Managerial Accounting

Topic: Introduction to Management Accounting

Presented by
Dr. Shamsi S. Bawaneh1
B.Sc. Acc.; MBA/Acc and PhD

Based on
Managerial Accounting 6 Edition and above
By
Weygandt, Kimmel, &Kieso
th

Accounting Principles 10 Edition

By
Weygandt, Kimmel, &Kieso
th

He is an Associate Professor at PSUT, received his bachelor's degree on accounting from the
University of Jordan, his MBA/ accounting from The University of Bridgeport/ USA, and his doctorate
in accounting & finance from The University of Manchester /UK.

The Plan in presenting the chapters' materials:

1. The study objectives of the chapter
2. The Preview of the chapter
3. Chapter's review
4. Lectures Outline
5. The summary of study objectives
6. Glossary
7. Demonstration problem
8. Quiz or Quizzes
9. Questions
10.Brief exercises
11.Exercises
12.Problems: set A
13.Problems: set B
14.Cases for analysis

Chapter 1
2

Introduction to Managerial Accounting

Study Objectives2
After studying this chapter, you should be able to:
1. Explain the distinguishing features of managerial accounting.
2. Identify the three broad functions of management.
3. Define the three classes of manufacturing costs.
4. Distinguish between product and period costs.
5. Explain the difference between a merchandising and a manufacturing income
statement.
6. Indicate how cost of goods manufactured is determined.
7. Explain the difference between a merchandising and a manufacturing balance
sheet.
8. Identify trends in managerial accounting.
Preview of Chapter 13
This chapter focuses on issues companies need to succeed in business. To succeed, the
company needs to determine and control the costs of material, labor, and overhead, and
understand the relationship between costs and profits. Managers often make decisions that
determine their companys fate and their own. Managers are evaluated on the results of
their decisions. Managerial accounting provides tools for assisting management in
making decisions and for evaluating the effectiveness of those decisions.
The content and organization of the chapter are as follows:

Introduction to Managerial accounting

ccountng

Managerial accounting
Managerial
basics cost concepts
. Comparing managerial
. Manufacturing
and
costs
financial accounting . Product vs. period costs
. Management functions
. Organizational structure
. Business ethics

Manufacturing costs in
financial statements
. Income statement
. Cost of goods
manufactured
. Balance sheet
. Cost concepts review

Managerial accounting
today
. Focus on the value chain
. Balanced scorecard
. Corporate social
responsibility

STUDY OBJECTIVES
2

Give you a framework from learning the specific concepts covered in the chapter.

The Preview describes and outlines the major topics and subtopics you will see in the chapter.

1. EXPLAIN THE DISTINGUISHING FEATURES OF MANAGERIAL

ACCOUNTING.
2. IDENTIFY THE THREE BROAD FUNCTIONS OF MANAGEMENT.
3. DEFINE THE THREE CLASSES OF MANUFACTURING COSTS.
4. DISTINGUISH BETWEEN PRODUCT AND PERIOD COSTS.
5. EXPLAIN THE DIFFERENCE BETWEEN A MERCHANDISING AND A
MANUFACTURING INCOME STATEMENT.
6. INDICATE HOW COST OF GOODS MANUFACTURED IS DETERMINED.
7. EXPLAIN THE DIFFERENCE BETWEEN A MERCHANDISING AND A
MANUFACTURING BALANCE SHEET.
8. IDENTIFY TRENDS IN MANAGERIAL ACCOUNTING.

CHAPTER REVIEW
4

Managerial Accounting Basics

1. (S.O. 1) Managerial accounting is a field of accounting that provides economic
and financial information for managers and other internal users. Managerial
accounting applies to all types of businessesservice, merchandising, and
manufacturingand to all forms of business organizationsproprietorships,
partnerships and corporations. Moreover, managerial accounting is needed in not-forprofit entities as well as in profit-oriented enterprises.
Comparing Managerial and Financial Accounting
2. There are both similarities and differences between managerial and financial
accounting.
a. Both fields of accounting deal with the economic events of a business and require
that the results of that companys economic events be quantified and communicated to
interested parties.
b. The principal differences are the (1) primary users of reports, (2) types and
frequency of reports, (3) purpose of reports, (4) content of reports, and (5) verification
process.
3. The role of the managerial accountant has changed in recent years. Whereas in the
past their primary concern used to be collecting and reporting costs to management,
today they also evaluate how well the company is using its resources and providing
information to crossfunctional teams comprised of personnel from production,
operations, marketing, engineering, and quality control.
Management Functions
4. (S.O. 2) Managers perform three broad functions within an organization:
a. Planning requires managers to look ahead and to establish objectives.
b. Directing involves coordinating a companys diverse activities and human
resources to produce a smooth-running operation.
c. Controlling is the process of keeping the firms activities on track.

Organizational Structure
5. In order to assist in carrying out management functions, most companies prepare
organization charts to show the interrelationships of activities and the delegation of
authority and responsibility with the company. Stockholders own the corporation but
manage the company through a board of directors. The chief executive officer
(CEO) has overall responsibility for managing the business. The chief financial
officer (CFO) is responsible for all of the accounting and finance issues the company
faces. The CFO is supported by the controller and the treasurer.

Business Ethics
5

6. All employees are expected to act ethically in their business activities and an
increasing number of organizations provide their employees with a code of business
ethics.
7. Due to many fraudulent activities in recent years, U.S. Congress passed the
Sarbanes-Oxley Act of 2002 which resulted in many implications for managers and
accountants. CEOs and CFOs must certify the fairness of financial statements, top
management must certify they maintain an adequate system of internal controls, and
other matters.
Manufacturing Costs
8. (S.O. 3) Manufacturing consists of activities and processes that convert raw
materials into finished goods.
9. Manufacturing costs are typically classified as either (a) direct materials, (b) direct
labor or (c) manufacturing overhead.
10. Direct materials are raw materials that can be physically and conveniently
associated with the finished product during the manufacturing process. Indirect
materials are materials that (a) do not physically become a part of the finished
product or (b) cannot be traced because their physical association with the finished
product is too small in terms of cost. Indirect materials are accounted for as part of
manufacturing overhead.
11. The work of factory employees that can be physically and conveniently associated
with converting raw materials into finished goods is considered direct labor. In
contrast, the wages of maintenance people, timekeepers, and supervisors are usually
identified as indirect labor because their efforts have no physical association with the
finished product, or it is impractical to trace the costs to the goods produced. Indirect
labor is classified as manufacturing overhead.
12. Manufacturing overhead consists of costs that are indirectly associated with the
manufacture of the finished product. Manufacturing overhead includes items such as
indirect materials, indirect labor, depreciation on factory buildings and machines, and
insurance, taxes, and maintenance on factory facilities.
Product Versus Period Costs
13. (S.O. 4) Product costs are costs that are a necessary and integral part of
producing the finished product. Period costs are costs that are matched with the
revenue of a specific time period rather than included as part of the cost of a salable
product. These are nonmanufacturing costs. Period costs include selling and
administrative expenses.
Manufacturing Income Statement
6

14. (S.O. 5) The income statements of a merchandising company and a manufacturing

company differ in the cost of goods sold section.
15. The cost of goods sold section of the income statement for a manufacturing
company shows:
Beginning Cost of Ending Cost of
Finished Goods + Goods Finished Goods = Goods Sold Manufactured Inventory
Determining Cost of Goods Manufactured
16. (S.O. 6) The determination of the cost of goods manufactured consists of the
following:
a. Beginning Work Total Current Total Cost of in Process + Manufacturing = Work in
Process Inventory Costs
b. Total Cost of Ending Cost of Goods Work in Work in Process = Manufactured
Process Inventory.
17. The costs assigned to the beginning work in process inventory are the
manufacturing costs incurred in the prior period.
18. Total manufacturing costs is the sum of the direct materials costs, direct labor
costs, and manufacturing overhead incurred in the current period.
19. Because a number of accounts are involved, the determination of costs of goods
manufactured is presented in a Cost of Goods Manufactured Schedule. The cost of
goods manufactured schedule shows each of the cost factors above.
The format for the schedule is:
Beginning work in process .................................................................. $XXXX
Direct materials used............................................ $XXXX
Direct labor ............................................................ XXXX
Manufacturing overhead ........................................ XXXX
Total manufacturing costs ............................................................... .... XXXX
Total cost of work in process ........................................................... ... XXXX
Less: Ending work in process........................................................... . XXXX
Cost of goods manufactured............................................................... $XXXX
Manufacturing Balance Sheet
20. (S.O. 7) The balance sheet for a manufacturing company may have three
inventory accounts:
finished goods inventory, work in process inventory, and raw materials inventory.
21. The manufacturing inventories are reported in the current asset section of the
balance sheet.
a. The inventories are generally listed in the order of their expected realization in
cash.
7

b. Thus, finished goods inventory is listed first.

22. Each step in the accounting cycle for a merchandising company is applicable to a
manufacturing company.
a. For example, prior to preparing financial statements, adjusting entries are required.
b. Adjusting entries are essentially the same as those of a merchandising company.
c. The closing entries for a manufacturing company are also similar to those of a
merchandising company.
Contemporary Developments
23. (S.O. 8) Contemporary developments in managerial accounting involve: (a) a U.S.
economy that has in general shifted toward an emphasis on providing services, rather
than goods; and (b) efforts to manage the value chain and supply chain.
24. Many companies have significantly lowered inventory levels and costs using justin-time (JIT) inventory methods. Under a just-in-time method, goods are
manufactured or purchased just in time for use. In addition, many companies have
installed total quality management (TQM) systems to reduce defects in finished
products.
25. Activity-based costing (ABC) is a popular method for allocating overhead that
obtains more accurate product costs. The theory of constraints is a specific approach
used to identify and manage constraints in order to achieve the company goals. The
balanced scorecard is a performance-measurement approach that uses both financial
and nonfinancial measures to evaluate all aspects of a companys operations in an
integrated fashion.

==========================
*Worksheet this is additional information
8

*26. (S.O. 9) When a worksheet is used in preparing financial statements, two

additional columns are needed for the cost of goods manufactured schedule.
a. The columns are labeled Cost of Goods Manufactured.
b. The columns are inserted before the income statement columns.
*27. In the cost of goods manufactured columns,
a. The beginning inventories of raw materials and work in process and all
manufacturing costs are entered as debits.
b. The ending inventories of raw materials and work in process are entered as credits.
c. The balancing amount for these columns is the cost of goods manufactured and is
entered as
a credit. The same amount is also entered in the income statement debit columns.
*28. The income statement and balance sheet columns are basically the same as for a
merchandising company.
a. Beginning finished goods inventory is entered in the income statement debit
column.
b. Ending finished goods inventory is entered in the income statement credit column
and the balance sheet debit column.
*29. In preparing closing entries, a Manufacturing Summary account is used to close
all accounts that appear in the cost of goods manufactured schedule.
a. Ending inventories of raw materials and work in process are debited and
Manufacturing Summary is credited.
b. Beginning inventories of raw materials and work in process and all manufacturing
cost accounts are credited and Manufacturing Summary is debited.
c. The balance in Manufacturing Summary is closed by debiting Income Summary
and crediting Manufacturing Summary.
*30. As in the case of a merchandise company, all accounts shown in the income
statement for a manufacturing company are closed to Income Summary.

DIFFERENCES BETWEEN FINANCIAL & MANAGERIAL ACCOUNTING

Feature

FINANCIAL
ACCOUNTING

MANAGERIAL
ACCOUNTING

Primary Users
of Reports

External users:
Stockholders, creditors,
and regulators

Internal users:
Officers and managers.

Types and
Frequency
of Reports

Financial statements.
Issued quarterly and annually

Internal reports.
Issued as frequently as needed.

Purpose of Reports

General-purpose

Special-purpose for specific

decisions.

Content of Reports

Pertains to business as a whole and

is highly aggregated (condensed).
Limited to double-entry accounting
and cost data.
Standard is generally accepted
accounting principles

Pertains to subunits of the business

and may be very detailed.
Extends beyond double-entry
accounting to any relevant data.
Standard is relevance
to decisions.

Verification Process

audited by certified public

accountants

No independent audits by certified

public accountant

MANAGEMENT FUNCTIONS
PLANNING
DIRECTING
CONTROLLING

Establishing objectives
Coordinating a companys diverse activities and human
resources to produce a smooth-running operation.
Process of keeping the firms activities on track by
determining whether planned goals are being met and what
changes are needed to get back on track.

PRODUCT VERSUS PERIOD COSTS

10

All Costs
PRODUCT COSTS
Manufacturing Costs

PERIOD COSTS
Nonmanufacturing Costs

Direct Materials

Selling Expenses

Direct Labor

Administrative Expenses

Manufacturing Overhead

COST OF GOODS SOLD SECTIONS

MERCHANDISER VS. MANUFACTURER
Merchandiser Company

Manufacturer Company

Income Statement
For the Year Ended December 31, 2012

Income Statement
For the Year Ended December 31, 2012

Cost of goods sold

Cost of goods sold

Merchandise inventory, January 1

Finished goods inventory, January 1

Cost of goods purchased

Cost of goods manufactured, see p.12

Cost of goods available for sale

Cost of goods available for sale

Less:
Merchandise inventory, December 31

Less:
Finished goods inventory, December 31

Cost of goods sold

Cost of goods sold

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COST OF GOODS MANUFACTURED SCHEDULE

MANUFACTURER COMPANY
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2012
Work in process, January 1

18400

Direct materials
Raw materials inventory, January 1

16,700

Raw materials purchases

152,500

Total raw materials available for use

169,200

Less: Raw materials inventory December 31 22,800

Direct materials used

146,400

Direct labor

175,600

Manufacturing overhead
Indirect labor

14,300

Factory repairs
Factory utilities
Factory depreciation
Factory insurance
Total Manufacturing overhead
Total Manufacturing costs
Total cost of work in process
Less: Work in Process, December 31
Cost of goods manufactured

12,600
10,100
9,440
8,360
54,800
376,800
395,200
25,200
370,000

CURRENT ASSETS SECTIONS

12

MERCHANDISER VS. MANUFACTURER

Merchandiser Company
Balance Sheet
December 31, 2012
Current Assets Section

Manufacturer Company
Balance Sheet
December 31, 2012
Current Assets Section

Cash
Accounts Receivable (net)
Merchandise Inventory

Cash
Accounts Receivable (net)
Inventory:
Finished goods
Work in Process
Raw materials
Prepaid expenses
Total current assets

Prepaid expenses
Total current assets

Merchandiser Company
Balance Sheet
December 31, 2012
Current Assets Section
Cash
Accounts Receivable (net)
Merchandise Inventory
Prepaid expenses
Total current assets

100,000
210,000
400,000
22,000
732,000
Manufacturer Company
Balance Sheet
December 31, 2012

Current Assets Section

Cash
Accounts Receivable (net)
Inventory:
Finished goods
80,000
Work in Process
25,200
Raw materials
22,800
Prepaid expenses
Total current assets

180,000
210,000
128,000

18,000
536,000

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The summary of learning (study) objectives

1. Explain the distinguishing features of managerial accounting.
The primary users of managerial accounting reports are internal users, who
are officers, department heads, managers, and supervisors in the company.
Managerial accounting issues internal reports as frequently as the need arises.
The purpose of these reports is to provide special-purpose information for a
particular user foe a specific decision. The content of managerial accounting
reports pertains to subunits of the business, may be very detailed, and may
extend beyond the double-entry accounting system. The reporting standard is
relevance to the decision being made. No independent audits are required in
managerial accounting.

Glossary
Balanced scorecard a performance- measurement approach that uses both
financial and nonfinancial measures, tied to company objectives, to evaluate a
companys operations in an integrated fashion.

Controller:

financial officer responsible for a companys accounting record,

system of internal control, and preparation of financial statements, tax returns, and
internal reports.

Direct Labor the work of factory employees that can be physically and directly
associated with converting raw materials into finished goods.

Direct materials raw materials that can be physically and directly associated with
manufacturing the finished product.
Managerial accounting a field of accounting that provides economic and financial
information for managers and other internal users.
Manufacturing overhead: Manufacturing costs that are indirectly associated with
the manufacture of the finished product.

Treasurer: financial officer responsible for custody of a companys funds and for
maintaining its cash position.

Triple bottom line the evaluation of a companys social responsibility

performance with regard to people, plant, and profit.

Quizzes
14

1. The management of an organization performs several broad functions. They

are:
a. Planning, directing, and selling.
b. Planning, directing, and controlling.
c. Planning, manufacturing, and controlling.
d. Directing, manufacturing, and controlling.
2. Indirect labor a:
a. Nonmauufacturing cost.
b. Raw material cost.
c. Product cost.
d. Period cost.

Questions
1. How do the content of reports and the verification of reports differ between
managerial and financial accounting?
2. How are manufacturing costs classified?

Brief Exercises
1. Determine whether each of the following costs should be classified as direct
materials (DM), direct labor (DL), or manufacturing overhead (MO):
a. Frames and tires used in manufacturing bicycles...
b. Wages paid to production workers
c. Insurance on factory equipment and machinery.
d. Depreciation on factory equipment..
2. FX Company has the following data: direct labor JD209,000, direct materials
used JD180,000, total manufacturing overhead JD208,000, and beginning
work in process JD25,000.
Compute
a. Total manufacturing costs
b. Total cost of work in process

15