Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
305
chapter
15(1)
Introduction to Managerial
Accounting
______________________________________________
OPENING COMMENTS
Students learn how costs flow through a manufacturing system.
organization, and its uses.
classifications of costs.
3. Describe sustainable business activities and eco-efficiency measures.
4. Describe and illustrate financial statements for a manufacturing business, including the balance sheet,
statement of cost of goods manufactured, and income statement
ADM: Describe and measure utilization in evaluating performance for a service company.
KEY TERMS
continuous process improvement
controller
Chapter 15 (1) Introduction to Managerial Accounting 306
controlling
conversion costs
cost
cost object
cost of goods manufactured
cost of goods sold
decision making
direct costs
direct labor cost
direct materials cost
directing
eco-efficiency measures
factory burden
factory overhead cost
feedback
financial accounting
finished goods inventory
indirect costs
line department
management by exception
management process
managerial accounting
manufacturing overhead
materials inventory
objectives (goals)
operational planning
period costs
planning
prime costs
product costs
staff department
statement of cost of goods manufactured
strategic planning
strategies
sustainability
Sustainability Accounting Standards Board (SASB)
utilization
work in process inventory
STUDENT FAQS
Why is conversion cost considered to be direct labor and factory overhead?
Why is direct and indirect cost so important to understand?
Why is product and period cost so important to understand?
Why do we have to maintain all these costs for each specific job?
Why is direct labor both a prime and a conversion cost? Isn’t that double accounting?
Chapter 15 (1) Introduction to Managerial Accounting 307
OBJECTIVE 1
Describe managerial accounting, including its differences with financial accounting, its
place in the organizations, and its uses.
SYNOPSIS
Managerial accounting provides information to internal users. Managers use this information to control,
plan, and evaluate the performance of the business. Managerial accounting information includes historical
data to evaluate performance and estimated data to assist in making future decisions. Financial accounting
is reported at fixed intervals and provides information to assist external users in making decisions. These
external users include shareholders, creditors, government agencies, and the general public.
Departments in a company can be either line or staff departments. Line departments are directly involved
in providing goods and services to the company’s customers. Managers in these line positions are
responsible for their department’s manufacturing and selling of goods. Staff departments provide services,
assistance, and advice to other departments. The controller is the chief management accountant;
accounting touches all phases of a company’s operations.
A manager uses planning in developing the company’s objectives and then takes actions to implement
these plans. Operational planning develops short-term actions for day-to-day operations. Strategic
planning develops long-term actions to achieve goals involving objectives for the next 5 to 10 years.
Managers direct the day-to-day operations of the business. Monitoring operating results and comparing
these results with the expected results is called controlling. Feedback allows managers to investigate
problems and take remedial actions. It may also lead to adjustment of future plans. Feedback is also used
to improve employees, business processes, and products in a continuous process improvement. Inherent
in all of these processes is decision making in which managers continually decide among alternative
actions.
Key Terms and Definitions
Continuous Process Improvement—A management philosophy of continually improving
employees, business processes, and product.
Controller—The chief management accountant of a division or other segment of a business.
Controlling—A phase in the management process that consists of monitoring the operating
results of implemented plans and comparing the actual results with the expected results.
Decision Making—A component inherent in the management processes of planning, directing,
controlling, and improving where management must continually decide among alternative
actions.
Directing—The process by which managers, given their assigned level of responsibilities, run
day-to-day operations.
Feedback—Measures provided to operational employees or managers on the performance of
subunits of the organization. These measures allow management to isolate areas for further
investigation and possible remedial action.
Financial Accounting—The branch of accounting that is concerned with recording transactions
using generally accepted accounting principles (GAAP) for a business or other economic unit and
with a periodic preparation of various statements from such records.
Line Department—A unit that is directly involved in the basic objectives of an organization.
Chapter 15 (1) Introduction to Managerial Accounting 308
Management by Exception—The philosophy of managing which involves monitoring the
operating results of implemented plans and comparing the expected results with the actual results.
This feedback allows management to isolate significant variations for further investigation and
possible remedial action.
Management (or Managerial) Accounting—The branch of accounting that uses both historical
and estimated data in providing information that management uses in conducting daily
operations, in planning future operations, and in developing overall business strategies.
Management Process—The five basic management functions of (1) planning, (2) directing, (3)
controlling, (4) improving, and (5) decision making.
Objectives (Goals)—Developed in the planning stage, these reflect the direction and desired
outcomes of certain courses of action.
Operational Planning—The development of short-term plans to achieve goals identified in a
business’s strategic plan. Sometimes called tactical planning.
Planning—A phase of the management process whereby objectives are outlined and courses of
action determined.
Staff Department—A unit that provides services, assistance, and advice to the departments with
line or other staff responsibilities.
Strategic Planning—The development of a long-range course of action to achieve business
goals.
Strategies—The means by which business goals and objectives will be achieved.
Relevant Check Up Corner and Exhibits
Exhibit 1—Financial Accounting and Managerial Accounting
Exhibit 2—Partial Organization Chart for Callaway Golf Company
Exhibit 3—The Management Process
Check Up Corner 15-1 – Management Process
SUGGESTED APPROACH—Differences in Financial and Managerial
Accounting
Use Transparency Master (TM) 15(1) -1 to review the basic differences between financial and managerial
accounting. It is helpful to point out that financial accounting stresses stewardship of assets (a historical
orientation), while managerial accounting stresses the best alternative uses of assets (a future orientation).
CLASS DISCUSSION—Managerial Accounting Reports
Ask students whether they receive or prepare any financial reports in their jobs, other than the financial
accounting reports discussed in previous chapters. Ask them to describe these reports and comment on
how management uses them to run the business.
WRITING EXERCISE—Managerial Accounting
Instruct your students to write an answer to the following question [TM 15(1)-2]:
Chapter 15 (1) Introduction to Managerial Accounting 309
Why is it permissible to violate generally accepted accounting principles when preparing reports used
strictly by company management?
Possible response: Since these reports are for internal use only, they should not provide any influence to
investors about decisions to invest in the company. These reports are for management to aid in the
decision-making process. It should be clear to all users that these reports may not follow GAAP.
CLASS DISCUSSION—Management Accountants
The role of the management accountant is to provide management with information needed to plan and
control the operations of a business. The Group Learning Activity below will ask your students to assume
the role of a manager in a variety of business situations. In this role, they must request information from
their company’s management accounting department to assist them in their management functions. This
exercise allows students to experience how management accountants participate in the management
process.
This section also introduces your students to the controller’s position in the typical organizational chart.
This is an opportune time to expose students to the Certificate in Management Accounting (CMA)
program. TM 15(1)-3 outlines the requirements for obtaining this credential. The following website is
also helpful in determining the CMA requirements: www.imanet.org/cma-certification.
GROUP LEARNING ACTIVITY—Managerial Accounting in the Management
Process
Divide the class into small groups. Handouts 15(1)-1 through 15(1)-5 each presents a manager who needs
information that can be supplied by managerial accounting. Assign each of the groups one of these
scenarios. Ask them to read the scenario and list the information that the manager should request from the
management accounting department.
Possible responses:
Handout 15(1)-1: One possible explanation is a recent change in supplier. If this is the case, the
accounting department can supply cost per yard of material from old supplier verses new supplier. They
can then factor in the increased scrap cost to determine if overall costs are more or less than the previous
supplier. It could be that the new supplier is cheaper per yard up front, but increased scrap cost results in
overall higher cost.
Handout 15(1)-2: Credit cards and ATM cards come with a processing fee that cash does not require.
This additional expense will cut into the bottom line. However, increased cost might be overcome with
increased sales to customers who will spend more with the convenience of shopping with a card.
Accounting can provide an analysis of processing fees to determine the level to which sales must increase
in order to break even.
Handout 15(1)-3: As the new sales manager focusing on Buddy at this time, I would want to know the
following information for the company and for each sales representative individually:
Chapter 15 (1) Introduction to Managerial Accounting 310
Total sales
Sales returns
Uncollectable accounts
Selling expenses
Focusing on uncollectable accounts, sales returns as a percentage of total sales, I would want to examine
if Buddy’s numbers are significantly different from the company and how these ratios look compared to
other high performing sales reps.
Handout 15(1)-4: The manager will need to know what costs are included in the overhead reporting.
Additionally, it would be beneficial to have historical data on these costs, as well as production numbers
for these same time periods. It would also be beneficial to have sales projections for the quarter in
question to match demand with cost.
Handout 15(1)-5: The manager will need to know what materials go into the manufacturing process, the
average amount used in each unit, the average cost for direct materials, the average time to manufacture
the product, average wages for direct labor in the manufacturing process, projected sales for the period,
and the desired ending inventory of finished goods, as well as current finished goods inventory. These
will be a good starting point for discussion of the manufacturing process.
GROUP LEARNING ACTIVITY—Organizational Chart
Ask your students to work in groups to construct an organizational chart for your college. You may want
to give them a list of major departments/divisions within the organization. Once the chart is complete,
instruct students to identify staff and line functions.
SUGGESTED APPROACH—Management Process
Cover the five basic phases of the management process:
a. Planning—used by management to develop the organization’s objectives (goals) and to translate
these objectives into courses of action.
1. Strategic planning—long-term courses of action to achieve goals usually in five to ten years
2. Operational planning—short-term courses of action.
b. Directing—the process by which managers run day-to-day operations.
c. Controlling—consists of monitoring the operating results of implemented plans and comparing the
actual results with the expected results.
d. Improving—uses process information to eliminate the source of problems in a process, so that the
process delivers the right products (services) in the right quantities at the right time.
e. Decision making—part of each of the four management processes above, developing a future plan to
respond to unfavorable performances.
Chapter 15 (1) Introduction to Managerial Accounting 311
INTERNET ACTIVITY—Resources for Management Accountants
Direct your students to visit the Institute of Management Accountants’ (IMA) Web site at
http://www.imanet.org. The IMA is the professional organization supporting management accountants.
To familiarize students with the resources available to management accountants through the IMA, instruct
your students to print out one or more of the following: the IMA’s mission, information on the IMA
Ethics Center, the IMA’s Statement of Ethical Professional Practice, or information on the CMA
certification.
OBJECTIVE 2
Describe and illustrate the nature of manufacturing operations, including different types
and classifications of costs.
SYNOPSIS
Manufacturing businesses use unique terminology to describe their accounting process. The payment of
cash or the commitment to pay cash in the future is called cost. Direct costs can be directly connected to a
specific cost object. Indirect costs are those that cannot be traced conveniently to the product.
Manufacturing costs can be divided into three categories: direct materials, direct labor, and factory
overhead. Direct materials must be an integral part of the final product. Direct labor refers to the costs of
employees who change the fit, form, or function of the product. Factory overhead costs are those that are
selling and administrative costs.
Key Terms and Definitions
Conversion Costs—The combination of direct labor and factory overhead costs used to convert
the materials into a finished product.
Cost—A payment of cash (or a commitment to pay cash in the future) for the purpose of
generating revenues.
materials into a finished product.
Direct Materials Cost—The cost of materials that are an integral part of the finished product.
Factory Burden—Another term for manufacturing overhead or factory overhead.
Factory Overhead Cost—All of the costs of producing a product except for direct materials and
direct labor.
incurred in the manufacturing process.
Chapter 15 (1) Introduction to Managerial Accounting 312
Period Costs—Those costs that are used up in generating revenue during the current period and
expenses.
Prime Costs—The combination of direct materials and direct labor costs.
Product Costs—The three components of manufacturing cost: direct materials, direct labor, and
factory overhead costs.
Relevant Check Up Corner and Exhibits
Exhibit 4—Guitar-Making Operations of Legend Guitars
Exhibit 5—Direct Costs of Legend Guitars
Exhibit 6—Indirect Costs of Legend Guitars
Exhibit 7—Classifying Direct and Indirect Costs
Exhibit 8—Manufacturing Costs of Legend Guitars
Exhibit 9—Prime Costs and Conversion Costs
Check Up Corner 15-2 – Manufacturing Operations
SUGGESTED APPROACH
Begin by contrasting merchandising and manufacturing operations. Remind students that merchandisers
purchase a product and sell it. Manufacturers purchase parts and raw materials, make a product, and sell
it. You may want to ask your students to list examples of service, merchandising, and manufacturing
companies.
WRITING EXERCISE—Manufacturing Costs
Ask your students to write the headings of two large columns: title the first column “Product Costs” and
the second column “Period Costs.” Under the “Product Costs” column, divide into three subheadings,
naming them Direct Materials, Direct Labor, and Factory Overhead. “Period Cost” can be divided into
two subheadings of Administrative Cost and Selling Cost. Point out an item in the classroom (such as a
LECTURE AID—Period Costs
Objective 2 also introduces the term “period costs.” These costs are selling and administrative expenses.
TM 15(1)-6 adds these costs to the diagram previously shown on TM 15(1)-5.
Chapter 15 (1) Introduction to Managerial Accounting 313
GROUP LEARNING ACTIVITY—Concepts and Terminology
Divide the class into groups of three with one in the middle as a recorder. Give two minutes of working
time on each exercise. You must push them to get them to work each in two minutes. This is important so
they learn that they must know how to classify these costs very quickly. Work each of the Exercises 15(1)
-1 through 15(1)-7 at the end of Chapter 15(1) in the textbook.
answers in the future.
OBJECTIVE 3
Describe sustainable business activities and eco-efficiency measures.
SYNOPSIS
information for external users.
Key Terms and Definitions
Eco-efficiency measures—A form of managerial accounting information that helps managers
evaluate the savings generated by using fewer natural resources in a company’s operations. .
Relevant Exhibits
Exhibit 12—Sustainable Business Activity
Exhibit 13—Eco-Efficiency Measures
