Managerial Accounting and
the Business Environment
Chapter One
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Work of Management
Planning
Directing and
Motivating
Controlling
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Planning
Identify
alternatives.
Select alternative that does
the best job of furthering
organization’s objectives.
Develop budgets to guide
progress toward the
selected alternative.
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Directing and Motivating
Directing and motivating involves managing dayto-day activities to keep the organization
running smoothly.
 Employee work assignments.
 Routine problem solving.
 Conflict resolution.
 Effective communications.
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Controlling
The control function ensures
that plans are being followed.
Feedback in the form of performance reports
that compare actual results with the budget
are an essential part of the control function.
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Planning and Control Cycle
Formulating longand short-term plans
(Planning)
Comparing actual
to planned
performance
(Controlling)
Decision
Making
Exh.
1-1
Begin
Implementing
plans (Directing
and Motivating)
Measuring
performance
(Controlling)
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Comparison of Financial and
Managerial Accounting
Financial Accounting
Managerial Accounting
External persons who
make financial decisions
Managers who plan for
and control an organization
Historical perspective
Future emphasis
3. Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5. Subject
Primary focus is on
the whole organization
Focuses on segments
of an organization
6. GAAP
Must follow GAAP
and prescribed formats
Need not follow GAAP
or any prescribed format
Mandatory for
external reports
Not
Mandatory
1. Users
2. Time focus
7. Requirement
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Exh.
1-2
Copyright © 2006, The McGraw-Hill Companies, Inc.
Costs Terms, Concepts and
Classifications
Chapter Two
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Copyright © 2006, The McGraw-Hill Companies, Inc.
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement
and balance sheet
• Product costs
• Direct materials
• Direct labor
• Manufacturing overhead
• Period costs (non manufacturing costs)
• Marketing and selling costs
• Administrative costs
Predicting changes in cost due to
changes in activity
• Variable costs
• Fixed costs
Assigning costs
• Direct costs
• Indirect costs
Making decisions
• Differential costs
• Sunk costs
• Opportunity costs
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COST CLASSIFICATIONS IN
MANUFACTURING COMPANIES
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Product Costs Versus Period Costs
Product costs include
direct materials, direct
labor, and manufacturing
overhead.
Cost of Good Sold
Inventory
Period costs include all
marketing or selling
costs and
administrative costs.
Expense
Sale
Balance
Sheet
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Income
Statement
Income
Statement
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Balance Sheet
Merchandiser
Current assets
Manufacturer
Current Assets
 Cash
 Cash
 Receivables

Receivables
Materials
waiting to
be processed.
 Prepaid
Expenses
 Prepaid Expenses
Partially complete
 Merchandise
products – some
Inventory
material, labor, or
overhead has been
added.
 Inventories
Raw Materials
Work in Process
Finished Goods
Completed products
awaiting sale.
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The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
$ 14,200
+ Purchases
234,150
Goods available
for sale
$ 248,350
- Ending
merchandise
inventory
(12,100)
= Cost of goods
sold
$ 236,250
McGraw-Hill/Irwin
Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv.
+ Cost of goods
manufactured
Goods available
for sale
- Ending
finished goods
inventory
= Cost of goods
sold
$ 14,200
234,150
$248,350
(12,100)
$236,250
Copyright © 2006, The McGraw-Hill Companies, Inc.
Schedule of Cost of Goods
Manufactured
Calculates the cost of raw
material, direct labor and
manufacturing overhead
used in production.
Calculates the manufacturing
costs associated with goods
that were finished during the
period.
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Product Cost Flows
Raw Materials
+
=
–
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
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Manufacturing
Costs
Work
In Process
Direct materials
As items are removed from raw
materials inventory and placed into
the production process, they are
called direct materials.
Copyright © 2006, The McGraw-Hill Companies, Inc.
Product Cost Flows
Raw Materials
+
=
–
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
McGraw-Hill/Irwin
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
Copyright © 2006, The McGraw-Hill Companies, Inc.
Product Cost Flows
Raw Materials
+
=
–
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
McGraw-Hill/Irwin
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
All manufacturing costs incurred
during the period are added to the
beginning balance of work in
process.
Copyright © 2006, The McGraw-Hill Companies, Inc.
Product Cost Flows
Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Beginning work in
process inventory
Total manufacturing
costs
Total work in
process for the
period
Ending work in
process inventory
Cost of goods
manufactured
+
=
–
Costs associated with the goods that
are completed during the period are
transferred to finished goods
inventory.
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=
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Product Cost Flows
Work
In Process
+
=
–
=
McGraw-Hill/Irwin
Beginning work in
process inventory
Manufacturing costs
for the period
Total work in process
for the period
Ending work in
process inventory
Cost of goods
manufactured
Finished Goods
Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
- Ending finished
goods inventory
Cost of goods
sold
Copyright © 2006, The McGraw-Hill Companies, Inc.
Manufacturing Cost Flows
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
McGraw-Hill/Irwin
Finished
Goods
Period Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Copyright © 2006, The McGraw-Hill Companies, Inc.
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement
and balance sheet
• Product costs
• Direct materials
• Direct labor
• Manufacturing overhead
• Period costs (non manufacturing costs)
• Marketing and selling costs
• Administrative costs
Predicting changes in cost due to
changes in activity
• Variable costs
• Fixed costs
Assigning costs
• Direct costs
• Indirect costs
Making decisions
• Differential costs
• Sunk costs
• Opportunity costs
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Cost Classifications for Predicting Cost
Behavior
How a cost will react to
changes in the level of
activity within the
relevant range.
 Total variable costs
change when activity
changes.
 Total fixed costs remain
unchanged when activity
changes.
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Copyright © 2006, The McGraw-Hill Companies, Inc.
Variable Cost
Minutes Talked
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PER UNIT
Per Minute
Telephone Charge
Total Long Distance
Telephone Bill
TOTAL
Minutes Talked
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Fixed Cost
TOTAL
Monthly Rent Expense per
Units sold
Monthly Rent
Expense
Number of units sold
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PER UNIT
Number of Local Calls
Copyright © 2006, The McGraw-Hill Companies, Inc.
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement
and balance sheet
• Product costs
• Direct materials
• Direct labor
• Manufacturing overhead
• Period costs (non manufacturing costs)
• Marketing and selling costs
• Administrative costs
Predicting changes in cost due to
changes in activity
• Variable costs
• Fixed costs
Assigning costs
• Direct costs
• Indirect costs
Making decisions
• Differential costs
• Sunk costs
• Opportunity costs
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Assigning Costs to Cost Objects
Direct costs
Indirect costs
• Costs that can be
easily and conveniently
traced to a unit of product
or other cost object.
• Costs that cannot be easily
and conveniently traced to
a unit of product or other
cost object.
• Examples: direct material
and direct labor
• Example: manufacturing
overhead
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement
and balance sheet
• Product costs
• Direct materials
• Direct labor
• Manufacturing overhead
• Period costs (non manufacturing costs)
• Marketing and selling costs
• Administrative costs
Predicting changes in cost due to
changes in activity
• Variable costs
• Fixed costs
Assigning costs
• Direct costs
• Indirect costs
Making decisions
• Differential costs
• Sunk costs
• Opportunity costs
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.