Introduction to
Managerial
Accounting
Module 4
Managerial Accounting
Concepts
Created by M. Mari
Fall 2007-1
Purpose of Managerial
Accounting
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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
Managerial
Characteristics
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Provides estimates
of future operations
Used by mgmt in
conducting daily
operations,
planning, and
developing
strategies
Differences with
Financial Accounting
Financial
Managerial
Users and
decision
makers
Investors, creditors, and
other users external to
the organization
Managers, employees,
and decision makers
internal to the
organization
Purpose of
information
Assist external users in
making investment,
credit decisions
Assist managers in
making planning and
control decision
Flexibility of
practice
Structured and often
controlled by GAAP
Relatively flexible
Timeliness of
information
Often available only after an
audit is complete
Available quickly without
the need to wait for an
audit
Focus on
information
Emphasis on whole
organization
Emphasis on an
organization’s project,
processes, and
subdivisions
Management Accountant in
the Organization
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Individual reporting units in an organization
can be viewed as having either
– Line responsibilities
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One directly involved in the basic objectives of the
organization
Such as production and distribution
– Staff responsibilities
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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
Organizational Chart
CEO
Chief Exexcutive Officer
VP of Production
VP of Sales
VP of Distribution
Director of Advertising Director of Marketing
Controller
Payroll
Accts Rec
Chief Financial Officer
Director of Budgeting Director of Taxation
Accts Payable
Cost
Budgeting
Purpose of Managerial
Accounting
– 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 short-term
courses of action to
manage the day to
day operations of a
business
Purpose of Managerial
Accounting
– Directing

Is the process by
which managers,
given their assigned
level of
responsibilities, run
day-to-day
operations.
Purpose of Managerial
Accounting
– 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.
Purpose of Managerial
Accounting
– Improving

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Feedback is used by
managers to support
continuous process
improvement.
CPI is the
philosophy of
continually
improving
employees,
business processes,
and products.
Purpose of Managerial
Accounting
– Decision making

is inherent in each of
the four
management
processes
described.
Types of Cost Classification

Cost object – is a
product, process,
department, or
customer to which
costs are assigned.
Types of Cost Classification
 Direct
cost – traceable to a cost object
• Material
• Labor
cost – are incurred for the benefit of
more than one cost object
 Indirect
• Maintenance
• Utilities
Materials

Direct –
– cost of materials
that are an integral
part of the product

Indirect –
– Cost of materials
that are not a
significant portion of
the total product
cost
Labor

Direct
– Cost of wages of
employees who are
directly involved in the
converting materials into
the manufactured
product

Indirect
– Labor that do not enter
directly into the
manufacture of a
product
Factory Overhead

Costs other than
direct materials cost
and direct labor
costs
– Manufacturing
overhead
– Factory burden
– Depreciation
– utilities
Manufacturing
Formulas:

Prime Costs
= Direct Material + Direct Labor

Conversion Costs
= Direct Labor + Factory Overhead
Example
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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
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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
$7,000 = FO
Costs

Product costs
– Direct materials,
direct labor, and
factory overhead
– Associated with the
production of the
product

Period costs
– Refer to
expenditures
identified more with
a time period than
with finished
products.
– Selling and
administrative
expenses
Inventory Accounts

Materials inventory
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Work in process inventory
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Refers to the goods a company acquires to use in making
products
Direct and indirect material costs
Asset account
Consists of products in the process of being manufactured
but not yet complete.
Consists of direct materials, direct labor and factory overhead
costs
Finished goods inventory
– Consists of completed products ready for sale.
– Contains all of the costs incurred to manufacture the
completed product.
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
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