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Describe managerial accounting and the role of managerial accounting in a business.
After studying this chapter, you should be able to:
Describe and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.
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Describe and illustrate the statement of cost of goods manufactured, income statement, and balance sheet for a manufacturing business.
After studying this chapter, you should be able to:
Describe the uses of managerial accounting information.
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Describe managerial accounting and the role of managerial accounting in a business.
Objective 1
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Financial accounting information is reported in statements that are useful for persons or institutions who are “outside” or external to the organization. Management also uses these financial statements in directing current operations and planning future operations.
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Managerial accounting information is provided to meet the specific needs of a company’s management, such as historical data and subjective estimates about future decisions.
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Planning
Planning is used by management to develop the organization’s objectives (goals) and to translate these objectives into courses of action.
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Strategic planning is developing long-range courses of action to achieve goals. Long-range courses of action, called strategies, can often involve periods ranging from five to ten years.
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Directing is the process by which managers, given their assigned level of responsibilities, run day-to-day operations.
Directing
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Controlling, sometimes called management by exception, consists of monitoring the operating results of implemented plans and comparing the actual results with the expected results.
Controlling
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Comparing actual results with expected results (feedback) allows management to isolate significant departures from plans for further investigation and possible remedial action.
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Feedback
Improving
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Describe and illustrate the following costs: direct and indirect, direct materials, direct labor, factory overhead, and product and period costs.
Objective 2
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Direct and Indirect Costs
Costs are often classified in terms of how they relate to an object or segment of operations, called a cost object. It may be a product, a sales territory, a department, or some activity. Costs are identified with cost objects as either direct costs or indirect costs.
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Direct Materials Cost
The cost of any material that is an integral part of the final product is classified as a direct materials cost.
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Direct Labor Cost
The wages of each employee who is directly involved in converting materials into the final product are classified as direct labor cost.
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Factory Overhead Cost
Costs, other than direct materials cost and direct labor cost, that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes also called manufacturing overhead or factory burden).
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Property taxes
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Factory
Overhead
Direct
Materials
Direct
Labor
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Product costs consist of the three elements of manufacturing cost: direct materials, direct labor, and factory overhead.
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Factory
Overhead
Direct
Materials
Direct
Labor
Product
Costs
The cost of materials that are an integral part of the product.
The cost of labor directly involved in converting material into the product.
Manufacturing costs other than direct materials and direct labor.
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Period costs are generally classified into two categories:
Selling expenses are incurred in marketing the product and delivering the sold product to the customer.
Administrative expenses are incurred in the administration of the business.
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Describe and illustrate the statement of cost of goods manufactured, income statement, and balance sheet for a manufacturing business.
Objective 3
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Materials inventory:
Sometimes called raw materials inventory
Consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process
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Work in process inventory:
Consists of the direct materials costs, the direct labor costs, and the factory overhead costs that have entered the manufacturing process but are associated with products that have not been completed.
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Finished goods inventory:
Consists of completed (or finished) products that have not been sold.
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Manufacturing and Merchandising Companies
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Cost of materials available for use $165,000
Less: Materials inventory, Dec. 31, 2008 35,000
Cost of materials placed in production $130,000
STEP 1:
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from Step 1
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Cost of materials used during the year $130,000
Direct labor 110,000
Factory overhead 44,000
STEP 2:
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Work in process inventory, Jan. 1, 2008 $ 30,000
Add: total manufacturing costs added 284,000
STEP 3:
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Work in process inventory, Jan. 1, 2008 $ 30,000
Add: total manufacturing costs added 284,000
Total manufacturing costs $314,000
Cost of goods manufactured $290,000
STEP 3:
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Manufacturing Company— Income Statement with Statement of Cost of Goods Manufactured (cont’d)
to income statement
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Manufacturing Company— Income Statement with Statement of Cost of Goods Manufactured
from statement of cost of goods manufactured
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Objective 4
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Managerial accounting provides information and reports that help managers run the day-to-day operations of their business.
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Managerial reports provide data that help managers evaluate the performance of a company’s operations.
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Managerial accounting data can be used to help managers understand how many units need to be sold in a month to cover recurring monthly costs.
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