Accounting Principles

Thirteenth Edition
Weygandt Kimmel Kieso

Chapter 19

Managerial Accounting
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
 Chapter 19

Managerial Accounting
Chapter Outline
Learning Objectives
LO 1 Identify the features of managerial accounting and
the functions of management.
LO 2 Describe the classes of manufacturing costs and
the differences between product and period costs.
LO 3 Demonstrate how to compute cost of goods
manufactured and prepare financial statements for
a manufacturer.
LO 4 Discuss trends in managerial accounting.
Copyright ©2019 John Wiley & Son, Inc. 3
 Managerial Accounting Basics
Provides economic and financial information for
managers and other internal users.
Comparing Managerial and Financial Accounting
Similarities and differences:
• Each field deals with economic events of a business
• Both require that economic events be quantified and
communicated to interested parties

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 Comparing Managerial and Financial
Feature Financial Accounting Managerial Accounting
Primary Users External users: shareholders, Internal users: officers and
of Reports creditors, and regulators. managers.
Types and Frequency Financial statements. Internal reports.
of Reports Quarterly and annually. As frequently as needed.
Purpose of Reports General-purpose. Special-purpose for
specific decisions.
Content of Reports Pertains to business as a whole. Pertains to subunits of the
Highly aggregated (condensed). business.
Limited to double-entry Very detailed.
accounting and cost data. Extends beyond double-entry
Accounting principles. accounting to any relevant data.
Standard is relevance to decisions.
Verification Process Audited by accountants. No independent audits.
ILLUSTRATION 19.1
Differences between financial and managerial accounting

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 Management Functions
Planning Directing Controlling
• Maximize short-term • Coordinate diverse • Keeping activities on
profit and market activities and human track
share resources
• Determine whether
• Commit to • Implement planned goals are met
environmental objectives
• Decide changes
protection and social
• Provide incentives to needed to get back
programs
motivate employees on track
• Add value to the
• Hire and train • May use an informal
business
employees or formal system of
evaluations
• Produce a smooth-
running operation

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 Organizational Shareholders
Organization charts show
Structure the interrelationships of
Board of activities and the
Directors delegation of authority
and responsibility within
Chief Executive the company.
Officer and
President

General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources

ILLUSTRATION 19.2 Treasurer Controller

A typical company
organization chart

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 DO IT! 1 Managerial Accounting
Indicate whether the following statements are true or false.
False 1. Managerial accountants have a single role
_______
within an organization: collecting and reporting costs to
management.
True 2. Financial accounting reports are general-
_______
purpose and intended for external users.
True 3. Managerial accounting reports are special-
_______
purpose and issued as frequently as needed.

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 DO IT! 1 Managerial Accounting
Indicate whether the following statements are true or false.
False 4. Managers’ activities and responsibilities can
_______
be classified into three broad functions: cost accounting,
budgeting, and internal control.
False 5. Managerial accounting reports must now
_______
comply with accounting standards.

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 Managerial Cost Concepts
Managers should ask questions such as the following.
1. What costs are involved in making a product or
providing a service?
2. If we decrease production volume, will costs
decrease?
3. What impact will automation have on total costs?
4. How can we best control costs?

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

Direct Materials Direct Labor

Manufacturing
Overhead
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 Manufacturing Costs
Direct Materials
Direct Materials
Raw Materials
• Basic materials and parts used in manufacturing
process
• Raw materials that can be physically and directly
associated with finished product during the
manufacturing process are direct materials

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 Manufacturing Costs
Indirect Materials have one of two characteristics
1. Not physically part of finished product or
2. they are an impractical to trace to the finished
product because their physical association with the
finished product is too small in terms of cost.

Considered part of manufacturing overhead

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 Manufacturing Costs
Direct Labor
Direct Labor
Work of factory employees that
can be physically and directly associated with converting
raw materials into finished goods.
Indirect Labor
• Work of factory employees that has no physical
association with finished product or
• which is impractical to trace costs to goods produced.

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 Manufacturing Costs
Manufacturing Overhead
• Costs that are indirectly associated with manufacturing
the finished product (see Alternative Terminology).
• Includes all manufacturing costs except direct materials
and direct labor.
• Also called factory overhead,
indirect manufacturing costs,
or burden. Manufacturing
Overhead

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 Product Versus Period Costs
Product Costs
 Direct materials
• Components:  Direct labor
 Manufacturing overhead
• Costs that are an integral part of producing the
product (see Alternative Terminology).
• Recorded in “inventory” account
• Not an expense (COGS) until goods are sold

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 Product Versus Period Costs
Period Costs
• Charged to expense as incurred
• Non-manufacturing costs
• Includes all selling and administrative expenses

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 Product Versus Period Costs
All Costs

Product Costs Period Costs

Manufacturing Costs Non-Manufacturing Costs
Direct Materials Selling Expenses

Direct Labor Administrative Expenses

Manufacturing Overhead
• Indirect materials
• Indirect labor
• Other indirect costs ILLUSTRATION 19.3
Product versus period costs

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 ILLUSTRATION 19.4

Illustration of Cost Concepts Assignment of costs to

cost categories

Illustration: Suppose you started your own snowboard factory,

Lapland Boards. Here are some of the costs that your snowboard
factory would incur. Assign the following costs:
Product Costs
Direct Direct Manufacturing Period
Cost Item Materials Labor Overhead Costs
1. Material cost (€30 per board) X
2. Labor costs (€40 per board) X
3. Depreciation on factory
equipment (€25,000 per year) X
4. Property taxes on factory
building (€6,000 per year) X

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 ILLUSTRATION 19.4

Illustration of Cost Concepts Assignment of costs to

cost categories

Product Costs
Direct Direct Manufacturing Period
Cost Item Materials Labor Overhead Costs
5. Advertising costs (€60,000 per
year) X
6. Sales commissions (€20 per
board) X
7. Maintenance salaries (factory
facilities, €45,000 per year) X
8. Salary of plant manager
(€70,000 per year) X
9. Cost of shipping boards (€8 per
board) X

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 Illustration of Cost Concepts
If Lapland Boards produces 10,000 snowboards the first year, what
would be the total manufacturing costs?

Cost Number and Item Manufacturing Cost

1. Material cost (€30 × 10,000) €300,000
2. Labor cost (€40 × 10,000) 400,000
3. Depreciation on factory equipment 25,000
4. Property taxes on factory building 6,000
7. Maintenance salaries (factory facilities) 45,000
8. Salary of plant manager 70,000
Total manufacturing costs €846,000
ILLUSTRATION 19.5
Computation of total
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 DO IT! 2 Managerial Cost Concepts
A bicycle company has these costs: tires, salaries of employees who put
tires on the wheels, factory depreciation, advertising expenditures,
lubricants, spokes, salary of factory manager, salary of accountant,
handlebars, and salaries of factory maintenance employees. Classify each
cost as direct materials, direct labor, overhead, or a period cost.

Direct Materials Direct Labor Overhead

• Tires • Salaries of • Factory depreciation
• Spokes employees who • Factory lubricants
put tires on the
• Handlebars • Factory manager
wheels
salary
Advertising expenditures and salary of • Factory
accountant are period costs. maintenance
employees salary
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 Manufacturing Costs in Financial
Statements
Income Statement
Under a periodic inventory system, the income
statements of a merchandiser and a manufacturer differ
in the cost of goods sold section.

“COGS”
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 Income Statement ILLUSTRATION 19.6
Cost of goods sold
components
Merchandiser

Beginning Cost of Goods Ending

+ - =
Inventory Purchased Inventory

Cost of
Goods Sold
Manufacturer

Beginning Ending
Cost of Goods
Finished Goods + - Finished Goods =
Manufactured
Inventory Inventory

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 Income Statement
Cost of goods sold sections of merchandising and
manufacturing income statements
ILLUSTRATION 19.7

Merchandising Company Manufacturing Company

Income Statement (partial) Income Statement (partial)
For the Year Ended December 31, 2020 For the Year Ended December 31, 2020
Cost of goods sold Cost of goods sold
Inventory, Jan. 1 £ 70,000 Finished goods inventory, Jan. 1 £ 90,000
Cost of goods purchased 650,000 Cost of goods manufactured 370,000
(see Illustration 19.9)
Cost of goods available for sale 720,000 Cost of goods available for sale 460,000
Less: Inventory, Dec. 31 400,000 Less: Finished goods inventory, Dec. 31 80,000
Cost of goods sold £320,000 Cost of goods sold £380,000

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 Cost of Goods Manufactured
Total Manufacturing Costs – sum of direct material costs, direct
labor costs, and manufacturing overhead in the current year.
Total Work in Process – (1) cost of beginning work in process
and (2) total manufacturing costs for the current period.

Beginning Total
Total Cost of
Work in Process + Manufacturing =
Work in Process
Inventory Costs

Ending
Total Cost of Cost of Goods
- Work in Process =
Work in Process Manufactured
Inventory
ILLUSTRATION 19.8
Cost of goods manufactured formula
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 Current Designs
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2020
Work in process, January 1 $ 18,400
Direct materials
Raw materials inventory, January 1 $ 16,700
Raw materials purchases 152,500
Total raw materials available for use 169,200
Less: Raw materials inventory, December 31 22,800
Direct materials used $146,400
Direct labor 175,600
Manufacturing overhead
Indirect labor 14,300
Factory repairs 12,600
Factory utilities 10,100
Factory depreciation 9,440
Factory insurance 8,360
Total manufacturing overhead 54,800
Total manufacturing costs 376,800
Total cost of work in process 395,200
Less: Work in process, December 31 25,200
Cost of goods manufactured $370,000
ILLUSTRATION 19.9
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 Statement of Financial Position
Inventory accounts of a manufacturer
• Raw Materials Inventory: Shows the cost of raw
materials on hand
• Work in Process Inventory: Shows the cost applicable
to units that have been started into production but
are only partially completed
• Finished Goods Inventory: Shows the cost of
completed goods on hand
The statement of financial position for a merchandising
company shows just one category of inventory.
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 Statement of Financial Position ILLUSTRATION 19.11
Current assets sections of merchandising
and manufacturing statements of financial
position

Merchandising Company Manufacturing Company

Statement of Financial Position Statement of Financial Position
December 31, 2020 December 31, 2020
Current assets Current assets
Prepaid expenses £ 22,000 Prepaid expenses £ 18,000
Inventory 400,000 Inventory
Accounts receivable (net) 210,000 Finished goods £80,000
Cash 100,000 Work in process 25,200
Total current assets £732,000 Raw materials 22,800 128,000
Accounts receivable (net) 210,000
Cash 180,000
Total current assets £536,000

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 DO IT! 3 Cost of Goods Manufactured
The following information is available for Kim Ltd. (amounts are in
thousands). March 1 March 31
Raw materials inventory ₩12,000 ₩10,000
Work in process inventory 2,500 4,000
Materials purchased in March ₩90,000
Direct labor in March 75,000
Manufacturing overhead in March 220,000
Prepare the cost of goods manufactured schedule for the month of
March 2020.

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 Kim Ltd.
Cost of Goods Manufactured Schedule
For the Month Ended March 31, 2020
Work in process, March 1 ₩ 2,500
Direct materials
Raw materials, March 1 ₩ 12,000
Raw materials purchases 90,000
Total raw materials available for use 102,000
Less: Raw materials, March 31 10,000
Direct materials used ₩ 92,000
Direct labor 75,000
Manufacturing overhead 220,000
Total manufacturing costs 387,000
Total cost of work in process 389,500
Less: Work in process, March 31 4,000
Cost of goods manufactured ₩385,500

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 Company Accounting Today
Service Industries
• Much of the global economy has shifted toward an
emphasis on providing services rather than goods.
• Most techniques learned for manufacturing firms are
applicable to service companies

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 Focus on the Value Chain
Refers to all business processes associated with providing
a product or service
For a manufacturing firm these include the following:

Research & Acquisition of Production Sales and Delivery Customer

development raw materials marketing relations and
and product subsequent
design services

ILLUSTRATION 19.12
A manufacturer’s value chain

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 Focus on the Value Chain
Just-In-Time (JIT) Inventory Methods
• Inventory system in which goods are manufactured or
purchased just in time for sale
Total Quality Management (TQM)
• Reduce defects in finished products, with goal of zero
defects

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 Focus on the Value Chain
Theory of Constraints
• Constraints (“bottlenecks” ) limit company’s potential
profitability.
• A specific approach to identify and manage these
constraints in order to achieve company goals.
Enterprise Resource Planning (ERP)
• Software programs designed to manage all major
business processes.

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 Focus on the Value Chain
Activity-Based Costing (ABC)
• Allocates overhead based on use of activities
• Results in more accurate product costing and scrutiny
of all activities in value chain

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 Balanced Scorecard
• Evaluates operations in an integrated fashion.
• Uses both financial and non-financial measures.
• Links performance to overall company objectives.

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 Business Ethics
• All employees are expected to act ethically.
• Many organizations have codes of business ethics.

Creating Proper Incentives

• Systems and controls sometimes create incentives for
managers to take unethical actions.
• Controls need to be effective and realistic.

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 Business Ethics
Code of Ethical Standards
Sarbanes-Oxley Act (SOX)
• Clarifies management’s responsibilities.
• Requires certifications by CEO and CFO.
• Selection criteria for Board of Directors and Audit
Committee.
• Substantially increased penalties for misconduct.

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 Company Social Responsibility
• Considers a company’s efforts to employ sustainable
business practices
• Sometimes referred to as triple bottom line because
it evaluates a company’s performance with regard to
people, planet, and profit
• Recent reports indicate that over 50% of the 500
largest U.S. companies provide sustainability reports

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 DO IT! 4 Trends in Managerial Accounting
Match the descriptions that follow with the corresponding terms.

g All activities associated with

1. ______ Terms:
providing a product or performing a. Activity-based costing
b. Balanced scorecard
service.
c. Company social responsibility
a A method of allocating d. Just-in-time (JIT) inventory
2. ______
e. Total quality management (TQM)
overhead based on each product’s f. Statement of Ethical Professional
use of activities in making the Practice
g. Value chain
product.

3. ______
e Systems implemented to reduce defects in finished
products with the goal of achieving zero defects.

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 DO IT! 4 Trends in Managerial Accounting
Match the descriptions that follow with the corresponding terms.

b A performance-
4. ______ Terms:
measurement approach that uses a. Activity-based costing
b. Balanced scorecard
both financial and nonfinancial
c. Company social responsibility
measures, tied to company d. Just-in-time (JIT) inventory
objectives, to evaluate a company’s e. Total quality management (TQM)
f. Statement of Ethical Professional
operations in an integrated fashion. Practice
g. Value chain
d Inventory system in which
5. ______
goods are manufactured or purchased
just as they are needed for use.

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 DO IT! 4 Trends in Managerial Accounting
Match the descriptions that follow with the corresponding terms.

c
6. ______ A company’s efforts to Terms:
employ sustainable business a. Activity-based costing
b. Balanced scorecard
practices with regards to its
c. Company social responsibility
employees, society, and the d. Just-in-time (JIT) inventory
environment. e. Total quality management (TQM)
f. Statement of Ethical Professional
Practice
f
7. ______ A code of ethical standards g. Value chain
developed by the Institute of
Management Accountants.

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Copyright ©2019 John Wiley & Son, Inc. 44