Accounting Principle

Chapter
19-1
CHAPTER 19
MANAGERIAL
ACCOUNTING
Accounting Principles, Eighth Edition

Chapter
19-2
Study
Study Objectives
Objectives
1. Explain the distinguishing features of managerial

accounting.
2. Identify the 3 broad functions of management.
3. Define the 3 classes of manufacturing costs.
4. Distinguish between product and period costs.
5. Explain the differences between a merchandising
and a manufacturing income statement.
Chapter
19-3
Study
Study Objectives
Objectives
6. Indicate how cost of

goods manufactured is
determined.
7. Explain the difference
between a merchandising
and a manufacturing
balance sheet.
8. Identify trends in
managerial accounting.
9.
Chapter
19-4
Preview
Preview of
of Chapter
Chapter
Managerial Accounting Basics
Compare managerial and financial accounting
Management functions and Business Ethics
Managerial Cost Concepts

Manufacturing costs
Product vs. period costs
Manufacturing Costs in Financial Statements

Income Statement and Balance Sheet
Cost concepts – A review
Managerial Accounting Today

Service industry trends
Chapter Managerial accounting practices
19-5
Managerial
Managerial Accounting
Accounting
Manufacturing
Manufacturing
Managerial
Managerial
Managerial
Managerial Costs
Costs in
in Managerial
Managerial
Cost
Cost
Accounting Financial
Financial Accounting
Concepts
Basics
Basics Statements
Statements Today
Today
Compare Manufacturing Income Service

Managerial and Costs Statement Industry
Financial Product vs Balance Sheet Trends
Accounting Period Costs Managerial
Cost Concepts
Management – A Review Accounting
Functions Practices
Business Ethics
Chapter
19-6
Managerial
Accounting Basics
Basics
Definition of Managerial Accounting
A field of accounting that provides economic and

financial information for managers and other
internal users.
Also called Management Accounting
Chapter
19-7
Managerial
Accounting Basics
Basics
Managerial Accounting Activities
Explain manufacturing and nonmanufacturing costs and

how they are reported (Chapter 19)
Compute cost of providing a service or manufacturing

a product. (Chapters 20 and 21)
Determine behavior of costs and expenses as activity

changes. (Chapter 22)
Chapter
19-8
Managerial
Accounting Basics
Basics
Managerial Activities: Continued
Assist management in profit planning and formalizing

these plans in the form of budgets. (Chapter 23)
Help to control costs by comparing actual results with

planned objectives and standard costs. (Chapters 24 and 25)
Accumulate and present data for making decisions.

(Chapter 26)
Chapter
19-9
Managerial
Accounting Basics
Basics
Distinguishing Features
Applies to all types of business -

Service, Merchandising, and Manufacturing
Applies to all forms of businesses –

Proprietorships, Partnerships, and Corporations
Applies to not-for-profit and profit oriented companies
Chapter
19-10 LO 1 Explain the distinguishing features of managerial accounting.
Managerial
Accounting Basics
Basics
Distinguishing Features: Continued
More responsible for strategic

cost management
Teams with people from production,

marketing, engineering, etc.
Aid in making critical decisions
Chapter
Comparing
Comparing Managerial
Managerial and
and Financial
Accounting
Similarities
Both deal with economic events of a business –

Thus, interests overlap
Both require that economic events be

quantified and communicated to
interested parties –
Determining unit cost is part of
managerial accounting,
Reporting cost of goods manufactured
is a part of financial accounting
Chapter
Comparing
Comparing Managerial
Managerial and
and Financial
Accounting
Differences
Chapter
19-13 LO 1 Explain the distinguishing features of managerial accounting .
Managerial
Accounting Basics
Basics
Review Question
Managerial accounting:
a. Pertains to the entity as a whole and is highly

aggregated.
aggregated
b. Places emphasis on special-purpose information.
c. Is limited to cost data.
d. Is governed by generally accepted accounting
principles.
Chapter
Managerial
Accounting Basics
Basics
Management Functions
Management’s activities and responsibilities can be

classified into the following three broad functions:
Planning
Directing
Controlling
Chapter
19-15 LO 2 Identify the 3 broad functions of management.
Management
Functions
Planning
Look ahead and establish objectives such as –

Maximize short-term profit
Commit to environmental protection
Key Objective: Add value to the business

Value measured by trading price of stock
and by potential selling price of the company
Chapter
Management
Functions
Directing
Coordinate diverse activities and human resources
Implement planned objectives
Provide incentives to motivate employees
Hire and train employees including

executives, managers, and supervisors
Produce smooth-running operation
Chapter
Management
Functions
Controlling
Keep activities on track
Determine whether goals are met
Decide changes needed to get back on track
May use an informal or formal system of evaluations
Good decision making is the outcome of good judgment

in planning, directing, and controlling.
Chapter
Good
Good Ethics
Ethics –– Good
Good Business
Business
Business Ethics
Business scandals caused massive investment
losses and employee layoffs.
Corporate fraud has increased 13% in last 5 years.
Employee fraud – 60% of all fraud
Intentional misstatement of financial reports
Aka financial reporting fraud
Most costly to companies
Chapter
19-19
Good
Good Ethics
Ethics –– Good
Good Business
Business
Creating Proper Incentives

Systems to monitor and evaluate employees
may produce incentives for unethical actions.
Employees may feel that they must succeed no

matter what.
Ineffective and unrealistic controls may result

in declining product quality.
Chapter
19-20
Good
Good Ethics
Ethics –– Good
Good Business
Business
Code of Ethical Standards
Sarbanes-Oxley Act of 2002

Clarifies management’s responsibilities.
Certifications by CEO and CFO -
fairness of financial statements and
adequacy of internal control
Selection criteria for Board of Directors and Audit
Committee
Substantially increased penalties for misconduct
IMA Statement of Ethical Professional Practices
Chapter
19-21
Management
Functions
Review Question
The management of an organization performs several

broad functions. They are:
a. Planning, directing, and selling.

selling
b. Directing, manufacturing, and controlling.
c. Planning, manufacturing, and controlling.
d. Planning, directing, and controlling.
Chapter
Managerial
Managerial Cost
Cost Concepts
Concepts
Manufacturing Costs
Manufacturing consists of activities to convert raw
materials into finished goods.
In contrast, a merchandising firm sells goods in the
form in which they were bought.
Categories of manufacturing costs include:
Chapter
19-23 LO 3 – Define the three classes of manufacturing costs.
Manufacturing
Manufacturing Costs
Costs
Materials
Raw Materials
Basic materials used in manufacturing
Direct Materials
Raw materials that can be physically and
directly associated with the finished product
Chapter
19-24 LO 3 Define the three classes of manufacturing costs.
Manufacturing
Manufacturing Costs
Costs
Materials
Indirect Materials
Raw materials that cannot be easily associated
with the finished product
Not physically part of the finished product or

they are an insignificant part of finished
product in terms of cost
Considered part of manufacturing overhead
Chapter
Manufacturing
Manufacturing Costs
Costs
Labor
Direct Labor
Work of factory employees that can be
physically and directly associated with
converting raw materials into finished goods
Indirect Labor
Work of factory employees that has no
physical association with the finished product
or for which it is impractical to trace to the goods
produced
Chapter
Manufacturing
Manufacturing Costs
Costs
Manufacturing Overhead
Costs that are indirectly associated

with manufacturing the product
Includes all manufacturing costs except

direct materials and direct labor
Chapter
Manufacturing
Manufacturing Costs
Costs
Review Question
Which of the following is not an element of
manufacturing overhead?:
a. Sales manager’s salary.

b. Plant manager’s salary.
c. Factory repairman’s wages.
d. Product inspector’s salary.
Chapter
Product
Product Versus
Versus Period
Period Costs
Costs
Product Costs
Components: direct material cost,

direct labor cost, and manufacturing
overhead
A necessary and integral part of
producing the product
Recorded as inventory when incurred
Not an expense until the finished goods

inventory is sold then cost of goods sold
Chapter
19-29 LO 4 Distinguish between product and period costs.
Product
Product Versus
Versus Period
Period Costs
Costs
Period Costs
Matched with revenue of a specific

time period and charged to expense as
incurred
Non-manufacturing costs
Deducted from revenues in period

incurred to determine net income
Includes all selling and administrative

expenses
Chapter
19-30 LO 4 Distinguish between product and period costs.
Product
Product Versus
Versus Period
Period Costs
Costs
Chapter
19-31 LO 4 Distinguish between product costs and period costs .
Manufacturing
Manufacturing Costs
Costs in
in Financial
Financial Statements
Statements
Income Statement
The income statement for a manufacturer is

similar to that of a merchandiser except
for the cost of goods sold section.
Chapter
LO 5 Explain the difference between a merchandising
19-32 and a manufacturing income statement.
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Cost of Goods Sold Components
Merchandiser versus Manufacturer
Chapter
19-33 and a manufacturing income statement.
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Cost of Goods Sold Section of the Income Statement
Chapter
19-34 and a manufacturing income statement .
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Determining the Cost of Goods Manufactured
Work in Process – partially completed units of product
Total Manufacturing Costs – sum of direct material costs,

direct labor costs, and manufacturing overhead; all
incurred in the current period
LO 6 Indicate how cost of goods manufactured is determined .

Chapter
19-35
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Chapter
LO 6 Indicate how cost of goods manufactured is determined .
19-36
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Balance Sheet - Inventories
Merchandising Company Manufacturing Company

One category of May have three
inventory: inventories:
Merchandise Inventory Raw Materials
Work in Process
Finished Goods
Chapter
19-37
LO 7 Explain the difference between a merchandising and a
manufacturing balance sheet.
Manufacturing
Manufacturing Costs
Costs in
in Financial
Statements
Balance Sheet - Inventories
Chapter
LO 7 Explain the difference between a merchandising and a
19-38 manufacturing balance sheet
Manufacturing
Manufacturing Costs
Costs
Review Question
Direct Materials are a:
Product Manufacturing Period

Cost Overhead Cost
a. Yes Yes No
b. Yes No No
c. Yes Yes Yes
d. No No No
Chapter
19-39
Managerial
Accounting Today
Today
Service Industry Trends
U.S. economy has shifted toward an emphasis on

providing services rather than goods
Over 50% of U.S. workers are now employed by
service companies
Trend is expected to continue in the future
Most of the techniques learned for manufacturing

firms are applicable to service companies
Chapter
19-40 LO 8 Identify trends in management accounting.
Managerial
Accounting Today
Today
Managerial Accounting Practices
Value Chain
Refers to all activities associated with providing a product or
service
For a manufacturing firm these include the following:
Chapter
Managerial
Accounting Today
Today
Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured
or purchased just in time for use
Quality
Increased emphasis on product quality because
goods are produced only as needed
Total Quality Management (TQM)
- a philosophy of zero defects -
Chapter
Managerial
Accounting Today
Today
Activity-Based-Costing (ABC)
Allocates overhead based on use of activities
Results in more accurate product costing and
scrutiny of all activities in the value chain
Balanced Scorecard
Evaluates operations in an integrated fashion
Uses both financial and non-financial measures
Links performance measures to overall company
objectives
Chapter
Managerial
Accounting Today
Today
Review Question
Which of the following managerial accounting techniques

attempts to allocate manufacturing overhead in a more
meaningful manner?
a. Just-in-time inventory.
b. Total-quality management.
c. Balanced scorecard.
d. Activity-based costing.
Chapter
Chapter
Chapter Review
Review -- Brief
Brief Exercise
Exercise 19-5
19-5
Indicate whether each of the following costs of an
automobile manufacturer would be classified as
direct materials, direct labor, or manufacturing
overhead.
______
DM a. Windshield
______
DM b. Engine
______
DL c. Wages of assembly line worker
______
MO d. Depreciation of factory machinery
______
MO e. Factory machinery lubricants
______
DM f. Tires
______
DM g. Steering wheel
______
MO h. Salary of painting supervisor
Chapter
19-45
Chapter
Chapter Review
Review -- Brief
Brief Exercise
Exercise 19-6
19-6
Identify whether each of the following costs
should be classified as product costs or period
costs.
____________
Product a. Manufacturing overhead
____________
Period b. Selling expenses
____________
Period c. Administrative expenses
____________
Period d. Advertising expense
____________
Product e. Direct labor
____________
Product f. Direct material
Chapter
19-46
Copyright
Copyright
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Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Chapter
19-47

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Chapter

Accounting Principles, Eighth Edition

1. Explain the distinguishing features of managerial

6. Indicate how cost of

Managerial Cost Concepts

Manufacturing Costs in Financial Statements

Managerial Accounting Today

Compare Manufacturing Income Service

Definition of Managerial Accounting

A field of accounting that provides economic and

Also called Management Accounting

Managerial Accounting Activities

Explain manufacturing and nonmanufacturing costs and

Compute cost of providing a service or manufacturing

Determine behavior of costs and expenses as activity

Managerial Activities: Continued

Assist management in profit planning and formalizing

Help to control costs by comparing actual results with

Accumulate and present data for making decisions.

Applies to all types of business -

Applies to all forms of businesses –

Applies to not-for-profit and profit oriented companies

Distinguishing Features: Continued

More responsible for strategic

Teams with people from production,

Aid in making critical decisions

Both deal with economic events of a business –

Both require that economic events be

a. Pertains to the entity as a whole and is highly

Management’s activities and responsibilities can be

Look ahead and establish objectives such as –

Key Objective: Add value to the business

Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including

Produce smooth-running operation

Keep activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or formal system of evaluations

Good decision making is the outcome of good judgment

Creating Proper Incentives

Employees may feel that they must succeed no

Ineffective and unrealistic controls may result

Sarbanes-Oxley Act of 2002

The management of an organization performs several

a. Planning, directing, and selling.

Not physically part of the finished product or

Considered part of manufacturing overhead

Costs that are indirectly associated

Includes all manufacturing costs except

a. Sales manager’s salary.

Components: direct material cost,

Recorded as inventory when incurred

Not an expense until the finished goods

Matched with revenue of a specific

Deducted from revenues in period

Includes all selling and administrative

The income statement for a manufacturer is

Cost of Goods Sold Section of the Income Statement

Determining the Cost of Goods Manufactured

Work in Process – partially completed units of product

Total Manufacturing Costs – sum of direct material costs,