ACC 406 Week 1
Chapter 1
What is Managerial Accounting?
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Providing accounting information for a company’s internal users
Not bound by GAAP or IFRS
Managerial accounting has three broad objectives
o To provide information for planning the organization’s actions
o To provide information for controlling the organization’s actions
o To provide information for making effective decisions
Information Needs for Planning, Controlling, and Decision Making
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Planning
Controlling
Decision making
Planning
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Detailed formulation of action to achieve a particular end
Controlling
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Managerial activity of monitoring a plan’s implementation and taking corrective action as needed
Decision Making
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Process of choosing among competing alternatives
Comparison of Managerial and Financial Accounting
Differences Between Managerial and Financial Accounting
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Past performances don’t indicate how they are going to perform in the future
Accounting System
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Needs to be flexible enough to provide both financial and managerial accounting information
The key point here is flexibility – the system should be able to supply difference information for different
purposes
Information now can be its own competitive advantage
Current Focus of Managerial Accounting
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Changes in technology, transportation, and communication have resulted in a new focus
o New methods of costing products and services such as activity-based costing
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Understanding customer orientation
Evaluation from a cross-functional perspective
Improving total quality management
Emphasis of time as a competitive element
Improving efficiency
Service and not-for-profit organizations
Customer Orientation
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Customer value is a key focus
Firms can establish a competitive advantage by creating better customer value for the same or a lower cost than
competitors
Create equivalent value for lower cost than that of competitors
Advantage comes when company can create better customer value
o Customer value = what customer receives – what customer gives up
Strategic Positioning: Increasing Customer Value
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Effective cost information can help increase customer value through two strategies
o Cost leadership: provide the same or better value to customers at a lower cost than competitors
o Superior products through differentiation: increase customer value by providing something to
customers not provided by competitors
The Value Chain
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Set of activities required to design, develop, produce, market, and deliver products and services, and provide
support services to customers
Successful pursuit of cost leadership and strategies
Total Quality Management
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Continuous improvement: continual search for ways to increase the overall efficiency and productivity of
activities by reducing waste, increasing quality, and managing costs
o Fundamental to establishing excellence
“Acceptable quality” attitude is unacceptable
Philosophy of total quality management and perfect products (zero defects) is the current attitude
Management accounting must provide both financial and nonfinancial information about quality
Companies attempt to increase organizational value by eliminating wasteful activities that exist throughout the
value chain
This has led to a change in accounting, referred to as lean accounting, which organizes costs according to the
value chain and collects both financial and nonfinancial information
o Focuses on cost driven by activity to help predict future performance
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A more recent charge of managerial accountants is to help carry out the company’s enterprise risk management
(ERM) approach
o ERM is a formal way for managerial accountants to identify and respond to the most threats and
business opportunities facing the organization
Time as a Competitive Element
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Time is crucial in all phases of the value chain
Firms reduce time to market by compressing design, implementation, and production cycles
Deliver products or services quickly by eliminating non-value-added time, which is time of no value to the
customer (eg. the time a product spends on the loading dock)
o Reduce the time without reducing quality
Decreasing non-value-added-time appears to go hand in hand with increasing quality
Managers must respond quickly and decisively to changing market conditions
Efficiency
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Improving efficiency is also a vital concern
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Non-financial measures look at resources and their usage
Management focuses on facilities and productions
Management Accounting for Service and Not-for-Profit Organizations
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Management accounting was primarily developed for manufacturing firms
However, management accounting concepts have evolved over the years and today apply to al types of
organizations, including service and not-for-profit organizations
Role of the Management Accountant
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The role of managerial accountants is one of support
They assist those who are responsible for carrying out an organization’s basic objectives
Positions that have direct responsibility for the basic objectives of an organization are line positions
Positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives
are staff positions
Ethical Behaviour
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The objective of firm value maximization should be constrained by the requirement that profits be achieved
through legal and ethical means
o Create most value for customers
Ethical behaviour involves choosing actions that are right, proper, and just
Behaviour can be right or wrong, it can be proper or improper, and the decisions we make can be fair or unfair
Companies in business for the long term find that it pays to treat all of their constituents with honesty and
loyalty
Company Codes of Ethical Conduct
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To promote ethical behaviour by managers and employees, organizations commonly establish standards of
conduct referred to as company codes of conduct
A quick review of various corporate codes of conduct shows some common ground
Important parts of corporate codes of conduct are integrity, performance of duties, and compliance with the
rule of law
They also uniformly prohibit the acceptance of kickbacks and improper gifts, insider trading, and
misappropriation of corporate information and assets
Accounting Designations in Canada
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The accounting profession relies on certification
o To provide evidence that the holder has achieved a minimum level of professional competence
o To promote and enforce ethical behaviour
CMA, CGA, CA
o CPA as one designation
The primary reason for amalgamation is to ensure that Canadian professional accountants have a strong voice in
the international community
This has become increasingly important as globalization has become the norm for many companies in both their
production operations and their marketing
Chapter 2
Cost and Cost Assignment
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Determine the cost of products, services, customers, and other items to managers
Cost: amount of cash or cash equivalent sacrificed for goods and/or services that bring a current or future
benefit to the organization
In a profit-making firm, these benefits usually mean revenues
Cost and Profit
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As costs are used up in the production of revenues, they are said to expire
Expired costs are called expenses
For a company to remain viable, revenues must be greater than expenses in the long term
Income Statement
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On the income statement, expenses are deduced from revenues to determine net income (also called profit)
Profit vs. Loss
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Revenues > Costs = Profits
Revenues = Cost = Zero profits
Revenues < Costs = Losses
Cost and Price
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A furniture manufacturer buys lumber for $10 000
The cost of the lumber is the amount given up
o $10 000
Price: amount we charge our customers for our products or services
Cost and price are not the same thing
Cost Accumulation
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Accumulating costs: the way that costs are measured and recorded
Received telephone bill
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Recorded in Telephone Expense account
Accumulating Costs
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This is helpful, but managers also need to know which departments used the $950 in Telephone Expense
o Managers want to know how costs are assigned to cost objects
Assigning Costs
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The way that a cost is linked to some cost object
Cost Objects
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Managerial accounting systems are structed to measure and assign costs
Cost object: any item such as a product, customer, department, project, geographic region or plant, for which
costs are measured and assigned
Assigning Costs to Cost Objects
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Costs can be assigned to cost objects in a number of ways
The choice of a method depends on a number of factors, such as the need for accuracy
o Some methods are more accurate but time consuming
o Others are simpler but not as precise
The objective is to measure and assign costs as well as possible, given management objectives
Assigning Costs
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Let’s say the Telephone Expense was incurred by the sales department and the manufacturing department
o The accountant assigns the Telephone Expense to the two cost objects
Sales Department and manufacturing Department are cost objects
Cost Classification
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In managerial accounting, costs are classified according to the decision-making needs of management
Different costs are used for different purposes
Cost definitions can vary according to the objective being served
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Costs can be classified by using a variety of criteria
Cost Classification Direct and Indirect Costs
Direct Costs
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Easily and accurately traced to a cost object
Relationship between the cost and the object can be physically observed
Indirect Costs
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Cannot be easily traced to a cost object
Relationship between the cost and the object not easily observed
Assigned through allocation
Cost Classification Assigning to Cost Objects
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Direct and indirect costs occur in service businesses as well
o Some businesses refer to indirect costs as overhead costs or support costs
Cost Classification in Relation to Cost Object
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Since indirect costs are not traceable, these costs need to be allocated/assigned
o Depends on relationship of cost object
Cost Classification in Relation to Changes in Activity Levels
Cost Classification in Relation to the Classification in the Financial Statements
Cost Classification
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Different costs are used for different purposes
Classification helps make sense of a great variety of costs
Product and Service Costs: Output
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One of the most important cost objects of a company is its output
Two types of output
o Products produced by manufacturing organizations
o Services produced by services organizations
Product and Service Costs: Service Costs
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Services: tasks or activities performed for a customer or an activity performed using an organization’s products
or facilities
o Insurance coverage, medical care, dental care, funeral care, and accounting are examples of service
activities
o Car rental, video rental, and skiing are examples of services where the customer uses an organization’s
products or facilities
Services differ from products in many ways
Product and Service Costs: Types of Costs
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Product costs: associated with the manufacture of goods or the provision of services
Period costs: all other costs (ie. Non-manufacturing costs)
Product Costs
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Product (manufacturing) costs: costs, both direct and indirect, of producing a product in a manufacturing firm
or of acquiring a product in a merchandising firm and preparing it for sale
o Only costs in the production section of the value chain are included in product costs
Inventoried
First added to an inventory account and remain in inventory until sold, at which time they are transferred to cost
of goods
For financial reporting, product costs are classified as
o Direct materials
o Direct labour
o Manufacturing overhead
Product Costs: Direct Materials
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Direct materials: materials that are a part of the final product and can be directly traced to the goods being
produced
o Car -> engine, gas, radio, seats, etc.
Materials cost can be directly charged to products because physical observation can be used to measure the
quantity used by each product
Materials that become part of a product usually are classified as direct materials
Product Costs: Direct Labour
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Direct labour: labour that can be directly traced to the goods being produced
o Physical observation can be used to measure the amount of labour used to produce a product
o Those employees who convert direct materials into a product are classified as direct labour
A company can also have indirect labour costs
o Indirect labour is included in overhead and, therefore, is an indirect cost rather than a direct cost
Product Costs: Manufacturing Overhead
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Manufacturing overhead: all product costs, other than direct materials and direct labour
Manufacturing overhead is also known as factory burden or indirect manufacturing costs
Costs are included as manufacturing overhead if they cannot be traced to the cost object of interest (eg. unit of
product)
Costs are included as manufacturing overhead if they cannot be traced to the cost object of interest (eg. unit of
product)
The manufacturing overhead cost category includes a variety of items
o Depreciation on plant buildings and equipment
o Janitorial and maintenance labour
o Plant supervision
o Materials handling
o Power for plant utilities
o Plant property taxes
Product Costs: Calculating Total Product Cost
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Total product cost = Direct materials cost + Direct labour cost + Manufacturing overhead cost
Unit product or Per-unit cost = Total product cost / Number of units produced
Product Costs: Prime and Conversion Costs
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Prime cost = Direct materials + Direct labour
Conversion cost = Direct labour + Manufacturing overhead
Period Costs
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Costs of production: assets that are carried in inventories until the goods are sold
Other costs, such as period costs, are not carried in inventory
Period costs: all costs that are not product costs (ie. All area of the value chain except for production)
o Expensed immediately
Eg. office supplies, research and development activities, the CEO’s salary, and advertising
The level of period costs can be significant, and controlling them may bring greater cost savings than the same
effort exercised in controlling production costs
Period costs typically are expensed in the period in which they are incurred
If a period cost is expected to provide an economic benefit (ie. Revenues) beyond the next year, then it is
recorded as an asset (ie. Capitalized) and allocated to expense through depreciation throughout its useful life
Selling Costs
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Those costs necessary to market, distribute, and service a product or service
Administrative Costs
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Include research, development, and general administration of the organization and cannot be assigned to either
selling or production
General administration ensures that the various activities of the organization are integrated so that the overall
mission of the firm is realized
Eg. executive salaries, legal fees, printing the annual report, and general accounting
Research and development costs: costs associated with designing and developing new products and must be
expensed in the period incurred
Direct and Indirect Period Costs
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Often helpful to distinguish between direct period costs and indirect period costs
Indirect labour is included in overhead
Service companies: distinguish between direct period costs and indirect period costs
These costs do not affect the calculation of inventories or COGS for service companies
Correct classification affects numerous decisions and planning and control activities for managers
Types of Business Operations
Financial Statements for Manufacturing Operations
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The cost of a manufactured product includes the cost of materials used in making the product as well as the cost
of converting those materials into a finished product
Thus, the cost of a finished product includes the following
o Direct materials cost
o Direct labour cost
o Manufacturing (factory) overhead cost
Balance Sheet for Manufacturing Operations
Inventory Reporting for Merchandising Operations
Cost of Goods Manufactured
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A manufacturer makes the products it sells using direct materials, direct labour, and factory overhead
Cost of goods manufactured (COGM): the total cost of making products that are available for sale during the
period
To determine the cost of goods manufactured needs to be calculated
The cost of goods manufactured is often determined by preparing a statement of cost of goods manufactured
Income Statement for a Manufacturing Business
Cost of Goods Manufactured
1. Determine the cost of direct materials used
2. Determine the total manufacturing costs incurred
3. Determine the cost of goods manufactured
Direct Materials Used
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Only the amount used on products produced during the current period
Consider beginning and ending inventory levels
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Purchases do not equal materials used
Income Statement: Manufacturing Firm
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Gross margin = Sales revenue – Cost of goods sold
o Shows how much the firm is making over and above the cost of the units sold
o Does not equal operating income or profit, as it is computed without subtracting selling and
administrative expenses
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If gross margin is positive, the firm is charging prices that cover the product cost
Gross Margin Percentage
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A company can compare gross margin percentage to the average for its industry to see whether its experience is
within the ballpark range for other firms in the industry
Gross margin percentage varies significantly by industry
Gross margin percentage = Gross margin / Sales revenue
Operating Income
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Selling and administrative expenses for the period are subtracted from gross margin to arrive at operating
income
Operating income = Gross margin – Selling and administrative expenses
Operating income is the key figure from the income statement
o It is profit and shows how much the owners are earning from the company
Income Statement of a Service Organization
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In a service organization, there is no product to purchase or to manufacture
This means there are no beginning or ending inventories
As a result, there is no cost of goods sold or gross margin on the income statement
Instead, the cost of providing services appears along with the other operating expenses of the company