Introduction to Managerial Accounting
The gathering and application of information to use internally to plan, make
decisions, evaluate performance and control an organization
Future Oriented, Provide detailed segment reports of an organization, Need not
Just-in-Time Inventory System: Only purchase raw materials and produce units as
needed to meet customer demand. Inventory is therefore reduced to a minimum.
You receive materials just in time for production -> complete parts just in time for
assembly -> complete products just in time to ship
Required very precise data and planning. Requires a great deal of time
Total Quality Management (TQM): Improves productivity and quality by
encouraging the use of fact and analysis for decision making and avoids counter-
productive organizational infighting.
Management of total quality. Total quality is defined as:
Quality of return to shareholders
Quality of products/services to satisfy consumers
Quality of life at work and outside
2 major Characteristics: Focus on serving customers & Systematic problem
solving using teams
Cost : It is a monetary measure of the resources given up to acquire a good/service.
Product Costs: Costs incurred to produce a product. Materials, factory rent
Manufacturing Costs: Direct materials, Direct labour and
Direct Costs : Costs that are clearly and conveniently traceable to
the cost object. Direct materials, Direct labour
www.notesolution.com Indirect Costs: Costs that cannot be traced directly to a cost
object and can only be allocated. Indirect materials, Indirect
Period Costs: Costs incurred in the non-production area. Accountants salary
Stages of Production:
Work not started (Raw materials)
Work-in-progress (Raw materials + Labour + Overhead)
Prime Costs = Raw materials + Direct Labor
Conversion Costs = Direct Labor + Overhead
Opening Balance + Additions Ending Balance = Withdrawals
Work in Progress = Raw materials + direct labour incurred + manufacturing
overhead incurred Transfer to COGS = Opening finished goods inventory +
additions to finished goods ending finished goods
PRODUCT COST FLOWS [Lecture 1]
Variable Costs: Costs that will increase in direct proportion to changes in activity.
Fixed Costs: Costs that will remain constant within the relevant range of acitivty
Product Cost and Cost Accumulation
2 Popular approaches in costing:
Job Order Costing : Companies with job-shop operations.
Process Costing : Companies that produce large numbers of identical units.
The key to this approach is that the production output needs to be
Job Order Costing: Used in situations with different products are produced each
period. Material Used + Direct labour incurred + Overhead allocated = Total Project
www.notesolution.com Manufacturing overhead includes indirect materials and indirect labour and is
allocated to jobs rather than directly traced to each job.
Problems: material requisition form is not properly completed. Labour hours
charged to the wrong projects and a misallocation of overhead costs.
Remedy: Computerized inventory system, provide clear descriptions of projects in
the job costing sheet and use multiple cost pools.
Overhead costs cannot be traced to products and services. This is a very problematic
are in project costing as it is an indirect cost. They are assigned to products based
on an allocation process.
Overhead allocation base: Should be some productive input that is common across
all of the companys products. It should have a cause and effect relation.
Traditional Allocation Base: Uses machine hours or direct labour hours.
Activity Based Costing: Separates costs into multiple cost pools.
Overhead Allocation Rate = Estimate total manufacturing overhead / # of units in
If the overhead is over or under applied and is not material/ significant, the
difference is closed to Cost of Goods Sold immediately
Activity Based Costing
Traditional Cost Allocation : There is one single overhead allocation rate. Volume
based cost driver is used because managers believe there is a large correlation
between costs incurrence and the volume of production.
ABC : A cost allocation system that allocated cost based on the underlying activities
the generates the costs. Uses multiple cost drivers.
3 Strategic Objectives:
Report accurate costs that can be used to identify the source of the firms
Identify activities that can be performed more efficiently
Identify future need for resources
www.notesolution.com Labour Intensive Process: Overhead costs are small and allocations may be
Automated Process: Overhead costs are relatively large and inaccurate overhead
allocation can lead to questionable product cost information.
Successful ABC implementation:
1. Must be a mandate from top management of the organization.
2. Design and implement a cross-functional effort.
Define Activities: make an implementation team to do so.
Data Collection: The strength of the ABC is highly dependent on the quality of data
Interviews and paper trails
Multidisciplinary project team
General Allocation Process:
Costs are accumulated in activity centre cost pools.
Costs are then allocated in the following manner
Unit Level Costs: unit-based cost driver. Direct material, d. labour.
Batch Level Costs: allocated over the # of units in a batch. Purchase
orders, setup, inspection, movement.
Product Level Costs: over # of units produced in relation to product
line. Equipment maintenance, product development.
Organizational Level Costs: allocated below the line. Building
depreciation, organizational advertising.
Cost Driver: a characteristic of an event or activity that results in the incurrence of
Activity Rates: are used for assigning overhead costs to products and customers.