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CHAPTER 18
MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Explain the purpose and nature
of, and the role of ethics in,
managerial accounting.
1, 2, 3, 13
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18-1, 18–2,
18-3, 18–14
18–1, 18-4
18-1, 18–2,
18-3, 18–5,
18–7,18– 8,
C2. Describe accounting concepts
useful in classifying costs.
4, 6, 7, 8, 9,
10, 17
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18-4, 18–5,
18-6, 18–16
18-2, 18-3,
18-4, 18-6
18-3, 18-7
C3. Define product and period costs
and explain how they impact
financial statements.
5, 7, 11,
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18-4
18-3, 18-6
18–3, 18-8
C4. Explain how balance sheets and
income statements for
manufacturing and
merchandising companies
differ.
12, 14, 15, 16,
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18-7
18-5, 18-6
C5. Explain manufacturing
activities and the flow of
manufacturing costs.
17, 18, 19
18-9, 18-12
18-4, 18–10,
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18-6
C6. Describe trends in managerial
accounting.
18–11
18–14, 18-15
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Analytical objectives:
A1 Assess raw materials inventory
management using raw
materials inventory turnover
and days’ sales in raw materials
inventory.
23, 24, 25,
26
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Procedural objectives:
P1. Compute cost of goods sold for
a manufacturer.
18-7, 18-8
18-8, 18-9
18-6
P2. Prepare a manufacturing
statement and explain its
purpose and links to financial
statements.
17, 20, 21,
22
18-10
18-9, 18-10,
18–12, 18-13
18-7
18-6
18-2
Additional Information on Related Assignment Material
Corresponding problems in set B (in text) also relate to learning objectives identified in grid on
previous page. The Serial Problem for Success Systems continues in this chapter. Problem 18-6A can
be completed using Excel.
Connect reproduces assignments online, in static or algorithmic mode, which allows instructors to
monitor, promote, and assess student learning. It can be used for practice, homework, or exams.
Narrated PowerPoint Correlation Guide
Slides
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Synopsis of Chapter Revision
Back to the Roots: NEW opener with new entrepreneurial assignment
New analytical learning objective
Chapter Outline
Notes
I. Introduction to Managerial Accounting—also called management
accounting
A. Purpose of Managerial Accounting—to provide financial and
nonfinancial information to managers and other internal decision
makers of an organization.
1. Cost of products and services⎯this information is very
important to managers when making planning and control
decisions. This includes predicting the future costs of
producing the same or similar items. Predicted costs are used
in:
a. product pricing.
b. profitability analysis.
firm (considers potential opportunities such as new
products, new markets and capital investments).
processes and outcomes.
b. Control feedback allows managers to take timely
corrective actions to avoid undesirable outcomes.
to the organization.
b. In managerial—Managers, employees and decision
makers internal to the organization.
Chapter Outline
Notes
2. Purpose of information
a. In financial—Assist external users in making investment,
credit and other decisions.
b. In managerial—Assist managers in making planning, and
control decisions.
3. Flexibility of practice
a. In financial—Structured and often controlled by GAAP.
b. In managerial—Relatively flexible (no GAAP constraints).
4. Timeliness of information
a. In financial—Often available only after the audit is
complete.
b. In managerial—Available quickly without the need to
wait for an audit.
5. Time dimension
a. In financial—Focus on historical information with some
predictions.
b. In managerial—Many projections and estimates;
historical information also presented.
6. Focus of information
a. In financial—Emphasis on whole organization.
b. In managerial—Emphasis on organization’s projects,
processes and subdivisions.
7. Nature of information
a. In financial—Monetary information.
b. In managerial—Mostly monetary; but also nonmonetary
information.
C. Managerial Decision Making—managerial accounting information
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Chapter Outline
Notes
D. Managerial Accounting in Business—the importance of
managerial accounting analytical tools has increased as a result of
the following changes in the business environment:
1. Lean business model—goal is to eliminate waste while
“satisfying the customer” and providing a “positive return to
the company”. This results in customer orientation and is
affected by the expanded competitive boundaries of the global
economy.
2. Lean practices, that follow an underlying philosophy of
continuous improvement, include:
b. Just-in-time manufacturing (JIT)—a system that acquires
inventory and produces only when needed (as order
of one’s job for personal gain, through the deliberate misuse of the
employer’s assets.
1. All fraud:
a. Urge adherence to company policies.
b. Promote efficient operations.
ethics to help accountants involved in solving ethical
dilemmas and provide a “road map” for resolving ethical
conflicts.
Chapter Outline
Notes
II. Managerial Cost Concepts—Costs can be classified based on any
one or combination of the five classifications listed below. To classify
it is necessary to understand costs and operations.
A. Behavior—At a basic level, a cost can be classified as fixed or
variable or mixed.
1. Fixed cost—cost does not change with changes in the volume
of an activity (within a certain range of activity known as an
activity’s relevant range).
2. Variable cost—cost changes in proportion to changes in the
volume of an activity.
3. Mixed—combination of fixed and variable costs.
B. Traceability—cost is traced to a cost object (a product, process,
department or customer to which costs are assigned). Cost is
classified as either a direct or indirect cost. To classify must
identify the cost object.
1. Direct costs—those traceable to a single cost object.
2. Indirect costs—those that cannot be traced to a single cost
object.
C. Controllability—costs can be defined as controllable or not
controllable and this classification depends on employee’s
responsibilities (hierarchical levels).
D. Relevance—costs classified by identifying it as either a sunk cost
or an out-of-pocket cost.
1. Sunk cost—already incurred and cannot be avoided or
changed. Irrelevant to future decisions.
specific action from two or more alternatives.
E. Function—costs classified as capitalized inventory (product) or
1. Product costs—expenditures necessary and integral to finished
products. Include direct materials, direct labor, and overhead
costs (indirect manufacturing costs). First assigned to
inventory (on balance sheet) and flow to income statement
when become part of cost of goods sold.
expenses.
Chapter Outline
Notes
III. Reporting Manufacturing Activities—financial statements for
manufacturing companies have some unique features resulting from
their activity of producing goods from materials and labor.
A. Manufacturing Costs
1. Direct Materials—tangible components of a finished
product; separately and readily traced through the
manufacturing process to finished goods.
efforts not linked to specific units or batches of product.
that are not direct materials or direct labor; costs that
costs associated with the factory.
associated with the manufacturing of finished goods).
Direct labor costs and overhead costs are also called
conversion costs (expenditures incurred in the process of
and usually reports these three inventories:
1. Raw Materials Inventory—goods a company acquires to
Exception: materials that do become part of product,
but have low or insignificant cost, and traceability to
product is not economically sound (application of
materiality principle).
Chapter Outline
Notes
C. Manufacturer’s Income Statement—the main difference between a
merchandiser’s and manufacturer’s income statement is in items
that make-up cost of goods sold (CGS).
1. Merchandiser computes CGS: Beginning merchandise
inventory plus cost of goods purchased minus ending
merchandise inventory.
2. Manufacturer computes CGS: Beginning finished goods
inventory plus cost of goods manufactured minus ending
finished goods inventory.
3. Cost of goods manufactured is the sum of direct materials,
direct labor, and overhead costs incurred in producing the
products.
D. Flow of Manufacturing Activities—the three manufacturing
activities are:
1. Materials Activities—manufacturers start a period with a
beginning raw materials inventory and then acquire additional
raw materials. When these purchases are added to beginning
inventory, we get the total raw materials available for use in
production. These raw materials are then either used in
production during the period or remain on hand at the end of
the period for use in future periods.
2. Production Activities—Four factors come together in
production:
a. Beginning goods in process inventory—consists of partly
produced goods from the previous period.
b. Direct materials used—traceable materials added during
the period.
c. Direct labor used—traceable labor added during the
period.
d. Overhead used—nontraceable manufacturing costs added
during the period.
Note: The production activity results in goods either finished or
unfinished. Both groups represent product costs. The cost of
finished goods make up the cost of goods manufactured for the
3. Sales Activities—Newly completed units are combined with
beginning finished goods inventory to make up total finished
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Chapter Outline
Notes
E. Manufacturing Statement (also called the schedule of
manufacturing activities or the schedule of cost of goods
manufactured)—reports costs of both materials and production
activities. Contains information used by management for planning
and control. It is not a general purpose financial statement. It is
divided into four parts:
1. Direct material used—determined by adding the beginning
raw materials inventory to this period’s materials purchases to
obtain total raw materials available for use during year and
then subtracting ending raw materials inventory which was
determined from a physical count.
2. Direct labor incurred—includes payroll taxes and fringe
benefits and is taken directly from the direct labor account
balance.
3. Overhead costs—generally lists each important factory
overhead item along with its cost. If a summary number is
used, a separate detailed schedule is usually prepared.
4. Computation of cost of goods manufactured—as follows:
a. Total manufacturing costs (Total of 1,2 and 3 above) are
added to beginning goods in process inventory to get total
cost of goods in process inventory for the year.
b. Compute cost of goods manufactured (or completed) for
year by subtracting the cost of ending goods in process
inventory (determined separately) from the total cost of
goods in process for the year.
IV. Trends in Managerial Accounting
C. E-Commerce—customers expect and demand to be able to
buy items electronically.
E. Lean Practices—the philosophy of continuous improvement
has led to adoption of :
improvement to all aspects of business.
2. Just-in-time Manufacturing (JIT)—system that acquires
F. Value Chain—series of activities that add value to products or
services.
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Chapter Outline
Notes
V. Decision Analysis
A. Raw Material Inventory Turnover
1. Assess how effectively raw materials inventory is
managed.
2. Calculated as raw materials inventory used divided by
average raw materials inventory.
3. Reveals how many times a company turns over its raw
materials inventory during a period. High ratio is
generally preferred as long as demand can be met.
B. Days’ Sales in Raw Materials Inventory
1. Measures how long it takes raw materials to be used in
production.
2. Calculated as ending raw materials inventory divided by
raw materials used, and multiplied by 365.
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Alternate Demo Problem Eighteen
Using the following information for Superior Manufacturing Company,
prepare the income statement for the year ended December 31, 2013.
(Assume a 30 % income tax.)
Administrative Expenses ……………………………………………………..
$ 70,000
Finished Goods Inventory January 1, 2013 …………………………..
120,000
Cost of Goods Manufactured during the year ……………………….
200,000
Finished Goods Inventory December 31, 2013 ……………………..
60,000
Selling Expenses …………………………………………………………………
40,000
Sales …………………………………………………………………………………..
680,000
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Solution: Alternate Demo Problem Eighteen
SUPERIOR MANUFACTURING COMPANY
Income Statement
For Year Ended December 31, 2013
Sales …………………………………………………………………
$ 680,000
Cost of Goods Sold:
Finished Goods Inventory, 1/1/13 ……………………….
$120,000
Cost of Goods Manufactured ……………………………..
200,000
Cost of Goods Available for Sale ………………………..
320,000
Finished Goods Inventory, 12/31/13 ……………………
60,000
Cost of Goods Sold ……………………………………………
260,000
Gross Profit ……………………………………………………….
$ 420,000
Operating Expenses: …………………………………………
Selling Expenses ……………………………………………….
$ 40,000
Administrative Expenses ……………………………………
70,000
Total Operating Expense ……………………………………
110,000
Net Income before Taxes ……………………………………
310,000
Income Tax Expense ………………………………………….
93,000
Net Income after Taxes ………………………………………
$ 217,000