Fundamental Cornerstones of
Managerial Accounting
Chapter One
Managerial Accounting Concepts and
Decision-Making Support
Heitger/Mowen/Hansen
Copyright © 2009 Cengage Learning South-Western.
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Management Accounting
•
•
Internal accounting system
Designed to support the information
needs of managers
2
Management Accounting
Generally
Accepted
Accounting
Principles
Management Accounting
is not bound by GAAP
(Generally Accepted
Accounting Principles)
3
Three broad objectives
Objective 1
To provide information for costing out…
Services
Products
Other objects of
interest to
management
4
Three broad objectives
Objective 2
To provide information for…
Planning
Continuous
Improvement
Controlling
Evaluation
5
Three broad objectives
Objective 3
To provide information for…
Decision
Making
6
Differences in Targeted
Users
Financial Accounting
Management Accounting
Focuses on
the external
user
Focuses on
the internal
user
7
Differences in Restrictions
Financial Accounting
Must follow
GAAP
Management Accounting
No
guidelines
that it must
follow
8
Differences in Types of
Information
Financial Accounting
Management Accounting
Produces
objective
and
verifiable
financial
information
May be
financial or
nonfinancial.
Much more
subjective
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Differences in Time
Orientation
Financial Accounting
Reports on
events that
have
already
happened
Management Accounting
Includes
historical,
but focuses
on future
events
10
Differences in Degree of
Aggregation
Financial Accounting
Focuses on
overall firm
performance
(a more
aggregated
viewpoint).
Management Accounting
Focuses on
performance
of…
entities, product
lines,
departments and
managers
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Accounting System
Needs to be flexible enough to
provide both financial and
managerial accounting information
12
Current Focus
Developments in technology,
transportation and communication have
created the need for better
information
13
Activity-Based Costing
•
•
A more detailed approach to determining the
cost of goods and services
Emphasizes cost of many activities or tasks
that must be done to produce a product
Objective: Find ways to perform necessary
activities more efficiently and eliminate
those that do not create customer value.
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Customer Orientation
Advantage comes when company can
create better customer value
Customer
Value
=
What
Customer
Receives
-
What
Customer
Gives Up
15
Increasing Customer Value
Two strategies:
Cost
Leadership
Superior
Products through
differentiation
Both strategies require an
understanding of the firm’s….
Value Chain
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Cross-Functional Perspective
•
Management accountant must understand
many functions of the business to manage
the value chain
A decision affecting one function affects the
others
This perspective allows management to
see the big picture and…
•
•
◦
Increase quality, reduce time, and improve
efficiency
17
Total Quality Management
•
•
•
•
“Acceptable quality” attitude is unacceptable
A philosophy of perfect products (zero
defects)
Management accounting must provide both
financial and nonfinancial information about
quality
Continuous improvement is fundamental
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Time as a Competitive Element
•
•
•
Time is crucial in all phases of the Value
Chain
Companies try to eliminate “non-valueadded” time
Managers must be able to respond quickly
and decisively to changing market
conditions
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Efficiency
•
Both financial and nonfinancial
measures are needed
Cost is a critical measure of efficiency
To be effective, cost must be properly
•
•
◦
◦
◦
Defined
Measured
Assigned
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Ethical Conduct
Choosing actions
that are right,
proper and just
10 Core Values
1.Honesty
2.Integrity
3. Promise keeping
4. Fidelity
5. Fairness
6. Caring for others
7. Respect for others
8. Responsible citizenship
9. Pursuit of excellence
10. Accountability
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Certified Management Accountant
(CMA)
•
•
•
Certification available to management
accountants
Establish management accounting as a
recognized professional discipline
Candidates must:
–
Pass an examination which underscoring the
multidisciplinary nature of management
accounting
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Certified Management Accountant
(CMA)
Candidates must:
• Pass an examination reflecting the
needs of management accounting and
underscoring its interdisciplinary flavor
• Meet an experience requirement
• Participate in continuing education
• Have a commitment to ethical principles
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Certified Public Accountant (CPA)
•
Another certification available to
management accountants
Purpose of the CPA certificate
•
◦
•
Provides minimal professional qualifications for
external auditors
Candidates must:
•
•
Pass an examination
Be licensed in the state in which they practice
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Certified Internal Auditor (CIA)
•
•
Created in 1974
Candidates must:
•
•
Pass an examination
Have two years experience
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Cost
•
Amount of cash or cash equivalent
sacrificed for goods and/or services
•
Expected to bring a current or future
benefit to the organization
Let’s look at an example
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Example
A wood furniture manufacturer buys
lumber for $10,000.
Cost of the lumber is the
amount given up….
$10,000
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Expenses
As costs are used up in the production
of revenues, they are said to expire.
Expired costs are called
EXPENSES
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Cost vs. Price
Be careful!
Cost & Price are not the same thing
Cost
What we pay
for something
Price
Amount we charge
our customers for
our products or
services
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Accumulating Costs
Telephone Expense
Received
Telephone bill
Phone
Bill
$150
Recorded in
Telephone
Expense
account
Bal. $800
+ $150
$950
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Accumulating Costs
This is helpful but
managers also need to
know whichIndepartments
other words,
used
the $950want
in to know
managers
Telephone
Expense
how costs
are assigned
to cost objects.
Telephone Expense
Bal. $800
+ $150
$950
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Cost Objects
•
Any item for which costs are
measured and assigned
•
Examples:
–
Products
–
Customers
–
Departments
–
Regions
Let’s continue with our
example
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Assigning Costs
Sales Dept.
Manufacturing
Dept.
Let’s say the Telephone
Expense was incurred by the
Sales and the Manufacturing
Departments
The Sales and
Manufacturing
departments are the
cost objects
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Assigning Costs
Sales Dept.
$350
Telephone Expense
Bal. $800
+ $150
$950
Manufacturing
Dept.
$600
The accountant
assigned the Telephone
Expense to the two cost
objects.
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Assigning Costs
•
Costs can be assigned in a number of ways
•
Some methods are more accurate, but time
consuming
•
While others are quite simple but not as
precise
These methods will be discussed in
the succeeding chapters.
35
Direct Costs
•
Costs that can be easily and accurately
traced to a cost object
•
Relationship between the cost and the
object can be physically observed
36
Indirect Costs
•
Costs that cannot be easily traced to a cost
object
•
Relationship between the cost and the
object not easily observed
•
Assigned through allocation
37
Other Categories of Cost
Variable Cost = Increases in total as
output increases and decreases in total as
output decreases
Fixed Cost = Total does not increase as
output increases and does not decrease
as output decreases
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Other Categories of Cost
Opportunity Cost
Benefit given up or sacrificed when one
alternative is chosen over another
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Output
One of the most important cost
objects of a company is its output.
Two types of output:
Tangible
Products
Services
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Tangible Products
Goods produced by converting raw
materials through the use of labor and
capital inputs. Produced by manufacturing
organizations.
41
Services
Tasks or activities performed for a
customer or an activity performed by a
customer using an organization’s
products or facilities. Produced by
service organizations.
42
Cost Types
•
Product costs
•
•
Associated with the manufacture of goods or
the provision of services
Nonproduction costs
•
All other costs
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Nonproduction Costs
Examples:
•
Designing
•
Distribution
•
Developing
•
Customer Service
•
General
Administration
•
Marketing
44
Nonproduction Costs
Examples:
These are Selling
Costs
•
Distribution
•
Customer Service
•
Marketing
45
Nonproduction Costs
Examples:
•
Designing
•
Developing
•
General
Administration
These are Administrative
Costs
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Product Cost Classifications
Only three cost elements can be
assigned to products for financial
reporting:
Direct
Materials
Direct
Labor
Overhead
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Direct Materials
Materials that are a part of the final
product and can be directly traced
to the goods and services being
produced.
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Direct Labor
Labor that can be directly traced to
the goods or services being produced.
49
Overhead
All product costs other than direct
materials or direct labor.
Indirect
Materials
Supplies
Utilities
Indirect
Labor
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Total Product Cost
Total Product
=
Cost
Direct
+
Materials
Direct
+ Overhead
Labor
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Product Cost Per Unit
Unit Cost
=
Total Product Cost
Number of Units
Produced
Let’s work through an
example
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Conversion Costs
Direct Labor + Overhead
It is the cost of converting raw
materials into a final product.
53
Period Costs
Unlike product costs which are
carried in inventory; period costs are
expensed in the period in which they
are incurred.
Two categories of period
costs: Selling Costs and
Administrative Costs.
54
Selling Costs
Costs necessary to market, distribute, and
service a product or service.
Examples:
Salaries and
commissions of
sales people
Warehousing
Advertising
Customer
Service
Shipping
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Administrative Costs
All costs associated with research,
development, and general administration of
the organization that cannot reasonably be
assigned to either selling or production.
Examples:
Top Executive Salaries
General
Accounting
Legal Fees
Expenses of printing
the annual report
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Cost of Goods Manufactured
Total product cost of goods
completed during the current period
Direct Materials
+ Direct Labor
+ Overhead
Sounds simple enough.
But there’s more to it than
meets the eye.
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Direct Materials Used
•
Only the amount used on products
produced during the current period
•
Consider beginning and ending inventory
levels
•
Key point: Purchases do not equal
Materials Used
Let’s go through an
example.
58
Work in Process
•
Second type of inventory
•
Cost of partially completed goods that are still
on the factory floor at the end of the period
•
Units are started, but not finished
•
Included direct materials, direct labor, and
overhead costs
Let’s continue our
example
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Cost of Goods Sold
•
Represents the total cost of units sold during
a period
•
Includes only product cost
•
Included direct materials, direct labor, and
overhead
•
Reported as an expense on the income
statement
“Sold” is the key word.
Let’s continue with our
example
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Income Statement:
Service Organization
•
Cost of services sold is typically made up of:
–
Materials
–
Labor
–
Overhead
◦
No beginning or ending finished goods
inventories.
•
Cost of Services Sold will always equal Cost
of Services Manufactured.
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