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Chapter 1 Introduction to Managerial Accounting Lecture and Practice Notes Overview of the chapter This chapter will focus on two sections: 1) the role of managerial accounting in an organization and 2) the role of cost in Managerial Accounting. In the first section, the role of managerial accounting, we will compare the financial and managerial accounting, we will review the types of organizations and the functions of management. We will also examine sustainability and decision analytics. In the 2 nd section, we will examine different types of costs. Learning Objectives 1. Describe the key differences between financial accounting and managerial accounting. 2. Describe how managerial accounting is used in different types of organizations to support the key functions of management. 3. Describe the importance of sustainability and decision analytics in managerial accounting. 4. Define and give examples of different types of cost: a. Out-of-pocket or opportunity costs. b. Direct or indirect costs. c. Manufacturing or nonmanufacturing costs. d. Product or period costs. e. Variable or fixed costs f. Relevant or irrelevant costs. 5. Describe the Sarbanes-Oxley Act and the importance of ethics in the accounting profession. ******************************************************************************************************************* Section 1: Role of Managerial Accounting in Organizations Learning Objective 1-1 Describe the key differences between financial accounting and managerial accounting. The primary goal of any accounting system is to capture, summarize and report useful information to users so they can make informed decisions. The key difference between managerial and financial accounting is the intended user. Financial accounting information is aimed at external _users whereas managerial accounting is aimed at _ internal _____users. Study the exhibit on the next page comparing Financial and Managerial Accounting (also found in your textbook) Let’s see if you can answer some sample questions from the exhibit Which accounting system(s) prepares their reports using GAAP? _ Financial _______ Which accounting system(s) is more subjective? _ Managerial ____________ Practice Multiple-choice Question 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. Acc 2033 Chapter 1 Lecture Notes Page 1

d. Financial accounting is prepared as needed (perhaps even daily), but managerial accounting is prepared periodically (monthly, quarterly, annually). More Practice in Connect 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. _B____   1. Is future-oriented. __A___   2. Is used primarily by external parties. ___C__   3. Is relied on for making decisions. ____A_   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 ************************************************************************************************************ Learning Objective 1-2 Describe how managerial accounting is used in different types of organizations to support the key functions of management. Types of Organizations Manufacturers purchase raw materials from suppliers and use them to create a finished product. Finished products are sold to customers. Acc 2033 Chapter 1 Lecture Notes Page 2

Practice Questions 1. 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 . 2. 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. 3. 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. Exercise 1-2 Identifying Management Functions LO 1-2 (Partial, rest in 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. _A____   1. Identifying five college campuses to serve as test markets. _ A ____   2. Setting the goal of $1 million in annual sales by the year 2015. __ B ___   3. Hiring workers for the manufacturing facility. Answer Choices: a. Planning b. Implementing c. Controlling ***************************************************************************************************************** Learning Objective 1-3 Describe the importance of sustainability and decision analytics in managerial accounting 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) Acc 2033 Chapter 1 Lecture Notes Page 4

2. Profit (also called Economy) 3. Planet (also called Environment) Accountants can play a key role in helping organizations achieve their sustainability goals by measuring and managing the triple bottom line. In the past accounting focused on profitability but managers are beginning to realize that in the long run, the business cannot survive without people (employees, customers, suppliers, or the planet (water, clean air, energy). For example, most public companies now issue corporate social responsibility (CSR) reports that provide sustainability-related information, including measures of social and environment impact. Decision Analytics Large, complex quantities of data are frequently referred to as “BIG” data due to 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 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.  _ S;EC ____   1. Implementing a health and wellness program to improve employees’ health, reduce stress, improve productivity, and reduce employee turnover.  __ EN ___   2. Ensuring that all future construction projects are LEED certified. M1-2 and M1-3 review in connect for terminology terms ******************************************************************************************************************* Section 2: The Role of Cost in Managerial Accounting Overview 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. 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. The final section of the text, chapters 8, 9, and 11, will introduce the use of accounting information for planning, control, and performance evaluation. 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. Acc 2033 Chapter 1 Lecture Notes Page 5

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 the 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. Variable versus Fixed Costs Managers often need to be able to predict how costs will change in response to changes inactivity. 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. _ Variable _______________ costs change, in total, in direct proportion to changes in activity level. _ Fixed Costs _________________ 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. 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. Acc 2033 Chapter 1 Lecture Notes Page 7

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 __ Out-of-Pocket ____________________ 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 __ Opportunity Costs ___________________________ 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. Cost Classification System Practice Question 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 Use the following information regarding Garcia Company for questions a-c. Factory rent $ 5,000 Direct Labor 8,000 Indirect Materials 1,000 Direct Materials used 3,500 Sales Commissions 2,500 Factory Manager’s salary 4,000 Advertising 1,500 Acc 2033 Chapter 1 Lecture Notes Page 8

g. Total nonmanufacturing (period) cost. ___ 4400 ____________________ everything else not highlighted Mini Exercise 1-9 For each of the following independent cases A through D, compute the missing values in the table below. Case Direct materials Direct Labor Manufacturin g overhead Prime Cost Conversion Cost A $900 $1,300 $2,000 2200 3300 B $400 2250 $1,325 $2,650 3575 C 2180 700 1,500 $2,880- 2200 D 850 750 1250 $1,600 $2,000 Computations for Case A DM+DL DL+MO Computations for Case B DM-PC DL+MO Computations for Case C DL+MO DL-PC Computations for Case D PC-DL CC-DL Exercise 1-8: Cotton White, Inc., makes specialty clothing for chefs. The company reported the following costs for 2018:  Description of the cost Amount Factory rent $42,000 Company advertising 18,000 Wages paid to sewing personnel 75,000 Depreciation on salespersons' vehicles 25,000 Thread 1,000 Utilities for factory 22,000 Cutting room supervisor's salary 30,000 President's salary 75,000 Premium quality cotton material 42,000 Buttons 750 Factory insurance 15,000 Depreciation on sewing machines 6,000 Wages paid to cutters 50,000 Compute the following for Cotton White: 1. Direct materials. __ 42,000_______________________ 2. Direct labor. __ 125,000_______________________ 3. Manufacturing overhead. __ 116,750_____________________ 4. Total manufacturing cost. __ 283,750 _________________________ Acc 2033 Chapter 1 Lecture Notes Page 10

5. Prime cost. ___ 167,00 _______________________________ 6. Conversion cost. __ 241,750____________________________ 7. Total period cost. ___ 118,000 __________________________ Exercise 1-11 The following information is available for Wonderway Inc., for the current year Description Amount Factory rent $ 40,000 Company advertising 20,000 Wages paid to laborers 82,000 Depreciation for president's vehicle 8,000 Indirect production labor 1,800 Utilities for factory 36,000 Production supervisor's salary 30,000 President's salary 60,000 Direct materials used 34,500 Sales commissions 7,500 Factory insurance 12,000 Depreciation on factory equipment 26,000 Calculate each of the following costs for WonderWay: 1. Direct labor. __82,000____________________________ 2. Manufacturing overhead. __145,800____________________________ 3. Prime cost. __116,500___________________________ 4. Conversion cost. __ 227,800____________________________ 5. Total manufacturing cost. __262,300____________________________ 6. Period expenses. __95,500____________________________ Acc 2033 Chapter 1 Lecture Notes Page 11

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 1-15 edited to show examples of exam multiple choice questions 1. The SOX requirement to require management to report on the 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. How’s it going? Indicate whether each of the following actions is likely to increase or decrease the risk of error or fraud arising from (O) Opportunities, (I) Incentives, or © Character 1. Enron was notorious for its “rank and yank” policy that involved ranking the financial performance of managers and firming the bottom 20% ________________ ________________ 2. Nintendo conducts pre-employment screening before hiring _______________ ____________ 3. Walt Disney has a strong board of directors _______________ ___________ 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 Acc 2033 Chapter 1 Lecture Notes Page 13