Universidad

Cuauhtémoc

Managerial Accounting
Concepts & Principles

Contabilidad Administrativa

Maestría en Administración de Hospitales

Educación a Distancia
 Contents

1 Description & Role of Managerial Accounting

2 Some Cost Definitions (Direct, Indirect, DM, DL, L&O)

3 Financial Statements of a Manufacturing Business

4 Managerial Accounting Information Uses

Managerial Accounting Concepts & Principles

1

Describe Managerial
Accounting and the role of
managerial accounting in a
business.

Managerial Accounting Concepts & Principles

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The difference between Managerial

and Financial Accounting
Financial accounting
Information is reported at fixed
intervals in general-purpose
financial statements. These
financial statements are prepared
according to IFRS (International
Financial Reporting Standards).
External Users.
Managerial Accounting Concepts & Principles
1

Managerial accounting
Information is designed to meet
the specific needs of a
company’s management, such
as historical data and subjective
estimates about future decisions.
Customized to business needs.
Internal users.
Managerial Accounting Concepts & Principles
1

Planning

Management uses
planning in developing
the company’s objectives
(goals) and translating
these objectives into
courses of action.

Managerial Accounting Concepts & Principles

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Strategic Planning
Strategic planning is
developing long-range actions
to achieve the company’s
objectives. Long-range courses
of action, called strategies, can
often involve periods ranging
from five to ten years.

Managerial Accounting Concepts & Principles

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Operational Planning

Develops short-term actions

for managing the day-to-day
operations of the company.

Managerial Accounting Concepts & Principles

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Directing
The process by which
managers run day-to-day
operations is called directing.

Managerial Accounting Concepts & Principles

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Controlling
Monitoring operating results
and comparing actual results
with the expected results is
controlling. This feedback
allows management to
isolate areas for further
investigation and possible
remedial action.

Managerial Accounting Concepts & Principles

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Improving

Continuous process improvement

is the philosophy of continually
improving employees, business
processes, and products.

Managerial Accounting Concepts & Principles

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Decision Making
Inherent in each of the
preceding management
processes is decision making.
Management must continually
decide among alternative
actions.

Managerial Accounting Concepts & Principles

2
Describe and illustrate the
following costs:
1. Direct and Indirect costs
2. Direct Materials, Direct Labor,
and Factory Overhead costs
3. Product and Period costs

Managerial Accounting Concepts & Principles

 2

Direct and Indirect Costs

Direct costs are identified with and can be traced to a

cost object. Indirect costs cannot be identified with or
traced to a cost object.

Managerial Accounting Concepts & Principles

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The cost of wood (materials) used by

Legend Guitars in manufacturing a
guitar is a direct cost of the guitar.

Managerial Accounting Concepts & Principles

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A production supervisor’s salary is

an indirect cost because it cannot
be traced to any individual guitar.

Managerial Accounting Concepts & Principles

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Direct Materials Cost

To be classified as a direct materials

cost, the cost must be: An integral part of
the finished product

Managerial Accounting Concepts & Principles

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Direct Labor Cost

The cost of employee wages that is an

integral part of the finished product is
classified as direct labor cost. A direct
labor cost must be: An integral part of the
finished product

Managerial Accounting Concepts & Principles

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Factory Overhead Cost

Costs, other than direct materials cost

and direct labor cost, that are incurred in
the manufacturing process are combined
and classified as factory overhead cost
(sometimes also called manufacturing
overhead or factory burden).

Managerial Accounting Concepts & Principles

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Examples of Factory Overhead Cost

• Heating and lighting the factory

• Repairing and maintaining factory equipment
• Property taxes
• Insurance
• Depreciation of factory plant and equipment

Managerial Accounting Concepts & Principles

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Prime Costs and Conversion Costs

Prime costs = Direct materials + Direct labor costs.

Conversion costs = Direct labor + Factory overhead.

Conversion costs are the costs of converting the
materials into a finish product.

Managerial Accounting Concepts & Principles

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Product costs consist of the three

elements of manufacturing cost:
direct materials, direct labor,
and factory overhead.

Managerial Accounting Concepts & Principles

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Period Costs
Period costs are generally classified into
two categories:

Selling expenses are incurred in

marketing the product and delivering the
sold product to the customer.

Administrative expenses are incurred in

managing the company and are not
directly related to the manufacturing or
selling functions.
Managerial Accounting Concepts & Principles
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Some KEY elements in the Financial

Statements

Managerial Accounting Concepts & Principles

 3

In a Manufacturing Entity

Raw Materials inventory:

Consists of the costs of the direct

and indirect materials that have
not yet entered the manufacturing
process

Managerial Accounting Concepts & Principles

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Work in process inventory:

Consists of the direct materials,
direct labor, and the factory
overhead costs that have entered
the manufacturing process but are
associated with products that have
not been completed.

Managerial Accounting Concepts & Principles

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Finished goods inventory:

Consists of completed (or finished)

products that have not been sold.

Managerial Accounting Concepts & Principles

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Uses of Managerial Accounting

information.

Managerial Accounting Concepts & Principles

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Managerial Accounting provides

the cost of manufacturing a
product, which can be used to
determine the selling price.

Managerial Accounting Concepts & Principles

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Managerial Accounting compares the

manufacturing cost over time.
It helps to monitor and control the
cost of direct materials, direct labor,
and factory overhead.

Managerial Accounting Concepts & Principles

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Uses of Managerial Accounting

Performance reports allow

management to identify any large
amounts of scrap materials or
employee downtime.

Managerial Accounting Concepts & Principles

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Uses of Managerial Accounting

A report could analyze how many

units need to be sold to cover
operating costs and expenses.
Such information could be used to
set monthly selling targets and
bonuses for sales personnel.

Managerial Accounting Concepts & Principles

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Managerial Accounting provides

the tools to control the business

Managerial Accounting Concepts & Principles

Universidad
Cuauhtémoc

Maestría en Administración de Hospitales

Educación a Distancia