WEEK 2

BASICS OF MANAGEMENT ACCOUNTING

Study objectives:

1. Explain the distinguishing features of management/managerial accounting.

2. Identify the three broad functions of management.
3. Define the three classes of manufacturing cost.
4. Distinguish between product and period costs.
5. Explain the difference between a merchandising and a manufacturing income statement.
6. Indicate how cost of goods manufactured is determined.
7. Explain the difference between a merchandising and a manufacturing balance sheet.
8. Prepare a work sheet and closing entries for a manufacturing company.

Managerial accounting (or Management/ Internal accounting) is a field of accounting

that provides economic and financial information for managers and other internal users
(decision-makers). Managerial accounting applies to all types of businesses—service,
merchandising, and manufacturing—and to all forms of business organizations—sole
proprietorships, partnerships and corporations. Moreover, managerial accounting is
needed in either non-profit or trading businesses.

Managerial accounting vs Financial accounting

Both fields of accounting deal with the economic events of a business

Similarities and require that the results of that company’s economic events be
quantified and communicated to interested parties.
(1) primary users of reports, (2) types and frequency of reports, (3)
Differences purpose of reports, (4) content of reports, and (5) verification process.
*see Appendix 1

Cost accounting, on the other hand, involves the accumulation of data regarding costs of
producing goods and services from both management accounting and financial
accounting.

Management functions (PLOC)

Planning requires managers to look ahead and to establish objectives.

Directing/ Motivating involves coordinating a company’s diverse activities and
(Organizing/ Leading) human resources to produce a smooth-running operation.
Controlling is the process of keeping the firm’s activities on track.

Organizational structure

In order to assist in carrying out management functions, most companies prepare

organization charts to show the interrelationships of activities and the delegation of
authority and responsibility with the company.

Stockholders own the corporation but manage the company through a board of directors
(BOD). The chief executive officer (CEO) has overall responsibility for managing the
business. The chief financial officer (CFO) is responsible for all of the accounting and
finance issues the company faces. The CFO is supported by the controller and the
treasurer. *see Appendix 2 and Appendix 6

Business Ethics

Management accountants have an obligation to the organizations they serve, their

profession, the public, and themselves to maintain the highest standards of ethical

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conduct. In recognition of this obligation, the Institute of Management Accountants (IMA)
has promulgated the following standards of ethical conduct for management
accountants: competence, confidentiality, integrity, and credibility. *see Appendix 3

Manufacturing Costs

Manufacturing consists of activities and processes that convert raw materials into
finished goods.

Manufacturing costs are typically classified as either (a) direct materials, (b) direct labor
or (c) manufacturing overhead.

a) Direct materials are raw materials that can be physically and conveniently
associated with the finished product during the manufacturing process. Indirect
materials are materials that (a) do not physically become a part of the finished
product or (b) cannot be traced because their physical association with the finished
product is too small in terms of cost. Indirect materials are accounted for as part of
manufacturing overhead.

b) The work of factory employees that can be physically and conveniently associated
with converting raw materials into finished goods is considered direct labor. In
contrast, the wages of maintenance people, timekeepers, and supervisors are
usually identified as indirect labor because their efforts have no physical association
with the finished product, or it is impractical to trace the costs to the goods
produced. Indirect labor is classified as manufacturing overhead.

c) Manufacturing overhead consists of costs that are indirectly associated with the
manufacture of the finished product. Manufacturing overhead includes items such
as indirect materials, indirect labor, depreciation on factory buildings and machines,
and insurance, taxes, and maintenance on factory facilities.

Product vs Period Costs

Product costs are costs that are a necessary and integral part of producing the finished
product. Period costs are costs that are matched with the revenue of a specific time
period rather than included as part of the cost of a salable product. These are non-
manufacturing costs. Period costs include selling and administrative expenses.

*see Appendix 4 for other cost terms

Manufacturing income statement

 The income statements of a merchandising company and a manufacturing

company differ in the cost of goods sold section. The cost of goods sold
section of the income statement for a manufacturing company shows:

 The determination of the cost of goods manufactured consists of the following:

 The costs assigned to the beginning work in process inventory are the
manufacturing costs incurred in the prior period.

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  Total manufacturing costs is the sum of the direct materials costs, direct labor
costs, and manufacturing overhead incurred in the current period.
 Because a number of accounts are involved, the determination of costs of goods
manufactured is presented in a Cost of Goods Manufactured Schedule. The cost
of goods manufactured schedule shows each of the cost factors above. The
format for the schedule is:

Manufacturing Balance Sheet

 The balance sheet for a manufacturing company may have three inventory
accounts: finished goods inventory, work in process inventory, and raw materials
inventory.
 The manufacturing inventories are reported in the current asset section of the
balance sheet.
a. The inventories are generally listed in the order of their expected realization
in cash.
b. Thus, finished goods inventory is listed first.
 Each step in the accounting cycle for a merchandising company is applicable to
a manufacturing company.
a. For example, prior to preparing financial statements, adjusting entries are
required.
b. Adjusting entries are essentially the same as those of a merchandising
company.
c. The closing entries for a manufacturing company are also similar to those
of a merchandising company.

Contemporary developments

Contemporary developments in managerial accounting involve: (a) a global economy

that has in general shifted toward an emphasis on providing services, rather than goods;
and (b) efforts to manage the value chain and supply chain.

Many companies have significantly lowered inventory levels and costs using just-in-time
(JIT) inventory methods. Under a just-in-time method, goods are manufactured or
purchased just in time for use. In addition, many companies have installed total quality
management (TQM) systems to reduce defects in finished products.

Activity-based costing (ABC) is a popular method for allocating overhead that obtains
more accurate product costs. The theory of constraints is a specific approach used to
identify and manage constraints in order to achieve the company goals. The balanced
scorecard is a performance-measurement approach that uses both financial and non-
financial measures to evaluate all aspects of a company’s operations in an integrated
fashion.

*see Appendix 5 for more discussion

Preparing the worksheet for a manufacturing business

 When a worksheet is used in preparing financial statements, two additional

columns are needed for the cost of goods manufactured schedule.
a. The columns are labeled Cost of Goods Manufactured.

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 b. The columns are inserted before the income statement columns.
 In the cost of goods manufactured columns,
a. The beginning inventories of raw materials and work in process and all
manufacturing costs are entered as debits.
b. The ending inventories of raw materials and work in process are entered
as credits.
c. The balancing amount for these columns is the cost of goods
manufactured and is entered as a credit. The same amount is also
entered in the income statement debit columns.
 The income statement and balance sheet columns are basically the same as for
a merchandising company.
a. Beginning finished goods inventory is entered in the income statement debit
column.
b. Ending finished goods inventory is entered in the income statement credit
column and the balance sheet debit column.
 In preparing closing entries, a Manufacturing Summary account is used to close
all accounts that appear in the cost of goods manufactured schedule.
a. Ending inventories of raw materials and work in process are debited and
Manufacturing Summary is credited.
b. Beginning inventories of raw materials and work in process and all
manufacturing cost accounts are credited and Manufacturing Summary is
debited.
c. The balance in Manufacturing Summary is closed by debiting Income
Summary and crediting Manufacturing Summary.
 As in the case of a merchandise company, all accounts shown in the income
statement for a manufacturing company are closed to Income Summary.

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 ACTIVITY WEEK 2
(Write your answers using sheet/s of yellow pad paper to be submitted next Monday, September
14, at the beginning of the class.)

1. Marky Manufacturing Company has the following data at June 30, 2018:
Raw materials inventory, June 1 ₱ 13,800
Work in process inventory, June 1 18,100
Finished goods inventory, June 1 43,500
Total manufacturing costs 510,000
Sales 590,000
Work in process inventory, June 30 30,400
Finished goods inventory, June 30 50,200
Raw materials inventory, June 30 18,000

Instructions
(a) Prepare an income statement through gross profit for the month of June.
(b) Indicate the balance sheet presentation of the June 30 inventories.

2. From the account balances listed below, prepare a schedule of cost of goods
manufactured for Jeffrey Manufacturing Company for the month ended December 31,
2018.

Account Balances
Finished Goods Inventory, December 31 ₱42,000
Factory Supervisory Salaries 12,000
Income Tax Expense 18,000
Raw Materials Inventory, December 1 12,000
Work in Process Inventory, December 31 25,000
Sales Salaries Expense 14,000
Factory Depreciation Expense 8,000
Finished Goods Inventory, December 1 35,000
Raw Materials Purchases 95,000
Work in Process Inventory, December 1 30,000
Factory Utilities Expense 4,000
Direct Labor 70,000
Raw Materials Inventory, December 31 19,000
Sales Returns and Allowances 5,000
Indirect Labor 21,000

3. Explain the distinction of Managerial Accounting vs Financial Accounting.

Sources:
Cabrera & Cabrera / Management Accounting Concepts and Application, 2017 Edition
Hilton / Managerial Accounting, 9th Edition
IMA / Standards of Ethical Conduct for Management Accountants,
https://www.accountingverse.com/managerial-accounting/introduction/code-of-ethics.html
Kieso & Waygandt / Managerial Accounting, 4th Edition
Roque, Rogelio S. / Reviewer in Management Advisory Services, 2016 Edition

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 End of Week 2

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