chapter
18
Managerial Accounting
Concepts and Principles
______________________________________________
OPENING COMMENTS
Chapter 18 introduces students to managerial accounting and the manufacturing process. Students will
learn how managerial accounting is used in the management decision process. They will also be exposed
to the terminology used to describe costs related to manufacturing.
Students learn how costs flow through a manufacturing system.
After studying the chapter, your students should be able to:
2. Define and illustrate the following costs: 1. direct and indirect costs, 2. direct materials, direct labor,
and factory overhead costs, 3. product and period costs.
4. Describe the uses of managerial accounting information.
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?
2 Chapter 18 Managerial Accounting Concepts and Principles
OBJECTIVE 1
Describe managerial accounting and the role of managerial accounting in a business.
KEY TERMS
Continuous Process Improvement Management Process
Controller Managerial Accounting
Controlling Objectives (goals)
Decision Making Operational Planning
Directing Planning
Feedback Staff Department
Financial Accounting Strategic Planning
Line Department Strategies
Management by Exception
SUGGESTED APPROACH — Differences in Financial and Managerial
Accounting
Use Transparency Master (TM) 18-1 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 18-2):
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
Chapter 18 Managerial Accounting Concepts and Principles 3
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 18-3 outlines the requirements for obtaining this credential. The following website is also
helpful in determining the CMA requirements: http://www.imanet.org/index.asp.
GROUP LEARNING ACTIVITY — Managerial Accounting in the Management
Process
Divide the class into small groups. Handouts 18-1 through 18-5 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 8-1: 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 8-2: 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 8-3: 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:
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 8-4: 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
4 Chapter 18 Managerial Accounting Concepts and Principles
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 8-5: 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
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
INTERNET ACTIVITY — Resources for Management Accountants
Direct your students to visit the Institute of Management Accountants’ (IMA) Web site at
http://www.imanet.org/index.asp. 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.
Chapter 18 Managerial Accounting Concepts and Principles 5
OBJECTIVE 2
Describe and illustrate the following costs: 1. direct and indirect costs, 2. direct materials,
direct labor, and factory overhead costs, 3. product and period costs.
KEY TERMS
Conversion Costs Factory Overhead Cost
Cost Indirect Costs
Cost Object Manufacturing Overhead
Direct Costs Period Costs
Direct Labor Cost Prime Costs
Direct Materials Cost Product Costs
Factory Burden
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.
TMs 18-4 and 18-5 provide information to assist you in reviewing the major categories of manufacturing
costs: direct materials, direct labor, and factory overhead. After explaining these categories, check your
students’ understanding by asking them to complete the writing exercise below.
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
chair, table, or textbook) and instruct students to list the costs necessary to manufacture the item. These
costs should be listed under the appropriate heading.
LECTURE AID — Period Costs
Objective 2 also introduces the term “period costs.” These costs are selling and administrative expenses.
TM 18-6 adds these costs to the diagram previously shown on TM 18-5.
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 18-1
through 18-8 at the end of Chapter 18 in the textbook.
6 Chapter 18 Managerial Accounting Concepts and Principles
Use the Instructor’s Resource CD to show correct answers as you progress quickly through these. Again,
stress to the students at the end that they must know how to classify these costs or they will miss many
answers in the future.
OBJECTIVE 3
Describe and illustrate the following statements for a manufacturing business: 1. balance
sheet, 2. statement of cost of goods manufactured, 3. income statement.
KEY TERMS
Cost of Finished Goods Available Materials Inventory
Cost of Goods Manufactured Merchandise Available for Sale
Cost of Goods Sold Statement of Cost of Goods Manufactured
Cost of Merchandise Sold Work in Process Inventory
Finished Goods Inventory
SUGGESTED APPROACH
Contrast a merchandising and manufacturing business. Use your local gas station as a merchandising
business. It buys and then sells students gasoline without doing anything to the product. This type of
business will have one type of inventory—gasoline, if they do not sell anything else. For a manufacturing
business, use something such as the local sub/sandwich shop at your school; they manufacture or produce
different sandwiches from different meats, cheeses, vegetables, and spreads. They start with the direct
materials just discussed, add direct labor to make the sandwiches, and toss in some cost for the use of the
equipment, building, heat, air conditioner, the oven, the cash register, the indirect labor of the cash
register person, etc. You may even make and bake cookies to demonstrate a manufacturing business as a
bakery business. You can illustrate beginning inventory, work in process inventory, and finished goods
inventory (if you hurry before they eat the cookies) by stopping at various points. This takes a lot of
preparation ahead of time.
The income statement is the first statement that needs preparation in any type of business; so it is with a
manufacturing-type business. Cost of merchandise sold for a merchandising business is figured as shown
below:
Beginning inventory
+ Purchases
= Merchandise available for sale
– Ending inventory
= Cost of merchandise sold
Cost of goods sold is calculated differently for a manufacturing company, due to the flow of costs through
three different inventory accounts: raw materials, work in process, and finished goods.
Chapter 18 Managerial Accounting Concepts and Principles 7
The statement of cost of goods manufactured shows the flow of costs into and out of raw materials
inventory, then the flow of costs into work in process, and the work in process inventory into finished
goods inventory. (See TM 18-7.)
The calculations involved are:
Beginning Inventory—Raw Materials
+ Net Purchases
= Total Raw Materials Available for Use
– Ending Inventory—Raw Materials
= Raw Materials Placed in Production
Beginning Work in Process
+ Raw Materials Placed in Production
+ Labor Charged to Work in Process
+ Overhead Charged to Work in Process
– Ending Work In Process
= Cost of Goods Manufactured
The income statement shows the flow of finished goods inventory into the cost of goods sold. (See TM
18-8.)
The calculations are:
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
= Cost of Finished Goods Available for Sale
– Ending Finished Goods Inventory
= Cost of Goods Sold
OBJECTIVE 4
Describe the uses of managerial accounting information.
SUGGESTED APPROACH
Use the related Cases & Projects as a basis for class discussion.
The uses of managerial accounting reports are limited only by the imagination of the managers who use
them. Some managers want endless details to analyze while others want a few summary items to review.
The managerial accounting reports should reflect the needs and styles of the business. The text provides a
few possible managerial uses of accounting information for the guitar manufacturing business discussed.
These can be used as a starting point to generate discussion of other manufacturing businesses that your
students may suggest or be interested in discussing.
Handout 18-1
Managerial Accounting Scenario 1
The manager of a fabric store has noticed a considerable increase in the amount of
defective fabric being scrapped by his store. Clerks notice the defects (such as
irregularities in the weave or color of fabric) when they cut yardage from bolts of fabric.
These defects usually affect only a small portion of the fabric on a bolt. Therefore, when
a clerk discovers a defect, the “bad spot” is cut from the bolt. The clerk fills out a defect
slip, which includes the amount of defective fabric (in yards), the retail price per yard,
and the inventory control number. The defect slip is attached to the fabric and put in a
“defects” bin in the storeroom. Once a month, the assistant manager sends the defect
slips to the accounting department and packages the bad fabric for sale as scrap
material. The accounting department uses the defect slips to write off the defective
inventory in the accounting records.
What information could the manager request from the management accounting
department that might help in attacking the problem of increasing defects?
Handout 18-2
Managerial Accounting Scenario 2
The top management of a fast-food hamburger chain is considering installing point–of–
sale machines that will allow customers to pay for food with an automated teller–
machine card. Previously, the restaurant has accepted only cash.
What information could the management accounting department supply to assist
management with this decision?
Handout 18-3
Managerial Accounting Scenario 3
B Squared Inc. manufactures and sells awnings all over the southeastern United States.
Each state has a sales representative who is paid on commissions. Each salesperson
is responsible for checking the credit of customers as part of the sales process. Buddy
has been the top salesman for the past 5 years in a row. You have been hired as the
new sales manager and after meeting with your sales representatives, there are some
questions being raised as to why Buddy is the top salesperson and the legitimacy of
some of the sales being reported. What information would you request from the
accounting department to help confirm or negate these accusations?
Handout 18-4
Managerial Accounting Scenario 4
You are the newly hired production manager for the XYZ Company manufacturing plant
and have been ask by the VP of manufacturing to provide a budget for the next quarter
production for overhead cost. What information will you need from accounting to assist
in building this report?
Handout 18-5
Managerial Accounting Scenario 5
You are the newly hired production manager for the XYZ Company manufacturing plant
and have been ask by the VP of manufacturing to provide a budget for the next quarter
production for prime cost. What information will you need from accounting to assist in
building this report?
DIFFICULTY BUSPROG ACBSP ACBSP IMA BLOOM’S TIME
Problem
Learning
Objective
Description Primary Primary Secondary
Managerial
Only
Spread-
sheet
GL
DQ18-1 18-1 Easy Analytic
Characteristics/Terminology
Management
Knowledge 5 min.
DQ18-2 18-1 Easy Analytic
Characteristics/Terminology
Management
Knowledge 5 min.
DQ18-3 18-2 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
DQ18-4 18-2 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
DQ18-5 18-2 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
DQ18-6 18-3 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
DQ18-7 18-3 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
DQ18-8 18-3 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
DQ18-9 18-3 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
DQ18-10 18–3 Easy Analytic
Features/Costs
Management
Knowledge 5 min.
PE18-1A 18-1 Management process Easy Analytic Management Functions
Management
Knowledge 5 min.
PE18-1B 18-1 Management process Easy Analytic Management Functions
Management
Knowledge 5 min.
PE18-2A 18-2
factory overhead
Easy Analytic
Features/Costs
Management
Knowledge 5 min.
PE18-2B 18-2
factory overhead
Easy Analytic
Features/Costs
Management
Knowledge 5 min.
HOMEWORK CHART WITH LEARNING OUTCOMES TAGGING
DIFFICULTY BUSPROG ACBSP ACBSP IMA BLOOM’S TIME
PE18-3A 18-2 Prime and conversion costs Easy Analytic
Features/Costs
Management
Knowledge 5 min.
PE18-3B 18-2 Prime and conversion costs Easy Analytic
Features/Costs
Management
Knowledge 5 min.
PE18-4A 18-2 Product and period costs Easy Analytic
Features/Costs
Management
Knowledge 5 min.
PE18-4B 18-2 Product and period costs Easy Analytic
Features/Costs
Management
Knowledge 5 min.
PE18-5A 18-3
manufactured
Easy Analytic
Features/Costs
Management
Application 10 min.
PE18-5B 18-3
manufactured
Easy Analytic
Features/Costs
Management
Application 10 min.
Ex18-1 18-2
labor, or factory overhead
Easy Analytic
Features/Costs
Management
Knowledge 10 min.
Ex18-2 18-2
labor, or factory overhead
Easy Analytic
Features/Costs
Management
Knowledge 10 min.
Ex18-3 18-2
overhead
Easy Analytic
Features/Costs
Management
Knowledge 10 min.
Ex18-4 18-2
period costs
Easy Analytic
Features/Costs
Management
Knowledge 10 min.
Ex18-5 18-1, 18-2 Concepts and terminology Easy Analytic
Characteristics/Terminology
Management
Knowledge 5 min.
Ex18-6 18-1, 18-2 Concepts and terminology Easy Analytic
Characteristics/Terminology
Management
Knowledge 5 min.
Ex18-7 18-2
company
Easy Analytic
Features/Costs
Management
Knowledge 10 min.
Ex18-8 18-2, 18-3 Classifying costs Moderate Analytic
Features/Costs
Management
Application 15 min.
Ex18-9 18-3
manufacturing firm
Moderate Analytic Financial Statements
Management
Application 30 min.
DIFFICULTY BUSPROG ACBSP ACBSP IMA BLOOM’S TIME
Problem
Learning
Objective
Description Primary Primary Secondary
Managerial
Only
Spread-
sheet
GL
Ex18-10 18-3
sheet
Easy Analytic Current Assets
Management
Application 10 min.
production for a manufacturing
Cost
Manufacturing company balance
Cost
Ex18-11 18-3
company
Easy Analytic
Features/Costs
Management
Application 10 min.
Ex18-12 18-3
Cost of goods manufactured for a
manufacturing company
Easy Analytic
Features/Costs
Cost
Management
Application 10 min.
Cost of goods manufactured for a
Cost
Ex18-13 18-3
manufacturing company
Easy Analytic
Features/Costs
Management
Application 10 min.
Ex18-14 18-3
manufacturing company
Easy Analytic Financial Statements
Management
Application 10 min.
Statement of cost of goods
manufactured for a manufacturing
Cost
Income statement for a
Cost
Ex18-15 18-3
company
Moderate Analytic Financial Statements
Management
Application 30 min. X
Ex18-16 18-3
Cost of goods sold, profit margin,
and net income for a manufacturing
Moderate Analytic Financial Statements
Cost
Management
Application 15 min.
Ex18-17 18-3 Cost flow relationships Moderate Analytic
Features/Costs
Cost
Management
Application 30 min.
Cost
Pr18-1A 18-2 Classifying costs Moderate Analytic
Features/Costs
Management
Knowledge 45 min.
Pr18-2A 18-2 Classifying costs Moderate Analytic
Features/Costs
Cost
Management
Knowledge 45 min.
Cost classifications-service
Cost
Pr18-3A 18-2
company
Moderate Analytic
Features/Costs
Management
Knowledge 45 min.
Pr18-4A 18-2, 18-3
manufactured
Challenging Analytic
Features/Costs
Statements
Management
Application 1.5 hours X
Manufacturing income statement,
statement of cost of goods
Managerial Accounting
Financial
Cost
Pr18-5A 18-2, 18-3
company
Challenging Analytic
Features/Costs
Statements
Management
Application 1 hour X
Pr18-1B 18-2 Classifying costs Moderate Analytic
Features/Costs
Management
Knowledge 45 min.
Pr18-2B 18-2 Classifying costs Moderate Analytic
Features/Costs
Management
Knowledge 45 min.
DIFFICULTY BUSPROG ACBSP ACBSP IMA BLOOM’S TIME
Problem
Learning
Objective
Description Primary Primary Secondary
Managerial
Only
Spread-
sheet
GL
Pr18-3B 18-2
Cost classifications-service
company
Moderate Analytic
Managerial Accounting
Features/Costs
Cost
Management
Knowledge 45 min.
Pr18-4B 18-2, 18-3
manufactured
Challenging Analytic
Features/Costs
Management
Application 1.5 hours X
Pr18-5B 18-2, 18-3
company
Challenging Analytic
Features/Costs
Management
Application 1 hour X
Ethics and professional conduct in
business
Managerial Accounting
Features/Costs
Cost
Management
CP18-2 18-1 Financial vs. managerial accounting Easy Analytic
Characteristics/Terminology
Management
Analysis 15 min.
CP18-4 18-2 Classifying costs Moderate Analytic
Characteristics/Terminology
Management
Application 1 hour
information
Management
Application 30 min.
CP18-6 18-2 Classifying costs Moderate Analytic
Features/Costs
Management
Application 2 hours