Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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CHAPTER 18
MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
of, and the role of ethics in,
managerial accounting.
18-5, 18-7,
18-8, 18-9
C2. Describe accounting concepts
useful in classifying costs.
4, 6, 7, 8, 9,
10, 17
18-2, 18-3,
18-4
18-2, 18-3,
18-4, 18–10
18-1, 18-2, SP
18-2, 18-7,
18-8
C3. Define product and period costs
and explain how they impact
financial statements.
5, 7, 11
18-5
18-5
18-1, 18-2
18-3
C4. Explain how balance sheets and
income statements for
manufacturing and
merchandising companies
differ.
12, 14, 15, 16
18-6
18-7, 18-9
18-4, 18-5, SP
C5. Explain manufacturing
activities and the flow of
manufacturing costs.
C6. Describe trends in managerial
accounting.
18-12
18-6, 18-17,
18-18, 18-19
18-4, 18-7
Analytical objectives:
A1 Assess raw materials inventory
management using raw
materials inventory turnover
and days’ sales in raw materials
inventory.
23, 24, 25
18-14
18-3
Procedural objectives:
P1. Compute cost of goods sold for
18-9, 18-8
18-8, 18-11,
18-5
a manufacturer.
18–15
P2. Prepare a manufacturing
statement and explain its
purpose and links to financial
statements.
17, 20, 21,
22
18-10, 18-11
18-8, 18-9,
18-12, 18–13,
18-14, 18–15
18-3, SP
18-6
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises
and Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and
Problems. It allows instructors to monitor, promote, and assess student learning. It can be used in
practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing.
Connect Insight is available through Connect titles.
The Serial Problem (SP) for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
NEW opener—NatureBox and entrepreneurial assignment.
Simplified discussion on purpose of managerial accounting.
Added references to more real-world companies.
Added discussion of enterprise risk management.
Revised Exhibit 18.1 to show common managerial decisions.
Simplified discussion on nature of managerial accounting.
New section on careers in managerial accounting and importance of managerial accounting for non–accountants.
New exhibit on managerial accounting salaries.
Added example on cost of iPhone.
New section head and revised discussion for nonmanufacturing costs.
Added graphics to cost flow exhibit.
Reduced number of overhead items in exhibit for cost of goods manufactured statement.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
I. Managerial Accounting Basics—managerial accounting provides
financial and nonfinancial information to organization’s managers.
A. Purpose of Managerial Accounting—to provide useful information
to aid in three key managerial tasks.
a. determining the costs of an organization’s products and
services.
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
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
2. Purpose of information
a. In financial—Assist external users in making investment,
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Chapter Outline
Notes
3. Flexibility of Reporting
a. In financial—Structured and often controlled by GAAP.
a. In managerial—relatively flexible (no GAAP constraints).
An important question the manager must ask—is the
4. Timeliness of Information
b. In financial—often available only after the audit is
5. Time Dimension
a. In financial—Focus on historical information with some
6. Focus of Information
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. Managerial Decision Making—managerial accounting information
is primarily used for internal decisions about a company’s
activities but financial and managerial accounting are not entirely
separate since both can affect people’s decisions and actions.
D. 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):
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Chapter Outline
Notes
2. Implications for managerial accounting—fraud increases
business costs and management must therefore rely on and
3. Ethics are beliefs that distinguish right from wrong. The IMA
4. Careers in Managerial Accounting – 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 behaves
with changed in the volume of activity.
1. Fixed Cost: a cost that does not change in total with changes
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).
1. Product costs—expenditures necessary and integral to finished
products. Include direct materials, direct labor, and indirect
2. Period costs—expenditures identified more with a time period
than finished products. Includes selling and general
administrative expenses on the income statement.
D. Identification of Cost Classifications—understanding how to
classify costs in several different ways enables managers to use
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Chapter Outline
Notes
cost information for a variety of decisions. Potential multiple
classifications are shown in Exhibit 18-9 in the text.
E. Cost Concepts for Service Companies – cost concepts described
also apply to service organizations.
III. Reporting of Costs—financial statements for manufacturing
companies have some unique features resulting from their activity of
producing goods from materials and labor.
A. Manufacturing Costs
1. Direct Materials—tangible components of a finished
2. Direct Labor—refers to the efforts of employees who
physically convert materials into finished products. Direct
3. Factory Overhead (also called manufacturing overhead)—
consists of all manufacturing costs that are not direct
materials or direct labor; costs that cannot be separately or
readily traced to finished goods. Include indirect materials
and indirect labor and other costs associated with the
factory.
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 are very low.
b. Indirect Labor—wages and salaries for those
workers’ efforts not linked to specific units or
batches of product. Include the wages of those
4. Prime and Conversion Costs
a. Prime costs—direct materials and direct labor.
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Chapter Outline
Notes
B. Manufacturer’s Balance Sheet—usually reports these three
inventories:
1. Raw Materials Inventory—goods a company acquires to
2. Work in Process Inventory— consists of products in the
process of being manufactured but not yet complete.
3. Finished Goods Inventory—consists of completed
products ready for resale.
4. Current assets section of the balance sheet for a
merchandiser reports only merchandise inventory rather
C. Manufacturer’s Income Statement—the main difference between a
merchandiser’s and manufacturer’s income statement is in items
that make-up cost of goods sold.
Cost of Goods Sold
2. A Merchandiser computes cost of goods sold as:
Beginning merchandise inventory
3. A Manufacturer computes cost of goods sold as:
Beginning finished goods inventory
5. A service provider does not make or buy inventory to be sold,
so it does not report cost of goods manufactured or cost of
goods sold.
D. Flow of Manufacturing Activities—the three manufacturing
activities are:
1. Materials Activities
Beginning raw materials
2. Production Activities—Four factors come together in
production:
a. Beginning Work in process inventory—consists of partly
produced goods from the previous period.
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Chapter Outline
Notes
b. Direct materials used—traceable materials added during the
period.
c. Direct labor used – traceable labor added during the period.
d. Overhead used—nontraceable manufacturing costs added
during the period.
Note: The production activity results in goods either finished or
unfinished. Both groups represent product costs. The cost of finished
3. Sales Activities—newly completed units are combined with
beginning finished goods inventory to make up total finished
goods available for sale. The cost of those goods that are sold
during the year is reported on the income statement.
E. Schedule of Cost of Goods Manufactured, also called a
manufacturing statement, summarizes the types and amounts of costs
incurred in a company’s manufacturing process. Contains
information used by management for planning and control. It is not a
general purpose financial statement. It is divided into four parts:
1. Direct materials—determined by adding the beginning raw
materials inventory to this period’s materials purchases to obtain
2. Direct labor—includes payroll taxes and fringe benefits and is
taken directly from the direct labor account balance.
3. Overhead—generally lists each important factory overhead item
4. Computation of cost of goods manufactured—as follows:
Direct Materials
Direct Labor
Factory Overhead
F. Using the Schedule of Cost of Goods Manufactured – useful to
management in planning and control of the company’s
manufacturing activities.
G. Estimating Cost Per Unit – managers may use the schedule of cost
of goods manufactured to make rough estimates of per unit costs.
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Chapter Outline
Notes
IV. Trends in Managerial Accounting
A. Customer Orientation—increased emphasis on understanding
changing needs and wants of customers as most important part
of business.
B. Global Economy—expands competitive boundaries and
provides customers more choices.
C. E-Commerce—customers expect and demand to be able to buy
items electronically.
D. Service Economy—service businesses account for over 60% of
total economic activity. Lean business model—goal is to
eliminate waste while “satisfying the customer” and “providing
a positive return to the company”.
E. Lean Practices—the philosophy of continuous improvement has
led to adoption of :
2. Just-in-time Manufacturing (JIT)—system that acquires
inventory and produces only when and order is received, a
demand-pull system, that delivers to customers on time.
F. Value Chain—series of activities that add value to products or
services.
G. Corporate Social Responsibility (CSR)—concept that goes
beyond following the law. In addition to maximizing
shareholder value, the corporation must often consider the
demands of the stakeholders including society. Triple bottom
line focuses on financial, social and environmental measures.
V. Decision Analysis
A. Raw Material Inventory Turnover
1. Assess how effectively raw materials inventory is managed.
3. Reveals how many times a company turns over its raw
materials inventory during a period. High ratio is generally
preferred as long as demand can be met.
B. Days’ Sales in Raw Materials Inventory
1. Measures how long it takes raw materials to be used in
production.
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Chapter 18 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, 2017. (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, 2017……………………….
$20,000
Raw Materials Inventory December, 31, 2017…………………..
Work in Process Inventory January 1, 2017…………………….
Work in Process Inventory December 31, 2017…………………
Raw Materials purchases during 2017……………………………
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Chapter 18 Solution: Alternate Demo Problem
SUPERIOR MANUFACTURING COMPANY
Manufacturing Statement
For Year Ended December 31, 2017
Raw Materials Inventory, 1/1/17 ………………………….
$ 20,000
SUPERIOR MANUFACTURING COMPANY
Income Statement
For Year Ended December 31, 2017
Sales
$ 600,000
Cost of Goods Sold:
Cost of Goods Manufactured ……………………………..
Cost of Goods Available for Sale ………………………..
Cost of Goods Sold ……………………………………………
Gross Profit ……………………………………………………….
Administrative Expenses ……………………………………
Total Operating Expense ……………………………………
Income before Taxes………………………………….
Net Income after Taxes ………………………………………
Raw Materials Purchases …………………………………..
Raw Materials Available for Use …………………………
Less Raw Materials Inventory, 12/31/17 ………………
Total Manufacturing Costs …………………………………
Add: Work in Process Inventory 1/1/17 ………………
Total Work in Process Inventory ………………………..
Less: Work in Process Inventory 12/31/17 ………….
Cost of Goods Manufactured …………………………….