Managerial Accounting ACCT310-1302B-06
Managerial Accounting specifically addresses the elements of accounting that are useful for
running a business, which means it’s vital for students pursuing Business degrees, employees
looking to increase their skill set and business owners looking to increase profits. Accounting I
and II are recommended, though not required.
Roll up your sleeves, because in Managerial Accounting you’ll get into the nuts and bolts of
running a business. You will focus on the identification, gathering, and interpretation of
information for planning, controlling, and evaluating the performance of a business. You’ll learn
how to measure the costs of producing goods or services and how to analyze and control these
costs, how to budget and make the key decisions that affect a company’s bottom line.
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• Used for planning purposes
• Prepared at the beginning ofthe period
• Based on one projected level ofactivity
• Used for control purposes
• Prepared at the end of the period
• "Flexed" to accommodate actuallevel of production
PROLOGUE Managerial Accounting and the Business Environment 1
Managerial accounting is concerned with providing information to managers— that is,
people insidean organization who direct and control its operations. In contrast, financial
accounting is concerned with providing information to stockholders, creditors, and others who
are outside an organization. Managerial accounting provides the essential data that are needed to
run organizations. Financial accounting provides the essential data that are used by outsiders to
judge a company's past financial performance.
Managerial accountants prepare reports on how well managers or business units have
performed and comparing actual results to plans and to standards. Some reports provide timely,
frequent updates on key indicators such as orders received, order backlog, capacity utilization,
and sales. Other analytical reports are prepared as needed to investigate specific problems such
as a decline in the profitability of a product line. And yet other reports analyze a developing
business situation or opportunity. In contrast, financial accounting is oriented toward producing a
limited set of specific prescribed annual and quarterly financial statements in accordance with
generally accepted accounting principles (GAAP).
After studying Chapter 1, you should be able to:
LO1 Identify and give examples of each of the three basic manufacturing cost categories.
Direct Labor Costs, paying wages to employees, to constantly monitor this cost to make sure
you are getting enough production for the money you are putting into labor.
Materials Costs, the cost of raw material used in the manufacturing process.
Indirect Overhead, The costs you pay for utilities, rent or mortgage payments and depreciation
on equipment and security.
L02 Distinguish between product costs and period costs and give examples of each.
3. Period vs. product costs. Costs can also be classified as period or product costs.
a. Period Costs. Period costs are expensed in the time period in which they are incurred. All
selling and administrative costs are typically considered to be period costs. You should be
careful to point out that the usual rules of accrual accounting apply. For example, administrative
salary costs are “incurred” when they are earned and not necessarily when they are paid to
b. Product Costs. Product costs are added to units of product (i.e., “inventoried”) as they are
incurred and are not treated as expenses until the units are sold. This can result in a delay of one
or more periods between the time in which the cost is incurred and when it appears as an expense
on the income statement. Product costs are also known as inventoriable costs. The discussion in
the chapter follows the usual interpretation of GAAP in which all manufacturing costs are treated
as product costs.
L03 Prepare an income statement including calculation of the cost of goods sold.
L04 Prepare a schedule of cost of goods manufactured.
L05- Define and give examples of variable costs and fixed costs.
Variable costs are those costs that vary depending on a company’s production volumes and rise
as production increases and fall as production decreases.
Fixed costs are rents, advertising insurance and office supplies.
L06- Define and give examples of direct and indirect costs.
Direct costs are costs that can be easily traced to a particular object (also called a cost object),
such as a product, the raw materials used to manufacture a product, or the labor associated with
the work to produce the product. If your company produces a widget and a production manager
is hired to oversee production of that widget, then the production manager's salary is a direct
cost. If you own a carpet cleaning business, which is a service organization, and you hire
workers just to clean carpets, their wages are direct costs
Indirect costs are those which affect the entire company, not just one product. They are costs like
advertising, depreciation, general supplies for your firm, accounting services, etc. They are
services, and costs, for your entire firm, not just one product. Indirect costs are usually called
overhead. Overhead is the ongoing cost of operating a business that can't be associated with just
one product or service.
Indirect costs can be fixed or variable costs. Often, they are fixed costs with an example being
the rent you pay on your building. Sometimes, they are variable. An example would be your
electricity or water bill which can change monthly
L07 Define and give examples of cost classifications used in making decisions: differential costs,
opportunity costs, and sunk costs.
CHAPTER ONE an Introduction to Managerial Accounting and Cost Concepts 26
CHAPTER TWO Systems Design: Job-Order Costing 72
CHAPTER THREE Systems Design: Activity-Based Costing 118
CHAPTER FOUR Systems Design: Process Costing 160
CHAPTER FIVE Cost Behavior: Analysis and Use 186
CHAPTER SIX Cost-Volume-Profit t Relationships 238
CHAPTER SEVEN Profit t Planning 284
CHAPTER EIGHT Standard Costs 334
CHAPTER NINE Flexible Budgets and Overhead Analysis 376
CHAPTER TEN Decentralization 418
CHAPTER ELEVEN Relevant Costs for Decision Making 450
CHAPTER TWELVE Capital Budgeting Decisions 494
CHAPTER THIRTEEN “How Well Am I Doing?” Statement of Cash Flows 536
CHAPTER FOURTEEN “How Well Am I Doing?” Financial Statement Analysis 580
Explain the purpose and nature of,and the role of ethics in, managerialaccounting. (p. 4)
C2 Describe accounting concepts usefulin classifying costs. (p. 8)
C3 Define product and period costs andexplain how they impact financialstatements. (p. 10)
C4 Explain how balance sheets andincome statements for manufacturingand merchandising
companiesdiffer. (p. 12)
C5 Explain manufacturing activities and theflow of manufacturing costs. (p. 16)
C6 Describe trends in managerialaccounting. (p. 19)
A1 Compute cycle time and cycleefficiency, and explain their importanceto production
management (p. 21)
P1 Compute cost of goods sold for amanufacturer. (p. 13)
P2 Prepare a manufacturing statementand explain its purpose and links toLP1
Cost Purpose of Managerial Accounting
The purpose of both managerial accounting and financial accounting is providing useful
informationto decision makers. They do this by collecting, managing, and reporting information
in demand by their users. Both areas of accounting also share the common practice of reporting
monetary information, although managerial accounting includes the reporting of nonmonetary
information. They even report some of the same information. For instance, a company’s financial
statements contain information useful for both its managers (insiders) and other persons
interested in the company (outsiders).
The remainder of this book looks carefully at managerial accounting information, how to gather
it, and how managers use it. We consider the concepts and procedures used to determine the
costs of products and services as well as topics such as budgeting, break-even analysis, product
costing, profit planning, and cost analysis. Information about the costs of products and services is
important for many decisions that managers make. These decisions include predicting the future
costs of a product or service. Predicted costs are used in product pricing, profitability analysis,
and in deciding whether to make or buy a product or component. More generally, much of
managerial accounting involves gathering information about costs for planning and Planning is
the process of setting goals and making plans to achieve them. Companies formulate long-term
strategic plans that usually span a 5- to 10-year horizon and then refine them with medium-term
and short-term plans. Strategic plans usually set a firm’s long-term direction by developing a
road map based on opportunities such as new products, new markets, and capital investments. A
strategic plan’s goals and objectives are broadly defined given its long-term. orientation.
Medium- and short-term plans are more operational in nature. They translate the strategic plan
into actions. These plans are more concrete and consist of better defined objectives and goals. A
short-term plan often covers a one-year period that, when translated in monetary terms, is known
as a budget.
Control is the process of monitoring planning decisions and evaluating an organization’s
activities and employees. It includes the measurement and evaluation of actions, processes, and
outcomes. Feedback provided by the control function allows managers to revise their plans.
Measurement of actions and processes also allows managers to take corrective actions to avoid
undesirable outcomes. For example, managers periodically compare actual results with planned
results. Exhibit 1.1 portrays the important management functions of planning and control.
Prime costs =Direct materials + Direct labor.
Conversion costs =Direct labor + Factoryoverhead