Managerial Accounting

Module 1: Nature of Managerial Accounting

Module Learning Outcomes

The nature of managerial accounting

1.1: Define managerial accounting

1.2: Assign costs to common cost categories
1.3: Describe the flow of manufacturing costs
Nature of Managerial Accounting
Learning Outcomes: Nature of Managerial
Accounting

1.1: Define Managerial Accounting

1.1.1: Define managerial accounting
1.1.2: Identify business trends that affect managerial accounting
1.1.3: Compare and contrast managerial and financial
accounting
Define Managerial Accounting

Managerial Accounting:

Managerial accounting provides

the timely and relevant
information needed for effective
decision making.
 Identify Business Trends That Affect
Managerial Accounting

Managerial accounting
● Influenced by managerial
philosophies and trends

Managerial accountants
● Responsible for staying current
with industry best practices
● Must stay flexible and
responsive, and even innovative
Compare and Contrast Managerial and Financial
Accounting
Financial Accounting Managerial Accounting
Users External–usually shareholders, financial Internal–usually managers
analysts, and creditors

Purpose Investment, extending credit, tax Plan, direct, and control operations
reporting

Rules Must comply with generally accepted No rules other than best practices
accounting principles (GAAP)

Perspective Uses historical (or past) data May use estimates of the future for
budgeting and decision making

Time Period Quarterly or annual Daily or weekly

Scope Presents summary data, costs, More detailed data are presented about
Classifying Costs
 Learning Outcomes: Assign Costs to
Common Cost Categories

1.2: Assign Costs to Common Cost Categories

1.2.1: Differentiate between period and product costs
1.2.2: Differentiate between direct and indirect costs
1.2.3: Differentiate between prime and conversion costs
1.2.4: Differentiate between fixed and variable costs
Differentiate Between Period and Product
Costs

The difference between period

costs and product costs is:

● Product costs are the

costs incurred making a
product.
● Period costs are the costs
of sales and administration
incurred within a defined
 Differentiate Between Direct and Indirect Costs

Direct costs are

expenditures in a factory
that can be specifically
traced to a manufactured
item and that becomes part
of its overall cost.
• Direct materials
• Direct labor

Direct costs do not include

manufacturing overhead.
 Differentiate Between Direct and Indirect
Costs
Indirect costs include
manufacturing overhead,
which includes ANY expense
in a factory that is not
specifically traced to
products that customers
purchase.
• Utilities
• Insurance
• Property taxes
• Depreciation
• Maintenance
• Supervisor salaries
Differentiate Between Prime and
Conversion Costs
The difference between
Prime costs and Conversion
costs is:

● Prime costs include

direct materials and
direct labor.

● Conversion costs
include direct labor and
manufacturing overhead.
 Differentiate Between Fixed and Variable Costs

A Variable Cost is a cost

that stays the same per unit
but changes in total
depending on activity.
Examples are:

• Hourly worker costs

• Sales commissions
• Production supplies
 Differentiate Between Fixed and Variable
Costs
A Fixed Cost is a cost that
does not change regardless
of units produced or sold.
Examples are:

• Electricity
• Insurance
• Depreciation
• Salaries
• Rent
 Differentiate Between Fixed and Variable
Costs
Fixed Costs are considered
within a relevant range. The
costs remain the same
regardless of the number of
units sold until capacity has
been reached, at which time
the company cannot
produce or sell any more
without spending money for
expansion.
Manufacturing Costs

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead

The Product
Manufacturing
Manufacturing Costs
Costs are
are usually
usually grouped
grouped into
into three
three
main
main groups
groups
Direct Materials
Raw materials that become an integral part of the product and
that can be conveniently traced directly to it.

Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Direct Labor
Those labor costs that can be easily traced to individual units
of product.

Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Manufacturing Overhead
Manufacturing costs that cannot be traced directly to specific
units produced.

Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials

Wages paid to employees Materials used to support

who are not directly the production process.
involved in production
work. Examples: lubricants and
Examples: maintenance cleaning supplies used in the
workers and security guards. automobile assembly plant.
Classifications of Costs

Manufacturing costs are often

classified as follows:

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Material
Material Labor
Labor Overhead
Overhead

Prime Conversion
Cost Cost
Non-manufacturing Costs (Period Costs)

Marketing or Administrative
Selling Cost Cost

Costs necessary to get

All executive,
the order and deliver
organizational costs.
the product.
Product Costs Versus Period Costs
Product costs include Period costs include
direct materials, all marketing or
direct labor, and selling costs and
manufacturing
overhead.
administrative
costs.
Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
Quick Check 
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Quick Check 
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Comparing Merchandising and
Manufacturing Activities
Merchandisers . . . Manufacturers . . .
• Buy finished goods. • Buy raw materials.
• Sell finished goods. • Produce and sell
finished goods.

MegaLoMart
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
 Cash
 Cash
 Receivables
 Prepaid Expenses  Receivables
 Merchandise Inventory  Prepaid Expenses
 Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
 Cash
 Cash
 Receivables
 Prepaid Expenses  Receivables
Materials waiting to
 Merchandise Inventory  Prepaid Expenses
be processed.
 Inventories
Raw Materials
Partially complete
Work in Process
products – some
Finished Goods
material, labor, or
overhead has been
added. Completed products
awaiting sale.
The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for
merchandisers.
Merchandising Company Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $ 248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $ 236,250
Inventory Flows
Beginning
Beginning Additions
Additions Available
Available
balance
balance + $$$
$$$
= $$$$$
$$$$$
$$
$$

Available
Available _ Withdrawals
Withdrawals
Ending
Ending
$$$$$
$$$$$ $$$
$$$
= balance
balance
$$
$$
Quick Check 
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the
end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
Quick Check 
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the
end of the month?
A. $1,000.
B. $ 800. $1,000 + $100 = $1,100
C. $1,200. $1,100 - $300 = $800
D. $ 200.
Schedule of Cost of Goods
Manufactured
Calculates the cost of raw
material, direct labor and
manufacturing overhead used
in production.

Calculates the manufacturing

costs associated with goods
that were finished during the
period.
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used As
Asitems
itemsare
areremoved
removedfrom
from raw
raw
in production materials
materialsinventory
inventoryand
andplaced
placedinto
into
the
theproduction
productionprocess,
process, they
theyare
are
called
calleddirect
direct materials.
materials.
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
Conversion
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs
costsare
arecosts
costs
+ Raw materials + Mfg. overhead incurred
incurredtoto
purchased = Total manufacturing convert
convert the
the
= Raw materials costs
direct
directmaterial
material
available for use
in production into
intoaafinished
finished
– Ending raw materials product.
product.
inventory
= Raw materials used
in production
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All
All manufacturing
manufacturingcosts
costsincurred
incurred
= Raw materials used
during
duringthe
theperiod
periodare
areadded
addedtotothe
the
in production
beginning
beginningbalance
balanceof
of work
workin
in
process.
process.
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending work in
process inventory
Costs
Costsassociated
associatedwith
withthe
thegoods
goodsthat
that = Cost of goods
are
arecompleted
completedduring
duringthe
theperiod
periodare
are manufactured
transferred
transferredto
tofinished
finishedgoods
goods
inventory.
inventory.
Product Cost Flows
Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials

Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
Quick Check 
Beginning raw materials inventory was
$32,000. During the month, $276,000 of
raw material was purchased. A count at the
end of the month revealed that $28,000 of
raw material was still present. What is the
cost of direct material used?
A.$276,000
B. $272,000
C. $280,000
D. $ 2,000
Quick Check 
Beginning raw materials inventory was
$32,000. During the month, $276,000 of
raw material was purchased. A count at the
end of the month revealed that $28,000 of
raw material was still present. What is the
cost of direct material used?
A. $276,000 Beg.
Beg. raw
raw materials
materials $
$ 32,000
32,000
+
+ Raw
Raw materials
materials
B. $272,000 purchased
purchased 276,000
276,000
=
= Raw
Raw materials
materials available
available
C. $280,000 for
for use
use in
in production
production $
$ 308,000
308,000
–
– Ending
Ending raw
raw materials
materials
D. $ 2,000 inventory
inventory 28,000
28,000
=
= Raw
Raw materials
materials used
used
in
in production
production $
$ 280,000
280,000
Quick Check 
Direct materials used in production totaled $280,000.
Direct labor was $375,000 and factory overhead was
$180,000. What were total manufacturing costs
incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Quick Check 
Direct materials used in production totaled $280,000.
Direct labor was $375,000 and factory overhead was
$180,000. What were total manufacturing costs
incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

Direct
Direct Materials
Materials $
$280,000
280,000
+
+ Direct
Direct Labor
Labor 375,000
375,000
+
+ Mfg.
Mfg. Overhead
Overhead 180,000
180,000
=
= Mfg.
Mfg. Costs
Costs Incurred
Incurred
for
for the
the Month
Month $
$835,000
835,000
Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month were
$835,000. There were $200,000 of partially finished
goods remaining in work in process inventory at the
end of the month. What was the cost of goods
manufactured during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month were
$835,000. There were $200,000 of partially finished
goods remaining in work in process inventory at the
end of the month. What was the cost of goods
manufactured during the month?
A. $1,160,000
B. $ 910,000 Beginning work in
process inventory
C. $ 760,000 + Mfg. costs incurred
for the period

D. Cannot be determined. = Total work in process

during the period
– Ending work in
process inventory
= Cost of goods
manufactured
Quick Check 
Beginning finished goods inventory was $130,000. The
cost of goods manufactured for the month was
$760,000. And the ending finished goods inventory was
$150,000. What was the cost of goods sold for the
month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Quick Check 
Beginning finished goods inventory was $130,000. The
cost of goods manufactured for the month was
$760,000. And the ending finished goods inventory was
$150,000. What was the cost of goods sold for the
month?
A. $ 20,000.
B. $740,000.
C. $780,000.
$130,000 + $760,000 = $890,000
D. $760,000.
$890,000 - $150,000 = $740,000
Cost Classifications for Predicting Cost
Behavior

How
How aa cost
cost will
will react
react
to
to changes
changes in in the
the
level
level of
of activity
activity
within
within the
the relevant
relevant
range.
range.
•• Total
Total variable
variable costs
costs
change
change when
when activity
activity
changes.
changes.
•• Total
Total fixed
fixed costs
costs
remain
remain unchanged
unchanged
when
when activity
activity
changes.
changes.
Total Variable Cost
Your total long distance telephone bill is based on how
many minutes you talk.

Total Long Distance

Telephone Bill

Minutes Talked
Variable Cost Per Unit
The cost per long distance minute talked is constant. For
example, 10 cents per minute.

Telephone Charge
Per Minute
Minutes Talked
Total Fixed Cost
Your monthly basic telephone bill probably does not
change when you make more local calls.

Telephone Bill
Monthly Basic

Number of Local Calls

Fixed Cost Per Unit
The average fixed cost per local call decreases as more
local calls are made.

Monthly Basic Telephone

Bill per Local Call
Number of Local Calls
Cost Classifications for Predicting
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Quick Check 
Which of the following costs would be
variable with respect to the number of cones
sold at a Baskins & Robbins shop? (There
may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check 
Which of the following costs would be
variable with respect to the number of cones
sold at a Baskins & Robbins shop? (There
may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.