Managerial Accounting:

An Introduction To Concepts, Methods,

And Uses
Chapter 1
Fundamental Concepts
Maher, Stickney and Weil
Learning Objectives

Deals with activities inside an

organization
Unregulated
May use projections about the
future
Implementing Strategies

Distinguish between managerial and

financial accounting.

Managerial accounting system should

help managers implement
organizations strategy

Understand how managers can use

accounting information to implement
strategies.

System must be adapted to

each organizations objectives,
strategy and environment

Identify the key financial players in the

organization.
Understand managerial accountants
professional environment and ethical
responsibilities.
Master the concept of cost.

Information required for decision

making, planning, and other
managerial activities often is not
provided by the financial accounting
system
Key Financial Players

P a r t ia l O r g a n iz a t io n C h a rt

Compare and contrast income

statements prepared for managerial
use and those prepared for external
reporting.
Understand the concepts useful for
managing costs.

P r e s id e n t a n d
C h i e f O p e r a t i n g O ffi c e r

In d u s tr ia l
D e p a r tm e n ts

Describe how managerial accounting

supports modern production
environments.
Understand the importance of
effective communication between
accountants and users of managerial
accounting information.
Understand the ethical standards that
comprise the Institute of Management
Accountants Code of Ethics.
Comparison of Financial
and Managerial Accounting
Financial Accounting
Deals with reporting to parties
outside the organization
Highly regulated
Primarily uses historical data
Managerial Accounting

S t a ff a n d
A d m in is tr a t iv e D e p a r t m e n t s

F in a n c e
V ic e - P r e s id e n t

T re a s u re r
C ost
A c c o u n tin g

C o n tr o lle r
F in a n c ia l
R e p o r tin g

O th e r
V ic e - P r e s id e n ts
I n c lu d in g E n g in e e r in g ,
L e g a l, E m p lo y e e R e la t io n s
In t e r n a l A u d it
Tax

Professional Environment
Institute of Management Accountants
(IMA)
Sponsors Certified Management
Accountant and Certified in
Financial Management
programs
Publishes a journal, policy
statements and research
studies on accounting issues

 Certified Public Accountant

Cost Accounting Standards Board

Fixed costs do not change in

total when the activity level
changes

Sets accounting standards for

contracts between the U.S.
government and defense
contractors

Income Statement For External

Reporting
Sales Revenue

$400,000

Ethical issues, while always

important, have taken on added
significance due to recent
accounting failures

Less Cost of Goods Sold

210,000

Gross Margin

$190,000

The IMA has developed a Code

of Conduct mandating that
management accountants have
a responsibility to maintain the
highest levels of ethical conduct

Net Income Before Taxes $110,000

Basis Cost Concepts

A cost is a sacrifice of resources
You must know the context in
which the word cost is used to
know its meaning
Opportunity cost is the foregone
income from using an asset in its best
alternative
A cost is distinguished from an
expense
An outlay of cash may lead to
another resource taking its
place
The term expense is reserved
for external reporting under
GAAP and for income tax
reporting
A cost object is any item for which the
manager wishes to measure cost
Costs directly related to the cost
object are called direct costs
Other costs are called indirect
costs
The distinction between fixed and
variable costs is important since it
affects strategic decision making
Variable costs change in total as
the activity level changes

Less Mktg. and Admin Exp.

80,000

Contribution Margin Format Income

Statement
Sales Revenue
$400,000
Less Variable Costs:
Variable Cost of Sales
Variable Mktg & Admin
168,000

$160,000
8,000

Contribution Margin
$232,000
Less Fixed Costs:
Fixed Cost of Sales $50,000
Fixed Mktg & Admin
122,000

72,000

Net Income Before Taxes

$110,000
Managing Costs
Effective cost control requires
managers to understand how
producing a product involves activities
and how those activities generate
costs
Activity-based Management studies
the need for activities and whether
they are operating efficiently
Value-Added Activities
Value-added activities increase the
products service to customers

 Managers try to eliminate nonvalue-added activities to reduce

costs without reducing the
products service potential to
customers
The value chain describes the linked
set of activities that add value to the
products or services of the
organization

Managerial Accounting in Modern

Production Environments
Key developments that reshaped
Managerial Accounting include:

understand how accountants adapt

costing systems to them.
Know how to compute end-of-period
inventory book value using equivalent
units of production.

Integrated information systems

Web hosting
Just-in-time and lean production
Total Quality Management
Theory of constraints
Benchmarking and continuous
improvement
Chapter 2
Measuring Product Costs
Learning Objectives
Understand the nature of
manufacturing costs.
Explain the need for recording costs by
department and assigning costs to
products.
Understand how the Work-in-Process
account both describes the
transformation of inputs into outputs
in a company and accounts for the
costs incurred in the process.
Compare and contrast normal costing
and actual costing.
Know various production methods and
the different accounting systems each
requires.

Manufacturing Costs
Include three major categories:
Direct materials
Easily traced to a product
Direct labor
Labor of workers who
transform materials into a
finished product
Manufacturing Overhead
All other costs of
transforming materials
into a finished product
Relation Between Departmental Costing
and Product Costing
Manufacturing costs are first assigned
to departments or responsibility
centers
A responsibility center is any
organizational unit with its own
manager
e.g., divisions, territories, plants
Aids in planning and performance
evaluation

Compare and contrast job costing and

process costing systems.
Compare and contrast product costing
in service organizations to that in
manufacturing companies.
Understand the concepts of customer
costing and profitability analysis.
Identify ethical issues in job costing.
Recognize components of just-in-time
(JIT) production methods and

Actual manufacturing costs recorded

in departments can be compared to
standard or budgeted amounts
Differences, called variances,
can be investigated further

 Actual overhead may vary for

reasons unrelated to production
activity resulting in product cost
fluctuations unrelated to
production activity

Costs are then assigned to products

Useful in managerial decision
making such as evaluating

Normal costing tends to smooth

out these fluctuations
Applying Overhead Costs
Normal costing works as follows:
1. Select a cost driver
2. Estimate overhead and the level of activity
for the accounting period
3. Compute the predetermined
manufacturing overhead rate
4. Apply overhead to production by
multiplying the predetermined overhead rate
times the actual activity

product profitability
Basis Cost Flow Equation
Beginning Balance + Transfers In= Transfers
Out + Ending Balance
Transfer In to Work-In-Process include:

Overhead Rate Computation

Predetermined manufacturing
overhead rate is calculated as follows:
Estimated Manufacturing Overhead
Normal (or Estimated) Activity Level
Predetermined Overhead

Materials

Rate

Labor

Example-Overhead
Rate Computation

Overhead
Equation is useful in determining
reasonableness of inventories
Cost Measures
Normal Costing--commonly used to
assign costs to products
Assigns actual direct materials
and direct labor plus normal
manufacturing overhead
Overhead is applied to
units produced using an
application rate
estimated before the
accounting period begins
Actual Costing--assigns actual
overhead to products

Plantimum Builders estimates that

next year variable overhead will be
$100,000 and direct labor will be
50,000 hours
The predetermined overhead
rate for next year will be:
$100,000

= $2.00 Per Direct Labor Hour

50,000 DLHs
Cost Systems
Effective cost systems must have the
following characteristics:
Decision focus

 Provide different cost

information for different
purposes
Pass the cost-benefit test

Typically used when production

involves a standardized method
of making a product that is
performed repeatedly
Products may share
common production
methods but differ in
details
Examples: Clothing,
computers, furniture
Service Organizations

Production Methods and Accounting

Systems

Flow of costs is similar to that of a

manufacturing company
Providing a service requires
labor, overhead, and sometimes
materials (called supplies)
Costs are collected by the job or
client
Provides info for cost control,
performance evaluation, and
future pricing decisions

Job Costing
Collect costs for each unit produced
Typically used by companies
producing customized products
or jobs
Examples: print shops,
customized construction
companies, defense contractors
Process Costing
Company accumulates costs in a
department or production process
Those costs are spread evenly
over units produced
Essentially, computes an
average cost per unit
Examples: manufacture of soft
drinks, paint, chemicals
Operation Costing
A hybrid of job and process costing

Ethical Issues in Job Costing

Improprieties in job costing generally
arise from:
Misstating stage of completion
Charging costs to the wrong job
May be an attempt to
avoid the appearance of
cost overruns
Misrepresenting the costs of
jobs
Causes problems when
job is billed on a costplus-fee basis
Just-In-Time (JIT) Methods
Attempt to obtain materials or provide
finished goods just in time
Reduces or eliminates
inventories and related carrying
costs

 May allow production costs to

be recorded directly to Cost of
Goods Sold (COGS)
May involve use of
Backflush Costing
Used to transfer
costs back to
inventories when
production costs
are initially
recorded as COGS

Chapter 3
Activity-Based Management
Learning Objectives
Identify strategic and operational uses
of activity-based management.
Differentiate between traditional cost
allocation methods and activity-based
costing.
Understand the concept of activitybased costing.
Identify the steps in activity-based
costing.
Identify strategic and operational uses
of activity-based management.
Differentiate between traditional cost
allocation methods and activity-based
costing.

Spoilage and
Quality of Production
Normal waste is typically included in
the cost of work performed
If waste is not normal it may
be included in an expense
account called Abnormal
Spoilage
Companies concerned about
quality production may not treat
any waste or spoilage as normal
Prevents these costs from
being buried in
production costs
Computing Costs of
Equivalent Production
Five steps required to compute costs
of products, ending inventory, and
finished goods
1. Summarize flow of physical units
2. Compute equivalent units
3. Summarize costs to be accounted for

Understand the concept of activitybased costing.

Identify the steps in activity-based
costing.
Apply activity-based management and
costing to marketing.
Use the cost hierarchy to organize cost
information for decision making.
Distinguish between resources used
and resources supplied, and measure
unused resource capacity.
Explain the difficulties of implementing
advanced cost-management systems.
Activity-based Costing and
Management (ABCM)
ABCM rests on this premise:
Products require activities
Activities consume resources
To understand a products costs, one
must:

4. Compute unit costs

Identify activities required to

make the product

5. Compute cost of goods completed and

transferred out and cost of ending inventory
of WIP

Identify resources used to

provide for those activities

 Figure the cost of those

resources
To be competitive, managers must
know both:
Activities involved in making the
goods or providing the services,
and
The cost of those activities
ABCM has 2 parts:
The costing part known as
Activity-based Costing (ABC)
The management part known as
Activity-Based management
(ABM)
ABC treats mostly indirect costs
including:
Overhead costs related to the
manufacture of a product or
providing a service
Indirect costs of marketing a
product
Indirect costs of managing a
company
Strategic Use of ABCM
Managers use activity-based
information in 2 ways:
To shift the mix of activities and
products away from less
profitable to more profitable
operations
To help them become a low-cost
producer or seller
Activity Analysis
Involves 4 steps:

activities or replace them with

more efficient activities
Cost Pools
Cost pools are groups of costs
Three major types of cost pools:
Plant (traditional)
Department (traditional)
Activity center (activity-based
costing)
Traditional Allocation Methods
Plantwide allocation
Uses the entire plant as a cost
pool
Simple organizations with only a
few departments and little
variety in activities might use
this method
Department allocation
Uses separate cost pools with
different overhead allocation
rates for each department
Activity-Based Costing
Activity-based costing (ABC)
Assigns costs first to activities
Then to products based on each
products use of activities

Activity-Based
Costing Methods
Requires the following steps:
1. Identify activities that consume resources
and assign costs to those activities

Chart activities used to

complete the product or service

2. Identify cost drivers associated with each

activity

Classify activities as valueadded or non-value-added

A cost driver is a factor that causes or

drives an activitys costs

Eliminate non-value-added
activities

3. Compute a cost rate for each cost driver

Continuously improve &

reevaluate efficiency of

4. Assign costs to products

Cost Rates per

Cost Driver Unit
Calculate predetermined cost rate for
each cost driver as follows:
Predetermined = Estimated indirect cost
cost rate

Est.volume of allocation base

Multiply predetermined cost

driver rate times volume of cost
drivers consumed
Cost Hierarchies

Resources Used Vs.

Resources Supplied
ABC estimates cost of resources used
by an activity as:
Cost driver rate X cost driver volume
Cost of Resources supplied = amount
spent on the activity
Difference between resources used
and supplied is unused capacity