Managerial Accounting

Module 1: Nature of Managerial Accounting

Module Learning Outcomes

The nature of managerial accounting

1.1: Define managerial accounting

1.2: Assign costs to common cost categories
1.3: Describe the flow of manufacturing costs
Nature of Managerial Accounting
Learning Outcomes: Nature of Managerial
Accounting

1.1: Define Managerial Accounting

1.1.1: Define managerial accounting
1.1.2: Identify business trends that affect managerial accounting
1.1.3: Compare and contrast managerial and financial
accounting
Define Managerial Accounting

Managerial Accounting:

Managerial accounting provides

the timely and relevant
information needed for effective
decision making.
 Identify Business Trends That Affect
Managerial Accounting

Managerial accounting
● Influenced by managerial
philosophies and trends

Managerial accountants
● Responsible for staying current
with industry best practices
● Must stay flexible and
responsive, and even innovative
Identify Business Trends That Affect
Managerial Accounting

Management philosophies
influencing managerial
accounting

● Total Quality Management

(TQM)
● Value Chain
● Triple Bottom Line
● Enterprise Resource Planning
(ERP)
● Just-in-Time Management (JIT)
Compare and Contrast Managerial and Financial
Accounting
Financial Accounting Managerial Accounting
Users External–usually shareholders, financial Internal–usually managers
analysts, and creditors

Purpose Investment, extending credit, tax Plan, direct, and control operations
reporting

Rules Must comply with generally accepted No rules other than best practices
accounting principles (GAAP)

Perspective Uses historical (or past) data May use estimates of the future for
budgeting and decision making

Time Period Quarterly or annual Daily or weekly

Scope Presents summary data, costs, More detailed data are presented about
Practice Question 1

Your business partner wants to save money by using the financial

statements prepared by your CPA for tax purposes to manage inventory
levels and to control costs. What is your best argument to hire a managerial
accountant instead?

A. Managerial accounting and financial accounting are identical, and

therefore the managerial accountant can prepared the year end
financials.
B. Having a managerial accountant on board will significantly reduce overall
costs and increase revenues.
C. Managerial accounting is a completely different system and utilizes
different books and accounting records, and therefore demands an
independent department.
D. Year-end financials do not give current, relevant information for planning,
directing, and controlling current operations.
Classifying Costs
 Learning Outcomes: Assign Costs to
Common Cost Categories

1.2: Assign Costs to Common Cost Categories

1.2.1: Differentiate between period and product costs
1.2.2: Differentiate between direct and indirect costs
1.2.3: Differentiate between prime and conversion costs
1.2.4: Differentiate between fixed and variable costs
Differentiate Between Period and Product
Costs

The difference between period

costs and product costs is:

● Product costs are the

costs incurred making a
product.
● Period costs are the costs
of sales and administration
incurred within a defined
 Differentiate Between Direct and Indirect Costs

Direct costs are

expenditures in a factory
that can be specifically
traced to a manufactured
item and that becomes part
of its overall cost.
• Direct materials
• Direct labor

Direct costs do not include

manufacturing overhead.
 Differentiate Between Direct and Indirect
Costs
Indirect costs include
manufacturing overhead,
which includes ANY expense
in a factory that is not
specifically traced to
products that customers
purchase.
• Utilities
• Insurance
• Property taxes
• Depreciation
• Maintenance
• Supervisor salaries
Differentiate Between Prime and
Conversion Costs
The difference between
Prime costs and Conversion
costs is:

● Prime costs include

direct materials and
direct labor.

● Conversion costs
include direct labor and
manufacturing overhead.
 Differentiate Between Fixed and Variable Costs

A Variable Cost is a cost

that stays the same per unit
but changes in total
depending on activity.
Examples are:

• Hourly worker costs

• Sales commissions
• Production supplies
 Differentiate Between Fixed and Variable
Costs
A Fixed Cost is a cost that
does not change regardless
of units produced or sold.
Examples are:

• Electricity
• Insurance
• Depreciation
• Salaries
• Rent
 Differentiate Between Fixed and Variable
Costs
Fixed Costs are considered
within a relevant range. The
costs remain the same
regardless of the number of
units sold until capacity has
been reached, at which time
the company cannot
produce or sell any more
without spending money for
expansion.
Manufacturing Costs
 Learning Outcomes: Describe the Flow of
Manufacturing Costs

1.3: Describe the flow of manufacturing costs.

1.3.1: Describe the flow of costs for a manufacturing
company
1.3.2: Create cost statements for a manufacturing company
1.3.3: Differentiate between service, merchandising, and
manufacturing cost accounting requirements
Describe the Flow of Costs for a Manufacturing
Company

Raw materials consist of

both direct materials and
indirect materials.
Work in process are
products that are not yet
ready for sale.

Finished goods are

products that are
completely done and
ready to go out the door.
Describe the Flow of Costs for a Manufacturing
Company
 Create Cost Statements for a Manufacturing
Company

We calculate cost of goods sold using the formula:

Costs of Goods Sold =

Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
– Ending Finished Goods Inventory

The schedule of cost of goods manufactured contains

even more details about the direct materials, direct
labor, and manufacturing overhead that went into the
cost of goods manufactured.
 Differentiate Between Service, Merchandising,
and Manufacturing Cost Accounting
Requirements
A service business sells expertise, advice,
assistance, professional skills, or an experience rather
than a physical product.
A merchandising business purchases finished and
packaged products from other companies, marks up
the costs of these items and sells them to customers.

A manufacturing business assembles and packages

products for sale to merchandisers or end-users.
Practice Question 2

Consider this calculation: Beginning finished goods inventory plus cost of

goods manufactured less ending finished goods inventory. What would this
formula tell you?

A. Cost of goods sold

B. Gross profit
C. Cost of good manufactured
D. Work-in-process inventory
Quick Review
• What is the definition of managerial accounting?
• What business trends affect managerial accounting?
• What are the similarities and differences between managerial and
financial accounting?
• Describe the differences between period and product costs.
• Illustrate the differences between direct and indirect costs.
• What are the differences between prime and conversion costs?
• Describe the differences between fixed and variable costs.
• What is the flow of costs for a manufacturing company?
• How do you create cost statements for a manufacturing company?
• Contrast and differentiate the cost accounting requirements
between service, merchandising and manufacturing.