Chapter (1): Introduction to Managerial Acc.

We will assume that we work in Mostafa Restaurant , which prepares hamburgers (like McDonalds).
and serves meals to two segments of customers: adults & children (happy meal).

Until now, you can prepare financial statements for the whole restaurant (all segments) according to GAAP to
help the external users in making decisions. The official financial statements which are prepared at the end of
the fiscal year about events actually happened during the ended year are mandatory and not optional. The
information in financial statements must be precise and verifiable. All of these are done by financial accounting
What about internal users (management)?
The management needs private and confidential information to enable it to carry out its functions (planning,
control, & decision making).

Suppose that the manager of Mostafa's restaurant has a special order to supply 2,000 happy meals a day to a
school, but at a special price of $38 instead of $40 per meal, and the manager needs to make a decision whether
he accepts such a special order or not?

In such a situation, the manager needs to assess the special order by comparing the expected costs & revenues.
This should be done quickly so that the information is relevant to take the right decision at the right time. Of
course, there are many situations that require working freely without being bound by any standards for
providing specific-segment information. All of these are done by managerial accounting

You should note that there are 6 differences between financial & managerial accounting as shown below:

There is a third subsystem of accounting called Cost Accounting which is responsible for measuring, analysing,
and reporting financial and nonfinancial information relating to the costs of acquiring or using resources in an
organization to the financial accountant and the managerial accountant. (You will cover this course in the future isA).

-1-
 All types of businesses, whether service, manufacturing, or merchandising, require
managerial accounting to help management in doing their activities. But its importance
is increasing in manufacturing business.

Functions in manufacturing company

Since the manufacturing function is the focus of these companies, functions can be categorized into

All activities that take place inside the factory building: All activities that take place outside the factory building:
The prime elements in manufacturing function are: The company cannot achieve its operational objective
1- Raw material without Selling & Administrative activities.
2- Production Labor (who operating machines)
The elements which convert raw material into FG are:
1- Production Labor Selling activities Administrative activities
Advertising, Marketing, Deliver Management activities
2- Machines & all other Manufacturing elements
product to customer, & customer
So, you can note that manufacturing function consist of 3 elements: service.
1- Material
= Operating activities = S&A
2- Labor
Three names of the same meaning.
3- Other Manufacturing elements (overhead).
Management activities

Planning Control Decision Making

Set objectives and plans (course of Compare actual performance with Choose the best alternative between
action) to achieve these objectives. the planned performance then competing alternatives
investigate for any deviation.
Managerial accounting role Managerial accounting role Managerial accounting role
CVP analysis (Cost-Volume-Profit) Provide feedback to alter plans. Identify alternatives and evaluate or
Budgeting (the formal expression for plans) asses them. Such as:
1- Drop or Retain segment.
2- Make or Buy component.
3- Accept or Reject special order.
4- Deal with a single constraint.
5- Sell or Process further.

-2-
 1- Introduction: already finished in the last two pages.
Before
2- Cost Concepts: will begin now and will take the next 2 lectures.
Midterm
3- Income statement formats: in lecture 4 will introduce them.
exam
4- CVP analysis: will cover it in 2 lectures (5 & 6).
After 5- Segmental Reporting: will cover it in lecture 8.
Midterm 6- Decision making: will cover it in 2 lectures (9 & 10).
exam 7- Budgeting: will cover it in 2 lectures (11 & 12).

1. Managerial accounting is primarily concerned with the organization as a whole rather than with segments of the
organization.
2. Managerial accounting places less emphasis on precision and more emphasis on timeliness and relevance than
financial accounting.
3. Managerial accounting is not governed by generally accepted accounting principles (GAAP).
4. Financial accounting and managerial accounting reports must be prepared in accordance with GAAP.
5. When carrying out planning activities, managers rely on feedback to ensure that the plan is carried out.
6. When carrying out their control activities, managers select a course of action and specify how the action will be
implemented.

1 2 3 4 5 6

1. Managerial accounting:
a. has its primary emphasis on the future.
b. is required by regulatory bodies such as the security market.
c. focuses on the organization as a whole, rather than on the organization's segments.
d. Responses a, b, and c are all correct.
2. Managerial accounting places considerable weight on:
a. generally accepted accounting principles.
b. the financial history of the entity.
c. ensuring that all transactions are properly recorded.
d. detailed segment reports about departments, products, and customers.
3. Which of the following is a characteristic of financial accounting?
a. not mandatory b. must follows GAAP
c. emphasis on relevance of data, rather than precision d. both A and C above
4. Which of the following is a characteristic of Managerial accounting?
a. not mandatory b. must follows GAAP
c. emphasis on relevance of data, rather than precision d. both A and C above
5. The plans of management are often expressed formally in:
a. financial statements. b. performance reports. c. budgets. d. ledgers.
6. The phase of accounting concerned with providing information to managers for use in planning and controlling
operations and in decision making is called:
a. planning. b. managerial accounting. c. financial accounting. d. controlling.

1 2 3 4 5 6

Cost: is an optional sacrifice with economic resources to get benefits either at present or in the future.
Expense Asset

-3-
Cost object: is anything we want to measure its cost (e.g., a chair in a furniture factory).
Notice: cost objects include anything we want to measure its cost as
products, services, customers, departments …. etc.

We can classify the cost according 6 classifications:

❶ ❷ ❸
Time of measurement Relation with cost object For reporting purpose
① Budgeted ① Direct ① Inventoriable
② Actual ② Indirect ② Period

❹ ❺ ❻
Functional classification Cost behaviour Decision Making
① Manufacturing ① Fixed ① Relevant
② Nonmanufacturing ② Variable ② Irrelevant

-4-
7. Products, services, departments, and customers may be cost objects.
8. The same cost may be direct for one cost object and indirect for another cost object.
9. Advertising is a manufacturing cost as long as it promotes specific products.
10. Direct labor is a part of both prime cost and conversion cost.
11. Conversion costs include all direct manufacturing costs.
12. Direct material cost combined with manufacturing overhead cost is known as conversion cost.
13. In a manufacturing firm, all costs are product costs.
14. A factory supervisor's salary would be classified as a direct cost of a unit of product.

7 8 9 10 11 12 13 14

7. Actual costs are:

a. the costs incurred b. budgeted costs c. estimated costs d. forecasted costs
8. Which of the following does NOT affect the direct/indirect classification of a cost?
a. the level of budgeted profit for the next year b. the materiality of the cost in question
c. available technology to gather information about the cost d. the design of the operation
9. All of the following are true EXCEPT that indirect costs:
a. may be included in prime costs b. are not easily traced to products or services
c. vary with the selection of the cost object d. may be included in manufacturing overhead
10. A manufacturing plant produces two product lines: football equipment and hockey equipment. Direct costs
for the football equipment line are the:
a. beverages provided daily in the plant break room
b. monthly lease payments for a specialized piece of equipment needed to manufacture the football helmet
c. salaries of the clerical staff that work in the company administrative offices
d. utilities paid for the manufacturing plant

-5-
11. The costs of direct materials are classified as:
Conversion cost Manufacturing cost Prime cost
a. Yes Yes Yes
b. No No No
c. Yes Yes No
d. No Yes Yes
12. Which one of the following costs should NOT be considered an indirect cost of serving a particular customer at
a Dairy Queen fast food outlet?
a. the cost of the hamburger patty in the burger they ordered.
b. the wages of the employee who takes the customer's order.
c. the cost of heating and lighting the kitchen.
d. the salary of the outlet's manager.
13. An example of a nonmanufacturing cost is:
a. fire insurance on a factory building. b. salary of a factory supervisor.
c. direct materials. d. rent on a headquarters building.
14. Prime cost consists of direct materials combined with:
a. direct labor. b. manufacturing overhead. c. indirect materials. d. COGM.
15. The three basic elements of manufacturing cost are direct materials, direct labor, and:
a. COGM. b. cost of goods sold. c. work in process. d. manufacturing overhead.
16. The following costs were incurred in August:
Direct materials $
20,000
Direct labors $
18,000
Manufacturing overhead $
21,000
Selling cost $
16,000
Administrative cost $
21,000
Prime cost during the month totalled:
a. $39,000 b. $59,000 c. $96,000 d. $38,000
17. The following costs were incurred in August:
Direct materials $
37,000
Direct labors $
14,000
Manufacturing overhead $
38,000
Selling cost $
10,000
Administrative cost $
28,000
Conversion cost during the month totalled:
a. $127,000 b. $51,000 c. $52,000 d. $75,000
18. Direct materials used in production totalled 330,000. Direct labor was 415,000 and manufacturing overhead
$ $

was $220,000. What were the total manufacturing costs incurred for the month?
a. $530,000 b. $965,000 c. $745,000 d. $635,000
19. Consider the following costs incurred in a recent period:
Direct materials $
33,000
Direct labors $
28,000
Selling cost $
16,000
Manufacturing overhead $
34,000
Administrative cost $
21,000
What was the total amount of the period costs listed above for the period?
a. $78,000 b. $71,000 c. $46,000 d. $37,000
(20-22) The following costs were incurred in August:
Direct materials $
200,000
Direct labors $
150,000
Manufacturing overhead $
250,000
20. Prime cost during the month totalled:
a. $400,000 b. $350,000 c. $600,000 d. $750,000
21. Conversion cost during the month totalled:
a. $400,000 b. $350,000 c. $600,000 d. $750,000
22. Total manufacturing cost during the month totalled:
a. $400,000 b. $350,000 c. $600,000 d. $750,000

-6-
23. During the month of August, direct labor cost totalled $10,000 and direct labor cost was 20% of prime cost. If
total manufacturing costs during August were $65,000.
manufacturing overhead cost during the month totalled:
a. $50,000 b. $15,000 c. $35,000 d. $65,000
24. In August direct labor was 60 of conversion cost. If the manufacturing overhead for the month was $54,000
%

and the direct materials cost was $34,000, the direct labor cost was:
a. $36,000 b. $22,667 c. $51,000 d. $81,000
25. Mostafa Company's direct labor cost is 25% of its conversion cost. If the manufacturing overhead for the last
period was $45,000 and the direct materials cost was $25,000, the direct labor cost was:
a. $15,000 b. $60,000 c. $33,333 d. $20,000
(26-30) Given the following cost items which pertain to a manufacturing company for the year ended
12/31/2019: (numbers are in thousands)
Direct Material used $
150
Plant equipment maintenance $
30
General administrative costs $
40
Notice: in case like this do the following:
Plant supervisory salaries $
20 1. highlight direct cost with blue line.
Direct labor cost $
80 2. Mark any other manufacturing cost with star.
Indirect material cost $
11 3. Mark the rest cost with dot.
Depreciation for plant building & equipment $
12
Depreciation for administrative building $
9
Sales commission $
15
Insurance on plant building & equipment $
3
Sales & administrative salaries $
45
26. The total of manufacturing overhead cost is:
a. $
116 b. $
85 c. $
76 d. $
121
27. The total of prime cost is:
a. $
266 b. $
226 c. $
230 d. $
271
28. The total of conversion cost is:
a. $
156 b. $
196 c. $
201 d. $
165
29. The total of inventoriable (product or manufacturing) cost is:
a. $
315 b. $
306 c. $
346 d. $
351
30. The total of period cost is:
a. $
120 b. $
109 c. $
112 d. $
129

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

16. Prime cost = DM + DL = 20,000 + 18,000 = 38,000

17. Conversion cost = DL + MOH = 14,000 + 38,000 = 52,000
18. TMC = DM + DL + MOH = 330,000 + 415,000 + 220,000 = 965,000
19. Period cost = Selling + Administrative = 16,000 + 21,000 = 37,000
20. Prime cost = DM + DL = 200,000 + 150,000 = 350,000
21. Conversion cost = DL + MOH = 150,000 + 250,000 = 400,000
22. TMC = DM + DL + MOH = 200,000 + 150,000 + 250,000 = 600,000
23.
20 100
⸪ 100
x Prime cost = 10,000 ⸫ Prime cost = 10,000 x
20
= 50,000

⸫ MOH = TMC - prime cost = 65,000 - 50,000 = 15,000

24. 25.
Conversion cost = Conversion cost =
DL + MOH DL + MOH

-7-
 60% 40% 25% 75%
? 54,000 ? 45,000
60 25
⸫ DL = 54,000 ×
40
= 81,000 ⸫ DL = 45,000 ×
75
= 15,000
26. MOH (all stars) = DM + DL = 30 + 20 + 11 + 12 + 3 = 76
27. Prime cost (all blue) = DM + DL = 150 + 80 = 230
28. conversion cost = DL + MOH = 80 + 76 = 156
29. inventoriable (product or manufacturing) cost = DM + DL + MOH = 150 + 80 + 76 = 306
30. period cost (all dots) = 40 + 9 + 15 + 45 = 109

-8-
Difference between financial & managerial accounting

-9-