Chapter 1

Introduction to
Managerial
Accounting

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Managerial Accounting Basics

Managerial accounting, a field of accounting that provides

economic and financial information for managers and other
internal users. Activities include:

1. Explaining manufacturing and nonmanufacturing costs

2. Computing cost of providing a service or manufacturing a

product

3. Determining the behavior of costs and expenses as activity

levels change and analyzing cost–volume–profit relationships
within a company
Define Managerial Accounting

Managerial accounting is the process of

✓ Identifying
✓ Measuring
✓ Analyzing
✓ Interpreting
✓ Communicating information

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Managerial Accounting Basics

Management Functions
Three broad functions:

1. Planning. Requires managers to look ahead and to

establish objectives.
2. Directing. ◆ maximizing short-term profits and
market share,
3. Controlling.
◆ maintaining a commitment to
environmental protection, and
◆ contributing to social programs.

SO 2 Identify the three broad functions of management.

Managerial Accounting Basics

Management Functions
Three broad functions: Involves coordinating diverse activities and
human resources to produce a smooth-
1. Planning. running operation. This function relates to

2. Directing. ◆ implementing planned objectives,

◆ providing necessary incentives to

3. Controlling. motivate employees,

◆ selecting executives,

◆ appointing managers and

supervisors, and

◆ hiring and training employees.

SO 2 Identify the three broad functions of management.

Managerial Accounting Basics

Management Functions
Three broad functions:

1. Planning.
Process of keeping the company’s
2. Directing. activities on track.

◆ Managers determine whether

3. Controlling.
planned goals are being met.

◆ When there are deviations from

targeted objectives, managers must
decide what changes are needed to
get back on track.

SO 2 Identify the three broad functions of management.

 Managing Resources, Activities,
and People
An organization . . .
Directing

Acquires Resources Decision

Organized set Making
of activities

Controlling Planning
Hires People

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How Managerial Accounting Adds
Value to the Organization
• Providing information for decision making and
planning.
• Assisting managers in directing and controlling
activities.
• Motivating managers and other employees
towards organization’s goals.
• Measuring performance of subunits, activities,
managers, and other employees.
• Assessing the organization’s competitive position.

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 Managerial versus Financial
Accounting
Accounting System
(accumulates financial and
managerial accounting data in the
cost accounting system)

Managerial Accounting Financial Accounting

Information for decision Published financial
making, planning, and statements and other
controlling an financial reports.
organization’s
operations.
Internal External
Users Users
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 Managerial versus Financial
Accounting
Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended Required and must conform to generally accepted
only for management. accounting principles. Regulated by the Financial
Accounting Standards Board, and, to a lesser
degree, the Securities and Exchange
Commission.
Source of Data The organization's basic accounting system, plus Almost exclusively drawn from the organization's
various other sources, such as rates of effective basic accounting system, which accumulates
products manufactured, physical quantities of financial information.
material and labor used in production, occupancy
rates in hotels and hospitals, and average take-off
delays in airlines.
Nature of Reports and Reports often focus on subunits within the Reports focus on the enterprise in its entirety.
Procedures organization, such as departments, divisions, Based almost exclusively on historical transaction
geographical regions, or product lines. Based on a data.
combination of historical data, estimates, and
projections of future events.
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 Line and Staff Positions
• A line position is directly • A staff position supports
involved in achieving the and assists line positions.
basic objectives of an – Example: A cost
organization. accountant in the
manufacturing plant.
– Example: A production
supervisor in a
manufacturing plant.

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 Cost Management Systems
Objectives
Measure the cost of
resources consumed.
Identify and eliminate
non-value-added Cost
costs. Management
System

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 Cost Management Systems
Objectives
Determine efficiency
and effectiveness of
major activities.
Identify and evaluate
new activities that Cost
Management
can improve System
performance.

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What skills do managers need to
succeed?
• Strategic management Skills
• Enterprise Risk Management Skills
• Process Management Skills
• Measurement Skills
• Leadership Skills

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1-15

Work of Management

Planning
Directing and
Motivating

Controlling
1-16

Planning

Identify
alternatives.

Select alternative that does

the best job of furthering
organization’s objectives.

Develop budgets to guide

progress toward the
selected alternative.
1-17

Directing and Motivating

Directing and motivating involves managing
day-to-day activities to keep the
organization running smoothly.
– Employee work assignments.
– Routine problem solving.
– Conflict resolution.
– Effective communications.
1-18

Controlling
The control function ensures
that plans are being followed.

Feedback in the form of performance reports

that compare actual results with the budget
are an essential part of the control function.
1-19

Planning and Control Cycle

Formulating long-
Begin
and short-term plans
(Planning)

Comparing actual
Implementing
to planned Decision plans (Directing
performance Making and Motivating)
(Controlling)

Measuring
performance
(Controlling)
1-20

Learning Objective 1

Identify the major differences

and similarities between
financial and managerial
accounting.
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Comparison of Financial and Managerial

Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
1-22

Learning Objective 2

Identify and give examples of

each of the three basic
manufacturing cost
categories.
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Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead

The Product
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Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.

Example: A radio installed in an automobile

1-25

Direct Labor

Those labor costs that can be easily

traced to individual units of product.

Example: Wages paid to automobile assembly workers

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Manufacturing Overhead
Manufacturing costs cannot be traced
directly to specific units produced.
Examples: Indirect materials and indirect labor

Materials used to support Wages paid to employees

the production process. who are not directly
involved in production
Examples: Lubricants and work.
cleaning supplies used in the Examples: Maintenance
automobile assembly plant. workers, janitors and
security guards.
1-27

Classifications of
Nonmanufacturing Costs
Administrative
Selling Costs
Costs

Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.