ACG 2071
Module 4: Managerial Accounting Concepts
Differences between Financial and Managerial
Accounting
Users and decision
makers
Purpose of
information
Flexibility of
practice
Timeliness of
information
Time dimension
Financial
Investors, creditors,
and other users
external to the
organization
Assist external users in
making investment,
credit decisions
Structured and often
controlled by GAAP
Often available only
after an audit is
complete
Historical information
with some predictions
Focus on
information
Emphasis on whole
organization
Nature of
Information
Monetary information
Created by M. Mari
Fall 2007-1
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Managerial
Managers, employees,
and decision makers
internal to the
organization
Assist managers in
making planning and
control decision
Relatively flexible
Available quickly
without the need to
wait for an audit
Many projections and
estimates historical
information also
presented
Emphasis on an
organization’s project,
processes, and
subdivisions
Mostly monetary, but
also non-monetary
information
ACG 2071
Module 4: Managerial Accounting Concepts
Management Accountant in the Organization
Individual reporting units in an organization can be
viewed as having either
o Line responsibilities
 One directly involved in the basic objectives
of the organization
 Such as production and distribution
o Staff responsibilities
 Is one that provides services, assistance, and
advice to the departments with line or other
staff responsibilities
 Has no direct authority over a line
department
 Controller is such an example
CEO
Chief Exexcutive Officer
VP of Production
VP of Sales
Director of Advertising
VP of Distribution
Director of Marketing
Payroll
Chief Financial Officer
Controller
Accts Rec
Director of Budgeting
Accts Payable
Cost
Budgeting
Purpose of Managerial Accounting
 Providing useful information to decision makers
 They do this by collecting, managing, and reporting
information in demand by their users.
 Much of managerial accounting involves gathering
information about costs for planning and control
decisions
Created by M. Mari
Fall 2007-1
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Director of Taxation
ACG 2071
Module 4: Managerial Accounting Concepts
o Planning
 Is the process of setting goals and making
plans to achieve them
 Strategic planning – developing long
range courses of action to achieve goals
 Operational planning – develop shortterm courses of action to manage the
day to day operations of a business
o Directing
 Is the process by which managers, given
their assigned level of responsibilities, run
day-to-day operations.
o Controlling
 Is the process of monitoring planning
decisions and evaluating an organization’s
activities and employees.
 It includes the measurement and evaluation
of actions, processes, and outcomes.
o Improving
 Feedback is used by managers to support
continuous process improvement.
 CPI is the philosophy of continually improving
employees, business processes, and
products.
o Decision making
 is inherent in each of the four management
processes described.
Created by M. Mari
Fall 2007-1
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ACG 2071
Module 4: Managerial Accounting Concepts
Manufacturing operations:
Sites to visit for virtual factory tours:
Porsche: www.porsche.com/uk/aboutporsche/virtualfactorytour/ - 8k Bubble Gum: www.dubblebubble.com/tour.html
Cameroon Balloon Factory: http://www.bized.co.uk/virtual/cb/tour/index.htm
Just Born Camdy: www.justborn.com/about/factory.html
BMW: http://www.bmwusfactory.com/build/
Avon: http://www.avoncompany.com/tour/index.html
Waterford: http://www.waterfordvisitorcenter.com/tor_intro.shtml
Ferrari : http://uk.sports.yahoo.com/050309/39/9k37.html
Types of Cost Classification
o Cost object – is a product, process, department, or
customer to which costs are assigned.
 Direct cost – traceable to a cost object
- Material
- Labor
 Indirect cost – are incurred for the benefit of
more than one cost object
- Maintenance
- Utilities
Manufacturing costs:
 Direct Materials
Created by M. Mari
Fall 2007-1
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ACG 2071
Module 4: Managerial Accounting Concepts
o Are tangible components of a finished product
o Used directly in the production of the good
 Direct Labor
o Labor used directly in the production of the good
o On the assembly line
 Factory Overhead
o Involves components or activities that support the
manufacturing process but are not direct materials
and direct labor
o Indirect materials
 Rags
 oil
o Indirect labor
 Supervisors
Created by M. Mari
Fall 2007-1
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ACG 2071
Module 4: Managerial Accounting Concepts
o
o
o
o
o
 inspectors
Utilities
Insurance
Property taxes
Depreciation on factory equipment
Repair and maintenance on factory equipment
Manufacturing Formulas:
Prime Costs = Direct Material + Direct Labor
Conversion Costs = Direct Labor + Factory Overhead
Example: Suppose that direct materials are $5,000, direct
labor is $4,000 and factory overhead is $3,000, what are
prime costs and conversion costs?
Prime costs = direct material + direct labor
= $5,000 + 4,000
= $9,000
Conversion costs = direct labor + factory overhead
= $4,000 + $3,000
= $7,000
Example: Suppose the direct materials are $3,000, prime
costs are $5,000, conversion costs are $9,000, and factory
overhead is $7,000. What are direct labor costs?
Prime costs = Direct materials + Direct Labor
$5,000 = $3,000 + DL
$2,000 = DL
Conversion costs = Direct labor + Factory overhead
$9,000
= $2,000 + FO
Created by M. Mari
Fall 2007-1
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Know
ACG 2071
Module 4: Managerial Accounting Concepts
$7,000 = FO
 Another cost classification is capitalization as inventory or
to expense as incurred.
o Product costs
 Expenditures necessary and integral to finished
products.
 Direct materials
 Direct labor
 Overhead costs
o Period costs
 Refer to expenditures identified more with a
time period than with finished products.
 Selling and administrative expenses
Manufacturing Accounts
 Raw materials inventory
o Refers to the goods a company acquires to use in
making products
o Direct and indirect material costs
o Asset account
 Work in process inventory
o Consists of products in the process of being
manufactured but not yet complete.
o Consists of direct materials, direct labor and factory
overhead costs
 Finished goods inventory
o Consists of completed products ready for sale.
o Contains all of the costs incurred to manufacture the
completed product.
Created by M. Mari
Fall 2007-1
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ACG 2071
Module 4: Managerial Accounting Concepts
 Cost of goods sold
Beginning finished goods inventory
+ cost of goods manufactured
Goods available for sale
Less Ending finished goods inventory
Cost of goods sold
Created by M. Mari
Fall 2007-1
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