Chapter 11
Fundamental Managerial Accounting Concepts
Chapter 11: Objectives
Differentiate between financial and managerial accounting.
Distinguish between product and period costs, direct and
indirect costs, controllable and noncontrollable costs, and
variable, fixed, and mixed costs.
Discuss the different costing systems and valuation
methods used by organizations.
Calculate and use a predetermined overhead rate.
Classify product costs as direct material, direct labor, and
overhead.
Record the flow of costs through the accounting system.
Prepare a statement of cost of goods manufactured.
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Financial or Managerial?
External Users
Rigid Rules
Historical Perspective
Aggregate Information
Quantitative
Information
Monthly/Annually
Internal Users
Flexible Format
Future Perspective
Detailed Information
Quantitative and
Qualitative information
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Managerial Accounting
Managerial Accounting is designed to:
--provide information to internal parties
for planning and controlling operations;
and
--estimate an organization's product or
service cost.
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Product or Period Cost?
Product Costs relate to the items that generate
organizational revenues : Inventory
(become part of COGS)
Direct Materials
Direct Labor
Factory Overhead
Period costs relate to an organization's selling and
administrative functions:
Certain Salaries
Insurance
(are expensed in period
consumed)
Freight Out
Administrative Overhead
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Direct and Indirect Costs
A direct cost is one that is clearly and easily
traceable to, and a monetarily important part
of, a specified cost object.
An indirect cost is one that is not clearly and
easily traceable, or is not a monetarily
important part of, a specified cost object.
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Controllable &
Noncontrollable Costs
Any cost that a manager can authorize or
directly influence in terms of dollar size
is a controllable cost.
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Variable Costs
A variable cost changes in total in direct proportion to changes in activity.
Total
Variable
Costs
Variable
= Cost per
unit
×
Units of
Activity
Examples include: Direct Materials, Direct Labor, Some Overhead
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Fixed Costs
A fixed cost remains constant in total with
changes in activity, within a Relevant Range.
Examples include: factory depreciation, insurance, property taxes.
Mixed costs have both a fixed and variable
component.
Total
Costs
=
(
Variable Cost
per unit
×
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Units of
Activity
)+
Fixed
Costs
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Manufacturing Costs
Direct Materials: any readily clearly identifiable and
conveniently traceable item that becomes a part of a
manufactured product; the cost of a direct material
must be monetarily significant to total product cost.
Direct Labor: the people who manufacture company
products.
Overhead: any cost incurred in the manufacturing area that
cannot or is not directly traced a product. Overhead consists of
indirect labor, indirect materials, and other indirect costs
that cannot be associated with a particular product.
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Inventory Costing Systems
Manufacturers that are producing goods in relatively small
quantities, often to customer specifications, use a job order
costing system. Service companies will generally use a job
order costing system.
Manufacturers that produce mass quantities of similar goods
(such as breakfast cereals, gasoline, or dog food) use a process
costing system to accumulate costs. Because the goods are all
the same and may flow through many production departments,
costs are accumulated by batches of goods .
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Inventory Valuation Methods
In an actual cost system, the actual costs of
materials, labor, and overhead are used to
compute product cost.
In a normal cost system, the actual costs of
materials and labor as well as an estimated cost
for overhead are used to compute product cost.
In a standard cost system, estimated "norms"
for materials, labor, and overhead are used to
compute product costs.
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Conclusions
 There are significant differences between
managerial and financial accounting.
 Costs may take many forms – product,
period, direct, indirect, controllable,
noncontrollable, fixed, variable, and mixed.
 Job order and process costing systems are
used to accumulate costs.
 There are actual, normal, and standard
costing systems.
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