Managerial Accounting Notes
Chapter 14: Managerial Accounting
Differences Between Financial and Managerial Accounting
Users:
Financial accounting serves external users (investors, regulators).
Managerial accounting is intended for internal users (management).
Frequency:
Financial accounting reports are prepared periodically (quarterly, annually).
Managerial accounting reports are generated as needed (daily, weekly).
Purpose:
Financial accounting aims to provide a historical record of a company's financial performance.
Managerial accounting focuses on providing information to help managers make informed decisions.
Content:
Financial accounting includes standardized financial statements.
Managerial accounting includes detailed reports and forecasts tailored for specific management needs.
Managerial Functions in Accounting
Planning:
Setting goals and objectives for the organization's future performance.
Directing:
Managing day-to-day operations and making decisions to guide the organization toward its objectives.
Controlling:
Monitoring performance by comparing actual results to budgeted goals and taking corrective action as needed.
Managerial Accounting in Use
System:
A comprehensive approach to the collection and analysis of data for managerial decisions.
Use of Data:
Data gathered is utilized for budgeting, forecasting, and resource allocation.
Balanced Scorecard:
A strategic management tool that incorporates financial and non-financial performance indicators to provide a balanced view of organizational performance.
ESG / Corporate Social Responsibility:
Focus on sustainability and ethical practices in business operations.
Manufacturing Cost Components
Direct Materials:
Raw materials that can be directly traced to the finished product.
Direct Labor:
Labor costs that can be directly linked to the production of specific goods.
Manufacturing Overhead:
Indirect costs associated with manufacturing that cannot be traced directly to specific units produced.
Indirect Materials:
Materials used in production that cannot be directly traced to the final product.
Indirect Labor:
Labor costs for employees who are not directly involved in production but support the manufacturing process (e.g., factory supervisors).
Cost Classification
Product Costs:
Costs that are associated with manufacturing a product, including .
Period Costs:
Costs that are not associated with production; these are expenses that are incurred in a period and cannot be capitalized into inventory.
Cost Examples
Direct Materials:
Wood cores, fiberglass, and resin ($30 per board) - considered as direct materials due to their essential role in the finished product.
Direct Labor:
Labor to trim and shape boards ($40 per board).
Manufacturing Overhead:
Depreciation on factory equipment ($25,000).
Property taxes on factory building ($6,000 per year).
Factory maintenance salaries ($25,000 per year).
Salary of factory manager ($70,000 per year).
Salary of product quality inspector ($20,000 per year).
Non-Product Costs (Period Costs):
Advertising costs ($60,000 per year).
Sales commissions ($20 per board).
Cost of shipping boards to customers ($8 per board).
Total Manufacturing Costs Calculation Example
Assuming Terrain Park Boards produces 10,000 snowboards the first year:
Material cost:
Labor cost:
Depreciation on factory equipment: $25,000
Property taxes on factory building: $6,000
Factory maintenance salaries: $25,000
Salary of factory manager: $70,000
Salary of product quality inspector: $20,000
Total manufacturing product costs:
Cost of Goods Manufactured Schedule
Cost of Goods Manufactured Schedule for the Year Ended December 31, 2025:
Work in process, January 1: $18,400
Direct materials:
Raw materials inventory, January 1: $16,700
Raw materials purchases: $152,500
Total raw materials available for use: $169,200
Less: Raw materials inventory, December 31: $22,800
Direct materials used: $146,400
Direct labor: $175,600
Manufacturing Overhead:
Indirect labor: $14,300
Factory repairs: $12,600
Factory utilities: $10,100
Factory depreciation: $9,440
Factory insurance: $8,360
Total manufacturing overhead: $54,800
Total manufacturing costs: $376,800
Total cost of work in process: $395,200
Less: Work in process, December 31: $25,200
Cost of goods manufactured: $370,000
Keystone Company Example: Cost of Goods Manufactured Schedule
For the month of March 2025:
Work in process, March 1: $12,000
Raw materials inventory, March 1: $10,000
Materials purchased in March: $90,000
Direct labor in March: $75,000
Manufacturing overhead in March: $220,000
Schedule for Keystone Company:
Total raw materials available for use: $102,000
Less: Raw materials, March 31: $10,000
Direct materials used: $92,000
Total manufacturing costs: $387,000
Total cost of work in process: $389,500
Less: Work in process, March 31: $4,000
Cost of goods manufactured: $385,500
Example Costs for Cepeda Corporation for June 2025
Cost records include:
Indirect factory labor: $4,500
Factory utilities: $400
Direct materials used: $20,000
Direct labor: $40,000
Work in process, 6/1/25: $3,000
Work in process, 6/30/25: $3,800
Cost of Goods Manufactured Schedule for June 2025:
Work in process, June 1: $3,000
Direct materials used: $20,000
Direct labor: $40,000
Manufacturing Overhead:
Indirect factory labor: $4,500
Factory manager's salary: $3,000
Indirect materials used: $2,200
Maintenance, factory equipment: $1,800
Depreciation, factory equipment: $1,400
Factory utilities: $400
Total manufacturing overhead: $13,300
Total manufacturing costs: $73,300
Cost of Goods Manufactured: $72,500
Income Statement for Cepeda Corporation for June 2025
Sales revenue: $92,100
Cost of goods sold:
Finished goods inventory, June 1: $5,000
Cost of goods manufactured: $72,500
Cost of Goods Available for Sale: $77,500
Less: Finished goods inventory, June 30: $7,500
Cost of goods sold: $70,000
Gross profit: $22,100
Cost Accounting Systems
Job Order Cost Systems:
Method used for accumulating costs for unique products or batches of products.
Accumulating Costs:
Involves tracking costs for materials, labor, and overhead associated with production.
Raw Material Cost:
Costs of acquiring materials to produce goods.
Factory Labor Costs:
Costs tied to labor used in production.
Manufacturing Overhead Costs:
Costs incurred that cannot be directly traced to specific goods.
Journal Entries:
Systematic recording of business transactions to reflect the financial position accurately.
Journal Entry Examples
Purchasing Raw Materials:
Debit: Raw Materials Inventory $4,200
Credit: Accounts Payable $4,200
(To record purchases of raw materials on account)
Factory Labor:
Debit: Factory Labor $18,000
Credit: Payroll Liabilities $18,000
(To record factory labor costs)
Manufacturing Overhead Costs:
Debit: Manufacturing Overhead $7,500
Credit: Utilities Payable $2,200
Credit: Prepaid Insurance $1,800
Credit: Accumulated Depreciation $3,500
(To record manufacturing overhead costs)
Direct and Indirect Materials to Production:
Debit: Work in Process Inventory $5,000
Debit: Manufacturing Overhead $1,000
Credit: Raw Materials Inventory $6,000
(To record manufacturing overhead costs)
Job Completion and Sale Entries: Onyx Corporation
Job Costs:
Job 109: $19,000
Job 112: $27,000
Sold Job 112 for $42,000.
Entries:
Completion of Jobs:
Debit: Finished Goods Inventory $46,000
Credit: Work in Process Inventory $46,000
(To record the completion of Jobs 109 and 112)
Sale of Job 112:
Debit: Accounts Receivable $42,000
Credit: Sales Revenue $42,000
(To record sale of Job 112)
Cost of Goods Sold:
Debit: Cost of Goods Sold $27,000
Credit: Finished Goods Inventory $27,000
(To record cost of goods sold for Job 112)
Comprehensive Example: Overhead Application
Example with Martin Company:
Actual manufacturing overhead: $80,000
Estimated manufacturing overhead: $75,000
Direct labor hours incurred: 4,800
Direct labor hours estimated: 5,000
Predetermined Overhead Rate Calculation:
Applied Manufacturing Overhead:
Activity-Based Costing (ABC)
Definition:
A method of allocating overhead costs based on the activities that drive costs rather than on a single overhead rate.
Key Concepts of ABC
Activity:
An event or task that incurs costs.
Activity Cost Pool:
The total cost attributed to a particular activity.
Cost Driver:
A factor that causes changes in the cost of an activity.
Steps in Implementing ABC
Identify Activity Cost Pools and allocate costs.
Identify Cost Drivers and estimate total usage based on identified activities.
Benefits of Activity-Based Costing
More Accurate Costing:
Provides more precise product cost information.
Enhanced Overhead Control:
Provides better management control over costs.
Improved Management Decisions:
Aids in strategic and operational decision-making.
Limitations of ABC
Cost:
Implementation can be expensive and complex compared to traditional systems.
Arbitrary Allocations may still exist.
Just-in-Time (JIT) Processing
Objective:
To minimize inventory throughout the manufacturing process, producing only what is needed when it's needed.
Elements of JIT Processing:
Dependable suppliers for timely materials.
A multiskilled workforce capable of performing diverse tasks.
A total quality control system ensuring high-quality outputs.