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Managerial Accounting
Code: 0502603
Week 1

Introduction to Managerial Accounting

• What will you study on this course?
 Cost Concepts
 Cost behaviour
 Cost-volume-profit analysis
 Budgeting
 Relevant costs for decision making
 Performance measures

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Introduction to Managerial Accounting

• Course ILOs
1. Explain, critically analyze and evaluate the concepts of
cost behavior, cost volume profit analysis, and short-term
decision making, as utilized in management accounting
decisions.
2. Evaluate the use of budgeting, cost control, and
performance measurement as management planning and
decision tools.
3. Apply managerial accounting and its objectives in a way
that demonstrates a clear understanding of ethical
responsibilities.
4. Applying managerial accounting concepts and techniques
to real world examples from the UAE business
environment.

Student Evaluation
Quizzes and 10 marks
assignments
Research paper 15 marks
Midterm 20 marks
Case studies 15 marks
Final exam 40 marks

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Textbook
• Garrison, R. H., Noreen,
E. W., Brewer, P. C.,
Cheng, N. S. and Yuen,
K. C. (2015),
Managerial
Accounting, Asia Global
Edition, Second Edition,
McGraw Hill Education,
New York.

What Is Managerial Accounting?

• Managerial Accounting: Is concerned with providing
information (i.e. financial and non-financial reports) to
managers, that's people inside organization who direct
and control its operations.
• This information helps managers make decisions to
fulfill the goals of an organization.
• Financial Accounting: is concerned with providing
information to stockholders and creditors andother's
outside organization.
• The fundamental difference between financial and
managerial accounting is that financial accounting
serves the needs of those outside the organization,
whereas managerial accounting serves the needs of
managers employed inside the organization.
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Cost Accounting?
• It provides information for both management
accounting and financial accounting.
• It measures and reports financial and
nonfinancial data relating the costs of acquiring
and using the resources of the organization.
• For example, calculating the cost of a product is a cost
accounting function that answers financial accounting’s
inventory-valuation needs, and management
accounting’s decision-making needs (such as deciding
how to price products and choosing which products to
promote).

Comparison of Financial and

Managerial Accounting
Financial Accounting Managerial Accounting
Report to external persons who make Managers who plan for and
• Users financial decisions" investors, lender, control an organization
tax authorities"
• Time Focus Historical perspective “past activities” Future perspective
• Verifiability versus Data should be objective and Emphasis on relevance
relevance verifiable "appropriate for problem on
hand"
• Precision versus Emphasis on precision Emphasis on timeliness
timeliness " Making sure that dollar amount are " Most manager prefer having
accurate for purposes of external good estimate immediately than
reports" wait for more precise"
Primary focus is on the whole Focuses on segments of an
• Subject
organization “companywide reports” organization “segment reports”
• GAAP (rules) Must follow GAAP / IFRS Need not follow GAAP/IFRS
" manager set their own rules"
• Requirement Mandatory for external reports Not Mandatory
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Management Activities
• Managers are carrying about three major
activities, whereby managerial accounting
helps managers perform such activities:
– Planning
– Controlling
– Decision making

General Cost Classifications

• In manufacturing companies costs are divided
onto:
1. Manufacturing costs
2. Non-manufacturing costs (selling, general
and administrative costs).

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1. Manufacturing costs
• Manufacturing costs includes three broad categories:
1. Direct Materials: raw materials that go into the final product.
Direct materials are those materials that become an integral
part of the finished product and whose costs can be
conveniently traced to the finished product.
– Examples:
Direct (Raw materials) Product
Screen Mobile device
Milk Ice Cream
Tyres Cars

1. Manufacturing costs
• 2. Direct Labor: consists of labor costs that
can be easily (i.e., physically and conveniently)
traced to individual units of product.
• Direct labor is sometimes called touch labor
because direct labor workers typically touch
the product while it is being made.
• Examples: workers assembling the mobile
devices.

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Your turn
• Provide a example for a direct material and a
direct labor cost for any product you suggest.

1. Manufacturing costs
• Before moving on to third manufacturing cost
category, how about: Indirect materials and
Indirect labor?
• Materials such as solder and glue are called
indirect materials.
• Indirect labor includes the labor costs of
supervisors, materials handlers, and night
security guards.

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1. Manufacturing costs
• 3. Manufacturing overhead , the third element of
manufacturing cost, includes all manufacturing
costs except direct materials and direct labor.
• Manufacturing overhead includes items such as
indirect materials; indirect labor; maintenance
and repairs on production equipment; and heat
and light, property taxes, depreciation, and
insurance on manufacturing facilities.
• Also called indirect manufacturing cost, factory
overhead, and factory burden.

Exercise
• Give examples of direct materials, direct labor
and manufacturing (factory) overhead costs
for a product of your choice.
• Provide your answer using the following table:
Product iphone
Direct materials (DM) Metal body, battery, board and screen
Direct labor (DL) Worker assembling the device
Manufacturing overhead Factory electricity bills and factory rent

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2. Nonmanufacturing costs
• Nonmanufacturing costs are often divided into
two categories:
• (1) selling costs and
• (2) administrative costs.

2. Nonmanufacturing costs
• (1) Selling costs include all costs that are
incurred to secure customer orders and get
the finished product to the customer.
• Example:
• Apple store sales employees salaries and
commissions.

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2. Nonmanufacturing costs
• (2) Administrative costs include all costs
associated with the general management of
an organization rather than with
manufacturing or selling.
• Examples of administrative costs include
executive compensation, general accounting,
secretarial and public relations.

To sum
Manufacturing costs Non-manufacturing costs

Direct Materials Selling

Direct Labor Administrative

Manufacturing Overhead (includes

indirect materials and indirect labor)

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Product Costs Versus Period Costs

Product costs include Period costs include all

direct materials, direct selling costs and
labor, and administrative costs.
manufacturing
overhead.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement

Quick Check 
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

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Quick Check 
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

Prime Costs Versus Conversion Costs

• Prime cost is the sum of direct materials cost and
direct labor cost.
Prime Costs = Direct Materials + Direct Labor
• Conversion cost is the sum of direct labor cost
and manufacturing overhead cost.
Conversion Costs= Direct Labor + Manufacturing
Overhead
• The term conversion cost is used to describe
direct labor and manufacturing overhead because
these costs are incurred to convert materials into
the finished product.

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Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost

End of Lecture

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