CHAPTER 19
MANAGERIAL ACCOUNTING
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.
b. The principal differences are the (1) primary users of reports, (2) types and frequency of
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
evaluate how well the company is using its resources and providing information to cross-
functional teams comprised of personnel from production, operations, marketing, engineering, and
quality control.
Management Functions
4. Managers perform three broad functions within an organization:
a. Planning requires managers to look ahead and to establish objectives.
b. Directing involves coordinating a company’s diverse activities and human resources to
produce a smooth-running operation.
c. Controlling is the process of keeping the firm’s activities on track.
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.
Stockholders own the corporation but manage the company through a board of directors. The
chief executive officer (CEO) has overall responsibility for managing the business. The chief
financial officer (CFO) is responsible for all of the accounting and finance issues the company
faces. The CFO is supported by the controller and the treasurer.
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.
9. The work of factory employees that can be physically and directly associated with converting raw
materials into finished goods is considered direct labor. In contrast, the wages of maintenance
people, timekeepers, and supervisors are usually identified as indirect labor because their efforts
have no physical association with the finished product, or it is impractical to trace the costs to the
goods produced. Indirect labor is classified as manufacturing overhead.
10. Manufacturing overhead consists of costs that are indirectly associated with the manufacture of
the finished product. Manufacturing overhead includes items such as indirect materials, indirect
labor, depreciation on factory buildings and machines, and insurance, taxes, and maintenance on
factory facilities.
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.
13. The cost of goods sold section of the income statement for a manufacturing company shows:
Beginning Cost of Ending Cost of
Finished Goods + Goods – Finished Goods = Goods Sold
Inventory Manufactured Inventory
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
b. Total Cost of Ending Cost of Goods
Work in – Work in Process = Manufactured
Process Inventory
15. The costs assigned to the beginning work in process inventory are the manufacturing costs
incurred in the prior period.
16. Total manufacturing costs is the sum of the direct materials costs, direct labor costs, and manu-
facturing overhead incurred in the current period.
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
Total manufacturing costs ……………………………………………….. XXXX
Total cost of work in process …………………………………………… XXXX
Less: Ending work in process …………………………………………. XXXX
Cost of goods manufactured ……………………………………………. $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.
20. Each step in the accounting cycle for a merchandising company is applicable to a manufacturing
company.
a. For example, prior to preparing financial statements, adjusting entries are required.
b. Adjusting entries are essentially the same as those of a merchandising company.
c. The closing entries for a manufacturing company are also similar to those of a merchandising
company.
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.
24. Activity-based costing (ABC) is a popular method for allocating overhead that obtains more
accurate product costs. The theory of constraints is a specific approach used to identify and
manage constraints in order to achieve the company goals. The balanced scorecard is a
performance-measurement approach that uses both financial and nonfinancial measures to
evaluate all aspects of a company’s operations in an integrated fashion.
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.
26. Due to many fraudulent activities in recent years, U.S. Congress passed the Sarbanes-Oxley Act
which resulted in many implications for managers and accountants. CEOs and CFOs must certify
the fairness of financial statements, top management must certify they maintain an adequate
system of internal controls, and other matters.
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.
2. Managerial accounting applies to all types of businesses: service,
merchandising, and manufacturing. It also applies to all forms of business
organizations: proprietorships, partnerships, and corporations.
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. Purpose of reports: special–purpose information for a specific decision.
d. Content of reports—pertains to subunits of the business and may be
very detailed; extends beyond double-entry accounting to any relevant
data; the standard is relevance to decisions.
e. Verification process—no independent audits.
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.
b. Directing involves coordinating a company’s diverse activities and
human resources to produce a smooth-running operation.
c. Controlling is the process of keeping the company’s activities on track.
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.
5. The chief financial officer (CFO) is responsible for all of the company’s
accounting and finance issues, and is supported by the controller and
the treasurer. Also serving the CFO is the internal audit staff who review
the reliability and integrity of financial information provided by the con–
troller and treasurer.
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) Cannot be traced because their physical association with the
finished product is too small in terms of cost (i.e. lock washers).
b. Companies account for indirect materials as part of manufacturing
overhead.
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.
Also, companies that produce and sell products in the U.S. save on
3. Manufacturing overhead consists of costs that are indirectly associated
with the manufacture of the finished product.
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.
3. 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.
4. Period costs include selling and administrative expenses and companies
deduct them from revenues in the period in which they are incurred.
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.
2. Manufacturers compute cost of goods sold by adding the beginning fin-
ished goods inventory to the cost of goods manufactured and subtracting
the ending finished goods inventory.
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
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.
b. Work in Process Inventory, which shows the cost applicable to
units that have been started into production but are only partially
completed.
c. Raw Materials Inventory, which shows the cost of raw materials 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
schedule of an airline would be fuel, flight crew salaries, maintenance
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.
4. Many companies have installed total quality management (TQM)
systems to reduce defects in finished products. These systems require
timely data on defective products, rework costs, and the cost of honoring
warranty contracts.
5. All companies have constraints that limit their potential profitability. The
theory of constraints is a specific approach used to identify and manage
constraints in order to achieve the company goals.
6. Many companies now employ enterprise resource planning (ERP)
software systems to manage their value chain. ERP systems provide a
comprehensive, centralized, integrated source of information that compa-
nies can use to manage all major business processes, from purchasing
to manufacturing to recording human resources.
7. In order to obtain more accurate product costs, many companies now
allocate overhead using activity-based costing (ABC). Under ABC,
companies allocate overhead based on each product’s use of activities
in making the product.
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
statements give a fair presentation of the company’s operating results
and its financial condition.
3. Top managers must certify that the company maintains an adequate
system of internal controls to safeguard the company’s assets and
ensure accurate financial reports.
4. The Institute of Management Accountants (IMA) has developed a code
of ethical standards to provide guidance for managerial accountants.
This code states that management accountants should not commit acts
or condone acts by others in violation of these standards.