Managerial Accounting
Wild and Shaw
Fourth Edition
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1
Managerial Accounting
Concepts and Principles
Conceptual Learning Objectives
C1: Explain the purpose and nature of, and the
role of ethics in, managerial accounting.
C2: Describe accounting concepts useful in
classifying costs.
C3: Define product and period costs and
explain how they impact financial
statements.
C4: Explain how the balance sheets and
income statements for manufacturing and
merchandising companies differ.
C5: Explain manufacturing activities and the
flow of manufacturing costs.
C6: Identify trends in managerial accounting.
1-3
Analytical Learning Objectives
A1: Assess raw materials inventory
management using raw materials
inventory turnover and days’ sales in
raw materials inventory.
1-4
Procedural Learning Objectives
P1: Compute cost of goods sold for a
manufacturer.
P2: Prepare a manufacturing statement
and explain its purpose and links to
financial statements.
1-5
C1
Managerial and Financial
Accounting
Managerial accounting
provides financial and
nonfinancial information
to an organization’s
managers and other
internal decision makers
Financial accounting
provides general
purpose financial
information to those
who are outside
the organization.
1-6
Nature of Managerial
Accounting
C1
Financial Accounting
Managerial Accounting
Investors, creditors, and
other external users
Managers, employees, and
other internal users
2. Purpose of
information
Making investment, credit,
Planning and
and other decisions
control decisions
3. Flexibility
of practice
Structured and often
Relatively flexible
controlled by GAAP
(no GAAP constraints)
4. Timeliness of
information
Often available only
Available quickly without
after audit is complete
need to wait for audit
Historical information
with some predictions
Many projections
and estimates
Emphasis on
Projects, processes and
whole organization
segments of an organization
Monetary
Monetary and
information
nonmonetary information
1. Users and
decision makers
5. Time dimension
6. Focus of
information
7. Nature of
information
1-7
C2
Managerial Cost Concepts
Behavior
Traceability
Controllability
Relevance
Function
1-8
C2
Classification by Behavior
Cost behavior refers to a costs
reaction to changes in the level of
business activity.
A fixed cost does not change with
changes in the volume of activity.
A variable cost changes in
proportion to changes in the volume
of activity.
A mixed cost refers to a combination of
fixed and variable costs.
1-9
C2
Classification by Traceability
Direct costs

Costs traceable to a
single cost object.

Examples: material
and labor cost for a
product.
Indirect costs

Costs that cannot be
traced to a single cost
object.

Example:
maintenance
expenditures
benefiting two or more
departments.
1-10
C2
Classification by Controllability
The degree of control depends on the
level of management in the organization.
Very little control
1-11
C2
Classification by Relevance:
All costs incurred in the past that cannot be avoided
or changed.
Sunk costs should not be considered in decisions.
Out-of-pocket costs require a future outlay of cash
and should be considered in decisions.
Opportunity costs are the potential benefits lost by
choosing a specific action from two or more
alternatives
1-12
C3
Classification by Function:
Product Costs
Direct
Material
Direct
Labor
Manufacturing
Overhead
The
Product
1-13
C3
Period and Product Costs
in Financial Statements
2013 Income
Statement
Operating
expenses
Period costs
(expenses)
2013 Costs
incurred
Product
costs
(inventory)
Cost of
goods sold
Inventory
sold in 2013
Inventory not
sold until 2014
2013 Balance
Sheet inventory –
(3 accounts)
Raw Materials
Goods in Process
Finished Goods
2014 Income
Statement
Cost of
goods sold
Inventory
sold in 2014
1-14
C4
Balance Sheet of a Manufacturer
Three Inventory Accounts
Raw
Materials
Inventory
Materials
waiting to be
processed.
Can be direct
or indirect.
Goods in
Process
Inventory
Partially complete
products.
Material to which
some labor and/or
overhead have
been added.
Finished
Goods
Inventory
Completed
products
for sale.
1-15
Income Statement of a
Manufacturer
C4
Merchandiser
Manufacturer
Beginning
Merchandise
Inventory
Beginning
Finished Goods
Inventory
+
+
Cost of Goods
Purchased
_
The major
difference
Ending
Merchandise
Inventory
=
Cost of Goods
Manufactured
_
Ending
Finished Goods
Inventory
Cost of Goods
Sold
=
1-16
Flow of Manufacturing
Activities
C5
Materials
Activity
Raw
Materials
Beginning
Inventory
Raw
Materials
Purchases
Production Activity
Sales Activity
Goods in Process
Beginning Inventory
Finished Goods
Beginning Inventory
Direct Labor Used
Cost of Goods
Manufactured
Factory
Overhead Used
Raw Materials
Used
Raw Materials
Ending Inventory
Finished
Goods
Ending
Inventory
Cost
of
Goods
Sold
Goods in Process
Ending Inventory
1-17
P2
Manufacturing Statement
Summarizes the types and amounts of costs
Incurred in a company’s manufacturing process.
+
+
=
+
–
=
Direct Materials Used
Direct Labor
Factory Overhead
Total Manufacturing Costs
Beginning Goods in Process
Ending Goods in Process
Cost of Goods Manufactured
1-18
End of Chapter 1