BUS105 Study Guide

Unit 1: Managerial Accounting

1a. Explain the differences between financial accounting and managerial accounting

  • What are the main differences between financial accounting and managerial accounting?
  • Who are the users that are being targeted in managerial accounting reports?
  • Why do managerial accounting reports include projections about the future?
  • Why do managerial accounting reports tend to be more detailed than financial accounting reports?

The main differences between financial accounting and managerial accounting lie in who the intended users of the accounting information are. For the most part, financial accounting is aimed at outside users, such as shareholders, investors, and creditors. Managerial accounting, on the other hand, is focused on internal users such as managers and upper-level management. Managerial accounting provides information to managers in order to enable them to make informed and timely decisions regarding operations within the organization. 

Managerial accounting, aimed at helping managers make informed decisions, generally includes both historical information as well as projections about the future. In contrast, financial accounting only includes information regarding a firm's past performance. Additionally, managerial accounting tends to include details like non-financial information in addition to financial information. Finally, financial accounting is governed by the Financial Accounting Standards Board (FASB), while managerial accounting has no such governing body. Each organization is free to produce whatever reports it feels are necessary and helpful in aiding management's decisions. 

Review Table 1.1 in Characteristics of Managerial Accounting.

1b. Explain the functions of various accounting personnel, such as the controller and accounting staff

  • What are the two main functions of managerial accounting personnel?
  • How are these two functions manifested in the managerial accounting process?
  • What role do managers play in the managerial accounting process?

The two main functions of managerial accountants are planning and control. Planning is the process of establishing goals for an organization and communicating these goals to the entire organization. After a plan is implemented, managers review the effectiveness of the plan and make any changes that are necessary for the next accounting period and beyond. This is referred to as control. 

Organizations usually formalize their plans with a budget. A budget is a group of interrelated reports on the expectations of the performance of various components of the organization. The various budgets (such as production, sales, and cash budgets) all come together to form the master budget. Each employee should have a clear picture of the budget in order to properly fulfill their specific duties while staying aligned with the goals of the organization as a whole. 

In most organizations, the controller is the top management accountant. The controller has the responsibility of preparing the proper managerial accounting reports at the proper time. The controller must determine what information is important at that particular time for decision-making. The controller leads the accounting staff who manage the day-to-day managerial accounting of the company. The accounting staff generally reports to the controller, who in turn reports to the Chief Financial Officer (CFO).

Review Planning and Control Functions Performed by Managers and Key Finance and Accounting Personnel.

1c. Describe standards of ethical conduct in the field of accounting and how the field addresses ethical conflicts

  • What sort of ethical dilemmas may arise as a managerial accountant?
  • What resources are provided by the managerial accounting industry to assist in ethical decision-making?
  • What are the four core responsibilities as defined by the Institute of Management Accountants? 

As a managerial accountant, ethically unclear situations arise occasionally. To help accountants make ethically sound decisions, the Institute of Management Accountants (IMA) developed a Statement of Ethical Professional Practice. This statement provides standards and guidelines that assist accountants in choosing an ethically acceptable course of action. The statement includes four core responsibilities for every accountant. These are competence, confidentiality, integrity, and credibility. The statement also provides guidelines on how to resolve ethical conflicts.

When an ethical dilemma does occur, the IMA recommends always following policies that have been established by the organization. If these policies do not exist or do not help in resolving the problem, the IMA recommends discussing the situation with an immediate supervisor, an objective adviser, or an attorney, if necessary. 

Aside from that provided by the IMA, further guidance on ethical issues is also provided by other organizations such as the AICPA, the IFAC, and the SEC. 

Review Figure 1.2 in Ethical Issues facing the Accounting Industry.

1d. Explain the benefits of computerized accounting systems

  • Why are computerized accounting systems important for companies and organizations?
  • What are some of the things to look for when setting up a company's accounting system?
  • How does an enterprise resource planning system aid in beneficial managerial accounting practices? 

Information technology has a big effect on managerial accounting. Companies use computerized systems for all components of a business from ordering and purchasing to manufacturing, sales, and collections. A good computerized accounting system provides relevant and up-to-date information that assists managers in making informed and timely decisions. 

In order to provide accurate, relevant, and up-to-date information, computer systems must be integrated with all segments of a business. An enterprise resource planning (ERP) system is designed to record and share information across many divisions of a firm, as well as across geographical areas. This enables everyone involved in a company to share and access information in an easy and timely manner. In turn, this leads to better decision-making.

For a smaller company that is first starting out, a large system such as an ERP may not be cost-effective. There are many smaller software packages that are available and that can help with managerial accounting. When choosing software for a business, care must be taken to ensure that the costs do not outweigh the benefits. 

Review Computerized Accounting Systems.

1e. Use cost terminology to describe the flow of manufacturing costs

  • What are the two broad categories of costs used in managerial accounting?
  • What are the three types of manufacturing costs?
  • What costs are included in manufacturing overhead?
  • How do manufacturing costs flow through the balance sheet and income statement accounts?
  • What is the difference between selling costs and general and administrative costs?

One of the main methods of making managerial decisions involves classifying costs. There are two broad categories of costs: Manufacturing costs (also called product costs) and non-manufacturing costs (also known as period costs). Manufacturing costs consist of any cost that is directly and easily traceable to a product being produced (or service provided). These include costs such as direct materials and direct labor. It also includes manufacturing overhead which consists of items that are part of the product but not as easily traceable. These include indirect materials and indirect labor as well as other manufacturing costs. Manufacturing costs are sometimes called product costs as they are the costs that are included in the products. Throughout the production process, these costs are listed on the balance sheet as inventory. Originally, they are debited to a raw materials inventory account. As they are used in production, they move to a work-in-process (WIP) inventory account and then to a finished goods inventory account when they are completed into finished products. These costs are only expensed as the cost of goods sold when the finished products are sold. 

Non-manufacturing costs include any costs that are not associated with the production of a product (or providing a service). These are divided into selling costs, which are costs associated with selling the goods, and general and administrative costs which include all other costs such as rent for office space, insurance, human resources, and legal costs. Non-manufacturing costs are sometimes called period costs as they are the costs that are not included in the products, but rather are expensed each period, regardless of production or sales.


1f. Prepare an income statement for a manufacturing company

  • What is the main difference between a manufacturing company and a merchandising company?
  • What is the basic cost flow equation?
  • What three schedules are necessary in order to create an income statement for a manufacturing company?

As opposed to a service company that has no cost of goods sold, or a merchandising company that buys and sells finished goods, a manufacturing company will have inventory at different stages of production. As such, the calculation of the cost of goods sold for a manufacturing company is more complex than for a merchandising company. 

In order to properly calculate the Cost of Goods Sold, a manufacturer makes use of the basic cost flow equation which states:

Beginning balance (BB) + Transfers in (TI) - Ending balance (EB) = Transfers out (TO)

Using this equation, the manufacturer can calculate the cost of raw materials used in production, cost of goods manufactured, and cost of goods sold. Using a schedule of raw materials placed in production, and a schedule of cost of goods manufactured, manufacturers can create a schedule of cost of goods sold which will produce the cost of goods sold that will appear on the income statement.

Review Income Statements for Manufacturing Companies.

Unit 1 Vocabulary

This vocabulary list includes terms you will need to know to successfully complete the final exam.

  • basic cost flow equation
  • budget
  • control
  • controller
  • cost of goods sold
  • direct labor
  • direct materials
  • enterprise resource planning (ERP) system
  • ethical dilemma
  • finished goods inventory
  • indirect labor
  • indirect materials
  • managerial accounting
  • manufacturing costs
  • manufacturing overhead
  • non-manufacturing costs 
  • period costs
  • planning
  • product costs
  • raw materials inventory
  • work-in-process (WIP) inventory