Managerial Accounting

The process of setting goals and making plans to achieve them
Strategic plans
Sets firm’s long term directions
Short term planning more operational
Process of monitoring planning decisions and evaluate an orgs activities and employees
Provided by the control function allows managers to revise their plan.
Financial accounting – users/decision makers
Investors, creditors, other users external to organization
Financial accounting – purpose of info
Assist external users in making investment, credit and other decisions
Financial accounting – flexibility of practice
Structured and often controlled by GAAP
Financial Accounting – timeliness of info
Often available only after audit is complete
Financial accounting – time dimension
Focus on historical info with some predictions
Financial accounting – focus of info
Emphasis on whole organization
Financial accounting – nature of info
Monetary info
Managerial accounting – users/decision makers
Mgrs, employees, decision makers internal to organization
Managerial accounting – purpose of info
Assist managers in making planning and control decisions
Managerial accounting – flexibility of practice
Relatively flexible (no GAAP restraints)
Managerial accounting – timeliness of info
Available quickly without the need to wait for an audit
Managerial accounting – time dimension
Many projections and estimates; historical info also presented
Managerial accounting – focus of info
Emphasis on an orgs projects, processes and subdivisions
Managerial accounting – nature of info
Mostly monetary; but also non-monetary
2008 Report to the Nation estimates US loses an average of —–% of revenue to fraud
Fraud increases business
Beliefs that distinguish right from wrong
Institute of Management Accountants (IMA)
Professional association for management of accountants – provides a road map for resolving ethical conflicts
Classification by behavior
Fixed or variable
Fixed cost
Does not change with changes in volume
Variable cost
Changes in proportion to changes in the volume of activity
Classification by Traceability
Direct and indirect costs
Direct costs
Costs are those traceable to one single cost object
Indirect costs (overheads)
Those costs that cannot easily and cost-beneficially traced to a single cost object
Classification by controllability
Controllable or not controllable
Nonfinancial information / nonmonitary information
Customer and employee satisfaction data, % of on time deliveries and product defect rates
Purpose of managerial accounting
Assists in analysis, planning and control of costs
Subsequent events
Reporting important events that occur while the financial statements are being prepared
Classification by relevance
Sunk cost or out of pocket cost
sunk costs
costs that have already been incurred and cannot be recovered or refunded
out-of-pocket cost
a cost that involves the payment of money or other resources
Opportunity Cost
the loss of potential gain from other alternatives when one alternative is chosen.
Classification by function
Product and period costs
Product Costs
Costs that are a necessary and integral part of producing the finished product (inventory). Capitalized costs because they are expected to have a future. First assigned to inventory, if sold that year then “income statement” as COGS. If not sold then “balance sheet” as inventory.
Period costs
Refer to expenditures identified more with a time period than a finished product (selling and G&A expenses). Flow to directly to “income statement” as expenses.
Cost item by behavior – bike tires
Cost item by behavior – wages of assembly worker
Cost item by behavior – advertising
Cost item by behavior – office depreciation
Cost item by behavior – prod mgr salary
Cost item by traceability – bike tires
Cost item by traceability- wages of assembly worker
Cost item by behavior – advertising
Cost item by traceability – prod mgr salary
Cost item by traceability- office depreciation
Cost item by function – bike tires
Cost item by function – wages for assembly workers
Cost item by function – advertising
Cost item by function – prod mgr salary
Cost item by function – office depreciation
Cost Concept
Applicable to service companies, relies on estimate costs
Which type of behavior increases total costs when when volume of activity increases
Manufacturers 3 balance sheets
Raw materials, goods in process, finished goods
Raw Material Inventory
Materials that are usually purchased but have yet to enter the manufacturing process.
Direct materials
Raw materials used directly in a product Tangible components of a finished product.
Indirect Materials
Materials used to support production processes
Materiality Principle
An accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a reader of the financial statements would not be misled.
Goods in process inventory
Products in process of being manufactured but not yet complete
finished goods inventory
manufactured items that are completed and ready for sale
Merchandiser cost of goods sold
Beginning inventory + cost of purchases – ending inventory = cost of goods sold
Manufacturer Cost of goods sold
Beginning “finished goods” Inventory + cost of goods manufactured – ending “finished goods” = cost of goods sold
Merchandise Inventory
The goods a business has on hand for sale to customers.
Manufacturer inventory
Finished goods inventory – not included are raw material and goods in process
Direct material costs
Expenditures for direct materials that are separately and readily traced through manufacturing process to finished goods.
Direct labor
Efforts of employees who physically convert materials to finished product
Direct labor costs
Wages and salaries for direct labor that are separately and readily traced through manufacturing process to finished goods
indirect labor costs
Costs of other workers who assist direct labor
Indirect labor
Manufacturing workers effort not linked to a specific unit or batch of the product
Factory overhead costs
all manufacturing costs that are not direct materials or direct labor
prime costs
Direct materials + direct labor
conversion cost
direct labor + overhead
Manufacturers Materials Activity
Raw materials (beginning inv and purchased)
Manufacturing production activity
Goods in process (GIP beginning inv, raw materials used, direct labor used, factory overhead used)
Manufacturing sales activity
Finished goods (finished goods beginning, goods manufactured) goods
Manufacturing statement
1) computes direct material used.
2). Reports direct labor costs
3). Reports overhead costs
4). Computes and reports cost of goods manufactured
Trends of managerial accounting
Customer orientation, global economy, e-commerce, service economy, lean practices and value chain
Lean business model
Eliminate waste while satisfying the customer and providing a positive return to the company.
Balanced scorecard
Financial, customer, internal business processes, learning and growth
cycle time
the time needed to complete a process (process time + inspection time + move time + wait time)
Process time
Time spent on producing the product. Is the only “value added” time activity.
Non value added activities
Inspection, move and wait time
Cycle efficiency (CE)
CE = value added time (process time) ➗ cycle time (process time + inspection time + move time + wait time)
Continuous improvement
Rejects the notion of “good enough”
Total Quality Management (TQM)
Quality improvement applied to all aspects of business, seek to uncover waste
just in time manufacturing
Acquires inventory and produces only when needed after they receive an order.

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