management accountability

the manager's responsibility to the various stakeholders of the company (suppliers, government, owners, creditors, customers)

management accountability requires two forms of accounting

financial accounting for external reporting & management accounting for internal planning and control

financial accounting

provides financial statements that report results of operations, financial position, and cash flows both to managers and to external stakeholders // SATISFIES managements accountability to owners and creditors for their investment decisions, regulatory agencies such as SEC FTC and Internal Revenue service, customers and society to ensure company acts responsibility

management accounting

focuses on RELEVANCE to business decisions and has FUTURE orientation (designed to meet needs of decision makers inside company) -- provides information to help managers plan and control operations as they lead the business -- managing company's plant, equipment, and human resources -- often requires forward looking information because of the futuristic nature of business decisions -- (focuses on future, emphasizes relevance, provides detailed info about individual parts of the company)


choosing goals and deciding how to achieve them


mathematical expression of the plan that managers use to coordinate the business's activities -- shows the expected financial impact of decisions and helps identify the resources needed to achieve goals


implementing the plans and evaluating operations by comparing actual results to the budget -- if actual costs FALL BELOW budget then that's good news, but if costs EXCEED budget then managers may need to make changes

differences between management and financial accounting

both use accrual basis of accounting -- mgt is not required to meet external reporting requirements such as generally accepted accounting principles -- managers have more leeway in preparing management reports

cost/benefit analysis

managers weigh the BENEFITS of the system (better info leads to higher profits) against the COSTS to develop and run the system -- benefits must exceed its costs

to be successful managers must consider recent business trends -- todays business environement

shift toward service economy -- global competition -- time based competition -- total quality management

service companies

provide health care, communication, banking, and other important benefits to society (FedEx, Google, eBay, Verizon, and CitiBank) -- provide intangible services with high quality, reasonable prices, timely delivery // simplest accounting since they carry no inventories of products for sale // have NO inventories on balance sheet //expenses are all period costs// doesn't have tangible product intented for sale//

global competition

many companies are moving operations to other countries to be closer to new markets (Ford, General Motors, DaimlerChrysler)

time based competition

internet, e-commerce, and express delivery speed the pace of business -- companies have to develop a time saving response: adv. info systems, e-commerce, just in time management

advanced information systems

time based competition // enterprise resource planning ERP systems to integrate all their worldwide functions, departments, and data -- streamline operations and that enables companies to respond quickly to changes in market


time based competition // online sales clerk that sells to thousands of customers around the world by providing every product the company offers 24/7

just in time management

time based competition // helps managers cut costs by speeding the transformation of raw materials into finished products -- just in time to satisfy needs

total quality management

TQM designed to provide customers with superior products and services -- achieve this by continuously improving quality and reducing or eliminating defects and waste

period costs

costs that are incurred and expensed in the same accounting period // CEO's salary, delivery van depreciation, sales commissions

merchandising companies

ex Amazon Walmart Footlocker -- resell products they buy from suppliers -- keep inventory of products and managers are accountable for purchasing, storage, and sale of products -- cost of goods sold is based on merchandise purchases // resell TANGIBLE products purchased ready made from suppliers -- have only ONE category of inventory // expenses include period costs AND product costs

merchandisers income statement

report cost of goods sold as the major expense -- shows flow of the product costs through inventory

inventoriable product costs

flow of the product costs through the inventory -- the products are held in inventory until sold -- include only the cost to purchase the goods plus fright in (the cost to get goods in the warehouse) -- treated as assets, these costs are expensed as cost of goods sold when products are sold

external reporting

GAAP requires companies to treat inventoriable product costs as an asset until the product is sold, at which time costs are expensed

manufacturing companies

use labor, plant, equipment, supplies, and facilities to convert raw materials into finished products -- must use these resources to create a product that customers want -- responsible for generating profits and maintaining positive cash flows -- broad range of production activities -- cost of goods sold is based on cost of goods manufactured -- 3 categories of inventory: materials, work in process, finished goods

manufacturing companies requires tracking costs on three kinds of inventory:

materials inventory (raw materials in making product), work in process inventory (goods that are in the manufacturing process but not complete), finished gods inventory (completed goods that haven't been sold, what manufacturer sells to merchandiser)

direct cost

cost that can be directly traced to a cost object, such as a product -- direct materials and direct labor are examples (cost of boat engine)

cost object

anything for which managers want a separate measurement of cost

indirect costs

costs that cannot be traced directly to a cost object, such as manufacturing overhead// example : Glue

direct materials

inventoriable product cost // become a physical part of the finished product -- cost of direct materials (purchase cost + freight in) can be traced directly to finished product//used to determine total inventoriable product costs

direct labor

inventoriable product cost // labor of employees who convert materials into the company's products -- cost of direct labor can be traced directly to finished products -- difficult to trace to specific products so it is part of manufacturing overhead (forklift operations, janitors, plant managers, wages of assembly line personnel)

manufacturing overhead

inventoriable product cost // includes all manufacturing costs other than direct materials and direct labor -- costs are created by all of the supporting production activities (storing materials, setting up machines, and cleaning work areas) -- product cost AND indirect cost

managers of large corporations and mom and pop businesses must consider recent trends, such as:

internet, electronic commerce (e-commerce), and express delivery seed the pace of business


the new competitive turf for world class business. to compete, companies have developed time saving responses such as just in time systems and enterprise resource planning systems

cost of goods sold

income statement for merchandising companies reports cost of goods sold as the major expense. merchandising companies inventoriable product costs include ONLY the goods purchase cost + freight in -- includes beginning inventory, purchases of merchandise, COG available for sale, ending inventory

difference between merchandiser and manufacturer

manufacturer MADE the product that it later sold, merchandiser PURCHASED the pre-manufactured product that was complete and ready for sale

cost of goods manufactured

summarizes the activities and related costs incurred to produce inventory during the year (direct materials used + direct labor + manufacturing over head) = total manufacturing costs incurred during the year

format of flow of costs through inventoriable accounts

direct materials inventory >> work in process inventory >> finished gods inventory

unit product cost

knowing unit product cost helps managers decide on the prices to charge for each product, identify ways to cut production costs, and decide which products to emphasize -- companies need to know which products are most profitable (cost of goods manufactured / total units produced)

standards of ethical conduct for management accounts

standards require management accountants to maintain their professional competence, preserve the confidentiality of the information they handle, and act with integrity and objectivity -- include competence, confidentiality, integrity, credibility -- to resolve ethical dilemmas the IMA suggests discussing ethical situations with your immediate supervisor

what costs are inventoriable under GAAP

service: no inventoriable product costs // merchandising: purchases and freight in // manufacturing: direct materials used, direct labor, and manufacturing overhead

management accountants

should disclose confidential information acquired in the course of their work

rent expense

incurred on a factory building would be treated as an indirect cost and a product cost

service economy

during the past century, many developed economies have shifted their focus from a manufacturing economy to a service economy

Component of IMA professional standard


Merchandise Inventory

inventory account for merchandise company

Rent Expense

Indirect and product cost

Merchandising Company

expenses include both period and product costs

cost accounting systems

accumulate cost info so that managers can measure how much it costs to produce each unit of merchandise // unit costs help managers 1) set selling prices that will lead to profits, 2) compute cost of goods sold for the income statement, 3) compute cost of inventory for the balance sheet // assigns these costs to company's product or service

job order costing system

accumulates costs for each batch, or job // other companies produce identical units through a series of production steps or processes // accounting firms, advertising agency, music studios, health care providers, building contractors, and furniture manufacturers use job order costing

process costing system

accumulates the costs of each process needed to complete the product // paper mills, Proctor & Gamble, General Motors, Chevron, Kraft Foods, and Coca Cola produce identical units through a serious of product steps or processes

product costs

are manufacturing costs that attach to the inventory: materials, labor and overhead costs

period costs

costs that do not attach to the inventory, such as administrative, marketing, distribution, research and development, design, customer service, and other costs. // gross profit must cover these types of period costs, otherwise company will incur a net loss for the period

predetermined indirect cost allocation rate

calculated before the year begins // companies then use it throughout the year to allocate indirect costs to individual jobs // based on two factors: total estimated indirect costs and total estimated quantity of the cost allocation base // allocation base is the primary cost driver (allocation bases of direct labor hours, direct labor costs, or machine hours)

estimated indirect costs

those that related to the manufacturing process, but cannot be directly assigned to a particular job (support staff salaries + computer leases + office supplies + office rent)


engineers study the materials, labor, and overhead that g into a product t pinpoint ways to cut costs // production managers then decide whether it is more profitable to make the product or OUTSOURCE it (buy from an outside supplier)

finance department

arranges financing for the venture

accounting department

provides all the cost data for making these decisions

cost accounting systems help managers

set selling prices that will lead to profits, compute cost of goods sold for the income statement, compute the cost of inventory for the balance sheet

job order and process costing

both accumulate the costs incurred to make the product & assign costs to the product

job order costing

tracks costs as raw materials move from the storeroom, to the production floor, to finished products // job cost record starts when work begins on the job // jobs started but not finished = work in process inventory // when job is finished = company totals the costs and transfers costs to finished goods inventory (asset) // when job unit is sold = costing system moves to cost of goods sold (expense)

materials inventory

general ledger account // should always equal the sum of the balances in the subsidiary materials ledger

indirect material

recorded first as manufacturing overhead

materials requisition

production team completes this document for both direct materials and indirect materials

job cost record

assigns the cost of the direct material (castings)

labor time record

each employee completes a labor time record for each job // the amount of time spent on the job and the labor cost charged to the job // DR manufacturing wages, CR wages payable

conversion costs

the addition of labor and manufacturing overhead to materials is called conversion costs because the labor and overhead costs CONVERT materials into a finished product

manufacturing overhead costs

are accumulated as debits to a single general ledger account - manufacturing overhead // actual manufacturing over head costs (indirect materials, indirect labor, depreciation, utilities, insurance, and property taxes on the plant) are DEBITED to manufacturing overhead as they occur throughout the year.

predetermined manufacturing overhead rate

calculated before the year begins, then throughout the year, companies use this predetermined rate to allocate estimated overhead cost to individual jobs // based on: total estimated manufacturing overhead costs for year, total estimated quantity of the manufacturing overhead allocation base

allocation base

the key to assigning indirect manufacturing costs to jobs is to identify a workable manufacturing overhead allocation base // a common denominator that links overhead costs to the products // primary cost driver of manufacturing overhead

cost driver

primary factor that causes (drives) a cost // manufacturing companies have used: direct labor hours, direct labor cost, machine hours

underallocated overhead

debit balance, because the manufacturing overhead allocated to work in process inventory is less than actual overhead cost // overallocated = credit balance -- decrease in COGS -- estimated overhead is assigned to the manufacturing process as production takes place

time record

software totals the amount of time spent on each job

manufacturing overhead

utilities, insurance, property taxes, and depreciation are part of manufacturing overhead ONLY if they are incurred in the manufacturing plant // if unrelated to manufacturing, they are operating expenses // if related to executive headquarters = administrative expenses // if related to distribution centers = selling expenses

allocate non inventoriable costs to jobs

managers need total product costs for internal decisions (such as setting selling prices)

manufacturing wages

would be debited to record direct labor costs actually incurred

service firms

follow the same approach as manufacturing companies to develop a predetermined indirect cost allocation rate

work in process inventory

when a manufacturing company uses direct materials, it traces the cost by debiting... // when a manufacturing company uses direct labor, it traces the cost by debiting...

manufacturing overhead

when a manufacturing company uses indirect materials, it assigns the cost by debiting...

fees to charge clients

why would the owner of a company want to know the total costs of a job (serving a particular client)? to determine...

cost of goods sold

a manufacturing company has this account but a service company does not

cost of goods manufactured

in computing cost of goods sold, which of the following is the manufacturers counterpart to the merchandisers purchases

manufacturing overhead for producing a computer

depreciation on deliver trucks is not part of manufacturing overhead for producing a computer


management accountant who avoids conflicts of interest meets the ethical standard of...

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