CHAPTER 1
LEARNING OBJECTIVES
1. IDENTIFY THE FEATURES OF MANAGERIAL
ACCOUNTING AND THE FUNCTIONS OF
MANAGEMENT.
2. DEFINE THE CLASSES OF MANUFACTURING COSTS
AND THE DIFFERENCES BETWEEN PRODUCT AND
PERIOD COSTS.
3. DETERMINE HOW TO COMPUTE COST OF GOODS
MANUFACTURED AND PREPARE FINANCIAL
STATEMENTS FOR A MANUFACTURER.
4. DISCUSS TRENDS IN MANAGERIAL ACCOUNTING.
CHAPTER REVIEW
Managerial Accounting Basics
1. (L.O. 1) Managerial accounting is a field of accounting that provides economic and financial
information for managers and other internal users. Managerial accounting applies to all types
of businesses—service, merchandising, and manufacturing—and to all forms of business
organizations—proprietorships, partnerships and corporations. Moreover, managerial accounting
is needed in not-for-profit entities as well as in profit-oriented enterprises.
Comparing Managerial and Financial Accounting
2. There are both similarities and differences between managerial and financial accounting.
a. Both fields of accounting deal with the economic events of a business and require that the
results of that company’s economic events be quantified and communicated to interested
parties.
reports, (3) purpose of reports, (4) content of reports, and (5) verification process.
3. The role of the managerial accountant has changed in recent years. Whereas in the past their
primary concern used to be collecting and reporting costs to management, today they also
Management Functions
4. Managers perform three broad functions within an organization:
a. Planning requires managers to look ahead and to establish objectives.
Organizational Structure
5. In order to assist in carrying out management functions, most companies prepare organization
charts to show the interrelationships of activities and the delegation of authority and responsibility
with the company.
Manufacturing Costs
6. (L.O. 2) Manufacturing consists of activities and processes that convert raw materials into
finished goods.
7. Manufacturing costs are typically classified as either (a) direct materials, (b) direct labor or
(c) manufacturing overhead.
8. Direct materials are raw materials that can be physically and directly associated with the finished
product during the manufacturing process. Indirect materials are materials that (a) do not
physically become a part of the finished product or (b) cannot be traced because their physical
association with the finished product is too small in terms of cost. Indirect materials are accounted
for as part of manufacturing overhead.
Product Versus Period Costs
11. Product costs are costs that are a necessary and integral part of producing the finished product.
Period costs are costs that are matched with the revenue of a specific time period rather than
included as part of the cost of a salable product. These are nonmanufacturing costs. Period costs
include selling and administrative expenses.
Manufacturing Income Statement
12. (L.O. 3) The income statements of a merchandising company and a manufacturing company
differ in the cost of goods sold section.
Determining Cost of Goods Manufactured
14. (L.O. 3) The determination of the cost of goods manufactured consists of the following:
a. Beginning Work Total Current Total Cost of
in Process + Manufacturing = Work in Process
Inventory Costs
17. Because a number of accounts are involved, the determination of cost of goods manufactured is
presented in a Cost of Goods Manufactured Schedule. The cost of goods manufactured schedule
shows each of the cost factors above. The format for the schedule is:
Beginning work in process ………………………………………………. $XXXX
Direct materials used ……………………………………………………… $XXXX
Direct labor …………………………………………………………………… XXXX
Manufacturing overhead …………………………………………………. XXXX
Manufacturing Balance Sheet
18. The balance sheet for a manufacturing company may have three inventory accounts: finished
goods inventory, work in process inventory, and raw materials inventory.
19. The manufacturing inventories are reported in the current assets section of the balance sheet.
The remainder of a manufacturer’s balance sheet is similar to a merchandising company’s
balance sheet.
Product Costing for Service Industries
21. Since service companies do not produce inventory, they use a subset of the accounts used by
manufacturers. However, just like manufacturers, service companies also need to keep track of
the costs of each service in order to know whether the service generates a profit.
Focus on the Value Chain
22. (L.O. 4) The business environment and regulations are always changing, managerial accounting
must continue to innovate in order to provide managers with the information they need. The
value chain refers to all business processes associated with providing a product or service.
Business Ethics
25. All employees are expected to act ethically in their business activities and an increasing number
of organizations provide their employees with a code of business ethics.
LECTURE OUTLINE
A. Managerial Accounting Basics.
1. Managerial accounting, also called management accounting, is a field of
accounting that provides economic and financial information for managers
and other internal users.
B. Comparing Managerial and Financial Accounting.
1. The distinguishing features of managerial accounting are:
a. Primary users of reports—internal users: officers and managers.
b. Types and frequency of reports—internal reports issued as frequently
as needed.
C. Management Functions.
1. Manager’s activities and responsibilities can be classified into three
broad functions:
a. Planning requires managers to look ahead and to establish objectives.
MANAGEMENT INSIGHT
Louis Vuitton is a French manufacturer of high-end handbags, wallets, and
suitcases. Luxury-goods manufacturers used to consider stock-outs to be a good
thing, but Louis Vuitton recently changed its attitude.
What are some of the steps that Louis Vuitton has taken in order to ensure that
production meets demand?
Answer: The company has organized flexible teams, with jobs arranged by the
amount of time a task takes. Employees now are multiskilled, so they
D. Organizational Structure.
1. Most companies prepare organization charts to show the interrelation-
ships of activities and the delegation of authority and responsibility within
the company.
2. Stockholders own the corporation, but they manage it indirectly through
a board of directors they elect.
3. The chief executive officer (CEO) has overall responsibility for managing
the business, but delegates responsibility to other officers.
4. Responsibilities within a company are classified as either: line positions—
employees directly involved in the company’s primary revenue-generating
operating activities, or staff positions—employees involved in activities
that support line employees’ efforts.
E. Manufacturing Costs.
Manufacturing costs are classified as (1) direct materials, (2) direct labor, or
(3) manufacturing overhead.
1. Direct materials are raw materials that can be physically and directly
associated with the finished product during the manufacturing process.
a. Indirect materials:
(1) Do not physically become part of the finished product or,
2. Direct labor is the work of factory employees that can be physically and
directly associated with converting raw materials into finished goods.
a. Indirect labor has no physical association with the finished product,
or it is impractical to trace the costs to the goods produced.
b. Companies classify indirect labor as manufacturing overhead.
MANAGEMENT INSIGHT
Prior to 2010, U. S. manufacturing employment decreased every year for 60
years. However, during 2010, manufacturing jobs in the U.S. increased by 1.2%.
What are some of the reasons attributed to this increase in manufacturing jobs?
Answer: Companies like Whirlpool, Caterpillar, and Dow are building huge
new efficient plants in the U.S. to replace old, inefficient facilities.
F. Product Versus Period Costs.
1. Product costs are costs that are a necessary and integral part of producing
the finished product.
2. Product costs do not become expenses until the company sells the
finished goods inventory.
G. Manufacturing Costs in Financial Statements.
1. The principal differences in a manufacturer’s financial statements occur
in the cost of goods sold section in the income statement and the current
assets section in the balance sheet.
3. To determine the cost of goods manufactured, companies add the cost
of the beginning work in process to the total manufacturing costs for the
current year to find the total cost of work in process for the year.
Companies then subtract the ending work in process from the total cost
of work in process to find the cost of goods manufactured.
4. The balance sheet for a manufacturing company may have three inven–
tory accounts:
a. Finished Goods Inventory, which shows the cost of completed goods
on hand.
SERVICE COMPANY INSIGHT
Allegiant Airlines must know something because while other airlines are losing
money, it is generating profits. As a low-budget airline, it focuses on controlling
costs. It flies out of small towns, so wages are low and competition is nonexistent.
If a route isn’t filling up, it quits flying it as often or cancels it altogether.
What are some of the line items that would appear in the cost of service
schedule of an airline?
Answer: Some of the cost items that would appear in the cost of service
H. Managerial Accounting Today.
1. Managerial accounting has experienced many changes in recent years
including a shift toward addressing the needs of service companies and
improving practices to better meet the needs of managers.
2. The value chain refers to all activities associated with providing a product
or service (i.e. research and development, production, delivery, etc.).
Analysis of the value chain has made companies far more responsive to
customer needs and has improved profitability.
3. Many companies have significantly lowered inventory levels and costs
using just-in-time (JIT) inventory methods. Under a just–in-time method,
goods are manufactured or purchased just in time for use.
8. The balanced scorecard is now used by many companies in order to attain
a more comprehensive view of the company’s operations. The balanced
scorecard is a performance-measurement approach that uses both financial
and nonfinancial measures to evaluate all aspects of a company’s opera–
tions in an integrated fashion.
I. Business Ethics.
1. Companies use complex systems to control and evaluate managers’
actions. Unfortunately these systems and controls unwittingly create
incentives for managers to sometimes take unethical actions.
2. Ethical business scandals involving fraudulent activities of managers
caused the U.S. Congress to enact the Sarbanes-Oxley Act of 2002.
This act requires that CEOs and CFOs certify that the financial