Financial and Managerial Accounting, 8e
14-1
CHAPTER 14
MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA and
BTN
Conceptual objectives:
C1. Explain the purpose and nature of, and
the role of ethics in, managerial
accounting.
explain how they impact financial
statements.
5, 7, 11
14-6
14-6
14-1, 14-2
BTN 14-1
merchandising, and service companies
differ.
1, 2, 3, 13
14-1
14-1
AA 14-1, AA 14-3,
BTN 14-3, BTN 14-6
C5. Explain manufacturing activities and
the flow of manufacturing costs.
17, 18, 19
14-8, 14-13,
14-14, 14–16
14-16
BTN 14-4
C6. Describe trends in managerial
accounting.
14-17, 14-18,
14-19
BTN 14-2, BTN 14-5
Analytical objectives:
A1 Assess raw materials inventory
management using raw materials
inventory turnover and days’ sales in
raw materials inventory.
23, 24, 25
14-15, 14–17
14-3
Procedural objectives:
P1. Compute cost of goods sold for a
manufacturer and for a merchandiser.
14-9, 14-10
14-8, 14-11,
14-5
P2. Prepare a schedule of cost of goods
manufactured and explain its purpose
and links to financial statements.
17, 20, 21,
14-3, SP
BTN 14-4
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
BTN refers to Beyond the Numbers
GL refers to General Ledger Problems
Questions with Guided Example videos
Explain manufacturing activities and the flow of manufacturing costs.
2:15
Flow of Manufacturing Activities
2:01
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
the video and audio functions for the Guided Examples are also available in the Connect Instructor Library and Exercise
Presentations. These are indicated in the Related Assignment Materials grid on page 1 in blue bold font.
Need-to-Know Videos
Need–to-Know
Title
Time
14-1
Managerial Accounting Basics
1:36
Concept Overview Videos
LO
Title
Time
C1
Explain the purpose and nature of, and the role of ethics in, managerial accounting.
2:01
Purpose of Managerial Accounting
3:16
Nature of Managerial Accounting
1:28
Fraud and Ethics in Managerial Accounting
C2
Describe accounting concepts useful in classifying costs.
0:32
Fixed versus Variable
0:47
Direct versus Indirect
C3
Define product and period costs and explain how they impact financial statements.
2:29
Product versus Period Costs
0:54
Identification of Cost Classifications
1:13
Cost Concepts for Service Companies
2:51
Manufacturing Costs
C4
Explain how balance sheets and income statements for manufacturing,
merchandising, and service companies differ.
2:15
Balance Sheet
1:48
Income Statement
P1
Compute cost of goods sold for a manufacturer and a merchandiser.
0:27
Cost of goods sold computation
0:34
Financial and Managerial Accounting, 8e
14-3
P2
Prepare a schedule of cost of goods manufactured and explain its purpose and
links to financial statements.
Schedule of Cost of Goods Manufactured
2:48
C6
Describe trends in managerial accounting.
Trends in Managerial Accounting
1:31
Lean Principles
1:25
Value Chain
1:17
Raw Materials Inventory Turnover
1:59
Days’ Sales in Raw Materials Inventory
1:19
Synopsis of Chapter Revisions
NEW opener—Moringa Connect and entrepreneurial assignment.
Added discussion on role of managerial accounting for nonaccounting and nonbusiness majors.
Added equation boxes for total manufacturing costs and cost of goods manufactured.
New margin exhibit showing product and period cost flows.
Chapter Outline
I. Managerial Accounting Basics—managerial accounting provides financial and nonfinancial
information to an organization’s managers.
A. Purpose of Managerial Accounting—to provide useful information to aid in three key managerial
Managerial accounting collects cost information and assigns it to an organization’s products and
services. Cost information helps in making product pricing, profitability analysis and decisions as to
whether to make or buy a product or component.
1. Planning is the process of setting goals and making plans to achieve them.
a. Strategic plans usually set the long-term direction of a firm (considers potential opportunities
such as new products, new markets and capital investments).
b. Short-term plans often cover a one-year period which, when translated in monetary terms, is
known as the budget.
2. Control is the process of monitoring planning decisions and evaluating the organization’s
activities and employees.
a. Control feedback allows managers to take timely corrective actions to avoid undesirable
outcomes.
b. Measurement of actions and processes allows managers to take corrective actions to obtain
better outcomes.
B. Nature of Managerial Accounting—illustrated by comparing the seven key differences between
managerial to financial accounting:
1. Users and decision makers
a. In financial—investors, creditors and other users external to the organization.
b. In managerial—managers, employees and decision makers internal to the organization.
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.
a. In financial—emphasis on whole organization.
7. Nature of Information
a. In financial—monetary information.
b. In managerial—mostly monetary; but also nonmonetary information such as customer
satisfaction data, product defect rates, etc.
C. Fraud and Ethics in Managerial Accounting—important factors in running business operations.
Fraud involves the deliberate misuse of one’s job for personal gain, through the deliberate misuse of
the employer’s assets.
1. Three factors must exit for a person to commit fraud (called the fraud triangle):
a. Opportunity
b. Financial pressure.
c. Rationalization
4. Career Paths – managerial accountants must understand financial, managerial concepts, have
strong communication skills, understand how businesses work and be team players.
II. Managerial Cost Concepts—Costs can be classified based on any one or combination of the five
classifications listed below.
A. Fixed vs. Variable: A cost can be classified by how it changes, in total, with changed in the volume
of activity.
1. Fixed Cost: a cost that does not change in total with changes in the volume of an activity
(within a certain range of activity known as an activity’s relevant range).
2. Variable Cost: a cost that changes in total in proportion to changes in volume of an activity.
B. Direct vs. Indirect: a 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. Product vs Period Costs: costs classified as capitalized inventory (product cost) or expensed as
incurred (period cost).
D. Cost Concepts for Service Companies – cost concepts described also apply to service organizations.
III. Managerial Reporting—financial statements for manufacturing companies have some unique features
resulting from their activity of producing goods from materials and labor.
14-6
A. Manufacturing Costs
1. Direct Materials—tangible components of a finished product; Direct Material Costs are the
expenditures that are separately and readily traced through the manufacturing process to
finished goods.
2. Direct Labor—refers to employees who physically convert materials into finished products.
Direct Labor costs are the wages and benefits for direct labor that are separately and readily
traced through the manufacturing process to finished goods.
3. Factory Overhead (also called manufacturing overhead)—consists of all manufacturing
costs that are not direct materials or direct labor; costs are not separately or readily traced to
finished goods. Includes indirect materials, indirect labor and other indirect costs not
directly traceable to the product.
a. Indirect Materials—used in manufacturing but not clearly identified with specific
product units. Often direct materials can be classified as indirect when their costs
4. Prime and Conversion Costs
a. Prime costs—direct materials and direct labor.
b. Conversion costs—direct labor and overhead costs (expenditures incurred in the
process of converting raw materials to finished goods).
B. Manufacturer’s Balance Sheet—usually reports these three inventories:
1. Raw Materials Inventory—goods a company acquires to use in making products Includes
both direct and indirect materials.
2. Work in Process Inventory— consists of products in the process of being manufactured but
not yet complete.
C. Manufacturer’s Income Statement—the main difference between the income statement of a
manufacturer and that of a merchandiser is in the items that make-up cost of goods sold.
1. A Merchandiser computes cost of goods sold as:
Beginning merchandise inventory
+ cost of goods purchased
Cost of goods available for Sale
– Ending merchandise inventory
Cost of Goods Sold
2. A Manufacturer computes cost of goods sold as:
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Cost of Goods Sold
3. *Cost of goods manufactured is the sum of direct materials, direct labor, and overhead costs
incurred in production.
1. Materials Activities
Beginning raw materials
+ Raw materials Purchases
Raw materials available for use in production
– Ending Raw Materials Inventory
Raw Materials Used in Production
2. Production Activities—Four factors come together in production:
a. Beginning Work in process inventory—consists of partly produced goods from the previous
period.
E. Schedule of Cost of Goods Manufactured – summarizes the types and amounts of costs incurred in
the manufacturing process. Schedule is divided into four parts:
F. Trends in Managerial Accounting
1. Customer orientation – managers and employees understand the changing needs and wants of
customers.
2. Global economy – expands competitive boundaries and provides customers many choices.
3. Service economy – typically account for over 60% of total economic activity in developed
7. Triple bottom line – focuses on financial, social and environmental measures.
G. Raw materials inventory turnover – helps managers assess how effectively a company manages its
raw materials inventory.
1. Computed as raw materials used divided by average raw materials inventory.
2. Reveals how many times a company turns over (uses in production) its raw materials inventory
during a period.
3. High ratio is preferred.
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Chapter 14 Alternate Demo Problem
Using the following information for Superior Manufacturing Company, prepare a
manufacturing statement and an income statement for the year ended December 31,
2019. (Assume a 25% income tax.) Further assume that all raw materials used were
direct materials and the factory overhead costs were totaled for you on a separate
schedule.
Raw Materials Inventory January 1, 2019……………………….
$20,000
Raw Materials Inventory December 31, 2019…………………..
40,000
Work in Process Inventory January 1, 2019…………………….
50,000
Work in Process Inventory December 31, 2019…………………
80,000
120,000
60,000
60,000
600,000
Raw Materials purchases during 2019……………………………
150,000
120,000
Financial and Managerial Accounting, 8e
Chapter 14 Solution: Alternate Demo Problem
SUPERIOR MANUFACTURING COMPANY
Manufacturing Statement
For Year Ended December 31, 2019
Raw Materials Inventory, 1/1/19 ………………………….
$ 20,000
Raw Materials Purchases …………………………………..
150,000
Raw Materials Available for Use …………………………
170,000
Less Raw Materials Inventory, 12/31/19 ………………
40,000
120,000
180,000
Total Manufacturing Costs …………………………………
430,000
Add: Work in Process Inventory 1/1/19 ………………
50,000
Total Work in Process Inventory ………………………..
480,000
Less: Work in Process Inventory 12/31/19 ………….
80,000
Cost of Goods Manufactured …………………………….
$ 400,000
$ 400,000
SUPERIOR MANUFACTURING COMPANY
Income Statement
For Year Ended December 31, 2019
Sales
$ 600,000
Cost of Goods Sold:
Finished Goods Inventory, 1/1/19 ……………………….
$140,000
Cost of Goods Manufactured ……………………………..
400,000
Cost of Goods Available for Sale ………………………..
540,000
Finished Goods Inventory, 12/31/19 ……………………
90,000
Cost of Goods Sold ……………………………………………
450,000
Gross Profit ……………………………………………………….
150,000
Administrative Expenses ……………………………………
Total Operating Expense ……………………………………
90,000
Income before Taxes………………………………….
15,000
Net Income after Taxes ………………………………………