PPB28102: Cost & Management Accounting

Managerial Accounting & business environment

1 Definition of managerial accounting:

- a field of accounting that provides economic and financial information for managers and
other internal users

2 Managerial activities include:

- explain manufacturing and non-manufacturing costs & how they are reported
- compute cost of providing services or manufacturing a product
- determine behavior of costs & expenses as activity changes
- gather & present relevant data for management decision making
- assist in profit planning & formalizing plan in the form of budgets
- help to control costs by comparing actual results with planned objectives & standard
costs

3 Use of managerial accounting applies to:

(i) all types of businesses – services, merchandising & manufacturing
(ii) all forms of businesses – proprietorship, partnerships & corporations
(iii) non-profit & profit-oriented companies

4 Differences:

Managerial accounting Financial accounting

Primary users of Reports
Types & frequency of Reports
Purpose of Reports
Content of Reports
Verification process
Internal users: managers
& officers
Internal reports
As frequently as needed
Special purpose for
specific decision
Pertains to sub-units of
the business
Very detailed
Extend beyond double-
entry accounting to any
relevant data
Standard is relevance to
decisions
No independent audits
External users:
stockholders, creditors &
regulators
Financial statements
Quarterly & annually
General purpose
Pertains to business as a
whole
Highly aggregated
(condensed)
Limited to double-entry
accounting & cost data
Generally accepted
accounting principles
Audit by CPA

5 Management functions:

Planning Look ahead

Establish objectives – eg. maximize short-term profit
Key objective: add value to business (i.e. value measured
by trading price of stock & by potential selling price of the
company)
Directing Coordinate diverse activities & human resources
Implement planned objectives

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Provide incentives to motivate employees

Hire & train employees
Controlling Keep activities on track
Determine whether goals are met
Decide changes needed to get back on track
May use an informal or a formal system of evaluation

6 Organizational chart:
- assists in carrying out management’s functions
- prepared by most companies
- shows :
The interrelationships of activities
The delegation of authority
The delegation of responsibility

7 3 classes of manufacturing costs:

(i) Materials
Direct materials
- raw materials – basic materials used in manufacturing
- can be physically & directly associated with the finished product
- eg. flour in the baking of bread, rubber in the making of tyres, etc
Indirect materials
- raw materials that cannot be easily associated with the finished product
- do not physically become part of the finished product or represent too small a
part of the finished product
- considered part of the manufacturing overhead
(ii) Labor
Direct labor
- factory employees that can be physically and directly associated with converting
raw material into finished goods
- eg. bottlers at Coco-Cola company, bakers at bakery shop, ect
Indirect labor
- factory workers that have no physical association with the finished product
- eg. supervisors, managers, etc
(iii) Manufacturing overhead
Cost that are indirectly associated with the manufacturing of the product
Eg. indirect labor, indirect materials, depreciation of machinery, insurance , etc

8 Differences:

Product costs Period costs

Related to manufacturing costs
Eg. direct materials, direct labor,
manufacturing overhead
Consist of direct material costs, direct labor
costs& manufacturing overhead costs
A necessary & integral part of producing the
product
Recorded as inventory when incurred
Related to non-manufacturing costs
Eg. selling expenses, administrative expenses
Matched with revenue of a specific time
period and charged to expense as incurred
Non-manufacturing costs
Deducted from revenue in period incurred to
determine net income

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Do not become expenses until the finished Include all selling expenses, general &
goods inventory is sold administrative expenses

9 Manufacturing costs in financial statement: merchandiser versus manufacturer

10 Cost of Goods Sold section of the Income Statement

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11 Cost of Goods Manufactured schedule

12 Balance Sheet – Inventories (current asset)

Merchandising company Manufacturing company

One category of inventory: 3 inventory accounts:
- merchandise inventory - raw material
- work in progress
- finished goods