Managerial Accounting

1
Managerial Accounting

• Chapter 17

2
Learning Objectives

• Describe the difference between managerial
  accounting and financial accounting
• Describe identify different types of cost
  behaviour
• Prepare a manufacturing income statement

3
Differences Between Managerial and Financial
Accounting

• Financial Accounting focuses on external users
• Investors
• Creditors
• Regulators
• Tax authorities

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Differences Between Managerial And Financial
Accounting

• External users have diverse information needs
• Financial Accounting attempts to meet their needs
  by producing a general purpose financial
  statement
• The general purpose statement can be applied to a
  wide variety of circumstances
• General Purpose statement governed by GAAP

5
Differences between Managerial and Financial
Accounting

• Managerial accounting attempts to meet the needs
  of management alone
• Statement is not general purpose but specific
  purpose
• Focus on management information needs
• No specific GAAP

6
Management Accounting

• Management accountants are part of the Management
  team
• Developing plan
• Implementing plan through directing controlling
  and improving
• Provide critical information on decision making

7
Direct and Indirect Costs

• Management accounting focuses on cost objects
• Cost objects can be anything
• A product
• A division
• A Sales Territory

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Direct and Indirect Costs Contd

• Costs that can be identified directly with a cost
  object are DIRECT COSTS
• Costs that CANNOT be directly identified with a
  cost object are INDIRECT COSTS
• Depending on the cost object, a cost can be
  either direct or indirect

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Direct and Indirect Costs Contd

• Example
• If a cost object is a product
• Power to run the machine is a direct cost
• Supervisory salaries are indirect
• If a cost object is a department
• Power to run the machine is still a direct cost
• Supervisory salaries are now direct

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Direct and Indirect Contd

• In practice it can be difficult to determine what
  is a direct cost and what is indirect
• Often relies on judgment

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Manufacturing Costs

• Classified amoung three categories
• Direct Material cost of material or cost of
  converting material
• Direct Labour cost of wages for employees
  directly involved in manufacturing.
• If there is a plastics manufacturer it would be
  the wages of the machine operator

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Manufacturing Costs Contd

• Factory Overhead costs of manufacturing which
  are not direct.
• Can include heat, light for the plant
• Repair and maintenance costs for the equipment
• Property taxes, insurance, amortization for the
  plant

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Factory Overhead Contd

• Also can include small incidental costs such as
  lubricants and blades
• Also can include janitorial, supervisory and
  quality control wages

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Classification of Costs

• Prime Costs
• Direct Material
• Direct Labour
• Conversion Costs
• Direct Labour
• Factory Overhead

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Prime and Conversion Costs
Direct Material
Prime Costs
Direct Labour
Conversion Costs
Factory Overhead
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Product and Period Costs

• Product costs are cost associated with the
  product which includes direct material, direct
  labour, and factory overhead
• Period costs are costs that do not vary with
  volume of work
• Period costs usually include selling and
  administrative expenses

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Financial Statement for a Manufacturer

• Three types of inventory
• Raw Material
• Work-in-process
• Finished Goods

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Raw Material Inventory

• Consists of direct and indirect material costs.
• For a plastics manufacturer it would be raw
  plastic and dyes

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Work-in-process

• Partially completed items
• Includes direct material, direct labour and
  factory overhead
• In the case of a plastics manufacturer making
  shovels
• It might be the shovel handle and blade and dowel
  but not yet put together as a finished product

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Finished Goods

• Finished Goods Inventory consists of those items
  completed
• In the case of the shovels at a plastics
  manufacturer it would be completed shovels

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Cost Flows

• Costs flow from one type of inventory to another
• Raw material inventory is either used and becomes
  work-in-process or remains raw material inventory
• Work-in-process either remains work-in-process or
  becomes finished goods

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Cost Flows
23
Manufacturers Financial Statement

• Book uses two statements
• Cost of Goods Manufactured
• Cost of Goods Manufactured will determine the
  cost of goods manufactured
• Income Statement
• Uses the costs of goods manufactured from the
  Cost of Goods Manufactured Statement