2. Definition
Management accounting is the type of accounting which assist
management in planning and decision-making and thus known as
decision accounting.
Management accounting is the process of measuring, analyzing, and
reporting financial and nonfinancial information that helps managers
make decisions to fulfill the goals of an organization.
Managerial accounting provides economic and financial information
for managers and other internal users.
3. Significance
What is the total cost to make and sell each Whopper Jr. or McDonald’s
double cheeseburger?
How many burgers must be sold and at what prices to cover costs and to
provide shareholders with an acceptable return on their investment?
Given that fast-food prices are constrained by competitors’ prices, what other
cost-cutting measures might Burger King employ to return operations to
normal profit margins?
4. Uses of Cost Accounting Information
Determining Product Costs and Pricing
1. Determining the selling price of a product.
Knowing the manufacturing cost of a product aids in determining the desired selling price. It should be high enough to
cover the cost of producing the item and the marketing and administrative expenses attributable to it, as well as to provide
a satisfactory profit to the owners.
2. Meeting competition.
If a product is being undersold by a competitor, detailed information regarding unit costs can be used to determine whether
the problem can be resolved by reducing the selling price, by reducing manufacturing and selling expenses attributable to
the product, or by some combination of the above that will still result in profitable sales.
5. Uses of Cost Accounting Information
3. Bidding on contracts.
Many manufacturers must submit competitive bids in order to be awarded contracts.
Knowledge of the unit costs attributable to a particular product is of great
importance in determining the bid price.
4. Analyzing profitability.
Unit cost information enables management to determine the amount of profit that
each product earns, thereby allocating the company’s scarce resources to those that
are most profitable.
6. Planning and Control
Determining the cost of manufacturing a product or providing a service
Evaluating operating performance using cost behavior relationships
Planning for the future by preparing budgets
Evaluating manufacturing costs by comparing actual with expected results
Evaluating special decision-making situations by comparing differential revenues and
costs, and allocating product costs using activity-based costing (Chapter
Evaluating alternative proposals for long-term investments in fixed assets
8. Costs of Goods Sold & Inventory
Merchandising concerns
Manufacturing concerns
Service concerns
9. Elements of Manufacturing Costs
Manufacturing consists of activities and processes that convert raw materials into finished goods.
Manufacturing or production costs are classified into three basic elements:
(1) direct materials, (2) direct labor, and (3) factory overhead.
Direct Materials
The materials that become part of a certain manufactured product and can be readily identified
with that product are classified as direct materials. Examples include flour in the baking of bread,
syrup in the bottling of soft drinks, and steel in the making of automobiles.
10. Indirect Material
Some raw materials cannot be easily associated with the finished product. These are
called indirect materials.
Indirect materials have one of two characteristics:
(1) They do not physically become part of the finished product (such as lubricants used
by Current Designs in its equipment and polishing compounds used for the finishing
touches on kayaks).
(2) they are impractical to trace to the finished product because their physical
association with the finished product is too small in terms of cost (such as cotter pins
and lock washers). Companies account for indirect materials as part of
manufacturing overhead.
11. Elements of Manufacturing Costs
Direct Labor
The labor of employees who work directly on the product manufactured, such as
machine operators or assembly-line workers, is classified as direct labor. The
employees who are required for the manufacturing process but who do not work
directly on the units being manufactured are considered indirect labor.
12. Indirect labor
It refers to the work of employees that has no physical association with the finished
product, or for which it is impractical to trace costs to the goods produced.
Examples include wages of factory maintenance people, factory time-keepers,
and factory supervisors. Like indirect materials, companies classify indirect labor
as manufacturing overhead.
13. Elements of Manufacturing Costs
Factory Overhead
Factory overhead, also known as manufacturing overhead and factory burden, includes
all costs related to the manufacture of a product except direct materials and direct labor.
Thus, factory overhead includes the previously mentioned indirect materials and indirect
labor, plus other manufacturing expenses, such as depreciation on the factory building
and the machinery and equipment, heat, light, power, maintenance, insurance, and taxes.
16. One study of manufactured goods found the following magnitudes of the three different
product costs as a percentage of the total product cost: direct materials 54%, direct labor 13%,
and manufacturing overhead 33%. Note that the direct labor component is the smallest.
Allocating direct materials and direct labor costs to specific products is fairly straightforward.
But allocating overhead costs to specific products presents problems.
How much of the purchasing agent’s salary is attributable to the hundreds of different products
made in the same plant? What about the grease that keeps the machines humming, or the
computers that make sure paychecks come out on time? Boiled down to its simplest form, the
question becomes: Which products cause the incurrence of which costs?
17. Product Versus Period Costs
Each of the manufacturing cost components—direct materials, direct labor, and manufacturing
overhead—are product costs. As the term suggests, product costs are costs that are a necessary
and integral part of producing the finished product.
Companies record product costs, when incurred, as inventory. These costs do not become
expenses until the company sells the finished goods inventory. At that point, the company records
the expense as cost of goods sold.
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. In order to determine net income, companies deduct
these costs from revenues in the period in which they are incurred.
18.
19. Samson Manufacturing had finished goods inventory of $45,000 on March 1, March
cost of goods manufactured of $228,000, and March 31 finished goods of $53,000.
Compute the cost of goods sold for the month of March.
Electricity used in heating a factory._______________
Automobile expense for customer service representatives.______________
Wages of a bricklayer employed by a home builder.___________________
Car batteries used by an automobile manufacturer.____________________
Supplies used to clean the factory floor.________________
20. Classify each cost as direct materials, direct labor, or overhead
A bicycle company has these costs:
tires salaries of employees who put tires on
the wheels
factory building depreciation handlebars
lubricants salary of factory manager
salaries of factory maintenance
employees
24. Practice question
The following information is available for Keystone Company.
March 1 March 31
Raw materials inventory $12,000 $10,000
Work in process inventory 2,500 4,000
Materials purchased in March $ 90,000
Direct labor in March 75,000
Manufacturing overhead in March 220,000
Prepare the cost of goods manufactured schedule for the month of March.
