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Chapter 1 Introduction to Managerial Accounting Lecture and Practice Notes Learning Objective 1-1 Describe the key differences between financial accounting and managerial accounting. Role of Managerial Accounting in Organizations The purpose of managerial accounting is to provide useful information to internal managers to help them ___________________ that arise as they manage people, projects, products, or segments of the business. Therefore managerial accounting has a decision-making Orientation Comparison of Financial and Managerial Accounting

Practice Question #1 The primary difference between financial accounting and managerial accounting is that a. Financial accounting is used by internal parties while managerial accounting is used by external parties. b. Financial accounting is future oriented while managerial accounting is historical in nature. c. Financial accounting is used by external parties while managerial accounting is used by internal parties. d. Financial accounting is prepared as needed (perhaps even daily), but managerial accounting is prepared periodically (monthly, quarterly, annually). ************************************************************************************************************ Learning Objective 1-2 Describe how managerial accounting is used in different types of organizations to support the key functions of management. Acc 2033 Chapter 1 Lecture Notes

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Functions of Management

Planning is the future-oriented aspect of the management process. It involves setting short-term and long-term goals or objectives, along with the tactics that will be used to achieve those goals. An important part of the planning and organizing function is the development of a budget that lays out the plan in financial terms so that managers can be sure they have the necessary resources to achieve the short- and long-term objectives. A budget is the quantification of the resources and expenditures that will be required during a given period of time to achieve a plan. Directing occurs when managers put the plan into action. Here, managers must make all of the detailed decisions to implement the plan, as well as motivate others to achieve results. The detailed decisions are also called operational decisions. Controlling involves measuring or monitoring the company’s actual results to see whether the planned objectives are being met. If not, managers may need to take corrective action to get back on track. Types of Organizations Manufacturers purchase raw materials from suppliers and use them to create a finished product. Finished products are sold to customers. Merchandisers sell the goods that manufacturers produce. Merchandisers that sell to other businesses are called wholesalers. Merchandisers that sell to the general public are called retailers. Service companies provide a service to customers or clients. Historically, managerial accounting focused heavily on manufacturing firms. Managerial accounting reports were prepared to keep track of the costs of raw materials, labor, and other costs incurred to produce a physical product. Today’s economy is moving to non-manufacturing firms. Given recent trends, managerial accounting systems must meet the needs of both manufacturing and nonmanufacturing firms.

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Practice Question #2 Which of the following companies is most likely to be considered a manufacturing company? a. Burger King. b. Abercrombie and Fitch. c. Supercuts. d. Maytag. Practice Question #3 Which of the functions of management involves monitoring actual results to see whether the objectives set in the planning stage are being met and, if necessary, taking corrective action to adjust the objectives or implementation of the plan? a. Implementing. b. Controlling. c. Planning. d. Selling. ***************************************************************************************************************** Learning Objective 1-3 Describe the importance of ethics, sustainability, and decision analytics in managerial accounting Ethics and Internal Reporting Managers are increasingly being held responsible for creating and maintaining an ethical work environment including the reporting of accounting information. Ethics refers to the standards of conduct for judging right from wrong, honest from dishonest, and fair from unfair. Many situations in business require accountants and managers to weigh the pros and cons of alternatives before making final decisions. Sarbanes-Oxley (SOX) Act of 2002 The Sarbanes-Oxley Act of 2002 was primarily aimed at renewing investor confidence in the external financial reporting system. However, it has many implications for managers such as: 1. Reducing opportunities for error and fraud. 2. Counteracting incentives for fraud. 3. Encouraging good character. Mini Exercise 1-3 edited to show examples of exam multiple choice questions 1. The SOX requirement to require management to report on effectiveness of internal controls meets which SOX objective? a. Counteract incentives for fraud. b. Reduce opportunities for error and fraud. c. Encourage good character. 2. The SOX requirement to establish a tip line for employees to report questionable acts meets which SOX objective? a. Counteract incentives for fraud. b. Reduce opportunities for error and fraud. c. Encourage good character. Sustainability Accounting Sustainability accounting aims at providing managers with a broader set of information to meet the needs of multiple stakeholders, with the goal of ensuring the company’s long-term survival in an uncertain and resource-constrained world. Sustainability accounting focuses on the three pillars of sustainability, called the triple bottom line or 3 P’s : 1. People (also called Society) 2. Profit (also called Economy) 3. Planet (also called Environment) Acc 2033 Chapter 1 Lecture Notes

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Decision Analytics Large, complex quantities of data are frequently referred to as “BIG” data due the large volume of data, the speed or velocity at which the data arrives and the variety of the data sources and formats. The purpose of data analytics is to derive meaningful and actionable insights from the data to make more intelligent business decisions. Three common types of analytics are: 1. Descriptive analytics (showing what has happened) 2. Predictive analytics (forecasting what is likely to happen) 3. Prescriptive analytics (recommending a course of action The Role of Cost in Managerial Accounting 4. This text is divided into three major sections. In chapters 1 2 and 4, we focus on alternative ways to measure the cost of various products, services, and customers. The ultimate goal of these four chapters is to help managers manage or control costs, make decisions, and plan for the future. 5. 6. The second section of the text includes chapters 5 through 7, in which we illustrate how managers can use cost and other information to make decisions. 7. 8. The final section of the text, chapters 8, 9 and 11, will introduce the use of accounting information for planning, control, and performance evaluation. Practice M1-1 Comparing Financial and Managerial Accounting LO 1-1 (Partial rest was assigned in Connect) Match each of the following characteristics that describe financial accounting, managerial accounting, both financial and managerial accounting, or neither financial nor managerial accounting. _____ 1. Is future oriented. _____ 2. Is used primarily by external parties. _____ 3. Is relied on for making decisions. _____ 4. Is historical in nature. Answer Choices a. Financial accounting b. Managerial accounting c. Both financial and managerial accounting d. Neither financial nor managerial accounting M1-3 review in Connect Exercise 1-2 Identifying Management Functions LO 1-2 (Partial, rest on Connect) Refer to E1-1. Suppose that, after a thorough investigation, Books on Wheels decided to go forward with the new product aimed at university students. The product, The Campus Cart, has gone into production, and the first units have already been delivered to campuses across the country. Match each of the following steps that took place as Books on Wheels moved through the decision making, production, marketing, and sale of The Campus Cart with the correct phase of the management process. _____ 1. Identifying five college campuses to serve as test markets. _____ 2. Setting the goal of $1 million in annual sales by the year 2015. _____ 3. Hiring workers for the manufacturing facility. Acc 2033 Chapter 1 Lecture Notes

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Answer Choices: a. Planning b. Implementing c. Controlling Exercise 1-3 Identify sustainability issues affecting the triple bottom line. LO 1-3 (Partial, rest in Connect)  For each of the following sustainability initiatives, indicate whether it will impact social (S), environmental (En), or economic (Ec) factors in the triple bottom line. Include more than one factor as appropriate.  _____ 1. Implementing a health and wellness program to improve employees’ health, reduce stress, improve productivity, and reduce employee turn-over.  _____ 2. Ensuring that all future construction projects are LEED certified. Multiple Choice Questions 1. Which of the functions of management involves monitoring actual results to see whether the objectives set in the planning stage are being met and, if necessary, taking corrective action to adjust the objectives or implementation of the plan? a. Implementing. b. Controlling. c. Planning. d. Selling. 2. Suppose you have decided that you would like to purchase a new home in five years. To do this, you will need a down payment of approximately $20,000, which means that you need to save $350 each month for the next five years. This is an example of a. Directing/Leading. b. Controlling. c. Planning/Organizing. d. Selling. ***************************************************************************************************************** Learning Objective 1-4 Define and give examples of different types of cost: 1. Out-of-pocket versus opportunity costs. 2. Direct versus indirect costs. 3. Variable versus fixed costs. 4. Manufacturing versus nonmanufacturing costs. 5. Product versus period costs. 6. Relevant versus irrelevant costs. Cost Terminology In this chapter, we introduce the terminology you will use to categorize or sort cost into different “buckets,” including: • Direct or Indirect • Variable or Fixed • Manufacturing or Nonmanufacturing • Product or Period • Relevant or Irrelevant Direct versus Indirect Costs Direct Costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Example: For California Pizza Kitchen, direct costs would include the costs of materials and labor that can be traced directly to each pizza produced. Acc 2033 Chapter 1 Lecture Notes

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Indirect Costs Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: At California Pizza Kitchen, indirect costs include items such as depreciation on the ovens used to bake the pizzas as well as the costs of utilities, advertising, and supervision. Variable versus Fixed Costs Managers often need to be able to predict how costs will change in response to changes in activity. The activity might be the output of goods or services or it might be some measure of activity, internal to the company, such as the number of purchase orders processed during a period. The most commonly used classifications of cost behavior are variable and fixed costs. Total variable costs increase as activity increases. For example, your total gasoline cost (total amount of gallon used) increases as you drive more miles in your car, but the cost per gallon remains the same. ________________ costs change, in total, in direct proportion to changes in activity level. __________________ do not change in total regardless of the activity level, at least within some reasonable range of activity. Average or per-unit fixed costs vary inversely with the number of units produced or the number of customers served. Manufacturing versus Nonmanufacturing Costs Manufacturing costs include all costs incurred to produce the physical product. Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. ________________________ are major material inputs that can be physically and conveniently traced directly to the final product. (Example: Glass windows installed in an automobile) __________________ is the cost of labor that can be physically and conveniently traced to the final product. (Example: Wages paid to automobile assembly workers) Direct labor is sometimes referred to as “touch labor” since it consists of the costs of workers who “touch” the product as it is being made. Manufacturing overhead includes all costs other than direct materials and direct labor that must be incurred to manufacture a product. Manufacturing overhead costs include the following costs at the manufacturing facility: maintenance and repairs on production equipment, utilities, property taxes, depreciation, insurance, and salaries for supervisors, janitors, and security guards. Manufacturing costs are often combined as follows: Direct labor and direct materials are often called the ______________costs of manufacturing. Both direct materials and direct labor can be traced to units of production. Direct labor and manufacturing overhead are called ________________ costs. Direct labor and manufacturing overhead are the costs incurred to convert the direct materials into finished goods. A manufacturing company incurs many other costs in addition to manufacturing costs. Nonmanufacturing costs are those costs associated with running the business and selling the product, as opposed to manufacturing the product. Selling costs include all costs necessary to secure customer orders and get the finished product into the hands of the customer. These costs are also referred to as order-getting and order-filling costs. Administrative costs include all executive, organizational, and clerical costs associated with the general management of an organization that are not classified as production or marketing costs. Acc 2033 Chapter 1 Lecture Notes

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Product versus Period Costs

Manufacturing costs include all the costs that are involved in acquiring or making a product. In the case of manufactured goods, it includes direct materials, direct labor, and manufacturing overhead. Product costs flow through work in process inventory, and finished goods inventory prior to being sold. Once sold, the product costs become part of cost of goods sold. Product costs are also known as inventoriable costs. Nonmanufacturing costs are often referred to as “Period Costs” because they result in an expense charge to income in a given period. There can be a delay of one or more periods between the time in which the cost is incurred and when it appears as an expense on the income statement. For example, all selling and administrative costs are typically considered to be period costs. The usual rules of accrual accounting apply to period costs. For example, administrative salary costs are “incurred” when they are earned by the employees and not necessarily when they are paid to employees. Relevant versus Irrelevant Costs A relevant cost has the potential to influence a decision, while an irrelevant cost will not influence a decision. For a cost to be relevant, it must: 1. Differ between the decision alternatives. Costs that differ between the alternatives are called incremental or differential costs. 2. Be incurred in the future rather than the past. Costs incurred in the past are called sunk costs. Out-of-Pocket versus Opportunity Costs ______________________ costs involve an actual outlay of cash. For example, if you were a company like CPK, out- of-pocket costs would include the cost of rent, wages, utilities, advertising, and insurance. An _____________________________ is the foregone benefit (or lost opportunity) of the path not taken. Anytime you choose to do one thing instead of another because of a limit on your time or money, you incur an opportunity cost.

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Cost Classification System

Accounting Knowledge can Benefit All Majors Accounting knowledge can make the difference in your ability to land a dream job, whether you hope to work in production and operations management, human resources, finance, marketing, or another field. • Production and Operations Management: Coordinate suppliers of parts for new products to meet target cost estimates • Human Resources: Develop affordable attractive pay programs • Finance: Assess the value of investment opportunities • Marketing: Set prices to achieve target sales • Entrepreneur – Understanding profit margin, break even, plans and budgeting Practice Question #4 Suppose you are trying to decide whether to sell your accounting book at the end of the semester or keep it as a reference book for future courses. If you decide to keep the book, the money you would have received from selling it is a(n) a. Sunk cost. b. Opportunity cost. c. Out-of-pocket cost. d. Indirect cost. Practice Question #5 Use the following information regarding Garcia Company for questions a-c.

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a. What is Garcia’s total manufacturing cost? ___________________________ Show calculation

b. What is Garcia’s prime cost?________________________ Show calculation

c. What is Garcia’s manufacturing overhead? ______________________ Show calculation

Mini Exercise 1-6 Assume that you have the following information about Top Shelf’s costs for the most recent month:

Determine each of the following costs for Top Shelf. a. Direct materials used. ____________________

b. Direct labor.

_____________________

c. Manufacturing overhead.

_____________________

d. Prime cost

____________________________

e. . Conversion cost.

____________________________

f.

Total manufacturing cost.__________________________

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g. Total nonmanufacturing (period) cost.

_______________________

Mini Exercise 1-9 For each of the following independent cases A through D, compute the missing values in the table below. Case Direct Direct Manufacturing Prime Cost Conversion Cost materials Labor overhead A $900 $1,300 $2,000 B $400 $1,325 $2,650 C 700 1,500 $2,880D 750 $1,600 $2,000 Computations for Case A Computations for Case B Computations for Case C Computations for Case D Exercise 1-6 Cotton White, Inc., makes specialty clothing for chefs. The company reported the following costs for 2015:

Compute the following for Cotton White: 1. Direct materials._________________________

2. Direct labor._________________________

3. Manufacturing overhead._______________________

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4. Total manufacturing cost.___________________________

5. Prime cost.__________________________________

6. Conversion cost.______________________________

7. Total period cost._____________________________ Exercise 1-8 The following information is available for Milky Way, Inc., for Year 1:

Calculate each of the following costs for Milky Way: 1. Direct labor.

______________________________

2. Manufacturing overhead.

______________________________

3. Prime cost.

_____________________________

4. Conversion cost.

______________________________

5. Total manufacturing cost.

______________________________

6. Period expenses.

______________________________

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Exercise 1-10 Noteworthy, Inc., produces and sell...