Accounting Principles

Thirteenth Edition
Weygandt ● Kimmel ● Kieso

Chapter 19

Managerial Accounting
This slide deck contains animations. Please disable animations if they cause issues with your device.
Chapter Outline
Learning Objectives
LO 1 Identify the features of managerial accounting and
the functions of management.
LO 2 Describe the classes of manufacturing costs and the
differences between product and period costs.
LO 3 Demonstrate how to compute cost of goods
manufactured and prepare financial statements for a
manufacturer.
LO 4 Discuss trends in managerial accounting.

Copyright ©2018 John Wiley & Sons, Inc. 2

Managerial Accounting Basics
Provides economic and financial information for
managers and other internal users.
Comparing Managerial and Financial Accounting
Similarities and differences:
• Each field deals with economic events of a business
• Both require that economic events be quantified and
communicated to interested parties

Copyright ©2018 John Wiley & Sons, Inc. 3

Comparing Managerial and Financial
Feature Financial Accounting Managerial Accounting
Primary Users of Reports External users: stockholders, Internal users: officers and managers.
creditors, and regulators.
Types and Frequency of Financial statements. Internal reports.
Reports Quarterly and annually. As frequently as needed.
Purpose of Reports General-purpose. Special-purpose for specific decisions.
Content of Reports Pertains to business as a whole. Pertains to subunits of the business.
Highly aggregated (condensed). Very detailed.
Limited to double-entry Extends beyond double-entry
accounting and cost data. accounting to any relevant data.
Generally accepted accounting Evaluated based on relevance to
principles. decisions.

Verification Process Audited by CPA. No independent audits.

Copyright ©2018 John Wiley & Sons, Inc. 4

Management Functions
Planning Directing Controlling
• Maximize • Coordinate diverse • Keeping activities
short-term activities and human on track
profit and resources • Determine whether
market share goals are met
• Implement planned
• Commit to objectives • Decide what
environmental changes needed to
protection and • Provide incentives to
motivate employees get back on track
social programs
• May use an
• Add value to • Hire and train employees
informal or formal
the business system of
• Produce a smooth-
running operation evaluations

Copyright ©2018 John Wiley & Sons, Inc. 5

Organizational Structure

Organization charts show the interrelationships of activities and

the delegation of authority and responsibility within the company.
Copyright ©2018 John Wiley & Sons, Inc. 6
Managerial Cost Concepts
Managers should ask questions such as the following.
1. What costs are involved in making a product or
providing a service?
2. If we decrease production volume, will costs change?
3. What impact will automation have on total costs?
4. How can we best control costs?

Copyright ©2018 John Wiley & Sons, Inc. 7

Manufacturing Costs (1 of 5)
Activities and processes that convert raw materials into
finished goods.

Copyright ©2018 John Wiley & Sons, Inc. 8

Manufacturing Costs (2 of 5)
Direct Materials
Raw Materials
• Basic materials and parts used
in manufacturing process
• Raw materials that can be
physically and directly
associated with finished are
direct materials

Copyright ©2018 John Wiley & Sons, Inc. 9

Manufacturing Costs (3 of 5)
Indirect Materials have one of two characteristics
1. Not physically part of finished product
2. Are impractical to trace to finished product because
their association with finished product is too small in
terms of cost
Considered part of manufacturing overhead

Copyright ©2018 John Wiley & Sons, Inc. 10

Manufacturing Costs (4 of 5)
Direct Labor
Work of factory employees that can be
physically and directly associated with
converting raw materials into finished
goods.
Indirect Labor
• Work of factory employees that
has no association with finished
product or
• which is impractical to trace costs
to goods produced.

Copyright ©2018 John Wiley & Sons, Inc. 11

Manufacturing Costs (5 of 5)
Manufacturing Overhead
• Costs indirectly associated with
manufacturing the finished
product
• All manufacturing costs except
direct materials and direct labor
• Also called factory overhead
and indirect manufacturing
costs

Copyright ©2018 John Wiley & Sons, Inc. 12

Product Versus Period Costs (1 of 3)
Product Costs
• Components:
o Direct materials
o Direct labor
o Manufacturing overhead
• Costs that are an integral part of producing product
• Recorded in “inventory” account
• Not an expense (COGS) until goods are sold

Copyright ©2018 John Wiley & Sons, Inc. 13

Product Versus Period Costs (2 of 3)
Period Costs
• Charged to expense as incurred
• Non-manufacturing costs
• Includes all selling and administrative expenses

Copyright ©2018 John Wiley & Sons, Inc. 14

Product Versus Period Costs (3 of 3)

Copyright ©2018 John Wiley & Sons, Inc. 15

Illustration of Cost Concepts (1 of 3)
Illustration: Suppose you started your own snowboard factory,
Terrain Park Boards. Here are some of the costs that your
snowboard factory would incur. Assign the following costs:
Product Costs
Direct Direct Manufacturing Period
Cost Item Materials Labor Overhead Costs
1. Material cost ($30 per board) X
2. Labor costs ($40 per board) X
3. Depreciation on factory
equipment ($25,000 per year) X
4. Property taxes on factory building
($6,000 per year) X

Copyright ©2018 John Wiley & Sons, Inc. 16

Illustration of Cost Concepts (2 of 3)
Product Costs
Direct Direct Manufacturing Period
Cost Item Materials Labor Overhead Costs
5. Advertising costs ($60,000 per
year) X
6. Sales commissions ($20 per
board) X
7. Maintenance salaries (factory
facilities, $45,000 per year) X
8. Salary of plant manager ($70,000
per year) X
9. Cost of shipping boards ($8 per
board) X

Copyright ©2018 John Wiley & Sons, Inc. 17

Illustration of Cost Concepts (3 of 3)
If Terrain Park Boards produces 10,000 snowboards the first
year, what would be the total manufacturing costs?
Cost Number and Item Manufacturing Cost
1. Material cost ($30 × 10,000) $300,000
2. Labor cost ($40 × 10,000) 400,000
3. Depreciation on factory equipment 25,000
4. Property taxes on factory building 6,000
7. Maintenance salaries (factory
facilities) 45,000
8. Salary of plant manager 70,000
Total manufacturing costs $846,000

Copyright ©2018 John Wiley & Sons, Inc. 18

Do It! 2: Managerial Cost Concepts
A bicycle company has these costs: tires, salaries of employees who put
tires on the wheels, factory depreciation, advertising expenditures,
lubricants, spokes, salary of factory manager, salary of accountant,
handlebars, and salaries of factory maintenance employees. Classify each
cost as direct materials, direct labor, overhead, or a period cost.
Direct Materials Direct Labor Overhead
• Tires • Salaries of • Factory depreciation
• Spokes employees who put • Factory lubricants
tires on the wheels
• Handlebars • Factory manager salary
• Factory maintenance
Advertising expenditures and salary of employees salary
accountant are period costs.

Copyright ©2018 John Wiley & Sons, Inc. 19

Manufacturing Costs in Financial
Statements
Income Statement
Under a periodic inventory system, the income
statements of a merchandiser and a manufacturer differ
in the cost of goods sold section.

Copyright ©2018 John Wiley & Sons, Inc. 20

Income Statement (1 of 2)

Copyright ©2018 John Wiley & Sons, Inc. 21

Income Statement (2 of 2)
Cost of goods sold sections of merchandising and
manufacturing income statements

Copyright ©2018 John Wiley & Sons, Inc. 22

Cost of Goods Manufactured (1 of 2)
Total Manufacturing Costs – sum of direct material costs, direct
labor costs, and manufacturing overhead in the current year.
Total Work in Process – (1) cost of beginning work in process and
(2) total manufacturing costs for the current period.

Copyright ©2018 John Wiley & Sons, Inc. 23

Cost of Goods Manufactured (2 of 2)

Copyright ©2018 John Wiley & Sons, Inc. 24

Balance Sheet (1 of 2)

The balance sheet for a merchandising company shows

just one category of inventory.
Copyright ©2018 John Wiley & Sons, Inc. 25
Balance Sheet (2 of 2)

Copyright ©2018 John Wiley & Sons, Inc. 26

Do It! 3: Cost of Goods Manufactured (1 of 2)

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 2020.
Copyright ©2018 John Wiley & Sons, Inc. 27
Do It! 3: Cost of Goods Manufactured (2 of 2)

Copyright ©2018 John Wiley & Sons, Inc. 28

Managerial Accounting Today
Service Industries
• Much of U.S. economy has shifted toward an emphasis
on services
• Over 50% of U.S. workers are now employed by service
companies
• Most techniques learned for manufacturing firms are
applicable to service companies

Copyright ©2018 John Wiley & Sons, Inc. 29

Focus on the Value Chain (1 of 4)
Refers to all business processes associated with providing
a product or service
For a manufacturing firm these include the following:

Copyright ©2018 John Wiley & Sons, Inc. 30

Focus on the Value Chain (2 of 4)
Just-In-Time (JIT) Inventory Method
• System in which goods are manufactured or purchased
just in time for sale
Total Quality Management (TQM)
• Reduce defects in finished products, with goal of zero
defects

Copyright ©2018 John Wiley & Sons, Inc. 31

Focus on the Value Chain (3 of 4)
Theory of Constraints
• Constraints (“bottlenecks”) limit company’s potential
profitability
• A specific approach to identify and manage these
constraints in order to achieve company goals
Enterprise Resource Planning (ERP)
• Software programs designed to manage all major
business processes

Copyright ©2018 John Wiley & Sons, Inc. 32

Focus on the Value Chain (4 of 4)
Activity-Based Costing (ABC)
• Allocates overhead based on use of activities
• Results in more accurate product costing and
contribute to increased efficiency in the value chain

Copyright ©2018 John Wiley & Sons, Inc. 33

Balanced Scorecard
• Evaluates operations in an integrated fashion
• Uses both financial and non-financial measures
• Links performance to overall company objectives

Copyright ©2018 John Wiley & Sons, Inc. 34

Business Ethics (1 of 2)
• All employees are expected to act ethically
• Many organizations have codes of business ethics
Creating Proper Incentives
• Systems and controls sometimes create incentives
for managers to take unethical actions
• Controls need to be effective and realistic

Copyright ©2018 John Wiley & Sons, Inc. 35

Business Ethics (2 of 2)
Code of Ethical Standards
Sarbanes-Oxley Act (SOX)
• Clarifies management’s responsibilities
• Requires certifications by CEO and CFO
• Selection criteria for Board of Directors and Audit
Committee
• Substantially increased penalties for misconduct

Copyright ©2018 John Wiley & Sons, Inc. 36

Corporate Social Responsibility
• Considers a company’s efforts to employ sustainable
business practices
• Sometimes referred to as triple bottom line because it
evaluates a company’s performance with regard to
people, planet, and profit
• Recent reports indicate that over 50% of the 500 largest
U.S. companies provide sustainability reports

Copyright ©2018 John Wiley & Sons, Inc. 37

Copyright
Copyright © 2018 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Act without the express written permission of the
copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies
for his/her own use only and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the use of these programs or
from the use of the information contained herein.

Copyright ©2018 John Wiley & Sons, Inc. 38