’s plant, equipment, and human resources.
Managerial accounting often requires forward-looking information because of the futuristic nature of
business decisions. Additionally, managerial accounting reports may contain proprietary (company
specific, non-public) information, whereas financial reports do not.
The second learning objective is to identify trends in the business environment and the role of
management accountability.
In order to be successful, managers of both large corporations and small, privately owned businesses
must consider recent business trends, such as the following:
● Shift toward a service economy. Service companies provide health care, communication, banking, and
other important benefits to society. Google and DirecTV do not sell products; they sell their services. In
the last century, many developed economies shifted their focus from manufacturing to service, and now
service companies employ more than half of the workforce. The U.S. Census Bureau expects services,
such as technology and health care, to grow especially fast.
● Global competition. To be competitive, many companies are moving operations to other countries to
be closer to new markets. Other companies are partnering with foreign companies to meet local needs.
For example, Toyota, a Japanese company, has five major assembly plants located in the U.S.—in
Huntsville, AL; Georgetown, KY; Princeton, IN: San Antonio, TX; and Buffalo, WV.
● Time-based competition. The Internet, electronic commerce (e-commerce), and express delivery
speed the pace of business. Customers who instant message around the world will not want to wait two
