978-1337119207 Chapter 15 Part 1

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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