Accounting 202 – Fall 2022

Principles of Financial Accounting –

Michael Barendse
 About Me

 Michael Barendse
 Educational Background
 BA, Finance and Accounting, CSUF
 MBA UCLA
 CPA
 Work Experience
 Ernst & Young
 Sony Pictures Entertainment
 American Golf Corporation
 Mysmart.com
 Marymount College
 Teaching Experience
 Webster University
 Cerritos College
 Marymount College
 Grossmont College
 SDSU/USD
 Personal
 Married with three Children
 Hobbies: surfing, golfing, playing guitar
 About the Class

 Why Accounting?
 Cooperative/Active Learning
 WileyPlus/Canvas
 What’s in the Syllabus?
 Questions
 Managerial Accounting
A field of accounting that provides economic
and financial information for managers and
other internal users.
It measures and reports financial and non-
financial information that helps managers
make decisions to fulfill the goals of the
organization.

Managerial
Accounting Chapter 14 4
 Chapter 14 - Managerial Accounting
Learning Objectives:
1. Explain the distinguishing features of managerial accounting.
2. Identify the three board functions of managerial accounting.
3. Define the three classes of manufacturing costs.
4. Distinguish between product and period costs.
5. Explain the difference between a merchandising and a
manufacturing income statement.
6. Indicate how costs of goods manufactured is determined.
7. Explain the difference between a merchandising and
manufacturing balance sheet.

Managerial
Accounting Chapter 14 5
 Distinctions Between Managerial and
Financial Accounting
Managerial Accounting Financial Accounting
 Primary users are internal  Primary users are parties

managers external to organization

 Internal financial reports as  Financial statement reports

needed, no constraint on are constrained by GAAP,

form of report nor audited must be audited by CPA
 Time focus has a short-  Past orientation time span:

term to future orientation historical evaluation

 Reports are more detailed  Reports are less detailed

re: departments, products, and less flexible; usually 1

customers, etc. year or 1 quarter

Managerial
Accounting Chapter 14 6
 Comparing Managerial and Financial
Feature Financial Accounting Managerial Accounting
Primary Users External users: stockholders, Internal users: officers
of Reports creditors, and regulators. and managers.
Types and
Financial statements. Internal reports.
Frequency
Quarterly and annually. As frequently as needed.
of Reports
Purpose of Special-purpose for
General-purpose.
Reports specific decisions.
Pertains to subunits of
Pertains to business as a
the business Very
whole. Highly aggregated
detailed. Extends beyond
Content of (condensed). Limited to
double-entry accounting
Reports double-entry accounting and
to any relevant data.
cost data. Generally accepted
Evaluated based on
accounting principles.
relevance to decisions.
Verification
Audited by CPA. No independent audits.
Managerial Process
Accounting
Chapter 14 7
 Managerial vs Financial
 BE 14-1

Managerial
Accounting Chapter 14 8
 BE14.1 Complete the following comparison table between
managerial and financial accounting.

Financial Accounting Managerial Accounting

Primary users of
reports
Types of reports
Frequency of reports
Purpose of reports
Content of reports
Verification process

Managerial
Accounting Chapter 14 9
 Management Functions
Planning –
 Look ahead

 Establish objectives

 Maximizing Short-term Profit

 Market Share

 Environmental Protection

 Social Programs

Managerial
Accounting Chapter 14 10
 Management Functions
Directing and Motivating -
 Coordinating company’s diverse

activities and human resources to

produce smooth-running operation

Managerial
Accounting Chapter 14 11
 Management Functions
Controlling –
 Keeping firm’s activities on track

Managerial
Accounting Chapter 14 12
 Management Functions
Managers plan, direct and motivate, and control; further, they make decisions

Formulating Long-Term &

Short-Term Plans (Planning)

Comparing Actual to Decision Implementing Plans

Planned Performance
(Controlling) Making (Directing & Motivating)

Measuring Performance
(Controlling)

Managerial
Accounting Chapter 14 13
 Managerial Cost Concepts
 What costs are involved in making a
product or providing a service?
 If production volume is decreased, will
costs decrease?
 What impact will automation have on
total costs?
 How can costs best be controlled?
Managerial
Accounting Chapter 14 14
 Manufacturing Costs
Consists of activities and processes that
convert raw materials into finished goods.
 Direct Materials - materials easily traced to

the product
 Direct Labor - labor costs easily traced to

the product
 Manufacturing Overhead - everything BUT

direct materials and direct labor

Managerial
Accounting Chapter 14 15
 Indirect Materials
Raw materials that do not physically
become a part of the finished product
or cannot be traced because their
physical association with the finished
product is too small.
Considered part of manufacturing overhead

Managerial
Accounting Chapter 14 16
 Indirect Labor
Work of factory employees that has no
physical association with the finished
product, or for which it is impractical
to trace the costs to the good produced.

Managerial
Accounting Chapter 14 17
 Product versus Period Costs
Product Costs - are a necessary and integral
part of producing the finished product.
Period Costs - Costs that are matched with a
specific time period and charged to expense
as incurred.
 Selling Expenses

 General and Administrative Expenses

Managerial
Accounting Chapter 14 18
 Illustration 1-3

Managerial
Accounting Chapter 14 19
 Product versus Period Costs

BE – 14.5

Managerial
Accounting Chapter 14 20
 BE14.5 Identify whether each of the following costs should be
classified as product costs or period costs

a. ________ Manufacturing overhead.

b. ________ Selling expenses.
c. ________ Administrative expenses.
d. ________ Advertising expenses.
e. ________ Direct labor.
f. ________ Direct materials.

Managerial
Accounting Chapter 14 21
 Where are the costs?
Sales
less: Cost of Goods Sold Product
Costs
Gross Margin
less: Operating Expenses Period Costs
Income before Taxes

Managerial
Accounting Chapter 14 22
 Illustration 1-4 Illustration 1-4

Components of Cost of Goods Sold

Managerial
Accounting Chapter 14 23
 Cost Flows in a Manufacturing
Company
Costs Balance Sheet Income
Statement
Product Cost
RM Purchases RM Inventory

Direct Labor WIP Inventory

ManufacturingFinished Goods Cost of Goods

Overhead Inventory Sold
Period Cost
Selling & Selling &
Administrative Administrative
Managerial
Accounting Chapter 14 24
 Illustration 1-6

Cost of Goods Manufactured

Managerial
Accounting Chapter 14 25
C5

Flow of Manufacturing Activities

Production Activity Sales Activity
Materials
Activity (work in process) (finished goods)
(raw materials) Work in Process
Finished Goods
beginning inventory
Raw beginning inventory
Materials
beginning Raw materials used
Goods
inventory
Direct labor used manufactured

Raw Factory overhead

Materials used
purchases
Income
Balance Sheet
Statement
Raw materials ending inventory
Financial Work in process ending inventory
cost of
reports Finished goods ending inventory goods sold

1-26
 Mason Company
Advertising expense $ 90,000 Insurance, factory 800
Direct labor cost 70,000 Supplies, factory 4,200
Maintenance, factory equip. 6,000 Purchase of raw materials 118,000
Rent, factory building 20,000 Depreciation, office equip 3,000
Indirect labor 30,000 Depreciation, factory equip 19,000
Sales salaries 50,000 Sales (assume) 500,000

January 1 December 31
Inventories
Raw materials $ 7,000 $15,000
Work-in-process $10,000 $ 5,000
Finished Goods $20,000 $35,000

Managerial
Accounting Chapter 14 27
 Mason Company
1. Prepare a schedule of cost of goods
manufactured in good form

2. Prepare of Mason Company’s Income

Statement and partial Balance Sheet
showing inventories only

Managerial
Accounting Chapter 14 28
 Computation of Raw Materials
Used in Production – Mason Co.

Beginning raw materials inventory

+ Purchases of raw materials
- Ending raw materials inventory
= Raw materials used in production

Managerial
Accounting Chapter 14 29
 Computation of Total
Manufacturing Costs - Mason Co.

Raw materials used in production

+ Direct labor
+ Manufacturing overhead
= Total current manufacturing costs

Managerial
Accounting Chapter 14 30
 Computation of Cost of Goods
Manufactured – Mason Co.

Beginning work-in-process inventory

+ Total manufacturing costs
- Ending work-in-process inventory
= Cost of goods manufactured (finished product)

Managerial
Accounting Chapter 14 31
 Computation of Cost of Goods
Sold – Mason Co.

Beginning finished goods inventory

+ Cost of goods manufactured
- Ending finished goods inventory
= Cost of goods sold

Managerial
Accounting Chapter 14 32
 Schedule of Cost of Goods
Manufactured – Mason Co.
Raw Materials:
Beginning Balance of Raw Materials
add: Purchases
Materials Available
less: Ending Balance of Raw Materials
Raw Materials Used
Direct Labor
Manufacturing Overhead:
Maintenance, factory equip.
Rent, factory
Indirect labor
Insurance, factory
Supplies, factory
Depreciation, factory
Total Manufacturing Overhead Costs added
add: Beginning Balance of Work-in-Process
Total Manufacturing Costs
less: Ending Balance of Work-in-Process
Cost of Goods Manufactured
Managerial
Accounting Chapter 14 33
 Income Statement – Mason Co.
Sales
Cost of Goods Sold:
Beginning Balance of Finished Goods
add: Cost of Goods Manufactured
Cost of Goods Available for Sale
less: Ending Balance of Finished Goods
Cost of Goods Sold
Gross Margin
Operating Expenses:
Selling Expenses (Salaries + Advertising)
Administrative Expenses (Depr. Office Equip.)
Income before Taxes
Managerial
Accounting Chapter 14 34
 Partial Balance Sheet – Mason Co.

Inventories:
Raw materials
Work-in-process
Finished goods
Total inventories

Managerial
Accounting Chapter 14 35
 Value & Supply Chain
Management
Value Chain - all activities associated with
providing a product or service.

Supply Chain - All activities from receipt of

an order to delivery of a product or service.

Managerial
Accounting Chapter 14 36
 Value Chain Functions
Research and Development - is the generation of, and
experimentation with, ideas related to new products,
services, or processes.
Design - is the detail and engineering of products.
Production - is the coordination and assembly of resources to
produce a product or deliver a service.
Marketing - is the manner by which individuals or groups
learn about the value and features of products or services.
Distribution - is the mechanism by which products or
services are delivered to the customer.
Customer Service - is the support activities provided to the
customer.
Managerial
Accounting Chapter 14 37
 Just-in-time (JIT) Inventory
JIT means that:
raw materials are received just in time to go into production,
parts arrive at work stations just in time to be assembled into products,
products are completed just in time to be shipped to customers.
Almost no inventories
Pulled through the system
Five Key Elements
1. Develop long term relationships with suppliers
2. Improve the plant layout to reduce distances between work stations
3. Reduce setup time
4. Strive for zero defects
5. Develop a flexible workforce
Managerial
Accounting Chapter 14 38
 Total Quality Management (TQM)
Systems implemented to reduce defects in finished
products with the goal of achieving zero defects.
TQM systems require timely data on defective
products, rework costs, and the cost of honoring
warranty contracts.
One TQM tool is benchmarking - studying
organizations that are the best at performing a
particular task.

Managerial
Accounting Chapter 14 39
 Theory of Constraints and Enterprise
Resources Planning (ERP)
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 (E R P)
•Software programs designed to manage all major

business processes

Managerial
Accounting Chapter 14 40
 Vital Role of
Accounting Information
 Management accounting plays a vital role
in the achievement of company goals and
objectives.
 Management accounting information is
used across the entire value chain of
activities as well as throughout the life
cycle of products and services.

Managerial
Accounting Chapter 14 41
 Balanced Scorecard

• Evaluates operations in an integrated fashion

• Uses both financial and non-financial measures
• Links performance to overall company objectives

Copyright ©2018 John Wiley &

LO 4 Sons, Inc. 42
 Business Ethics (1 of 2)

• 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

Copyright ©2018 John Wiley &

LO 4 Sons, Inc. 43
 Business Ethics (2 of 2)

Code of Ethical Standards

Sarbanes-Oxley Act (SOX)
•Clarifies management’s responsibilities

•Requires certifications by C EO and CFO

•Selection criteria for Board of Directors and Audit Committee

•Substantially increased penalties for misconduct

Copyright ©2018 John Wiley &

LO 4 Sons, Inc. 44
 Corporate 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

Copyright ©2018 John Wiley &

LO 4 Sons, Inc. 45
 Do It! 4: Trends in Managerial
Accounting (1 of 3)

Match the descriptions that follow with the corresponding terms.

Terms:
a. Activity-based costing
b. Balanced scorecard
c. Corporate social responsibility
d. Just-in-time (JIT) inventory
e. Total quality management (T QM)
f. Statement of Ethical Professional Practice
g. Value chain
Copyright ©2018 John Wiley &
LO 4 Sons, Inc. 46
 Do It! 4: Trends in
Managerial Accounting (2 of 3)
1. All activities associated with providing a product or g
performing service.

2. A method of allocating overhead based on each product’s use of a

activities in making the product.
3. Systems implemented to reduce defects in finished products with e
the goal of achieving zero defects.
4. A performance-measurement approach that uses both
b
financial and nonfinancial measures, tied to company
objectives, to evaluate a company’s operations in an
integrated fashion.
5. Inventory system in which goods are manufactured or
d
purchased just as they are needed for use.
Copyright ©2018 John Wiley &
LO 4 Sons, Inc. 47
 Do It! 4: Trends in Managerial
Accounting (3 of 3)
6. A company’s efforts to employ sustainable business c
practices with regards to its employees, society, and the
environment.

7. A code of ethical standards developed by the Institute of f

Management Accountants.

Copyright ©2018 John Wiley &

LO 4 Sons, Inc. 48
 Computation of Raw Materials
Used in Production – Mason Co.

Beginning raw materials inventory $ 7,000

+ Purchases of raw materials 118,000
- Ending raw materials inventory 15,000
= Raw materials used in production $110,000

Managerial
Accounting Chapter 1 49
 Computation of Total
Manufacturing Costs - Mason Co.

Raw materials used in production $110,000

+ Direct labor 70,000
+ Manufacturing overhead 80,000
= Total current manufacturing costs $260,000

Managerial
Accounting Chapter 1 50
 Computation of Cost of Goods
Manufactured – Mason Co.

Beginning work-in-process inventory

$10,000
+ Total current manufacturing costs
260,000
- Ending work-in-process inventory
5,000
= Cost of goods manufactured (finished product) $265,000

Managerial
Accounting Chapter 1 51
 Computation of Cost of Goods
Sold – Mason Co.

Beginning finished goods inventory

$20,000
+ Cost of goods manufactured 265,000
- Ending finished goods inventory
35,000
= Cost of goods sold
$250,000

Managerial
Accounting Chapter 1 52
Schedule of Cost of Goods
Manufactured – Mason Co.
Raw Materials:
Beginning Balance of Raw Materials $7,000
add: Purchases 118,000
Materials Available 125,000
less: Ending Balance of Raw Materials 15,000
Raw Materials Used $110,000
Direct Labor 70,000
Manufacturing Overhead:
Maintenance, factory equip. 6,000
Rent, factory 20,000
Indirect labor 30,000
Insurance, factory 800
Supplies, factory 4,200
Depreciation, factory 19,000
Total Manufacturing Overhead Costs added 80,000
add: Beginning Balance of Work-in-Process 10,000
Total Manufacturing Costs 270,000
less: Ending Balance of Work-in-Process 5,000
Cost of Goods Manufactured $265,000
 Income Statement – Mason Co.
Sales $500,000
Cost of Goods Sold:
Beginning Balance of Finished Goods $ 20,000
add: Cost of Goods Manufactured 265,000
Cost of Goods Available for Sale 285,000
less: Ending Balance of Finished Goods 35,000
Cost of Goods Sold 250,000
Gross Margin 250,000
Operating Expenses:
Selling Expenses (Salaries + Advertising) 140,000
Administrative Expenses (Depr. Office Equip.) 3,000 143,000
Income before Taxes $107,000

Managerial
Accounting Chapter 1 54
 Partial Balance Sheet – Mason Co.

Inventories:
Raw materials $15,000
Work-in-process 5,000
Finished goods 35,000
Total inventories $55,000

Managerial
Accounting Chapter 1 55