MGR Outline 01

7/31/2019 MGR Outline 01

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Chapter 1 Managerial Accounting Concepts & Principles

Chapter Outline

I. Managerial Accounting Basics also called management accountingwhich is an activitythat provides financial and nonfinancial information to an organizations managers and otherdecision makers.

A. Purpose of Managerial Accounting to provide useful information todecisionmakers of an organization.

1. Cost of productsand services this information is very important to managerswhen making planning and controldecisions. This includes predicting the futurecosts of a product or service. Predicted costs are used in:

a. product pricing.

b. profitability analysis.

c. deciding whether to make or buy a product or component.

2. Planning is the process of setting goals and making plans to achieve them.

a. Strategic plans usually set the long-term direction of a firm based onopportunities such as new products, new markets, and capital investments.

b. Medium and short-term plans often cover a one-year period which, whentranslated in monetary terms, is known as the budget.

3. Controlis the process of monitoring planning decisions and evaluating theorganization's activities and employees.

a. Control includes measurement and evaluationof actions, processes and

outcomes.b. Feedback allows managers to take timely corrective actions to avoid

undesirable outcomes.

B. Nature of Managerial Accounting illustrated by comparing the seven keydifferences between managerial to financialaccounting:

1. Users and decision makers

a. In financial investors, creditors, analysts, regulators and other usersexternal to the organization.

b. In managerial managers, employees and decision makers internalto theorganization who are responsible for making and implementing company

decisions.

2. Purpose of information

a. In financial assist external users in making investment, credit and otherdecisions.

b. In managerial assist managers in making planning and control decisions.


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3. Flexibility of practice

a. In financial relies on structured principles often controlled by GAAP.

b. In managerial systems are relatively flexible (no GAAP) to assist in planning,decision-making, and control.

4. Timeliness of informationa. In financial often available only after the audit is complete which is usually

several weeks after period-end.

b. In managerial available quickly without the need to wait for an audit.Internal auditing evaluates the flow of information inside and outside thecompany and is responsible for preventing and detecting fraudulent companyactivities.

5. Time dimension

a. In financial provides primarily historical information with only limitedpredictions.

b. In managerial includes many projections and estimates; historicalinformation is also presented.

6. Focus of information

a. In financial emphasis on whole organization.

b. In managerial emphasis on organization's specific activities, projects,processes and subdivisions.

7. Nature of information

a. In financial monetary information.

b. In managerial mostly monetary; but also nonmonetary information.

C. Managerial Decision Making managerial accounting information is primarilyused for internal decisions about a company's activities but financial and managerialaccounting are not entirely separate since both can affect people's decisions and actions.

D. Fraud and Ethics in Managerial Accounting are important factors in running abusiness. Fraud involves the use of ones job for personal gain, through deliberate misuse ofthe employers assets.

The most common type of fraud involves employees who steal or misuse the employersresources. All fraud is done to provide direct or indirect benefit to the employee; violates theemployees duties to his employer; costs the employer money; and is secret.

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Implications for Managerial Accounting fraud increases a businesss costswhich can result in poor pricing decisions, improper product mix, and faultyperformance evaluations.

Managers rely upon an internal control system to monitor and control businessactivities. An internal control system is the policies and procedures managers use tourge adherence to company policies; promote efficient operations; ensure reliableaccounting; and protect assets.


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Ethics are beliefs that distinguish right from wrong. They are accepted standards ofgood and bad behavior. The Institute of Management Accountants (IMA) hasissued a Statement of Ethical Professional Practice which provides a road map forresolving ethical conflicts.

II. Managerial Cost ConceptsA. Types of Cost Classifications - Costs can be classified based on any one orcombination of the five classifications listed below.

1. Behavior at a basic level, a cost can be classified as fixed, variable ormixed.

1. Fixed cost cost does not change with changes in the volume of an activity(within a certain range of activity known as an activity's relevant range).

2. Variable cost cost changes in proportion to changes in the volume ofactivity.

3. Mixed combination of fixed and variable costs.

2. Traceability cost is traced to a cost object (a product, process,department or customer). Cost is classified as either a direct or indirect cost.To classify, must identify the cost object.

1. Direct costs traceable to a single cost object.

2. Indirect costs not traceable to a single cost object

3. Controllability costs can be defined as controllable ornot controllable.Classification is dependent on employees responsibilities to the hierarchical levels inmanagement.

4. Relevance costs classified by identifying it as either a sunk cost or an out-of-

pocket cost.

a. Sunk cost already incurred and cannot be avoided or changed. Irrelevantto future decisions.

b. Out-of-pocket cost requires a future outlay of cash and is relevant fordecision making.

c. Opportunity cost is the potential benefit lost by choosing a specific actionfrom two or more alternatives.

5. Function costs classified as capitalized inventory (product) or expensed (period)as incurred.

a. Product costs expenditures necessary and integral to finished products.

Includes direct materials, direct labor, and overhead costs. First assigned toinventory (on the balance sheet) and flow to the income statement when theybecome part of cost of goods sold.

b. Period costs - expenditures identified more with a time period than finishedproducts. Include selling and general administrative expenses. Reported onincome statement as expenses.


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B. Identification of Cost Classification. Must be able to identify the activity forbehavior, cost object for traceability, management hierarchical level for controllability,opportunity cost for relevance, and benefit period for function.

C. Cost Concepts for Service Companies. The concepts are also applicable toservice organizations. Classification by function is not relevant to service companies

because services are not inventoriable.

III. Reporting Manufacturing Activities financial statements for manufacturing companieshave some unique features resulting from their activity of producing goods from materials andlabor.

A. Manufacturers Balance Sheet carry several unique assets and usuallyreports these three inventories:

1. Raw Materials Inventory goods a company acquires to use in making productsTwo types are:

a. Direct materials physically become part of the product and are clearlyidentified with specific units or batches of product.

b. Indirect Materials used in support of the production process. Generally, donot become a part of a product. Exception: materials that do become part of aproduct, but have low or insignificant cost, and traceability is not economically sound(application of materiality principle).

1. Goods in Process Inventory (or work in process inventory) consists ofproducts in the process of being manufactured but not yet complete.

2. Finished Goods Inventory consists of completed products ready for sale.

B. Manufacturers Income Statement the main difference between amerchandisers and manufacturers income statement is in items that make up cost ofgoods sold (COGS).

1. Merchandiser computes COGS: Beginning merchandise inventory plus cost ofgoodspurchasedminus ending merchandise inventory.

2. Manufacturer computes COGS: Beginning finished goods inventory plus cost ofgoods manufacturedminus ending finished goods inventory.

3. Cost of goods manufactured is the sum of direct materials, direct labor, and

overhead costs incurred in producing the products.

a. Direct materials costtangible components of a finished product; separatelyand readily traced through the manufacturing process to finished goods.

b. Direct labor costswages and salaries for direct labor that are separately andreadily traced through the manufacturing process to finished goods.


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c. Indirect labor costscosts of other workers efforts not linked to specific units orbatches of product. Part of overhead costs.

d. Factory overhead costsall manufacturing costs that cannot be separately orreadily traced to finished goods. Include indirect materials and indirect labor andother costs associated with the factory.

e. Prime and conversion costs -- direct materials and direct labor are also calledprime costs and are expenditures directly associated with the manufacturing offinished goods. Direct labor costs and overhead costs are also called conversioncostsand are expenditures incurred in the process of converting raw materials tofinished goods.

C. Flow of Manufacturing Activitiesthe three manufacturing activities are:

1. Materials activities manufacturers start a period with some beginning rawmaterials inventory and then acquire additional raw materials. When these purchasesare added to beginning inventory, we get the total raw materials available for use in

production. These raw materials are then either used in are then either used inproduction during the year or remain on hand at the end of the period for use in futureperiods.

2. Production activities four factors come together in production:

a. Beginning goods in process inventory consists of partly produced goods fromthe previous period.

b. Direct materials used traceable materials added during the period.

c. Direct labor used traceable labor added during period.

d. Overhead used nontraceable manufacturing costs added during the period.

3. Note: The production activity results in goods either finished or unfinished. Bothgroups representproduct costs. The cost of finished goods make up the cost of goodsmanufactured for the year. Unfinished goods are identified as ending goods in processinventory.

4. Sales activities newly completed units are combined with beginning finishedgoods inventory to make up total finished goods available for sale. The cost of thosegoods that are sold during the year is reported on the income statement as cost of goodssold.

D. Manufacturing Statement(also called the schedule of manufacturing activities

orthe schedule of cost of goods manufactured) summarizes the types and amounts ofcosts incurred in the manufacturing process. Contains information used by management forplanning and control. It is not a general purpose financial statement. It is divided into fourparts:

1. Direct material used determined by adding the beginning raw materials inventoryto the current period's materials purchases to obtain total raw materials available for useduring year and then subtracting ending raw materials inventory determined from aphysical count.


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2. Direct labor incurred includes payroll taxes and fringe benefits and is takendirectly from the direct labor account balance.

3. Overhead costs generally lists each important factory overhead item along withits cost. If a summary number is used, a separate detailed schedule is usually prepared.

4. Computation of cost of goods manufactured as follows:

a. Total manufacturing costs (total of 1, 2 and 3 above) are added to beginning goodsin process inventory to get total cost of goods in process inventory for the year.

b. Compute cost of goods manufactured (or completed) for year by subtracting thecost of ending goods in process inventory (determined separately) from the totalcost of goods in process for the year.

E. Trends in Managerial Accounting the importance of managerial accounting

analytical tools has increased as a result of the following changes in the businessenvironment:

1. Customer orientation increased emphasis on customers. This results incustomer orientation whereby employees understand the changing needs and wantsof their customers and align their management and operating practices accordingly.

2. Lean practices, that follow an underlying philosophy ofcontinuous improvement,include:

a. Total quality management (TQM) focuses on quality improvement and appliesthis standard to all aspects of business activities.

b. Just-in-time manufacturing (JIT) a system that acquires inventory and

produces only when needed as orders are received a demand-pullsystem.c. Implications for Managerial Accounting following the lean business modelmeans that a company must completely realign its systems and procedures.Managerial accounting provides accurate cost and performance information. Acompany uses this information to assist in cost control and improved performance.

F. Global Economy our global economy expands competitive boundaries providingcustomers more choices.

G. E-Commerce people have become increasingly interconnected via electronicapplications. Many businesses have expanded their websites to allow for onlinetransactions.

H. Service Economy businesses that provide services are an ever-growing part ofour economy. Service businesses typically account for 60-70 percent of total economicactivity.

I. Value Chain refers to the series of activities that add value to a companysproducts or services. Companies can use lean practices


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IV. Global View Manufacturing accounting is more flexible than financial accounting anddoes not follow a set of rules. Many international businesses use managerial accountingconcepts and principles outlined in this chapter.

V. Decision AnalysisCycle Time and Cycle Efficiency

A. Cycle time equals process time plus inspection time plus move time plus wait time.

1. Process time is the time spent producing the product.

2. Inspection time is the time spent inspecting (1) raw materials when received, (2)goods in process while in production, and (3) finished goods prior to shipment.

3. Move time is the time spent moving (1) raw materials from storage to production, and(2) goods in process from factory location to another factory location.

4. Wait time is the time that an order or job sits with no production applied to it.

B. Process time is considered value-added time because it is the only activity incycle time that adds value to the product from the customers perspective.

C. The other three costs are considered non-value added time because they addno value to the customer.

D. Companies strive to reduce non-value-added time to improve cycle efficiency which

is the ratio of value-added time to total cycle time.

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MGR Outline 01