Managerial Accounting

Wild and Shaw

Fourth Edition

Wild and Shaw

Fourth Edition

Copyright © 2014 by The McGraw-Hill Companies, Inc. All

rights reserved.McGraw-Hill/Irwin

Chapter 1

Managerial Accounting Concepts and Principles

Conceptual Learning Objectives

C1: Explain the purpose and nature of, and the role of ethics in, managerial accounting.

C2: Describe accounting concepts useful in classifying costs.

C3: Define product and period costs and explain how they impact financial statements.

C4: Explain how the balance sheets and income statements for manufacturing and merchandising companies differ.

C5: Explain manufacturing activities and the flow of manufacturing costs.

C6: Identify trends in managerial accounting.1-3

A1: Assess raw materials inventory management using raw materials inventory turnover and days’ sales in raw materials inventory.

Analytical Learning Objectives

1-4

P1: Compute cost of goods sold for a manufacturer.

P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.

Procedural Learning Objectives

1-5

Managerial accountingprovides financial and

nonfinancial informationto an organization’s managers and other

internal decision makers

Financial accountingprovides generalpurpose financial

information to thosewho are outsidethe organization.

Managerial and Financial Accounting

C1

1-6

Financial Accounting Managerial Accounting

1. Users and Investors, creditors, and Managers, employees, and decision makers other external users other internal users

2. Purpose of Making investment, credit, Planning and

information and other decisions control decisions

3. Flexibility Structured and often Relatively flexible

of practice controlled by GAAP (no GAAP constraints)

4. Timeliness of Often available only Available quickly without

information after audit is complete need to wait for audit

5. Time dimension Historical information Many projections with some predictions and estimates

6. Focus of Emphasis on Projects, processes and

information whole organization segments of an organization

7. Nature of Monetary Monetary and

information information nonmonetary information

Nature of Managerial Accounting

C1

1-7

Behavior

Traceability

Controllability

Relevance

Function

Managerial Cost ConceptsC2

1-8

Cost behavior refers to a costs reaction to changes in the level of business activity.

Classification by BehaviorC2

A fixed cost does not change with changes in the volume of activity.

A variable cost changes in proportion to changes in the volume

of activity.

A mixed cost refers to a combination of fixed and variable costs.

1-9

Direct costs Costs traceable to a

single cost object. Examples: material

and labor cost for a product.

Indirect costs Costs that cannot be

traced to a single cost object.

Example: maintenance expenditures benefiting two or more departments.

Classification by TraceabilityC2

1-10

The degree of control depends on thelevel of management in the organization.

More control

Mor

e co

ntro

l

Very little control

Classification by ControllabilityC2

1-11

All costs incurred in the past that cannot be avoided or changed.

Sunk costs should not be considered in decisions.

Out-of-pocket costs require a future outlay of cash and should be considered in decisions.

Opportunity costs are the potential benefits lost by choosing a specific action from two or more

alternatives

Classification by Relevance:C2

1-12

TheProduct

Classification by Function:Product Costs

DirectMaterial

DirectLabor

Manufacturing Overhead

C3

1-13

Period costs(expenses)

Product costs

(inventory) Inventory not sold until 2014

Operatingexpenses

Cost ofgoods sold

Raw MaterialsGoods in ProcessFinished Goods

Cost ofgoods sold

2013 Costsincurred

2013 IncomeStatement

2014 IncomeStatement

2013 BalanceSheet inventory –

(3 accounts)

Inventorysold in 2013

Period and Product Costsin Financial Statements

C3

1-14

Inventory sold in 2014

Completedproductsfor sale.

Materialswaiting to beprocessed.

Can be director indirect.

Partially completeproducts.

Material to whichsome labor and/or

overhead havebeen added.

Balance Sheet of a ManufacturerThree Inventory Accounts

RawMaterials Inventory

FinishedGoods

Inventory

Goods inProcess Inventory

C4

1-15

Beginning Merchandise

Inventory

BeginningFinished Goods

Inventory

Cost of Goods Purchased

Cost of GoodsManufactured

Ending Merchandise

Inventory

EndingFinished Goods

Inventory

Cost of Goods Sold

Merchandiser Manufacturer

+

_

+

==

_

The major difference

Income Statement of a Manufacturer

C4

1-16

Finished GoodsBeginning Inventory

Cost of GoodsManufactured

FinishedGoodsEnding

Inventory

RawMaterials

BeginningInventory

RawMaterials

Purchases

Raw MaterialsEnding Inventory

Costof

GoodsSold

Goods in ProcessBeginning Inventory

Direct Labor Used

FactoryOverhead Used

Raw MaterialsUsed

Sales ActivityProduction ActivityMaterialsActivity

Flow of Manufacturing Activities

Goods in ProcessEnding Inventory

C5

1-17

Summarizes the types and amounts of costsIncurred in a company’s manufacturing process.

Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Goods in Process – Ending Goods in Process = Cost of Goods Manufactured

Manufacturing StatementP2

1-18

End of Chapter 1