Chapter 1: Managerial Accounting - Key Concepts (Flashcards)
Chapter 1 notes (Managerial Accounting) – Comprehensive chapter summary
Chapter Overview
Chapter focuses on how managers determine and control costs (material, labor, overhead) and relate costs to profits.
Emphasizes that managers’ decisions influence company fate and that accounting information is critical for decision making and performance evaluation.
Feature Story: Wenonah Canoe and Current Designs illustrate real-world relevance of cost management and the role of accounting behind-the-scenes decisions.
Key lesson: To succeed, a company must have a firm grip on its numbers, not just great products or sales.
Wenonah’s context: founder Mike Cichanowski built Wenonah Canoe; acquisition of Current Designs expanded capacity and product lines; 90 employees at Current Designs produce about 12,000 canoes/kayaks per year.
Mike’s “three-legged stool” of success:
Great product quality and capability (knowledge/commitment to a superior product).
Strong selling capability (ability to market and sell products).
Accounting/financial information (control of costs, profitability, and decision support).
Practical implication: Without solid accounting information, even excellent products will struggle financially.
Core takeaway: Managerial accounting provides tools for planning, directing, controlling, and evaluating performance.
What Is Managerial Accounting? (Context in the Course)
Provides economic and financial information for internal users (managers, supervisors, internal decision-makers).
Emphasizes decision-focused information for planning, directing, and controlling operations.
Connects to real-world business activities (production, pricing, budgeting, performance evaluation).
Watch/Reference: What Is Managerial Accounting? video in WileyPLUS (Intro to topics and course structure).
Chapter Outline and Learning Objectives
LO1: Identify features of managerial accounting and functions of management; contrast with financial accounting.
LO2: Describe classes of manufacturing costs; differentiate product vs. period costs.
LO3: Demonstrate cost of goods manufactured (COGM) and prepare financial statements for a manufacturer.
LO4: Discuss trends in managerial accounting (service industries, value chain focus, ethics, data analytics).
The chapter includes practice opportunities, DO IT! exercises, and links to WileyPLUS tutorials.
Essential Concepts and Key Terms (Introductory Definitions)
Managerial accounting vs. financial accounting:
Managerial: internal users, special-purpose reports, as-needed frequency, decision-relevant content; not GAAP-bound; no mandatory independent audits.
Financial: external users, general-purpose reports, periodic (quarterly/annual), GAAP-bound; audited by CPAs.
Primary management functions: Planning, Directing, Controlling.
Organizational structure references: organization charts show reporting relationships; roles include line vs. staff positions; CFO, Controller, Treasurer, Internal Audit, etc.
Differences: Financial vs Managerial Accounting (Illustration 1.1 summary)
Primary users:
Financial: External (stockholders, creditors, regulators).
Managerial: Internal (officers, managers).
Reports and frequency:
Financial: External financial statements; quarterly and annual.
Managerial: Internal reports; as frequently as needed.
Purpose:
Financial: General-purpose.
Managerial: Special-purpose for specific decisions.
Content and scope:
Financial: Pertains to the entity as a whole; highly aggregated; limited to accrual accounting and cost data; GAAP-governed.
Managerial: Pertains to subunits; very detailed; extends beyond accrual to all relevant data; not GAAP-bound.
Organizational Structure (Illustration 1.2; 1.3 overview)
Corporate hierarchy basics:
Board of Directors -> CEO/President
CEO works with CFO (VP Finance) and other officers (Marketing, Legal, Operations, IT, HR).
CFO supported by Controller and Treasurer; Internal Audit function (staff) reports to CFO.
Internal Audit reviews reliability/integrity of financial information and internal controls; ensures compliance with policies/regulations; helps ensure efficient use of resources.
Line vs. staff positions:
Line: directly generate revenue (e.g., VP Ops, factory managers, supervisors, production workers).
Staff: support line functions (e.g., finance, legal, HR).
Key management functions and control mechanisms:
Large firms use budgets, responsibility centers, performance reports to monitor and control resources.
Decision-making is an outcome of planning, directing, and controlling (not a separate function).
Management insight examples (Illustration 1.2–1.6):
DPR Construction example: some firms operate without a single CEO using a management committee to improve decision-making and continuity.
DO IT! exercises reinforce understanding of managerial accounting basics (e.g., True/False items about functions and GAAP).
Essential Management Functions in Detail
Planning: Look ahead; set objectives; can include environmental/societal goals; objective is value creation (stock price, market share).
Directing: Coordinate activities and human resources; implement plans; assign/incentivize employees; example: coordination of purchasing, manufacturing, warehousing, and selling.
Controlling: Track performance against plans; analyze deviations; implement corrective actions; importance of internal controls (risk of scandals without controls).
The role of internal control systems in ensuring reliable information and safeguarding assets (references to Theranos, Danske Bank examples).
Value Chain, Cost Concepts, and Cost Classifications
Value chain concept: all business processes from R&D/design through delivery and after-sales service; includes both manufacturing and non-manufacturing costs.
Just-in-time (JIT) and total quality management (TQM) as value-chain innovations to reduce waste and defects; emphasis on near-zero defects.
Theory of constraints: identify bottlenecks and address them to improve overall profitability.
Enterprise Resource Planning (ERP) systems: centralized data management to integrate major processes (purchasing, manufacturing, sales, HR); may replace many legacy software packages.
Activity-Based Costing (ABC): allocate overhead to products based on activities that drive costs; improves product costing accuracy and value-chain efficiency.
Data analytics: big data, data visualizations; used for better decision-making; end-of-chapter exercises often include data-visualization tasks (e.g., Disney MagicBand data example).
Trends in Managerial Accounting (LO4 focus)
Service industries now dominate the U.S. economy (≈80% of workers in service companies).
Value chain focus drives innovations (JIT, lean manufacturing, TQM, ABC, theory of constraints).
Balanced Scorecard: integrates financial and nonfinancial measures aligned with company objectives; used by Hilton, Walmart, HP, etc.; links performance measures in a cause-and-effect chain.
Corporate social responsibility (CSR) and the triple bottom line (people, planet, profit); many large firms publish sustainability reports; financial incentives often tied to sustainability goals.
Ethics and regulatory environment:
SOX (Sarbanes-Oxley Act) increases accountability; CEOs/CFOs certify financial statements; independent audit committees with financial expertise; higher penalties for misconduct.
Ethical considerations in budgeting and performance incentives (risk of “gaming” budgets when targets are unattainable or misrepresented).
Key Cost Concepts: Manufacturing Costs, Product vs. Period Costs
Manufacturing costs = Direct Materials (DM) + Direct Labor (DL) + Manufacturing Overhead (MOH).
Product costs (inventoriable costs): DM, DL, MOH; initially recorded as inventory; become COGS when sold.
Period costs (non-manufacturing): selling and administrative expenses; expensed in the period incurred.
Direct materials (DM): materials that can be physically and directly associated with the finished product (e.g., polyethylene powder for kayaks; Kevlar in high-end models).
Direct labor (DL): factory workers physically and directly involved in converting materials to finished goods.
Manufacturing overhead (MOH): indirect costs related to production (indirect materials, indirect labor, depreciation on factory, factory insurance, utilities, maintenance, etc.).
Indirect materials and indirect labor are MOH.
Alternative terminology for MOH: factory overhead, indirect manufacturing costs, burden.
Indirect costs challenge: tracing overhead to specific products is difficult; multiple costing methods (allocation bases) address this in later chapters.
Product vs. period costs summary (Illustration 1.3):
Product costs: DM, DL, MOH (inventoriable).
Period costs: selling/admin (non-manufacturing).
Detailed Cost Classifications (Examples and Nuances)
Breakdown of MOH includes: indirect materials, indirect labor, depreciation on factory buildings and machines, factory utilities, factory insurance, factory maintenance, property taxes on factory, etc. (illustrative content in Illustration 1.8–1.9).
Direct materials vs. indirect materials: some raw materials are DM (directly traceable); others are indirect and included in MOH (e.g., polishing compounds).
Direct labor vs. indirect labor: direct labor traces to product; indirect labor (maintenance, quality inspectors) is MOH.
Product costs vs. period costs with real examples (Terrain Park Boards; Allegiant Airlines case):
Terrain Park Boards: total manufacturing costs and per-unit cost example: total manufacturing costs $846,000 for 10,000 boards → $84.60 per unit (illustration 1.5).
Allegiant case: cost-control through used planes, low wages, high utilization; emphasizes knowledge of costs to stay profitable.
Cost of Goods Manufactured (COGM) and its schedule:
COGM is the cost of goods that were completed during the period and removed from work in process.
Formulaic approach: Beginning Work in Process + Total Manufacturing Costs − Ending Work in Process = Cost of Goods Manufactured.
A separate COGM Schedule provides line-by-line detail (DM, DL, MOH, total MOH, total manufacturing costs, etc.).
Balance sheet presentation differences for manufacturers vs. merchandisers:
Balance sheet (current assets) for manufacturers includes Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory; merchandisers typically show only a single Inventory account.
Income statement presentation under periodic system:
Merchandiser: Beginning Inventory + Cost of Goods Purchased − Ending Inventory = COGS (subject to periodic system).
Manufacturer: Beginning Finished Goods + Cost of Goods Manufactured − Ending Finished Goods = COGS.
Illustrations to recall (Illustrations 1.6–1.11): inventory accounts, balance sheets, COGS presentation, and COGM schedules; the examples cover multiple numerical scenarios (e.g., Keystone, Superior, Allegiant-insight style exercises).
Worked Numerical Illustrations and Practice Scenarios (selected highlights)
Terrain Park Boards (Illustration 1.4–1.5):
Cost items classified by DM/DL/MOH and period costs.
Example totals: Direct materials, direct labor, MOH sum to total manufacturing costs; beginning WIP plus total manufacturing costs minus ending WIP yields Cost of Goods Manufactured.
In Terrain Park Boards example: total manufacturing costs = direct materials (30 x 10,000 boards) + direct labor (40 x 10,000) + MOH (sum of depreciation, property taxes, maintenance, etc.) = $376,800; ending WIP and beginning WIP determine COGM = $370,000.
Keystone Company – COGM Schedule (Illustration 1.10–1.11):
Given: beginning WIP, direct materials used, direct labor, MOH, ending WIP; compute Total Manufacturing Costs; then compute COGM.
Example results: Beginning WIP (2,500); Direct materials used (92,000); Direct labor (75,000); MOH (220,000); Total manufacturing costs (387,000); Total cost of WIP (389,500); Ending WIP (4,000); COGM = 385,500.
Current Designs – Cost of Goods Manufactured Schedule (Illustration 1.11):
Demonstrates structure with opening WIP, raw materials usage, DL, MOH (with subcategories), and ending WIP to yield COGM of 370,000 under assumed data.
Comparative balance sheets and COGS for merchandising vs manufacturing (Illustration 1.7–1.9):
Shows separate inventory accounts for manufacturing (Raw Materials, Work in Process, Finished Goods) vs. merchandising (only one Inventory), and how COGS is derived under periodic system.
Trends, Ethical Considerations, and Data Analytics (Chapter themes)
Value chain focus: R&D → raw materials → production → sales/marketing → delivery → customer service; includes after-sales support.
JIT and lean manufacturing: minimize inventory; require high-quality and reliable processes; raise emphasis on defect reduction (TQM).
ABC (Activity-Based Costing): allocate MOH more accurately by activities (e.g., setups); motivates process improvements to reduce overhead allocations.
ERP adoption: integration of multiple business processes; reduces reliance on multiple disparate software packages; increases data availability for decision making.
Balanced Scorecard: a multi-dimensional performance measurement system linking financial and non-financial metrics to strategy; e.g., linking defect reduction to training to improve ROA.
CSR and triple bottom line: people, planet, profit; many firms publish sustainability reports; management incentives increasingly linked to CSR metrics.
Ethics and governance: SOX mandates CEO/CFO certification of financial statements; independent audit committees with financial expertise; higher penalties for misreporting; IMA ethical standards guide professional behavior.
Data analytics in practice:
Data trails from operations; need for data visualization and analytics to interpret trends and performance (Disney’s MagicBand example for predicting and managing crowds and demand).
Data visualization and analytics skills are emphasized in end-of-chapter exercises (DA1 cases in later chapters).
Practice and Review (DO IT! and Exercises themes)
DO IT! exercises reinforce comprehension: True/False items, cost classifications, and COGM/COGS computations.
Practice problems cover:
Classifying costs (DM, DL, MOH, period costs) for different industries.
Calculating total manufacturing costs and COGM for a month or year.
Preparing current asset sections for balance sheets; constructing COGM schedules; income statements under manufacturing vs merchandising formats.
Solving for missing amounts in COGM, COGS, and inventory balances across multiple scenarios.
End-of-chapter questions emphasize: regulatory changes (SOX), ethical considerations, and the practical implications of managerial accounting for decision making.
Connection to Real-World Applications (Representative Case Contexts)
DPR Construction case: organization without a single CEO illustrates collaboration/continuity advantages of management committees; implications for decision rights and accountability.
Allegiant Airlines: demonstrates cost discipline and capacity management as a service provider; highlights cost structure components relevant for managerial costing.
Inditex (Fast Fashion) case (Data Analytics): showcases using big data and analytics to manage the value chain; demonstrates how data-driven decisions affect inventory, pricing, and speed-to-market.
Disney’s use of data analytics (MagicBands): shows behavioral analytics in service operations; design decisions for park operations and long-term planning; impact on wait times, customer experience, and capacity planning.
Current Designs/ Terrain Park Boards: illustrate manufacturing costing in a mixed product environment; emphasize COGM/COGS reporting and inventory management in a real company context.
Key Formulas and Calculations (LaTeX)
Total Manufacturing Costs (per period):
Cost of Goods Manufactured (COGM):
Cost of Goods Sold (COGS) – Merchandising company (periodic):
Cost of Goods Sold (COGS) – Manufacturing company (periodic):
Product costs vs. Period costs (conceptual):
Product costs (DM, DL, MOH) are inventoried until product sale.
Period costs (selling, administrative) are expensed when incurred.
Unit cost example (Terrain Park Boards):
Inventory accounts in a manufacturer (three types): Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory.
Key Takeaways to Memorize
Managerial accounting provides decision-relevant information for internal use; it complements financial accounting by focusing on subunits, cost behavior, and process improvements.
Distinguish product costs (DM, DL, MOH) from period costs (selling/admin); only product costs become part of inventory.
Understand COGM and COGS mechanics, including the role of beginning/ending inventories and the flow from raw materials to finished goods.
Recognize evolving trends: JIT, ABC, ERP, balanced scorecard, CSR, and the increasing role of data analytics in managerial decision making.
Ethical and regulatory frameworks (SOX, IMA code) shape the conduct and reporting expectations of managerial accountants.
Notes prepared to mirror well-organized study notes that cover major and minor points raised across the transcript. When practicing, use the figures and illustrations cited (1.1–1.11) as templates for solving real problems, and refer to WileyPLUS for additional tutorials and practice opportunities.
Chapter Overview
Focuses on how managers determine and control costs (material, labor, overhead) to relate costs to profits.
Accounting information is critical for managerial decision-making and performance evaluation.
Key lesson: A company needs a firm grip on its numbers (accounting/financial information) for success, alongside great products and strong selling capability.
Managerial accounting provides tools for planning, directing, controlling, and evaluating performance.
What Is Managerial Accounting?
Provides economic and financial information for internal users (managers, supervisors).
Emphasizes decision-focused information for planning, directing, and controlling operations.
Learning Objectives (LOs)
LO1: Identify features of managerial accounting and management functions; contrast with financial accounting.
LO2: Describe classes of manufacturing costs; differentiate product vs. period costs.
LO3: Demonstrate Cost of Goods Manufactured (COGM) and prepare financial statements for a manufacturer.
LO4: Discuss trends in managerial accounting (service industries, value chain, ethics, data analytics).
Managerial vs. Financial Accounting
Managerial Accounting:
Users: Internal (managers).
Reports: Special-purpose for specific decisions; as frequently as needed.
Purpose: Aid planning, directing, controlling.
Content: Pertains to subunits; very detailed; extends beyond accrual to all relevant data; not GAAP-bound; no mandatory independent audits.
Financial Accounting:
Users: External (stockholders, creditors, regulators).
Reports: General-purpose financial statements; quarterly and annual.
Purpose: General-purpose for external stakeholders.
Content: Pertains to the entity as a whole; highly aggregated; limited to accrual accounting and cost data; GAAP-governed; audited by CPAs.
Primary Management Functions
Planning: Look ahead, set objectives (e.g., value creation, market share, environmental goals).
Directing: Coordinate activities, implement plans, assign/incentivize employees.
Controlling: Track performance against plans, analyze deviations, implement corrective actions; relies on internal controls.
Organizational Structure
Line positions: Directly generate revenue (e.g., VP Operations, factory managers).
Staff positions: Support line functions (e.g., finance, legal, HR).
CFO supported by Controller and Treasurer; Internal Audit reports to CFO and reviews financial integrity/controls.
Value Chain and Key Concepts
Value Chain: All business processes from R&D/design through delivery and after-sales service.
Just-in-Time (JIT): Minimize inventory by producing goods only as needed.
Total Quality Management (TQM): Emphasizes near-zero defects throughout the production process.
Theory of Constraints: Identify and address bottlenecks to improve overall profitability.
Enterprise Resource Planning (ERP) Systems: Centralized data management to integrate major business processes.
Activity-Based Costing (ABC): Allocates overhead based on activities that drive costs for improved accuracy.
Data Analytics: Use of big data and visualizations for better decision-making.
Trends in Managerial Accounting
Service Industries: Now dominate the U.S. economy.
Balanced Scorecard: Integrates financial and non-financial measures aligned with company objectives (e.g., customer satisfaction, internal processes, learning & growth).
Corporate Social Responsibility (CSR): Focus on the triple bottom line (people, planet, profit); sustainability reporting.
Ethics and Regulatory Environment: Sarbanes-Oxley Act (SOX) increases accountability (CEO/CFO certification of financial statements, independent audit committees, higher penalties).
Key Cost Concepts: Manufacturing vs. Period Costs
Manufacturing Costs = Direct Materials (DM) + Direct Labor (DL) + Manufacturing Overhead (MOH).
Product Costs (Inventoriable Costs):
DM, DL, MOH.
Initially recorded as inventory; become Cost of Goods Sold (COGS) when products are sold.
Period Costs (Non-Manufacturing Costs):
Selling and administrative expenses.
Expensed in the period incurred.
Components of Manufacturing Costs
Direct Materials (DM): Materials physically and directly associated with the finished product (e.g., polyethylene for kayaks).
Direct Labor (DL): Factory workers physically and directly involved in converting materials to finished goods.
Manufacturing Overhead (MOH): Indirect costs related to production.
Includes indirect materials, indirect labor, depreciation on factory, factory insurance, factory utilities, factory maintenance, property taxes on factory.
Also known as factory overhead, indirect manufacturing costs, or burden.
Cost of Goods Manufactured (COGM)
COGM is the cost of goods completed during the period and transferred from Work in Process to Finished Goods Inventory.
Formula:
Financial Statement Presentation for Manufacturers
Balance Sheet (Current Assets): Includes Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory.
Income Statement (Cost of Goods Sold):
Key Formulas and Calculations
Total Manufacturing Costs:
Cost of Goods Manufactured (COGM):
Cost of Goods Sold (COGS) – Manufacturing company:
Unit Cost:
Key Takeaways
Managerial accounting provides internal, decision-relevant information focusing on subunits, cost behavior, and process improvements.
Distinguish product costs (DM, DL, MOH) from period costs (selling/admin).
Understand the flow of costs through COGM and COGS, including inventory accounts.
Recognize evolving trends: JIT, ABC, ERP, balanced scorecard, CSR, and data analytics.
Adhere to ethical and regulatory frameworks (SOX, IMA code of conduct).