Chapter 16

Introduction to Management Accounting

Chapter Overview
Chapter 16 introduces students to management accounting, as distinguished from financial accounting. Students
learn about the information that managers—the decision makers inside the business—must know and use in order
to effectively plan and control the business. The chapter then begins a discussion on today’s business
environment. Recent trends include a shift toward a service economy, competing in the global marketplace,
timed-based competition, advanced information systems, and the quality movement. Service, merchandising, and
manufacturing companies are discussed and an income statement example is provided for each. A mid-chapter
summary problem requires the student to calculate cost of goods sold and total period costs, and to prepare the
income statement for a merchandising company. Cost classification issues are explained, such as product cost
versus period costs and manufacturing overhead. A summary exhibit provides product cost and period cost
examples for the three types of companies. The calculation of cost of goods manufactured is presented and a
schedule example is provided. Exhibits help students visualize the flow of costs through a manufacturing
company’s three inventory accounts.

The chapter finishes with a discussion of the professional ethical standards for management accountants and
provides several ethical dilemmas. The end of chapter summary problem requires the student to identify product
and period costs and compute cost of goods manufactured.

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 Chapter 16: Teaching Outline

1) Distinguish management accounting from financial accounting

a) Exhibit 16-1 Management Accountability to Stakeholders

c) Exhibit 16-2 Financial Accounting versus Managerial Accounting

2) Identify trends in the business environment and the role of management accountability

a) Enterprise Resource Planning (ERP)

b) E-Commerce

c) Just-in-Time Management (JIT)

d) Total Quality Management (TQM)

3) Apply ethical standards to decision making

a) Exhibit 16-3 IMA Statement of Ethical Professional Practice (excerpt)

4) Classify costs and prepare an income statement for a service company

a) Exhibit 16-4 Income Statement – Service Company

5) Classify costs and prepare an income statement for a merchandising company

a) Exhibit 16-5 Income Statement – Merchandising Company

6) Classify costs and prepare an income statement and statement of cost of goods manufactured for a

manufacturing company

a) Types of Costs

i) Direct Materials

ii) Direct Labor

iii) Manufacturing Overhead

b) Exhibit 16-6 Manufacturer’s Inventoriable Product Costs

c) Exhibit 16-7 Income Statement - Manufacturing Company

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d) Exhibit 16-8 Inventoriable Product Costs and Period Costs for Service, Merchandising, and

Manufacturing Companies

d) Exhibit 16-9 Manufacturing Company: Inventoriable Product Costs and Period Costs

e) Exhibit 16-10 Schedule of Cost of Good Manufactured

f) Exhibit 16-11 Flow of Costs Through a Manufacturer’s Inventory Accounts

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 Chapter 16: Summary Handout for Students

1. Exhibit 16-3 Financial Accounting versus Managerial Accounting

2. Acting ethically is where integrity and credibility prevail; issues where professional judgments must

be made arise often.

3. Service companies have only period costs.

o Period costs are incurred and expensed in the same accounting period.

o Unit cost per service = Total service costs/Total number of services provided

4. Merchandising companies have both product and period costs.

o Inventoriable product costs are held in inventory until sold.

o Beginning Inventory + Net Purchases + Freight In – Ending Inventory = Cost of Goods Sold

o Unit cost per item = Total cost of goods sold/Total number of items sold

5. Manufacturing companies maintain three kinds of inventory -

o Materials inventory

o Work in process inventory

o Finished goods inventory

6. Three components of manufacturing costs are inventoriable product costs -

o Direct materials

o Direct labor

o Manufacturing overhead

 Indirect materials

 Indirect labor

 Other indirect costs

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 Lecture Outline Tips: Key Topics

When discussing financial and managerial accounting, it is common for students to prefer one over the other. It
may be helpful to point this out to students, especially for accounting or business majors that may second guess
their choice of major if they don’t like or excel in managerial accounting as they have in financial accounting. On
the other hand, some students may prefer and excel in managerial accounting, which makes this a good time to
point out the variety of career paths available in accounting.

When discussing the service economy and global competition, it may be interesting to take a survey of the types
of jobs that students have and how many students know someone who had a job that was outsourced to another
country. Ask students if the findings verify the textbook content.

Students will probably be able to relate to service and merchandising companies (think Wal-Mart) better than
manufacturing companies. Service and merchandising companies have already been discussed in the textbook. It
may be helpful to ask students to provide examples of each type of company, especially merchandising and
manufacturing, to assess their knowledge of the differences.

Manufacturers have three inventory accounts – materials, WIP, and finished goods. All three are assets on the
balance sheet. Inventory is removed from finished goods when sold. The inventory accounts record product costs
as they are added in the production process – direct materials, direct labor, and manufacturing overhead.

Point out the distinction between direct and indirect manufacturing costs. Direct costs are added to WIP, whereas
indirect costs are added to manufacturing overhead and applied to WIP using a predetermined overhead rate.
Therefore, when materials are used, you must know if it is indirect or direct. When labor is incurred, you must
know whether it is direct or indirect. The recording of labor in an asset account (WIP) may need additional
explanation. Students may want to expense labor because it was expensed in previous chapters. Remind students
that manufacturing companies add all product costs to inventory and they are expensed (costs of goods sold)
when inventory is sold.

Overhead includes all manufacturing costs other than direct materials and direct labor. Therefore, students must
know if a cost is manufacturing or non-manufacturing. For example, “depreciation” will no longer suffice. Is it
manufacturing or non-manufacturing? As discussed for labor above, students may want to expense all indirect
costs such as depreciation, insurance, etc. because they were expensed in previous chapters. Remind students that
manufacturing companies add all product costs to inventory and they are expensed (costs of goods sold) when
inventory is sold.

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 Chapter 16 Assignment Grid
Learning Short Exercises Problems (Group A) Problems (Group B)
Objective Exercises Moderate Difficult Difficult
Easy
1 1, 2 14 22 28
2 3 15 22 28
3 4 16 23 29
4 5, 8 17 22 28
5 6, 7, 8 18 24 30
6 8, 9, 10, 11, 19, 20, 21 25, 26, 27 31, 32, 33
12, 13

Other End of Chapter Materials:

Continuing Exercise E16-34
Continuing Problem P16-35
Practice Set
Decision Case 16-1
Decision Case 16-2
Ethical Issue 16-1
Fraud Case 16-1
Financial Statement Case 16-1
Team Project 16-1
Communication Activity 16-1

End of Chapter Exercises and Problems available utilizing Accounting software:

Excel in Practice E16-20, P16-22A, P16-26A, P16-27A
General Ledger, QuickBooks, Peachtree None

Sample Homework Questions in MyAccountingLab:

E16-14, E16-15, E16-16, E16-17, E16-21, P16-22A, P16-24A, P16-26A, P16-27A

Pre-Test Questions in MyAccountingLab:

S6-2, S16-3, S16-4, S16-5, S16-6, S16-7, S16-10

Post-Test Questions in MyAccountingLab:

P16-28B, P16-33B

Exercise and/or Problems used in PowerPoint slides:

S16-1, S16-3, S16-5, S16-6, S16-9, S16-12

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Answer Key to Chapter 16 Quiz:
1. A 6. C
2. B 7. C
3. D 8. B
4. C 9. B
5. D 10. D

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 Name Date Section

CHAPTER 16
TEN-MINUTE QUIZ
Circle the letter of the best response.

1. Which is not a characteristic of managerial accounting information?

A. Emphasizes the external financial statements
B. Provides detailed information about individual parts of the company
C. Emphasizes relevance
D. Focuses on the future

2. World-class businesses use which of these systems to integrate all of a company’s worldwide functions,
departments, and data into a single system?
A. Cost standards
B. Enterprise resource planning
C. Just-in-time management
D. All of the above

3. Today’s business environment is characterized by

A. global competition.
B. time-based competition.
C. a shift toward a service economy.
D. A, B, and C.

4. Which of the following accounts does a manufacturing company, but not a service company, have?
A. Advertising expense
B. Salary payable
C. Cost of goods sold
D. Retained earnings

5. In computing cost of goods sold, which of the following is the manufacturer’s equivalent to the
merchandiser’s purchases?
A. Total manufacturing costs to account for
B. Direct materials used
C. Total manufacturing costs incurred during the period
D. Cost of goods manufactured

6. Which of the following is a direct cost of manufacturing a sport boat?

A. Salary of engineer who rearranges plant layout
B. Depreciation on plant and equipment
C. Cost of boat engine
D. Cost of customer hotline

7. Which of the following is not part of manufacturing overhead for producing a computer?
A. Manufacturing plant property taxes
B. Manufacturing plant utilities
C. Depreciation on delivery trucks
D. Insurance on plant and equipment

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 Questions 8 and 9 use the data that follow. Suppose a bakery reports this information:

Beginning materials inventory $ 8,000

Ending materials inventory 7,000
Beginning work in process inventory 4,000
Ending work in process inventory 3,000
Beginning finished goods inventory 3,000
Ending finished goods inventory 5,000
Direct labor 30,000
Purchases of direct materials 95,000
Manufacturing overhead 21,000

8. What is cost of direct materials used?

A. $95,000
B. $96,000
C. $103,000
D. $94,000

9. What is the cost of goods manufactured?

A. $146,000
B. $148,000
C. $144,000
D. $147,000

10. A management accountant who avoids conflicts of interest meets the ethical standard of
A. confidentiality.
B. competence.
C. credibility.
D. integrity.