Chapter 1 (16): Introduction to Managerial Accounting – Study Notes

Introduction to Managerial Accounting

Overview

Managerial accounting is a branch of accounting focused on providing information to internal decision makers within an organization. Unlike financial accounting, which serves external stakeholders, managerial accounting supports managers in planning, directing, and controlling business operations to achieve organizational goals.

Learning Objective 1.1: Define Managerial Accounting and Its Uses

Managerial vs. Financial Accounting

• Managerial Accounting: Provides information for internal users (managers) to aid in decision-making, planning, and controlling operations.

• Financial Accounting: Focuses on external users (investors, creditors, regulators) and the preparation of financial statements.

Example: A manager uses cost data to decide whether to discontinue a product line, while an investor reviews financial statements to assess company profitability.

Managers’ Role in the Organization

• Managers exist at various levels and departments within a company.

• Organizational charts illustrate the structure and reporting relationships.

• The Board of Directors sets strategic goals; the CEO implements plans.

• Line positions are directly involved in producing goods/services; staff positions support line functions.

Managerial Accounting Functions

• Planning: Setting goals and determining how to achieve them (strategic and operational planning).

• Directing: Overseeing day-to-day operations.

• Controlling: Monitoring operations and ensuring alignment with goals.

Ethical Standards of Managers

Managerial accountants are expected to uphold high ethical standards, as outlined by the Institute of Management Accountants (IMA):

• Competence: Maintain professional expertise and provide accurate information.

• Confidentiality: Protect sensitive information and disclose only when authorized or required by law.

• Integrity: Avoid conflicts of interest and act ethically.

• Credibility: Communicate information fairly and objectively.

Example: If pressured to manipulate financial results, an accountant should follow organizational policies and escalate concerns if necessary.

Learning Objective 1.2: Classify Costs Used in Managerial Accounting

Types of Companies

• Service Companies: Sell time, skill, and knowledge (e.g., consulting).

• Merchandising Companies: Resell products purchased from suppliers (e.g., retailers).

• Manufacturing Companies: Convert raw materials into finished goods using labor and equipment.

Manufacturing Inventories

• Raw Materials Inventory (RM): Materials awaiting use in production.

• Work-in-Process Inventory (WIP): Goods in production but not yet complete.

• Finished Goods Inventory (FG): Completed products ready for sale.

Direct and Indirect Costs

• Direct Costs: Easily traced to a cost object (e.g., direct materials, direct labor).

• Indirect Costs: Cannot be easily traced to a cost object (e.g., manufacturing overhead).

Manufacturing Costs

• Direct Materials (DM): Raw materials used in production.

• Direct Labor (DL): Labor directly involved in manufacturing.

• Manufacturing Overhead (MOH): Indirect costs such as factory rent, utilities, and indirect labor.

Prime and Conversion Costs

• Prime Costs: Direct Materials + Direct Labor

• Conversion Costs: Direct Labor + Manufacturing Overhead

Formulas:

• Prime Costs: $\$\text{Prime Costs} = \text{Direct Materials} + \text{Direct Labor}$

• Conversion Costs: $\$\text{Conversion Costs} = \text{Direct Labor} + \text{Manufacturing Overhead}$

Product and Period Costs

• Product Costs: Costs of making or purchasing a product (DM, DL, MOH).

• Period Costs: Non-manufacturing costs (selling, administrative, taxes, interest).

Learning Objective 1.3: Prepare Financial Statements for a Manufacturer

Balance Sheet

• Service Companies: No inventory accounts.

• Merchandising Companies: Merchandise Inventory account.

• Manufacturing Companies: Raw Materials, Work-in-Process, and Finished Goods Inventory accounts.

Income Statement

• Service Companies: Only period costs (e.g., salaries, rent).

• Merchandising/Manufacturing Companies: Report Cost of Goods Sold (COGS) as a major expense.

Flow of Product Costs in Manufacturing

Product costs flow from Raw Materials to Work-in-Process to Finished Goods, and finally to Cost of Goods Sold when sold.

Calculating Cost of Goods Manufactured (COGM)

1. Step 1: Calculate direct materials used.

2. Step 2: Calculate total manufacturing costs incurred during the year.

3. Step 3: Calculate cost of goods manufactured.

Formula:

• COGM: $\$\text{COGM} = \text{Total Manufacturing Costs} + \text{Beginning WIP Inventory} - \text{Ending WIP Inventory}$

Calculating Cost of Goods Sold (COGS)

• COGS represents the cost of finished goods sold during the period.

Formula:

• COGS: $\$\text{COGS} = \text{Beginning Finished Goods Inventory} + \text{COGM} - \text{Ending Finished Goods Inventory}$

Unit Product Cost

• Managers use the schedule of cost of goods manufactured to calculate the cost per unit produced.

Formula:

• Unit Product Cost: $\$\text{Unit Product Cost} = \frac{\text{COGM}}{\text{Total Units Produced}}$

Learning Objective 1.4: Business Trends Affecting Managerial Accounting

Key Trends

• Shift toward a service economy

• Global competition

• Time-based competition (e.g., ERP systems, e-commerce, Just-in-Time management)

• Advances in technology

Total Quality Management (TQM)

• TQM is a philosophy of continuous improvement in products and processes.

• Focuses on adding value at each step of the value chain.

The Triple Bottom Line

• Considers economic, social, and environmental impacts (Profits, People, Planet).

• Stakeholders increasingly value ethical and sustainable business practices.

Learning Objective 1.5: Managerial Accounting in Service and Merchandising Companies

Application in Different Organizations

• Managers use cost information to set prices for services or goods.

• Example: Calculating cost per service or per item sold to determine pricing strategies.