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Chapter 1
Managerial Accounting
Concepts and Principles

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Conceptual Learning Objectives
C1: Explain the purpose and nature of
managerial accounting
C2: Describe the lean business model
C3: Describe accounting concepts useful in
classifying costs
C4: Define product and period costs and
explain how they impact financial
statements
C5: Explain how the balance sheets for
manufacturing and merchandising
companies differ
C6: Explain manufacturing activities and the
flow of manufacturing costs.

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A1: Compute cycle time and cycle
efficiency, and explain their importance
to production management
Analytical Learning Objectives

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P1: Compute cost of goods sold for a
manufacturer
P2: Prepare a manufacturing statement
and explain its purpose and links to
financial statements.
Procedural Learning Objectives

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Managerial accounting
provides financial and
non-financial information
for managers of an
organization and other
decision makers
Financial accounting
provides general
purpose financial
information to those
who are outside
the organization.
Managerial and Financial
Accounting
C 1

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Planning and Control
C 1

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Financial Accounting Managerial Accounting
1. Users and Investors, creditors and Managers, employees and
decision makers other external users other internal users
2. Purpose of Making investment, credit Planning and
information and other decisions control decisions
3. Flexibility Structured and often Relatively flexible
of practice controlled by GAAP (no GAAP)
4. Timeliness of Often available only Available quickly without
information after audit is complete need to wait for audit
5. Time dimension Historical information Many projections
with some predictions and estimates
6. Focus of Emphasis on Projects, processes and
information whole organization segments of an organization
7. Nature of Monetary Monetary and
information information nonmonetary information
Nature of Managerial
Accounting Exh.
18-2
C 1

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Lean Business Model
Customer
Orientation
Global
Economy
Lean
Business
Model
Elimination
of Waste
Satisfy the
Customer
Positive
Return
C 2

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Lean Practices
Customer
Orientation
in a Global
Economy
C 2

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New ways to
improve
operations
Continuous Improvement
C 2

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on
Quality improvement
applied to all aspects of
business activities.
Seek and uncover
waste.
Employees encouraged
to try new methods
to improve quality.
Company emphasizes
value of quality through
quality awards.
Total Quality Management
C 2

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Complete products
just in time to
ship to customers.
Complete parts
just in time for
assembly into products.
Receive materials
just in time for
production.
Schedule
production.
Receive
customer
orders.
Just-In-Time (JIT)
Manufacturing
C 2

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Just-In-Time (JIT)
Manufacturing
C 2
To accomplish just-in-time
manufacturing:
Processes must be
aligned to eliminate
delays and
inefficiencies
Companies must
establish good
relations with
suppliers

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Implications of Lean
Manufacturing
C 2
Understand
the nature and
sources of
cost
Measure
value provided
to customers
Determine
price
customers
pay

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Behavior
Traceability
Controllability
Relevance
Function
Cost Accounting Concepts
C 3

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Cost behavior means how a cost will
react to changes in the level of
business activity.
Classification by Behavior
C 3
A fixed cost does not change with
changes in the volume of activity
A variable cost changes in
proportion to changes in the volume
of activity
A mixed cost refers to a combination of
fixed and variable

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Rent
Cost
Tires
Cost Classification by Behavior
Cost behavior means
how a cost will react to
changes in the level of
business activity.
 Total fixed costs do
not change when
activity changes.
 Total variable costs
change in proportion
to activity changes.
C 3

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Direct costs
 Costs traceable to a
single cost object.
 Examples: material
and labor cost for a
product.
Indirect costs
 Costs that cannot be
traced to a single cost
object.
 Example:
maintenance
expenditures
benefiting two or more
departments.
Classification by Traceability
C 3

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The degree of control depends on the
level of management in the organization.
Very little control
Classification by Controllability
C 3

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All costs incurred in the past that cannot be avoided
or changed.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost
$15,000 two years ago. The $15,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $15,000
cost.
Classification by Relevance:
Sunk Costs
C 3

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Classification by Relevance:
Out-of-Pocket Costs
C 3
A cost that requires a future outlay of cash.
Out-of-pocket costs should be considered in
decisions.
Example: You plan on buying a new car for
$25,000 next month. The cost of the new car is
an out-of-pocket cost because you can choose
to spend the $25,000 or not in the future

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The potential benefit lost by choosing a
specific action from two or more alternatives
Example: If you were not attending
college, you could be earning $20,000 per
year. Your opportunity cost of attending
college for one year is $20,000.
Classification by Relevance:
Opportunity Costs
C 3

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The
Product
Classification by Function:
Product Costs
Direct
Labor
Direct
Material
Manufacturing
Overhead
C 4

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Period costs are expenses
not attached to the product.
Classification by Function:
Period Costs
Administrative Costs
Non-manufacturing costs
of staff support and
administrative functions –
accounting, data processing,
personnel, research
and development.
Selling Costs
Costs incurred to obtain
customer orders and to
deliver finished goods
to customers –
advertising and shipping.
C 4

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Period Costs
(Expenses)
Product Costs
(Inventory)
Inventory Not
Sold in 2008
Operating
Expenses
Cost of
Goods Sold
Raw Materials
Goods in Process
Finished Goods
Cost of
Goods Sold
2008 Costs
Incurred
2008 Income
Statement
2009 Income
Statement
2008 Balance
Sheet Inventory
Inventory
Sold in 2008
Period and Product Costs
in Financial Statements Exh.
18-8
C 4

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Cost Item Behavior Traceability Function
Materials Variable Direct Product
Assembly Wages Variable Direct Product
Advertising Fixed Indirect Period
Production Manager's Salary Fixed Indirect Product
Office Depreciation Fixed Indirect Period
Potential Multiple Cost
Classifications Exh.
18-9
C 4

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I suppose these same
cost concepts apply to
service companies.
Cost Concepts for Service
Companies
C 4

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Merchandisers . . .
 Buy finished goods.
 Sell finished goods.
SaleMart
Manufacturers . . .
 Buy raw materials.
 Produce and sell
finished goods.
Reporting Manufacturing
Activities
C 5

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Manufacturing
Inventory
Classifications
Balance Sheet of a
Manufacturer
Raw
Materials
Finished
Goods
Goods in
Process
C 5

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Completed
products
for sale.
Materials
waiting to be
processed.
Can be direct
or indirect.
Partially complete
products.
Material to which
some labor and/or
overhead have
been added.
Balance Sheet of a
Manufacturer
Raw
Materials
Finished
Goods
Goods in
Process
C 5

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MERCHANDISER
Current Assets
 Cash
 Receivables
 Merchandise
Inventory
MANUFACTURER
Current Assets
 Cash
 Receivables
 Inventories
Raw Materials
Goods in Process
Finished Goods
The only difference is inventory.
Balance Sheet of a
Manufacturer
C 5

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Beginning
Merchandise
Inventory
Beginning
Finished Goods
Inventory
Cost of Goods
Purchased
Cost of Goods
Manufactured
Ending
Merchandise
Inventory
Ending
Finished Goods
Inventory
Cost of Goods
Sold
Merchandiser Manufacturer
+
_
+
=
=
_
The major
difference
Income Statement of a
Manufacturer Exh.
18-11
P1

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Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv. 14,200
$
+ Cost of goods
manufactured 234,150
= Goods available
for sale 248,350
$
- Ending
finished goods
inventory (12,100)
= Cost of goods
sold 236,250
$
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory 14,200
$
+ Purchases 234,150
= Goods available
for sale 248,350
$
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold 236,250
$
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for
merchandisers.
Income Statement of a
Manufacturer Exh.
18-12
P1

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Direct Materials
Materials that are separately and readily
traced to a particular product.
Example:
Steel used to
manufacture
the automobile.
Income Statement of a
Manufacturer
P1

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Direct Labor
Labor costs that are separately and
readily traced to finished product.
Example:
Wages paid to an
automobile assembly
worker.
Income Statement of a
Manufacturer
P1

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Factory Overhead
All manufacturing costs except
direct material and direct labor
Factory costs that cannot be
separately or readily traced directly to
products.
Examples:
Indirect labor – maintenance
Indirect material – cleaning supplies
Factory utility costs
Supervisory costs
Income Statement of a
Manufacturer
P1

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Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
Manufacturing costs are often
combined as follows:
Income Statement of a
Manufacturer
P1

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Question
What type of account is the goods in
process account?
a. Income statement expense account.
b. Balance sheet inventory account.
c. Temporary clearing account for direct
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
C 5

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What type of account is the goods in
process account?
a. Income statement expense account.
b. Balance sheet inventory account.
c. Temporary clearing account for direct
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
Question
C 5

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Question
The primary distinction between product
and period costs is . . .
a. Product costs are expensed in the period
incurred.
b. Product costs are directly traceable to
product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
C 4

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The primary distinction between product
and period costs is . . .
a. Product costs are expensed in the period
incurred.
b. Product costs are directly traceable to
product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
Question
C 4

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Finished Goods
Beginning Inventory
Cost of Goods
Manufactured
Finished
Goods
Ending
Inventory
Raw
Materials
Beginning
Inventory
Raw
Materials
Purchases
Raw Materials
Ending Inventory
Cost
of
Goods
Sold
Goods in Process
Beginning Inventory
Direct Labor
Factory
Overhead
Raw Materials
Used
Sales activity
Production activity
Materials
activity
Flow of Manufacturing
Activities
Goods in Process
Ending Inventory
Exh.
18-15
C 6

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Summarizes the types and amounts of costs
Incurred in a company’s manufacturing process.
Direct Materials Used
+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Work in Process
– Ending Work in Process
= Cost of Goods Manufactured
Manufacturing Statement
P2

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Let’s take a look
at Rocky
Mountain Bikes’
Manufacturing
Statement.
P2
Manufacturing Statement

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ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
P2
Manufacturing Statement

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ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Computation of Cost of Direct Material Used
Beginning raw materials inventory 8,000
$
Add: Purchases of raw materials 86,500
Cost of raw materials available for use 94,500
$
Deduct: Ending raw materials inventory 9,000
Cost of direct materials used in production 85,500
$
P2

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ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Include all direct labor
costs incurred during the
current period.
P2
Manufacturing Statement

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ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Manufacturing Statement
Computation of Total Manufacturing Overhead
Indirect labor 9,000
$
Factory supervision 6,000
Factory utilities 2,600
Property taxes, factory building 1,900
Factory supplies used 600
Factory insurance expired 1,100
Depreciation, building and equipment 5,300
Other factory overhead 3,500
Total factory overhead costs 30,000
$
P2

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ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Beginning work in
process inventory is
carried over from the
prior period.
P2
Manufacturing Statement

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ROCKY MOUNTAIN BIKES
Manufacturing Statement
For Year Ended December 31, 2008
Direct materials used in production 85,500
$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500
$
Add: Beginning goods in process inventory 2,500
Total cost of goods in process 178,000
$
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured 170,500
$
Ending work in process inventory
contains the cost of unfinished goods,
and is reported in the current assets
section of the balance sheet.
P2
Manufacturing Statement

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End of Chapter 1