Islamic University of Gaza
Managerial Accounting
Chapter 1
Dr. Hisham Madi
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What Is Managerial Accounting?
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.
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
Corporations

Partnerships

Proprietorships

Not-for-profit
Why Accounting is Essential for Decision
Makers and Managers
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
Managerial accounting adds value to the organization by
helping managers do their jobs more efficiently and
effectively.

Accounting information is used in decision making.
MANAGERIAL ACCOUNTING vs. FINANCIAL
ACCOUNTING
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The Manager’s Role
Management Functions
Planning

Directing
Maximize short-term
profit and market
share.

Commit to
environmental
protection and social
programs.
 Add value to the
business.


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Coordinate diverse
activities and human
resources.
Implement planned
objectives.
 Provide incentives to
motivate employees
 Hire and train
employees.
 Produce smoothrunning operation.
Controlling

Keeping 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.
Managerial Accounting Basics
Organizational Structure
Organization charts show the
interrelationships of activities
and the delegation of authority
and responsibility within the
company.
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Managerial Accounting Basics
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
Stockholders own the corporation, but they manage it
indirectly through a board of directors they elect.

The board formulates the operating policies for the
company or organization.

The chief executive officer (CEO)has
responsibility for managing the business.

the CEO delegates responsibilities to other officers
overall
Managerial Accounting Basics





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Responsibilities within the company are frequently
classified as either line or staff positions.
Employees with line positions are directly involved in the
company’s primary revenue-generating operating
activities.
Examples of line positions include the vice president of
operations, vice president of marketing, plant managers,
supervisors, and production personnel.
Employees with staff positions are involved in activities
that support the efforts of the line employees.
employees in finance, legal, and human resources have
staff positions
Managerial Accounting Basics


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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
Business Ethics
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
All employees are expected to act ethically.

Many organizations have codes of business ethics.

Past financial frauds:
►
Enron,
►
Global Crossing,
►
WorldCom
Business Ethics
Creating Proper Incentives

Systems and controls sometimes create incentives
for managers to take unethical actions.

the budget is also used as an evaluation tool,
some managers try to “game’’ the budgeting
process
by
underestimating
their
division’s
predicted performance so that it will be easier to
meet their performance targets

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Controls need to be effective and realistic.
Business Ethics
Code of Ethical Standards
Sarbanes-Oxley Act (SOX)

Clarifies management’s responsibilities.

Requires certifications by CEO and CFO.

Selection criteria for Board of Directors and Audit
Committee.

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Substantially increased penalties for misconduct.
Manufacturing Costs
Managers should ask questions such as the following.
1. What costs are involved in making a product or
providing a service?
2. If we decrease production volume, will costs decrease?
3. What impact will automation have on total costs?
4. How can we best control costs?
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Manufacturing Costs
Manufacturing Costs
Manufacturing consists of activities and processes that
convert raw materials into finished goods.
Merchandising, which sells merchandise in the form in
which it is purchased
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Manufacturing Costs
Direct Materials
Raw Materials
Basic materials and parts used in
manufacturing process.
Direct Materials
Raw materials that can be physically and directly associated
with the finished product during the manufacturing process.
Examples include flour in the baking of bread, syrup in the
bottling of soft drinks, and steel in the making of automobiles
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Manufacturing Costs
Direct Materials
Indirect Materials
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
Not physically part of the finished product or they are
an insignificant part of finished product in terms of
cost, because their physical association with the
finished product is too small in terms of cost

Considered part of manufacturing overhead.
Manufacturing Costs
Direct Labor
Work of factory employees that can be
physically
and
directly
associated
with
converting raw materials into finished goods.
Bottlers at Coca-Cola, and bakers at Sara
Lee, are employees whose activities are
usually classified as direct labor
Indirect Labor
Work of factory employees that has no physical
association with the finished product or for which it is
impractical to trace costs to the goods produced.
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Manufacturing Costs
Indirect Labor
Work of factory employees that has no physical
association with the finished product or for which it is
impractical to trace costs to the goods produced.
Examples include wages of factory maintenance people,
factory time-keepers, and factory supervisors.
Like indirect materials, companies classify indirect labor
as manufacturing overhead
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Manufacturing Costs
Manufacturing Overhead

Costs that are indirectly associated with manufacturing
the finished product.

Includes all manufacturing costs except direct materials
and direct labor.

Also called factory overhead, indirect manufacturing
costs, or burden.
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Manufacturing Costs



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Allocating direct materials and direct labor costs to
specific products is fairly
straightforward. Good recordkeeping can tell a company
how much plastic it used in making each type of gear, or
how many hours of factory labor it took to assemble a
part.
But allocating overhead costs to specific products
presents problems. How much of the purchasing agent’s
salary is attributable to the hundreds of different products
made in the same plant?
Product Versus Period Costs
Product Costs
 Direct materials
 Direct labor
 Manufacturing overhead

Components:

Costs that are an integral part of producing the
finished product.
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
Recorded in “inventory” account.

Not an expense (COGS) until the goods are sold.
Product Versus Period Costs
Period Costs

Charged to expense as incurred.

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.
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
Non-manufacturing costs.

Includes all selling and administrative expenses.
Product Versus Period Costs
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A bicycle company has these costs: tires, salaries of employees
who put tires on the wheels, factory building depreciation, wheel
nuts, spokes, salary of factory manager, handlebars, and salaries
of factory maintenance employees. Classify each cost as direct
materials, direct labor, or overhead.
Direct Materials

Tires.

Spokes.

Handlebars.
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Direct Labor

Salaries of
employees who put
tires on the wheels.
Overhead

Factory depreciation.

Factory manager
salary.

Factory maintenance
employees salary.
Manufacturing Costs in Financial Statements
Income Statement
Under a periodic inventory system, the income statements
of a merchandiser and a manufacturer differ in the cost of
goods sold section.
“COGS”
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Manufacturing Costs in Financial Statements
Cost of Goods Manufactured
Cost of Goods Sold Components – (Periodic Inventory System)
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Manufacturing Costs in Financial Statements
Cost of goods sold sections of merchandising and
manufacturing income statements
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Manufacturing Costs in Financial Statements
Determining the Cost of Goods Manufactured
Total Work in Process – (1) cost of beginning work in process and (2)
total manufacturing costs for the current period.
Total Manufacturing Costs – sum of direct material costs, direct labor
costs, and manufacturing overhead in the current year.
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Illustration 1-8
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Manufacturing Costs in Financial Statements
Balance Sheet
Inventory accounts for a manufacturer
The balance sheet for a merchandising company shows just one
category of inventory.
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Manufacturing Costs in Financial Statements
Balance Sheet
Current assets sections of merchandising and manufacturing balance
sheets
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Managerial Accounting Today
Focus on the Value Chain
Refers to all business process associated with providing a
product or service.
For a manufacturing firm these include the following:
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Managerial Accounting Today
Just-In-Time Inventory Methods

Inventory system in which goods are manufactured or
purchased just in time for sale.
Total Quality Management (TQM)

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Reduce defects in finished products, with the goal of
zero defects.
Managerial Accounting Today
Theory of Constraints

Constraints (“bottlenecks” ) limit the company’s potential
profitability.

A specific approach to identify and manage these
constraints in order to achieve company goals.
Enterprise Resource Planning (ERP)

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Software programs designed to manage all major
business processes.
Managerial Accounting Today
Activity-Based Costing (ABC)
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
Allocates overhead based on use of activities.

Results in more accurate product costing and scrutiny of
all activities in the value chain.
Managerial Accounting Today
Balanced Scorecard
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
Evaluates operations in an integrated fashion.

Uses both financial and non-financial measures.

Links performance to overall company objectives.
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