MANAGERIAL

ACCOUNTING
Di erences Between Financial and
Managerial Accounting
Primary Users of Reports
Financial Accounting Managerial Accounting
External Users, i.e: Stockholders, Creditors, Internal Users, ie: O cers, Department
and Regulatory Agencies. Heads, Managers, and Supervisors in the
company.

Types and Frequency of Reports

Financial Accounting Managerial Accounting
Classi ed nancial statements, issued Internal reports, issued as frequently as
quarterly and annually. needed.

Purpose of Reports
Financial Accounting Managerial Accounting
To provide general-purpose infos for all users. To provide special-purpose infos for a
particular user for speci c decions.

Content of Reports
Financial Accounting Managerial Accounting
Entity as a whole and highly aggregated. Sub units of the entity, may be very detailed.
Limited to double entry accounting system May extend beyond double entry accntng
and cost data. Reporting standard is system ot any type of relevant data.
generally accepted accounting principles. Reporting standard is relevant to the
decisions to be made.
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 Veri cation Process
Financial Accounting Managerial Accounting
Annual independent audit by CPA. No independent audits.

Ethical Standards for Managerial

Accountants
✓Managerial accountants have an ethical obligation to their companies and the public
✓ To provide guidance for managerial accountants in the performance of their duties, the
Institute of Management Accountants (IMA) has a developed a code of ethical standards,
entitled Standards of Ethical Conduct for Management Accountants.
✓ The code divides managerial accountant’s responsibilities into 4:
- Competence, Con dentiality, Integrity, and Objectivity

Management Functions Planning

The management of an organization performs three broad functions:

✓ Planning requires mngmnt: to look ahead, and establish objectives

- These objectives are usually quite diverse, key modern mngmnt objective appears to
be to add value to the business under its control.
- Value is usually measured by
- The trading price of the company’s stock and the potential selling price of the
company

✓ Directing and Motivating: involves coordinating diverse activities and human resources to
produce a smooth-running operation.
- This function relates to the implementation of planned objectives.
- Most companies prepare org charts to show
- interrelationshop of activities, and delegation of authority and
responsibility within the company.

✓ Controlling: process of keeping rm’s activities on track.

In controlling ops, mngmnt determines
- Whether planned goals are being met, and what changes are necessary when there
are deviations from targeted objectives.
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 Managerial Cost Concepts
to perform three mngmnt functions e ectively, mngmnt needs info. One very
important type of info is related to costs. Questions such as the need answering:

- What costs are involved in making the product?

- If production volume is decreased, will costs decrease?
- What impact will automation have on total costs?
- How can costs best be controlled in the organization?

Managerial Costs: Direct Materials

✓ Raw materials represent the basic materials and parts that are to be used in the
manufacturing process.

✓ Raw materials that can be physically and conveniently associated with the nished product
during the manufacturing process are termed direct materials.

Indirect Materials
✓ The cost is insigni cant and immaterial
✓ Cannot be easily associated with the nish product
- do not physically become part of the nished product, or cannot be traced because
their physical association with the nished product is too small in terms of cost.
- account for as part of manufacturing overhead.

Direct Labor
✓ work of factory employees that can be physically and conveniently associated with
converting raw materials into nished goods.

Indirect Labor
✓ wages of maintenance people, timekeepers, and supervisors are normally categorized as
indirect labor.
✓ their e orts have no physical association with the nished product.
✓ it is impractical to trace the costs to the goods provided.
✓part of manufacturing overhead.
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 Manufacturing Overhead
consists of costs that are indirectly associated with the manufacture of the nished
product.

these costs may also be de ned as manufacturing costs that cannot be classi ed as
either direct materials or direct labor.

Manufacturing overhead includes

- indirect materials, indirect labor, depreciation on facotry buildings and
machinery,

Product Costs
also called as invetoriable costs, include each of the manufacturing cost elements
(direct materials, direct labor, and manufacturing overhead). They are the costs that are a
necessary and integral part of producing the nished product.

Not expensed (as cost of goods)

Prime and Conversion

- direct materials and direct labor are often referred to as prime
costs due to their direct association with the manufacturing of the
nished product.

- direct labor and manufacturing overhead are often referred to as

conversion costs since they are incurred in converting raw materials
into nished goods.

Period Costs
- are identi able with a speci c time period rather than a salable
product.
- are deducted from revenues in the period in which they are
incurred.
- relate to nonmanufacturing, (thus, noninventoriable) costs, and
include selling and admin expense.
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Merchandising versus Manufacturing
Income Statements
- income statements of a merchandising company and a
manufacturing company di er in the cost of goods sold section.

- Merchandising company, cost of goods sold is calculated by

adding the beginning merchandise inventory and the cost of goods
purchased, and subtracting the ending merchandise inventory.

- Manufacturing company, cost of goods sold is calculated by

adding the beginning nished goods inventory and the cost of goods
manufactured, and subtracting the ending nished goods inventory.
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Merchandising versus Manufacturing
Balance Sheets
- Unlike the balance sheet for a merchandising company,
which shows just one inventory category, the balance sheet of a
manufacturing company may have three inventory accounts:

- Finished Goods Inventory, which shows the cost of

completed goods on hand;
- Work in Process Inventory, which shows the cost
applicable to units that have been started into prod, but
are only partially completed
- Raw Materials Inventory, which shows the cost of raw
materials on hand.