Introduction to
Management Accounting
Chapter 19
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The Functions of Management
Planning
Acting
Controlling
Feedback
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Objective 1
Distinguish between financial
accounting and management
accounting.
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Management Accounting and
Financial Accounting
Primary Users
Internal managers of the business
Investors, Creditors,
Government authorities (IRS, SEC, etc.)
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Management Accounting and
Financial Accounting
Purpose of Information
Help managers plan and
control business operations
Help investors, creditors, and others make
investment, credit, and other decisions
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Management Accounting and
Financial Accounting
Focus and Time Dimension
Relevance
Reliability, objectivity, and focus on the past
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Management Accounting and
Financial Accounting
Type of Report
Internal reports not restricted by GAAP
Financial statements restricted by GAAP
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Management Accounting and
Financial Accounting
Verification
No independent audit
Annual independent audit by CPAs
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Management Accounting and
Financial Accounting
Scope of Information
Detailed reports on
parts of the company
Summary reports primarily
on the company as a whole
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Management Accounting and
Financial Accounting
Behavioral Implications
Concern about how reports
will affect employees behavior
Concern about adequacy of disclosure
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Service, Merchandising, and
Manufacturing Companies
Service Company:
provides intangible services,
rather than tangible products
Merchandising Company:
resells products previously
bought from suppliers
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Service, Merchandising, and
Manufacturing Companies
Manufacturing Company:
uses labor, plant, and equipment to convert
raw materials into finished products
Materials inventory
Work in process inventory
Finished goods inventory
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Objective 2
Describe the value chain
and classify costs by
value-chain functions.
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Value Chain
Research and
Development
Marketing
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Design
Production or
Purchases
Distribution
Customer
Services
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Objective 3
Distinguish direct costs
from indirect costs.
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Cost Objects, Direct Costs,
and Indirect Costs
Cost objects are anything for which a
separate measurement of costs is desired.
 Cost drivers are any factors that affect cost.

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Cost Objects, Direct Costs,
and Indirect Costs

–
–
–
–
What are examples of cost objects?
individual products
alternative marketing strategies
geographic segments of the business
departments
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Cost Objects, Direct Costs,
and Indirect Costs
What are direct costs?
 Direct costs are those costs that can be
specifically traced to the cost object.
 What are indirect costs?
 Indirect costs are costs that cannot be
specifically traced to the cost object.

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Objective 4
Distinguish among full product
costs, inventoriable product
costs, and period costs.
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Product Costs
What are product costs?
 They are the costs to produce (or purchase)
tangible products intended for sale.
 There are two types of product costs:

Full
product
costs
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Inventoriable
product
costs
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External Reporting
Inventoriable
product
costs
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Period
costs
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Inventoriable Product Costs
For external reporting, merchandisers’
inventoriable product costs include only
costs that are incurred in the purchase of
goods.
 Inventoriable costs are an asset.
 Period costs flow as expenses directly to the
income statement.

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Inventoriable Product Costs
For external reporting, manufacturers’
inventoriable product costs include raw
materials plus all other costs incurred in the
manufacturing process.
 Inventoriable product costs are incurred only
in the third element of the value chain.
 Costs incurred in other elements of the value
chain are period costs.

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Inventoriable Product Costs
Direct
Materials
Direct
Labor
Indirect Indirect
Labor Materials
Other
Manufacturing Overhead
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Inventoriable Product Costs
Direct
Materials
Direct
Labor
Prime Costs = Direct Materials + Direct Labor
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Inventoriable Product Costs
Direct
Labor
Indirect
Labor
Indirect
Materials
Other
Conversion Costs = Direct Labor
+ Manufacturing Overhead
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Objective 5
Prepare the financial statements
of a manufacturing company.
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Financial Statements for
Service Companies
There is no inventory and thus no
inventoriable costs.
 The income statement does not include cost
of goods sold.

Revenues – Expenses = Operating income
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Financial Statements for
Merchandising Companies
BALANCE SHEET
INCOME STATEMENT
Inventoriable
Costs
Purchases of
Inventory plus
Freight-In
Sales Revenue
Inventory
when
sales
occur
deduct
Cost of
Goods Sold
equals Gross Margin
deduct
Operating
Period
Costs
Expenses
equals Operating Income
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Financial Statements for
Manufacturing Companies
BALANCE SHEET
INCOME STATEMENT
Inventoriable
Costs
Materials
Inventory
Sales Revenue
Finished
Goods
Inventory
Work in
Process
Inventory
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when
sales
occur
deduct
Cost of
Goods Sold
equals Gross Margin
deduct
Operating
Period
Costs
Expenses
equals Operating Income
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Manufacturing Company Example
Kendall Manufacturing Company:
 Beginning and ending work-in-process
inventories were $20,000 and $18,000.
 Direct materials used were $70,000.
 Direct labor was $100,000.
 Manufacturing overhead incurred was
$150,000.

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Manufacturing Company Example

What is the cost of goods manufactured?
Beginning work in process
Direct labor
$100,000
Direct materials
70,000
Mfg. overhead
150,000
Ending work in process
Cost of goods manufactured
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$ 20,000
320,000
18,000
$322,000
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Manufacturing Company Example
Kendall Manufacturing Company’s
beginning finished goods inventory was
$60,000 and its ending finished goods
inventory was $55,000.
 How much is the cost of goods sold?

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Manufacturing Company Example
Beg. finished goods inventory
+ Cost of goods manufactured
= Cost of goods available for sale
– Ending finished goods
= Cost of goods sold
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$ 60,000
322,000
$382,000
55,000
$327,000
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Manufacturing Company Example
Kendall Manufacturing Company had sales
of $627,000 for the period.
 How much is the gross margin?

Sales
– Cost of goods sold
= Gross margin
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$627,000
327,000
$300,000
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Manufacturing Company Example
Kendall Manufacturing Company had
operating expenses as follows:
 Sales salaries and commissions
$ 80,000
Delivery expense
10,000
Administrative expenses
30,000
Total
$120,000
 What is Kendall’s operating income?

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Manufacturing Company Example
Gross margin
– Operating expenses
= Operating income
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$300,000
120,000
$180,000
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Flow of Costs through a
Manufacturer’s Accounts
Direct Materials Inventory 
 Beginning inventory

+ Purchases and freight-in
+
+
+
= Direct materials available =
for use
– Ending inventory
–
= Direct materials used
=

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Work in Process Inventory
Beginning inventory
Direct materials used
Direct labor
Manufacturing overhead
Total manufacturing costs
to account for
Ending inventory
Cost of goods manufactured
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Flow of Costs through a
Manufacturer’s Accounts


+
=
–
=
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Finished Goods Inventory
Beginning inventory
Cost of goods manufactured
Cost of goods available for sale
Ending inventory
Cost of goods sold
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Objective 6
Identify major trends in the
business environment, and use
cost-benefit analysis to make
business decisions.
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Shift to a Service Economy
Service Industries
Other
In the U.S., 55% of the workforce
is employed in service companies.
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Competing in the Global
Marketplace
Foreign Operations
Other
Foreign operations account
for over 30% of GE’s revenues.
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Just-in-Time
JIT philosophy means that the company
schedules production just in time to satisfy
needs.
 Speeding up of the production process
reduces throughput time.
 Throughput time is the time between buying
raw materials and selling the finished
products.

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Total Quality Management
The goal of total quality management
(TQM) is to please customers by providing
them with superior products and services.
 TQM emphasizes educating, training, and
cross-training employees.
 Quality improvement programs cost money
today.
 The benefits usually do not occur until later.

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Total Quality Management
Initial benefits
and costs
Total Benefits
Total Cost
$170 million
$200 million
Additional
expected benefits
Total
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68 million
$238 million
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$200 million
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Objective 7
Use reasonable standards to
make ethical judgments.
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Professional Ethics for
Management Accountants
In many situations the ethical path is not
so clear.
 The Institute of Management Accountants
(IMA) has developed standards to help
management accountants deal with these
situations.

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Standards of Ethical Conduct for
Management Accountants
Competence
Integrity
Confidentiality
Objectivity
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End of Chapter 19
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