Weygandt_Managerial_Accounting_6e

Interactive Tutorial: Chapter 1

Learning Objective 1
Narrator: Learning Objective 1.
Managerial Accounting Basics
Narrator: Managerial accounting is a field of accounting that provides economic and
financial information for managers and other internal users.
The activities that are part of managerial accounting are as follows:
1. explaining manufacturing and nonmanufacturing costs and how they are reported
in the financial statements,
2. computing the cost of providing a service or manufacturing a product,
3. determining the behavior of costs and expenses as activity levels change, and
analyzing cost-volume-profit relationships within a company.
4. accumulating and presenting relevant data for management decision making,
5. determining prices for external and internal transactions,
6. assisting management in profit planning and formalizing these plans in the form
of budgets,
7. providing a basis for controlling costs and expenses by comparing actual results
with planned objectives and standard costs,
8. accumulating and presenting data for capital expenditure decisions.
Differences Between Financial and Managerial Accounting
Narrator: There are both similarities and differences between managerial and financial
accounting. Both of these accounting fields deal with economic events, but the users of
information and reporting structure differ. These differences are illustrated here.
Financial reports are prepared in accordance with generally accepted accounting
principles, and are audited by certified public accountants.
In contrast, managerial accounting provides internal reports for officers and managers.
These internal reports must be relevant to management decisions, but do not require
independent audits.
Learning Objective 2
Narrator: Learning Objective 2.
Management Functions

Narrator: Managements activities and responsibilities can be classified into three broad
functions, planning, directing, and controlling.
Planning requires management to look ahead and establish objectives. A key modern
management objective is to add value to the business under its control. Value is usually
measured by the trading price of the companys stock, and the potential selling price of
the company.
Directing and motivating involves coordinating diverse activities and human resources to
produce a smooth-running operation. This function relates to implementing planned
objectives. Directing also involves selecting executives, appointing managers and
supervisors, and hiring and training employees.
Controlling is the process of keeping the firms activities on track. In controlling
operations, managers determine whether planned goals are being met, and, when there
are deviations from targeted objectives, they decide what changes are needed to get back
on track.
Corporation Organization Chart
Narrator: In order to assist in carrying out management functions, most companies
prepare organizational charts to show the interrelationships of activities, and the
delegation of authority within the company. The chief executive officer, CEO, has
overall responsibility for managing the business. The chief financial officer, CFO, is
responsible for all the accounting and finance issues the company faces.
Business Ethics
Narrator: In recent years, financial scandals resulted in a general mistrust of financial
reporting. In 2002, Congress passed the Sarbanes-Oxley Act to try to reduce unethical
corporate behavior. The major provisions of SOX are shown here. All employees within
an organization are expected to act ethically in their business activities. Given the
importance of ethical behavior to corporations and their owners, an increasing number of
organizations provide codes of business ethics for their employees. In response to
corporate scandals in 2000 and 2001, the U.S. Congress enacted the Sarbanes-Oxley Act
of 2002
Managerial Cost Concepts
Narrator: To perform the three management functions effectively, management needs
information. One very important type of information is related to costs. The following
questions need answering. What costs are involved in making the product or providing a
service? If production volume is decreased, will costs decrease? What impact will
automation have on total costs? How can costs best be controlled?

Learning Objective 3
Narrator: Learning Objective 3
Managerial Cost Concepts
Narrator: Manufacturing consists of activities and processes that convert raw materials
into finished goods.
Classifications of Manufacturing Costs
Narrator: Manufacturing costs are usually classified as follows: direct materials, direct
labor, and manufacturing overhead
Manufacturing Costs
Narrator: Raw materials are the basic materials and parts that are to be used in the
manufacturing process. Raw materials that can be physically and directly associated with
the finished product during the manufacturing process are called direct materials.
Some raw materials cannot be easily associated with the finished product. These are
considered indirect materials. Indirect materials do not physically become part of the
finished product. They cannot be traced because their physical association with the
finished product is too small in terms of cost. Indirect materials are accounted for as part
of manufacturing overhead.
Direct labor is the work of factory employees that can be physically and directly
associated with converting raw materials into finished goods. The wages of maintenance
people, timekeepers, and supervisors are usually identified as indirect labor. Their efforts
have no physical association with the finished product. Like indirect materials, indirect
labor is part of manufacturing overhead.
Manufacturing overhead consists of costs that are indirectly associated with the
manufacture of the finished product. These costs may also be manufacturing costs that
cannot be classified as direct materials or direct labor. Manufacturing overhead includes:
1. indirect materials
2. indirect labor
3. depreciation on factory buildings and machines
4. insurance, taxes, and maintenance on factory facilities.
Manufacturing Cost Concepts
Learning Objective 4
Narrator: Learning Objective 4

Product Costs Versus Period Costs

Narrator: Product costs include each of the manufacturing cost elements (direct
materials, direct labor, and manufacturing overhead.) They are costs that are a necessary
and integral part of producing the finished product. These costs are not expensed to cost
of goods sold under the matching principle until the finished goods inventory is sold.
Period costs are matched to the revenue of a specific time period, relate to
nonmanufacturing costs, and include selling and administrative expenses.
Product Versus Period Costs
Narrator: The relationships between product and period costs are summarized here.
Learning Objective 5
Narrator: Learning Objective 5
Cost of Goods Sold
Narrator: Under a periodic inventory system, the income statements of a merchandiser
and a manufacturer differ in the cost of goods sold section. For a merchandiser, cost of
goods sold is computed by adding the beginning merchandise inventory to the cost of
goods purchased and subtracting the ending merchandise inventory. For a manufacturer,
cost of goods sold is computed by adding the beginning finished goods inventory to the
cost of goods manufactured and subtracting the ending finished goods inventory.
Cost of goods sold components are shown here.
Cost of Goods Sold Sections
Narrator: Here is an illustration of a cost of goods sold section for a merchandising
company. Here is an illustration of a cost of goods sold section for a manufacturing
company. The other sections of an income statement are similar for merchandisers and
manufacturers.
Learning Objective 6
Narrator: Learning Objective 6
Cost of Goods Manufactured Formula
Narrator: The total cost of work in process for the year is equal to the sum of the cost of
the beginning work in process inventory, and the total manufacturing costs for the current
period. To find the cost of goods manufactured, we subtract the cost of the ending work
in process inventory from the total cost of work in process.

Cost of Goods Manufactured Schedule

Narrator: The cost of goods manufactured schedule is an internal financial schedule that
shows each of the cost elements.
Cost of Goods Manufactured
Learning Objective 7
Narrator: Learning Objective 7
Current Assets Sections
Narrator: The balance sheet for a merchandiser shows just one inventory category. In
contrast, the balance sheet of a manufacturer may have three inventory accounts:
1. Finished Goods Inventory, which shows the cost of completed goods on hand,
2. Work in Process Inventory, which shows the cost applicable to units that have
been started into production but are only partially completed, and
3. Raw Materials Inventory, which shows the cost of raw materials on hand.
Here is a typical current assets section of a merchandising balance sheet. Here are the
current assets for a manufacturing company.
Service Industry Trends
Narrator: Although much of this chapter focused on accounting for manufacturing firms,
most of these techniques are also applicable to service companies.
Learning Objective 8
Narrator: Learning Objective 8
Managerial Accounting Today
Narrator: In recent years, the competitive environment for U.S. business has changed
significantly. Managerial accountants must be forward-looking, acting as advisors and
information providers to different members of the organization.
Today, there is increased focus on value chain management. The value chain is the term
that describes all activities associated with providing a product or service. Activities in
the value chain include research and development, ordering raw materials,
manufacturing, marketing, delivery, and customer relations.
Technology has played a large part in the value chain. Computerization and automation
have permitted companies to be more effective in streamlining production, and thus
enhancing the value chain.

Many companies have significantly lowered inventory levels and costs using Just-inTime inventory methods. The use of Just-in-Time inventory requires an increased
emphasis on product quality. In recent years overhead costs have become an increasingly
large component of product and service costs. In order to obtain more accurate costs,
many companies now allocate overhead using activity-based costing, or ABC.
The theory of constraints is a specific approach used to identify and manage constraints,
in order to achieve the companys goals.
The balanced scorecard is a performance measurement approach that uses both financial
and non-financial measures to evaluate all aspects of a companys operations in an
integrated fashion.