Accounting Principles, 5e
Weygandt, Kieso, & Kimmel
Prepared by
Marianne Bradford, Ph.D.
Bryant College
John Wiley & Sons, Inc.
CHAPTER 20
MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:
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 difference between a
merchandising and a manufacturing income
statement.
CHAPTER 20
MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:
6 Indicate how cost of goods manufactured is
determined.
7 Explain the difference between a
merchandising and a manufacturing balance
sheet.
PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING
Managerial
Accounting Basics
 Comparing
managerial and
financial accounting
 Ethical
standards
 Management
functions
Managerial
Cost Concepts
 Manufacturing
 Product
costs
versus period costs
PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING
Manufacturing Costs in
Financial Statements
 Income
statement
 Balance
sheet
 Cost
Concepts: a review
Contemporary Developments
in Managerial Accounting
 Service
industry
trends
 Value
chain
management
STUDY OBJECTIVE 1
Explain the distinguishing features
of managerial accounting.
MANAGERIAL ACCOUNTING
BASICS
Managerial accounting
(management accounting) is a field
of accounting that provides
economic and financial
information for managers and
other internal users.
MANAGERIAL ACCOUNTING
BASICS

The activities that are part of managerial
accounting are as follows:
1 Explaining manufacturing and
nonmanufacturing costs and how they are
reported in the financial statements.
2 Computing the cost of providing a service
or manufacturing a product.
3 Determining the behavior of costs and
expenses as activity levels change and
analyzing cost-volume-profit
relationships within a company.
MANAGERIAL ACCOUNTING
BASICS
4 Assisting management in profit planning and
formalizing these plans in the form of budgets.
5 Providing a basis for controlling costs and expenses by
comparing actual results with planned objectives and
standard costs.
6 Accumulating and presenting relevant data for
management decision making.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Primary Users of Reports
 External users: stockholders, creditors, and regulatory.
Types and Frequency of Reports
 Classified financial statements.
 Issued quarterly and annually.
Purpose of Reports
 General-purpose information for all users.

ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Content of Reports
 Pertains to business as a whole and is highly aggregated (condensed).
 Limited to double-entry accounting system and cost data.
 Reporting standard is generally accepted accounting principles.
Verification Process
 Annual independent audit by certified public accountant.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Primary Users of Reports
 Internal users: officers, department heads, managers, and
supervisors.
Types and Frequency of Reports
 Internal reports.
 Issued as frequently as needed.
Purpose of Reports
 Special-purpose information for a particular user for a specific decision.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Content of Reports
 Pertains to subunits of the entity and may be very detailed.
 May extend beyond double-entry accounting system to any type of
relevant data.
 Reporting standard is relevance to the decision to be made.
Verification Process
 No independent audits.
ETHICAL STANDARDS
FOR
MANAGERIAL ACCOUNTANTS
 Managerial accountants recognize that they have an
ethical obligation to their companies and the public.
 The Institute of Management Accountants (IMA)
has developed a code of ethical standards, entitled
Standards of Ethical Conduct for Management
Accountants.
 This code divides the managerial accountant’s
responsibilities into 4 areas:
1 competence,
2 confidentiality,
3 integrity, and
4 objectivity.
STUDY OBJECTIVE 2
Identify the three broad
functions of management.
MANAGEMENT
FUNCTIONS
The management of an organization
performs (3) broad functions:
1 Planning
2 Motivating and Directing
3 Controlling
MANAGEMENT FUNCTIONS
PLANNING
 Planning requires management to
1 look ahead and
2 establish objectives.
 A key modern management objective is to add
value to the business under its control.
 Value is usually measured by
1 the trading price of the company’s stock and
2 the potential selling price of the company.
MANAGEMENT FUNCTIONS
ORGANIZING AND DIRECTING
 Motivating and directing involves coordinating
diverse activities and human resources to
produce a smooth-running operation.
 This function relates to implementing of
planned objectives.
 Most companies prepare organization charts to
show
1 the interrelationship of activities and
2 the delegation of authority and responsibility
within the company.
MANAGEMENT FUNCTIONS
CONTROLLING
 Controlling is the process of keeping the firm’s
activities on track.
 In controlling operations, managers determine
1 whether planned goals are being met and
2 when there are deviations from targeted objectives.
MANAGERIAL
COST CONCEPTS
 To perform the three management functions
effectively, management needs information. One very
important type of information is related to costs.
 The following questions need answering:
1 What costs are involved in making the product or
providing a service?
2 If production volume is decreased, will costs decrease?
3 What impact will automation have on total costs?
4 How can costs best be controlled?
STUDY OBJECTIVE 3
Define the three classes
of manufacturing costs.
MANAGERIAL
COST CONCEPTS
 Manufacturing consists of activities and
processes that convert raw materials into
finished goods.
 Manufacturing costs are usually classified
as follows:
1 direct materials,
2 direct labor, and
3 manufacturing overhead.
ILLUSTRATION 20-2
CLASSIFICATIONS OF
MANUFACTURING COSTS
DIRECT MATERIALS
DIRECT LABOR
MANUFACTURING
OVERHEAD
MANUFACTURING COSTS
DIRECT MATERIALS
 Raw materials are the basic materials and parts
that are to be used in the manufacturing process.
 Raw materials that can be physically and
directly associated with the finished product during
the manufacturing process are called direct
materials.
Materials
MANUFACTURING COSTS
INDIRECT MATERIALS
Some raw materials cannot be easily
associated with the finished product. These
are considered indirect materials – which
areaccounted for as part of manufacturing
overhead and
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.
MANUFACTURING COSTS
DIRECT LABOR
 Direct labor is the work of factory employees that can
be physically and directly associated with converting
raw materials into finished goods.
 The wages of maintenance people, timekeepers, and
supervisors are usually identified as indirect labor.
Their efforts have no physical association with the
finished product.
 Like indirect materials, indirect labor is Factory
part of manufacturing overhead.
Labor
MANUFACTURING COSTS
MANUFACTURING OVERHEAD



Manufacturing overhead consists of costs that are
indirectly associated with the manufacture of the
finished product.
These costs may also be manufacturing costs that
cannot be classified as direct materials or direct
labor.
Manufacturing overhead includes
Manufacturing
Overhead
1 indirect materials;
2 indirect labor;
3 depreciation on factory buildings and machines
4 insurance, taxes, and maintenance on
factory facilities.
STUDY OBJECTIVE 4
Distinguish between product and period costs.
PRODUCT COSTS VERSUS
PERIOD COSTS
 Product costs include each of the manufacturing
cost elements (direct materials, direct labor, and
manufacturing overhead); they are costs that are a
necessary and integral part of producing the
finished product.
 These costs are not expensed to cost of goods sold
under the matching principle until the finished
goods inventory is sold.
PRODUCT COSTS VERSUS
PERIOD COSTS
 Direct materials and direct labor are often referred
to as prime costs due to their direct association with
the manufacturing of the finished product.
 Direct labor and manufacturing overhead are often
referred to as conversion costs since they are
incurred in converting raw materials into finished
goods.
 Period costs: a) are identifiable with a specific time
period, b) relate to nonmanufacturing
noninventoriable costs, and c) include selling and
administrative expenses.
ILLUSTRATION 20-4
PRODUCT VERSUS PERIOD COSTS
Product Costs
Manufacturing
Costs
Direct Labor
Manufacturing
Overhead
Period Costs
Selling Expenses
Nonmanufacturing
Costs
Administrative
Expenses
{
{
Direct Materials
Prime
Costs
Conversion
Costs
STUDY OBJECTIVE 5
Explain the difference between a
merchandising and a manufacturing
income statement.
COST OF GOODS SOLD
COMPONENTS
 Under a periodic inventory system, the income
statements of a merchandiser and a manufacturer
differ in the cost of goods sold section.
 For a merchandiser, cost of goods sold is computed by
adding the beginning merchandise inventory and the
cost of goods purchased and subtracting the ending
merchandise inventory.
 For a manufacturer, cost of goods sold is computed
by adding the beginning finished goods inventory and
the cost of goods manufactured and subtracting the
ending finished goods inventory.
ILLUSTRATION 20-5
COST OF GOODS SOLD
COMPONENTS
Merchandiser
Beginning
Merchandise
Inventory
+
Cost of Goods
Purchased
-
Ending
Merchandise
Inventory
=
Cost of
Goods Sold
Manufacturer
Beginning
Finished Goods
Inventory
+
Cost of Goods
Manufactured
-
Ending
Finished Goods
Inventory
=
ILLUSTRATION 20-6
COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
The cost of goods sold sections for merchandising
and manufacturing enterprises that are
presented illustrate the different presentations:
MERCHANDISE COMPANY
Partial Income Statement
For the Year Ended December 31, 2002
Cost of goods sold
Merchandise inventory, January 1
Cost of goods purchased
Cost of goods available for sale
Merchandise inventory, December 31
Cost of goods sold
$ 70,000
650,000
720,000
400,000
$ 320,000
ILLUSTRATION 20-6
COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
MANUFACTURING COMPANY
Partial Income Statement
For the Year Ended December 31, 2002
Cost of goods sold
Finished goods inventory, January 1
Cost of goods manufactured
Cost of goods available for sale
Finished goods inventory, December 31
Cost of goods sold
$ 90,000
370,000
460,000
80,000
$ 380,000
STUDY OBJECTIVE 6
Indicate how cost of goods
manufactured is determined.
ILLUSTRATION 20-7
COST OF GOODS MANUFACTURED
FORMULA
 The total cost of work in process for the year is equal to the sum of:
1 the cost of the beginning work in process inventory and
2 the total manufacturing costs for the current period.
 To find the cost of goods manufactured, we subtract the cost of the
ending work in process inventory from the total cost of work in
process.
Beginning Work
in Process
Inventory
Total Cost of
Work in Process
+
-
Total Current
Manufacturing
Costs
Ending Work in
Process Inventory
=
Total Cost of
Work in Process
=
Cost of Goods
Manufactured
ILLUSTRATION 20-8
COST OF GOODS MANUFACTURED
SCHEDULE
The Cost of
Goods
Manufactured
Schedule – as
shown on the
right is an
internal financial
schedule that
shows each of the
cost elements
explained in
Illustration 20-7.
OLSEN MANUFACTURING COMPANY
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2002
Work in process, January 1
Direct materials
Raw materials inventory, January 1
Raw materials purchases
Total raw materials available for use
Less: Raw materials inventory, December 31
Direct materials used
Direct labor
Manufacuring overhead
Indirect labor
Factory repairs
Factory utilities
Factory depreciation
Factory insurance
Total manufacturing overhead
Total manufacuring costs
Total cost of work in process
Less: Work in process, December 31
Cost of goods manufactured
$ 18,400
$ 16,700
152,500
169,200
22,800
$ 146,400
175,600
14,300
12,600
10,100
9,440
8,360
54,800
376,800
395,200
25,200
$ 370,000
STUDY OBJECTIVE 7
Explain the difference between
a merchandising and a
manufacturing balance sheet.
CURRENT ASSETS SECTIONS
OF MERCHANDISING AND MANUFACTURING
BALANCE SHEETS
 The balance sheet for a merchandiser shows just one
inventory category.
 In contrast, the balance sheet of a manufacturer may
have 3 inventory accounts:
1 Finished Goods Inventory – shows the cost of
completed goods on hand,
2 Work in Process Inventory – shows the cost applicable
to units that have been started into production but are
only partially completed, and
3 Raw Materials Inventory – shows the cost of raw
materials on hand.
ILLUSTRATION 20-10
CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
Merchandising Company
Balance Sheet
December 31, 2002
Current assets
Cash
Receivables (net)
Merchandise inventory
Prepaid expenses
Total current assets
$ 100,000
210,000
400,000
22,000
$ 732,000
ILLUSTRATION 20-10
CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
Manufacturing Company
Balance Sheet
December 31, 2002
Current assets
Cash
Receivables (net)
Inventories:
Finished goods
Work in process
Raw materials
Prepaid expenses
Total current assets
$ 180,000
210,000
$ 80,000
25,200
22,800
128,000
18,000
$ 536,000
ILLUSTRATION 20-11
ASSIGNMENT OF COSTS TO
COST CATEGORIES
The manufacturing and selling costs can be
assigned to the various categories shown below.
Cost Item
1. Material cost ($10 per door)
2. Labor costs ($8 per door)
3. Depreciation on new equipment
($25,000 per year)
4. Property taxes ($6,000 per year)
5. Advertising costs ($30,000 per year)
6. Sales commissions ($4 per door)
7. Maintenance salaries ($28,000 per
year)
8. Salary of plant manager ($70,000)
9. Cost of shipping pre-hung doors
($12 per door)
Product Costs
Direct
Direct Manufacturing
Materials Labor
Overhead
Period
Costs
X
X
X
X
Prime
Costs
Conversion
Costs
X
X
X
X
X
X
X
X
X
X
X
X
ILLUSTRATION 20-12
COMPUTATION OF TOTAL
MANUFACTURING COSTS
Total manufacturing costs are the sum of the product costs
– direct materials, direct labor, and manufacturing overhead
costs. Northridge Company produces 10,000 pre-hung wooden
doors the first year. The total manufacturing costs are:
Cost Number and Item
1. Material cost ($10 X 10,000)
2. Labor cost ($8 X 10,000)
3. Depreciation on new equipment
4. Property taxes
7. Maintenance salaries
8. Salary of plant manager
Total manufacturing costs
Manufacturing
Cost
$ 100,000
80,000
25,000
6,000
28,000
70,000
$ 309,000
CONTEMPORARY DEVELOPMENTS IN
MANAGERIAL ACCOUNTING
Global competition has intensified. Today,
contemporary business managers demand from
managerial accountants different and better
information than they needed just a few years
ago.
 Service Industry Trends – in some respects the
challenges for managerial accounting are greater
in service companies than in manufacturing
companies.
ILLUSTRATION 20-13
SERVICE INDUSTRIES AND COMPANIES
 What are the questions faced by service company
managers in these industries?
 Transportation
 Package delivery services
 Telecommunications
 Professional services
 Financial institutions
 Health Care
CONTEMPORARY DEVELOPMENTS IN
MANAGERIAL ACCOUNTING
VALUE CHAIN
 The value chain is the term that describes all
activities associated with providing a product or
service.
 Activities included in the value chain include:
Research and development
Ordering raw materials
Manufacturing
Marketing
Delivery
Customer relations.
CONTEMPORARY DEVELOPMENTS IN
MANAGERIAL ACCOUNTING
VALUE CHAIN
A number of factors affect efforts to
manage the value chain and supply
chain.
Technological change
Just-in-time inventory methods
Quality
Focus on activities
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CHAPTER 20
MANAGERIAL ACCOUNTING