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Introduction
tostyle

Managerial
Accounting

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After studying this chapter, you
should be able to:
1. Describe managerial
accounting and the role of
managerial accounting in a
2. business.
Describe and illustrate the
following costs: direct and
indirect, direct materials,
direct labor, factory overhead,
and product and period costs.

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After studying this chapter, you
should be able to:
3. Describe and illustrate the
statement of cost of goods
manufactured, income
statement, and balance sheet
a manufacturing
4. for
Describe
the uses of business.
managerial accounting
information.
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Objective
1
Objective 1

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Describe managerial
accounting and the role
of managerial
accounting in a
business.
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Financial
information
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
Managerial
accounting
information
operations.
is provided to meet the specific needs
of a companys management, such as
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historical data and subjective
estimates about future decisions.

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Financial AccountingManagerial
Accounting
Users of Accounting Information

Management
Shareholders
Creditors
Government Agencies
General Public
Management
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Financial
and Managerial

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Planning
Planning is used by management
to develop the organizations
objectives (goals) and to translate
these objectives into courses of
action.
Strategic planning is developing
long-range courses of action to
achieve goals. Long-range courses
of action, called strategies, can
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often involve periods ranging from
five to ten years.

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Directing

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Directing is the process by which

managers, given their assigned
level of responsibilities, run day-today
operations.
Controlling
Controlling, sometimes called
management by exception,
consists of monitoring the operating
results of implemented plans and
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comparing the actual results with the
expected results.

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Feedback

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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.

Improving
Continuous process improvement is
the philosophy of continually improving
employees, business processes, and
products.

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Objective 22
Describe and illustrate
the following costs:
direct and indirect,
direct materials, direct
labor, factory overhead,
and product and period
costs.

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Direct
and to
Indirect

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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
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7-2

The cost of any material that is an

integral part of the final product is
classified as a direct materials
cost.
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

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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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Examples of Factory Overhead Cost

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Heating and lighting the factory

Repairing and maintaining factory
equipment
Property taxes
Insurance
Depreciation of factory plant and
equipment
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Prime
Costs
Conversion
Prim
e
Costs

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Direct
Direct
Materials
Materials
Direct
Direct
Labor
Labor

Factory
Factory
Overhead
Overhead

Conversio
n Costs
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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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Direct
Direct
Materials
Materials
Product
Product
Costs
Costs

Direct
Direct
Labor
Labor

Factory
Factory
Overhead
Overhead

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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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7-2

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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(Continued)

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Objective
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Objective

7-3

Describe and illustrate the

statement of cost of goods
manufactured, income
statement, and balance sheet
for a manufacturing business.
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A Manufacturing Firms Inventories

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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,

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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.
Finished goods
inventory:
Consists of completed (or
finished) products that have not
been sold.

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Balance
in

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Manufacturing and Merchandising Companies

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Determining the Cost of Goods Manufactured

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STEP 1:

Materials inventory, January 1, 2008$

65,000
Add: Materials purchased during December
100,000
Cost of materials available for use $165,000
Less: Materials inventory, Dec. 31, 2008
to total
35,000
manufacturing
cost
Cost of materials
placed in
production
$130,000

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STEP 2:

Cost of materials placed in production

$130,000
from
Step 1

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Determining the Cost of Goods Manufactured

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STEP 2:

Cost of materials used during the year

$130,000
Factorylabor
overhead
44,000
Direct
110,000
Total manufacturing costs added
$284,000
to cost of
goods
manufactured
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Determining the Cost of Goods Manufactured

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STEP 3:

Work in process inventory, Jan. 1, 2008$

30,000
Add: total manufacturing costs added
284,000
from
Step 2

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7-3

Determining the Cost of Goods Manufactured

STEP 3:

Work in process inventory, Jan. 1, 2008$

30,000
Add: total manufacturing costs added
Less:
work in process inven., Dec. 31, 2008
284,000
24,000
Total
manufacturing costs
$314,000
Cost of goods manufactured
$290,000

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Manufacturing Company
Income Statement with
Statement of Cost of Goods Manufactured
(contd)

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to
income
stateme
nt
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Manufacturing Company
Income Statement with
Statement of Cost of Goods Manufactured

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from
statement
of cost of
goods
manufactur
ed
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Objective
Objective 44

7-4

Describe the uses of

managerial
accounting
information.
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7-4

Managerial accounting provides

information and reports that help
managers run the day-to-day
operations of their business.
Managerial reports provide data that
help managers evaluate the
performance of a companys
operations.
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7-4

Companies use managerial

accounting information to support
long-term planning decisions, such as
investment decisions.
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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