Chapter 14 Notes: Managerial Accounting (Kimmel, Weygandt, Mitchell)
Learning Objective 1: Identify the features of managerial accounting and the functions of management
Managerial accounting provides economic and financial information for managers and other internal users.
Internal users vs external users (contrast with financial accounting).
Both managerial and financial accounting quantify and communicate economic events, but they differ in purpose, scope, and audience.
Comparing Managerial and Financial Accounting
Similarities: Both deal with economic events of a business and require quantification and communication of those events to interested parties.
Differences (LO 1):
Primary users
Financial accounting: external users (stockholders, creditors, regulators).
Managerial accounting: internal users (officers and managers).
Types and frequency of reports
Financial: external financial statements, typically quarterly and annually.
Managerial: internal reports, as frequently as needed.
Purpose of reports
Financial: general-purpose.
Managerial: special-purpose for specific decisions.
Content of reports
Financial: pertains to the business as a whole; highly aggregated; limited to accrual accounting and cost data; GAAP-governed.
Managerial: pertains to subunits of the business; very detailed; extends beyond accrual accounting to any relevant data; not GAAP-bound; evaluated for decision relevance.
Verification process
Financial: audited by CPA.
Managerial: no independent audits.
Management functions (Planning, Directing, Controlling) and their sub-points
Planning
Maximize short-term profit and market share.
Commit to environmental protection and social programs.
Add value to the business.
Directing
Coordinate diverse activities and human resources.
Implement planned objectives.
Provide incentives to motivate employees; hire and train employees; ensure smooth operation.
Controlling
Keep and maintain activities on track.
Determine whether goals are met.
Decide what changes are needed to get back on track.
May use informal or formal evaluation systems.
Organizational structure
Organization charts show interrelationships of activities and the delegation of authority and responsibility within the company.
DO IT! 1: Managerial Accounting Part 1 — True/False
1) Managerial accountants have a single role within an organization: collecting and reporting costs to management. FALSE
2) Financial accounting reports are general-purpose and intended for external users. TRUE
3) Managerial accounting reports are special-purpose and issued as frequently as needed. TRUE
DO IT! 1: Managerial Accounting Part 2 — True/False
4) Managers’ activities and responsibilities can be classified into three broad functions: cost accounting, budgeting, and internal control. FALSE
5) Managerial accounting reports must now comply with generally accepted accounting principles (GAAP). FALSE
Learning Objective 2: Describe the classes of manufacturing costs and the differences between product and period costs
Manager questions to guide cost thinking
1. What costs are involved in making a product or providing a service?
2. If we decrease production volume, will costs change?
3. What impact will automation have on total costs?
4. How can we best control costs?
Manufacturing costs (LO 2)
Definition: Activities and processes that convert raw materials into finished goods.
Major components: Direct Materials, Direct Labor, Manufacturing Overhead.
Direct Materials (DM): Raw materials that can be physically and directly associated with the finished product during the manufacturing process.
Direct Materials example: material costs that become part of the finished product.
Direct Labor (DL): Work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
Indirect Materials: Not physically part of the finished product or too costly to trace; part of Manufacturing Overhead (MOH).
Indirect Labor: Manufacturing-related employees without direct physical association to the finished product; costs are part of MOH.
Manufacturing Overhead (MOH): All manufacturing-related costs not direct materials or direct labor; also called factory overhead, indirect manufacturing costs, or burden.
Product costs vs. Period costs
Product costs (inventoriable): DM + DL + MOH; costs that are an integral part of producing the product; recorded in inventory; expensed as COGS when goods are sold.
Period costs (non-manufacturing): Nonmanufacturing costs (selling and administrative expenses); expensed in the period incurred.
Product Costs vs. Period Costs (summary chart behavior)
Product costs (Inventoriable):
Direct Materials, Direct Labor, Manufacturing Overhead.
In Inventory (Finished Goods, Work in Process, Raw Materials).
Period costs (Non-Inventoriable):
Selling Expenses, Administrative Expenses.
Illustration: Terrain Park Boards (cost classification exercise)
1. Wood cores, fiberglass, and resin ($30 per board) → Product Cost (Direct Materials)
2. Labor to trim and shape boards ($40 per board) → Product Cost (Direct Labor)
3. Factory equipment depreciation ($25,000) → Product Cost (Manufacturing Overhead)
4. Property taxes on factory building ($6,000 per year) → Manufacturing Overhead
5. Advertising costs ($60,000 per year) → Period Cost
6. Sales commissions ($20 per board) → Period Cost
7. Factory maintenance salaries ($25,000 per year) → Manufacturing Overhead
8. Salary of factory manager ($70,000 per year) → Manufacturing Overhead
9. Cost of shipping boards to customers ($8 per board) → Period Cost
Salary of product quality inspector ($20,000 per year) → Manufacturing Overhead
Additional Terrain Park quantitative example (Total manufacturing costs concept)
Given:
Direct materials used: $146,400
Direct labor: $175,600
Manufacturing overhead: $54,800 (indirect materials, indirect labor, and other overhead items broken out: Indirect labor $14,300; Factory repairs $12,600; Factory utilities $10,100; Factory depreciation $9,440; Factory insurance $8,360)
Beginning Work in Process: $18,400
Ending Work in Process: $25,200
Total Manufacturing Costs =
Cost of Goods Manufactured (COGM) = Beginning WIP + Total Manufacturing Costs − Ending WIP
Note: The Terrain Park example shows a complete COGM schedule flow, including raw materials flows and WIP calculations; values illustrate the mechanics of moving raw materials through to finished goods.
Why it matters
Product costing ties directly to inventory valuation and expense recognition (COGS) under different inventory systems.
Distinguishing product vs. period costs helps managers make decisions about pricing, budgeting, and cost control.
DO IT! 2: Managerial Cost Concepts — Quick classification (summary of solution)
Tires: Direct Materials → Product Cost
Wages of employees who put tires on the wheels: Direct Labor → Product Cost
Factory building depreciation: Manufacturing Overhead → Product Cost
Advertising expenditures: Period Cost
Factory machine lubricants: Manufacturing Overhead → Product Cost
Spokes: Direct Materials → Product Cost
Salary of factory manager: Manufacturing Overhead → Product Cost
Salary of accountant: Period Cost
Handlebars: Direct Materials → Product Cost
Salaries of factory maintenance employees: Manufacturing Overhead → Product Cost
Salary of product quality inspector: Manufacturing Overhead → Product Cost
Learning Objective 3: Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer
Manufacturing costs in financial statements (intro)
The financial statements of a manufacturer are similar to those of a merchandiser, but differences arise in two places:
The current assets section of the balance sheet
The cost of goods sold (COGS) section of the income statement
Balance Sheet: Inventories in a manufacturer
Inventory accounts include Raw Materials, Work in Process, and Finished Goods.
A merchandising company reports a single Inventory (no separate subinventories).
The presence of multiple inventory accounts affects the current assets presentation and the calculation of COGS.
Income Statement differences under a periodic system
Merchandising company: COGS = Beginning Inventory + Purchases - Ending Inventory
Manufacturing company (periodic): COGS = Beginning Finished Goods + Cost of Goods Manufactured - Ending Finished Goods
Sample forms (conceptual, not all numbers shown)
Balance Sheet (Merchandiser vs. Manufacturer):
Merchanising: Current assets typically include Cash, Accounts receivable, Inventory, Prepaid expenses.
Manufacturing: Current assets include Cash, Accounts receivable, Inventory (which is subdivided into Raw Materials, Work in Process, Finished Goods), Prepaid expenses.
Income Statement (partial) under a periodic system:
Merchandising: COGS section shows beginning inventory, purchases, cost of goods available for sale, ending inventory, Cost of Goods Sold.
Manufacturer: COGS section shows Beginning Finished Goods, Cost of Goods Manufactured, Cost of Goods Available for Sale, Ending Finished Goods, Cost of Goods Sold.
Cost of Goods Manufactured (COGM) schedule (structure)
Work in Process, January 1 (BWIP)
Direct Materials Used
Direct Labor
Manufacturing Overhead
Total Manufacturing Costs
Total Cost of Work in Process (TCWIP)
Less: Work in Process, December 31 (EWIP)
Cost of Goods Manufactured (COGM)
Example structure (from textbook layout):
Begin WIP (Jan 1)
Raw Materials: Inventory Jan 1; Raw materials purchases; Total raw materials available; Less: Raw materials inventory Dec 31; Direct materials used
Direct Labor
Manufacturing Overhead (with breakdowns, e.g., Indirect labor, Factory repairs, Factory utilities, Factory depreciation, Factory insurance)
Total Manufacturing Costs
Total cost of Work in Process
Less: WIP December 31
Cost of Goods Manufactured
Illustrative calculations (Terrain Park-inspired example; Keystone has its own numbers)
Total Manufacturing Costs:
Direct Materials Used = $146{,}400
Direct Labor = $175{,}600
Manufacturing Overhead = $54{,}800
Total Manufacturing Costs =
Beginning Work in Process (BWIP) = $18{,}400; Ending Work in Process (EWIP) = $25{,}200
Cost of Goods Manufactured (COGM) = BWIP + Total Manufacturing Costs − EWIP =
Note: A separate Keystone example yields a different COGM (e.g., $385,500) due to different input numbers; the method remains the same.
Balance Sheet and Income Statement emphasis on COGS
For a manufacturer, COGS reflects: Beginning Finished Goods + COGM − Ending Finished Goods.
The finished goods inventory is part of current assets; changes affect the COGS calculation and gross margin.
DO IT! 3: Cost of Goods Manufactured — Keystone example (structure to replicate)
Given: March 1 and March 31 balances: Raw Materials, Work in Process, Materials purchased, Direct labor, MOH.
Prepare COGM for March 2025 using the schedule layout and assuming all raw materials used are direct materials.
Solution structure typically shows BWIP, DM used, DL, MOH, Total Manufacturing Costs, TCWIP, EWIP, and COGM (numerical result).
Learning Objective 4: Discuss trends in managerial accounting
Service industries and the value chain
Much of the U.S. economy focuses on services rather than goods.
About 80% of U.S. workers are employed by service companies.
Most manufacturing techniques apply to service companies as well.
Focus on the value chain
The value chain includes all business processes associated with providing a product or service.
For manufacturers, this typically includes activities from product design to after-sales service.
Key trends and concepts
Just-In-Time (JIT) Inventory: Goods manufactured or purchased just in time for sale.
Total Quality Management (TQM): System to reduce defects with the goal of zero defects.
Theory of Constraints (TOC): Identify and manage bottlenecks to improve profitability.
Enterprise Resource Planning (ERP): Software that integrates major business processes.
Activity-Based Costing (ABC): Allocates overhead based on product use of activities; improves costing accuracy and efficiency.
Balanced Scorecard: A performance measurement approach using financial and nonfinancial measures linked to company objectives in a cause-and-effect framework.
Corporate Social Responsibility (CSR): Focus on sustainable business practices affecting people, planet, and profit; many large companies publish sustainability reports.
Ethical standards and governance: It’s essential to act ethically; codes of ethics and governance structures support this.
Sarbanes-Oxley Act (SOX): Clarifies management responsibilities, requires CEO/CFO certifications, strengthens board/audit committee criteria, increases penalties for misconduct.
Triple bottom line: People, Planet, Profit; CSR is sometimes framed in these terms.
DO IT! 4: Trends in Managerial Accounting — Matching exercise
Items 1–5 (descriptions matched to terms):
All activities associated with providing a product or performing service → Value chain (g)
A method of allocating overhead based on each product’s use of activities in making the product → Activity-based costing (a)
Systems implemented to reduce defects in finished products with the goal of achieving zero defects → Total Quality Management (TQM) (e)
A performance-measurement approach using financial and nonfinancial measures tied to objectives → Balanced Scorecard (b)
Inventory system in which goods are manufactured or purchased just as they are needed → Just-In-Time (JIT) inventory (d)
Items 6–7 (CSR and ethics) matched as:
Corporate social responsibility → CSR (c)
A code of ethical standards developed by the Institute of Management Accountants → Statement of Ethical Professional Practice (f)
Ethics, governance, and practical implications
Emphasis on ethics and proper controls to prevent manipulation of incentives.
SOX and governance requirements shape reporting and management accountability.
CSR and sustainability reporting influence stakeholder decision-making and long-term strategy.
Key formulas to remember
Total Manufacturing Costs = Direct Materials Used + Direct Labor + Manufacturing Overhead
Cost of Goods Manufactured (COGM)
Cost of Goods Sold (Merchandising)
Cost of Goods Sold (Manufacturer)
Product costs vs. Period costs (conceptual)
Product costs: DM + DL + MOH; inventoriable
Period costs: Selling and Administrative (non-inventoriable)