Managerial Accounting Chapter 1

Managerial Accounting Basics

• Managerial accounting provides financial and nonfinancial information to an organization's managers to aid in planning, controlling, and decision-making.
• Managerial accounting is used to determine the costs of an organization's products and services, compare actual results to planned results, and identify areas for improvement.

Purpose of Managerial Accounting

• Managerial accounting helps managers make informed decisions about product pricing, profitability analysis, and whether to make or buy a product.
• Managerial accounting involves gathering information for planning and control, which includes setting goals, making plans, and evaluating performance.

Users of Accounting Information

• Managerial accounting information is provided primarily to internal managerial and executive employees.
• Financial accounting information is provided primarily to external users, including investors, creditors, and regulators.

Flexibility of Reporting

• Financial accounting follows generally accepted accounting principles (GAAP) to provide consistency and comparability of financial statements across companies.
• Managerial accounting is more flexible and does not follow GAAP, reflecting the needs of managers to analyze, plan, and control products and processes.

Timeliness of Information

• Financial accounting provides information to external users following required time periods (such as annual and quarterly).
• Managerial accounting provides information to internal users as they request it, which can be as immediate and frequent as demanded.

Time Dimension

• Financial accounting provides historical information using information that is often months old.
• Managerial accounting provides real-time reports that are used to evaluate current performance, plan future activities, and make projections.

Focus of Information

• Financial accounting focuses on the performance of a company as a whole.
• Managerial accounting focuses on a specific activity, product, department, or division for which a manager is responsible.

Nature of Information

• Financial accounting reports have primarily monetary information.
• Managerial accounting reports have both monetary and nonmonetary information, including customer and employee satisfaction data, and product defect rates.

Fraud and Ethics in Managerial Accounting

• Fraud is a costly problem that affects all businesses, with an average U.S. business losing 5% of its revenues to fraud.
• The fraud triangle consists of opportunity, pressure, and rationalization.
• To prevent fraud, managers set up internal controls, including procedures to ensure reliable accounting, uphold company policies, protect assets, and promote efficiency.

Career Paths

• Managerial accountants are highly regarded and are in demand.
• Many accounting specialists hold certifications, such as certified management accountant (CMA), certified public accountant (CPA), certified financial manager (CFM), and certified internal auditor (CIA).

Cost Concepts

• Classifying costs is important for managers to make informed decisions about product pricing, profitability analysis, and whether to make or buy a product.
• Cost classifications include direct vs. indirect, prime vs. conversion, product vs. period, and manufacturing vs. nonmanufacturing costs.### Classifying Costs
• Costs can be classified as direct or indirect, depending on their link to a cost object.
• A cost object is a product, process, department, or customer to which costs are assigned.
• Direct costs are costs that can be cost-effectively traced to a cost object.
  • Examples of direct costs for a bicycle manufacturer include:
    • Direct materials (tires, frame, seat, chain, etc.)
    • Direct labor (wages and benefits of workers making the bikes)
• Indirect costs are costs that cannot be cost-effectively traced to a cost object.
  • Examples of indirect costs for a bicycle manufacturer include:
    • Salary of a manufacturing supervisor
    • Wages of maintenance department employees
    • Factory rent and utilities

Direct Materials, Direct Labor, and Factory Overhead

• Direct materials are materials that are crucial parts of a finished product.
  • Examples of direct materials for a bicycle manufacturer include tires, seat, frame, pedals, brakes, cables, and handlebars.
• Direct labor refers to employees who directly convert materials to finished goods.
  • Examples of direct labor for a bicycle manufacturer include operators directly converting raw materials into finished goods and assembly workers who attach materials.
• Factory overhead, also called manufacturing overhead or overhead, includes all manufacturing costs that are not direct materials or direct labor.
  • Examples of factory overhead costs include:
    • Indirect materials (screws, nuts, staples, glue, etc.)
    • Indirect labor (costs of workers who assist in or supervise manufacturing, but do not assemble products)
    • Factory utilities (water, gas, electricity)
    • Factory rent and insurance
    • Depreciation on factory buildings and equipment

Prime and Conversion Costs

• Prime costs consist of direct materials costs and direct labor costs.
• Conversion costs are costs incurred in converting raw materials to finished goods.
  • Conversion costs consist of direct labor and factory overhead.

Product versus Period Costs

• Product costs are production costs necessary to create a product and consist of direct materials, direct labor, and factory overhead.
• Period costs are nonproduction costs linked to a time period (not to specific products).
  • Examples of period costs include:
    • Selling expenses (advertising, delivery, salesperson salaries, commissions, and travel expenses)
    • General and administrative expenses (office accounting, office employee wages, office rent, depreciation on office equipment, and office manager's salary)

Reporting Product and Period Costs

• Product costs are added to inventory, or capitalized, during manufacturing of products.
• When products are sold, product costs are expensed as cost of goods sold.
• Period costs are expensed in the period when incurred and reported on the income statement as either selling expenses or general and administrative expenses.

Cost Concepts for Service Companies

• Managers in service companies apply cost concepts, but classification as product versus period costs is not relevant to service companies.
• Service companies can classify costs into direct materials, direct labor, overhead, selling, or general and administrative costs.
• All service company costs are expensed when incurred.

Decision Making

• Tracing costs directly to cost objects is desirable if it is cost-effective.

• If the cost of purchasing and maintaining accounting software is greater than the benefit of tracing costs, it may not be worth the investment.### Reporting Inventory on the Balance Sheet

• Companies that pursue multiple activities, such as Best Buy, report different types of inventories.

• Manufacturers report three types of inventories: raw materials, work in process, and finished goods.

• Raw materials inventory is the cost of materials acquired to make products.

• Work in process inventory consists of the costs of direct materials, direct labor, and overhead for partially completed products.

• Finished goods inventory consists of the costs of direct materials, direct labor, and overhead of completed products ready for sale.

• Manufacturer balance sheets differ from those of merchandising and service companies.

• The current assets section of a manufacturer's balance sheet reports three types of inventory, whereas a merchandiser reports only merchandise inventory, and a service company usually reports no inventory.

Reporting Cost of Goods Sold on the Income Statement

• The main difference between the income statement of a manufacturer and that of a merchandiser is the content of cost of goods sold.
• Merchandisers add cost of merchandise purchased to beginning merchandise inventory and subtract ending merchandise inventory to compute cost of goods sold.
• Manufacturers add cost of goods manufactured to beginning finished goods inventory and subtract ending finished goods inventory to compute cost of goods sold.
• Key differences between merchandisers and manufacturers include:
  • Merchandisers have merchandise inventory, while manufacturers have finished goods inventory.
  • Merchandisers have cost of merchandise purchased, while manufacturers have cost of goods manufactured.
• Service companies do not report cost of goods sold because they do not make or buy inventory to sell.

Cost Flows and Cost of Goods Manufactured

• The flow of manufacturing activities and their cost flows are shown in Exhibit 18.13.
• Manufacturing activities and cost flows include:
  • Raw materials inventory
  • Work in process inventory
  • Finished goods inventory
  • Cost of goods manufactured