Chapter 15, Introduction to Managerial Accounting:
Managerial Accounting
Differences Between Managerial and Financial Accounting:
Two types of accounting:
1. Financial Accounting: Reported at fixed intervals in the financial statements, which are used
by external users such as shareholders, creditors and government agencies.
2. Managerial accounting: Designed to meet the specific needs of a company’s management.
Includes the following:
Historical data: Provide objective measures of past operations
Estimated data: Provide subjective estimates about future decisions
Unlike the financial statements in financial accounting, managerial accounting reports do NOT always
have to be:
- Prepared according to GAAP: management decides
- Prepared at fixed intervals: most reports are prepared as management needs the info
- Prepared for the business as a whole: most reports are prepared for specific segments
Financial Statements Managerial Accounting reports
Users of Information External users and company Management
management
Nature of Information Objective Objective and subjective
Guidelines for preparation Prepared according to GAAP Prepared according to
management needs
Focus on Reporting Company as a whole Company as a whole or segment
Managerial Accounting in the Organisation:
Company can be divided into two departments:
1. Line department: Line responsibilities. Directly involved in providing goods or services to the
company (Senior Vice President, Plant Manager, Managing Director)
2. Staff department: Staff responsibilities. Provides services, assistance and advice to
departments with line or other staff responsibilities (Human Resources, Controller)
Controller: The chief management accountant. Responsible for specialized accounting.
The Management Process:
Management process has five basic phases:
1. Planning
2. Directing
3. Controlling
4. Improving
5. Decision making
,Planning: Used to develop the company’s objectives (goals) and translating these into courses of
actions.
1. Strategic planning: Developing long-term actions to achieve the company’s objectives.
Strategies: The long-term actions developed in strategic planning.
2. Operational planning: Developing short-term actions for managing the day-to-day
operations.
Directing: The process by which managers run day-to-day operations.
Controlling: Monitoring operating results and comparing these with the expected results.
- This feedback allows management to isolate areas for further investigation.
- Management by exception: The philosophy of controlling by comparing actual and expected
results.
Improving: Feedback is used to support continuous improvement.
- Continuous process improvement: the philosophy of continually improving employees,
business processes and products.
Decision making: Inherent in each of the preceding management processes.
Uses of Managerial Accounting Information:
Examples of how managerial accounting could be used:
1. The cost of production may be used to determine price
2. Comparing specific costs factors over time may be used to monitor and control costs
3. Performance/efficiency reports
4. Compare processes to identify cost savings
Manufacturing Operations:
Direct and Indirect Costs:
Cost: A payment of cash or the commitment to pay cash in the future for the purpose of generating
revenues.
Cost object: The segment to which costs are assigned. Common examples of cost objects are:
product lines, geographic territories, customers, departments
E.g. in the manufacture of chocolate bars, the cost object is ‘chocolate bar’.
Direct costs:
Expenses that can be directly attributed to a cost object. Directly related to the production of the
goods or services produced (cost of raw materials, labor, equipment or machinery used to
manufacture a product).
So also: the wages of the workers who assemble the furniture
Indirect cost:
Cannot be identified with or traced to a cost object. E.g. salaries of factory supervisors.
, Manufacturing Costs:
The cost to manufacture a product includes
1. Direct materials cost
2. Direct labour cost
3. Factory overhead cost
Direct materials cost:
The cost of any material that is an integral part of the finished product. Materials directly associated
with the finished product. Two requirements:
1. An integral part of the finished product
2. A significant portion of the total cost of the product
The cost of guitar string, when producing a guitar, is not a direct materials cost since the cost of
guitar strings is an insignificant part of the total cost.
Direct labour cost:
Cost of employee wages that is an integral part of the finished product. E.g. wages of employees who
assembled the products and processed the raw materials. Two requirements:
1. An integral part of the finished product
2. A significant portion of the total cost of the product
E.g., machine operators and assembler’s wages ARE direct labour
Janitors cleaning the factory are NOT direct labour.
Factory Overhead Cost:
Costs other than direct materials and direct labour that are incurred in the manufacturing process-
- Sometimes also called manufacturing overhead or factory burden.
Include the following:
- Heating and lighting the factory
- Repairing and maintaining factory equipment
- Property taxes on factory buildings and land
- Insurance on factory buildings
- Depreciation on factory plant and equipment
Also includes materials an labour costs that do not enter directly into the finished product. E.g. the
cost of oil used to lubricate machinery and the wages of janitors and supervisors. Also when costs are
not a significant portion of the total product cost.
Prime costs and conversion costs:
For analysis and reporting, direct materials, direct labour and factory overhead costs may be grouped
together for analysis and reporting.
Prime costs: Direct labour + Direct materials
Conversion costs: Direct labour + overhead
Direct labour is both a prime cost and conversion cost.
Managerial Accounting
Differences Between Managerial and Financial Accounting:
Two types of accounting:
1. Financial Accounting: Reported at fixed intervals in the financial statements, which are used
by external users such as shareholders, creditors and government agencies.
2. Managerial accounting: Designed to meet the specific needs of a company’s management.
Includes the following:
Historical data: Provide objective measures of past operations
Estimated data: Provide subjective estimates about future decisions
Unlike the financial statements in financial accounting, managerial accounting reports do NOT always
have to be:
- Prepared according to GAAP: management decides
- Prepared at fixed intervals: most reports are prepared as management needs the info
- Prepared for the business as a whole: most reports are prepared for specific segments
Financial Statements Managerial Accounting reports
Users of Information External users and company Management
management
Nature of Information Objective Objective and subjective
Guidelines for preparation Prepared according to GAAP Prepared according to
management needs
Focus on Reporting Company as a whole Company as a whole or segment
Managerial Accounting in the Organisation:
Company can be divided into two departments:
1. Line department: Line responsibilities. Directly involved in providing goods or services to the
company (Senior Vice President, Plant Manager, Managing Director)
2. Staff department: Staff responsibilities. Provides services, assistance and advice to
departments with line or other staff responsibilities (Human Resources, Controller)
Controller: The chief management accountant. Responsible for specialized accounting.
The Management Process:
Management process has five basic phases:
1. Planning
2. Directing
3. Controlling
4. Improving
5. Decision making
,Planning: Used to develop the company’s objectives (goals) and translating these into courses of
actions.
1. Strategic planning: Developing long-term actions to achieve the company’s objectives.
Strategies: The long-term actions developed in strategic planning.
2. Operational planning: Developing short-term actions for managing the day-to-day
operations.
Directing: The process by which managers run day-to-day operations.
Controlling: Monitoring operating results and comparing these with the expected results.
- This feedback allows management to isolate areas for further investigation.
- Management by exception: The philosophy of controlling by comparing actual and expected
results.
Improving: Feedback is used to support continuous improvement.
- Continuous process improvement: the philosophy of continually improving employees,
business processes and products.
Decision making: Inherent in each of the preceding management processes.
Uses of Managerial Accounting Information:
Examples of how managerial accounting could be used:
1. The cost of production may be used to determine price
2. Comparing specific costs factors over time may be used to monitor and control costs
3. Performance/efficiency reports
4. Compare processes to identify cost savings
Manufacturing Operations:
Direct and Indirect Costs:
Cost: A payment of cash or the commitment to pay cash in the future for the purpose of generating
revenues.
Cost object: The segment to which costs are assigned. Common examples of cost objects are:
product lines, geographic territories, customers, departments
E.g. in the manufacture of chocolate bars, the cost object is ‘chocolate bar’.
Direct costs:
Expenses that can be directly attributed to a cost object. Directly related to the production of the
goods or services produced (cost of raw materials, labor, equipment or machinery used to
manufacture a product).
So also: the wages of the workers who assemble the furniture
Indirect cost:
Cannot be identified with or traced to a cost object. E.g. salaries of factory supervisors.
, Manufacturing Costs:
The cost to manufacture a product includes
1. Direct materials cost
2. Direct labour cost
3. Factory overhead cost
Direct materials cost:
The cost of any material that is an integral part of the finished product. Materials directly associated
with the finished product. Two requirements:
1. An integral part of the finished product
2. A significant portion of the total cost of the product
The cost of guitar string, when producing a guitar, is not a direct materials cost since the cost of
guitar strings is an insignificant part of the total cost.
Direct labour cost:
Cost of employee wages that is an integral part of the finished product. E.g. wages of employees who
assembled the products and processed the raw materials. Two requirements:
1. An integral part of the finished product
2. A significant portion of the total cost of the product
E.g., machine operators and assembler’s wages ARE direct labour
Janitors cleaning the factory are NOT direct labour.
Factory Overhead Cost:
Costs other than direct materials and direct labour that are incurred in the manufacturing process-
- Sometimes also called manufacturing overhead or factory burden.
Include the following:
- Heating and lighting the factory
- Repairing and maintaining factory equipment
- Property taxes on factory buildings and land
- Insurance on factory buildings
- Depreciation on factory plant and equipment
Also includes materials an labour costs that do not enter directly into the finished product. E.g. the
cost of oil used to lubricate machinery and the wages of janitors and supervisors. Also when costs are
not a significant portion of the total product cost.
Prime costs and conversion costs:
For analysis and reporting, direct materials, direct labour and factory overhead costs may be grouped
together for analysis and reporting.
Prime costs: Direct labour + Direct materials
Conversion costs: Direct labour + overhead
Direct labour is both a prime cost and conversion cost.
