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Foundational 15 Chapter 1 Essay

1583 words - 7 pages

Unit 1 Lecture

This unit explores the general business environment, in the Prologue, and the reason for the existence of managerial accounting in Chapter 1. Managers are in need of information. Managerial accounting is the vehicle that satisfies that need. Without reasonable, valid, timely information companies will always be at a disadvantage when it comes to competing in the marketplace.

Managers use the provided information to carry out three major activities: planning, directing and motivating, and controlling

Planning involves the identification of alternative business plans. The plans that are most beneficial to the company should be reviewed and implemented if feasible. The ...view middle of the document...

How long could a small company remain profitable if it had such a manger? Not very.

As stated before, managerial accounting is the vehicle managers use to help in carrying out the above activities. But, does a company need managerial accounting. It depends. Does a small corner grocery store need to know how to price all its products or are the prices set by other criteria, such as viewing other competitors’ prices. Managerial accounting is not mandatory. It exists to help managers, yes. Each company has different needs and each company must make a decision based upon its own informational requirements.

Managerial accounting is unlike financial accounting in several ways. Managerial accounting has less emphasis on precision, where financial accounting is driven by precision. Managerial accounting is geared towards internal users, financial accounting is concerned with external users—thus thus the need for precision. Managerial accounting is not mandatory, as stated before, and is not GAAP regulated. As a matter of fact, there are no regulatory agencies for managerial accounting. However, financial accounting is greatly needed and highly regulated.


Now we know why managerial accounting exists and its differences established between financial accounting, we get into general cost classifications.

Manufacturing costs are separated into three broad categories: direct materials, direct labor and manufacturing overhead. All three manufacturing costs will make up product cost. You will see in your homework assignment this is true.

Direct materials + direct labor + manufacturing overhead = product cost.

Direct materials are raw materials used in the production of the final product. For direct materials think of the wood that goes into making a desk, it is a big part of the process. The glue used to hold the wood in place is important to the production but would be an indirect cost and fall into manufacturing overhead. It is still part of the product cost.

The employees who produce the desk, touch the product, would fall into Direct labor. There is also indirect labor that goes into producing the desk: example, the factory managers’ salary. This cost would also fall into manufacturing overhead.

Manufacturing overhead includes all costs of manufacturing a product other than direct labor and direct materials. It is the easiest classification of the three. All indirect costs, factory utilities, factory taxes, factory depreciation, etc…


Prime costs and conversion costs are show above. Prime costs are the labor and materials used to convert materials into a product.

Non-manufacturing costs, selling and administrative, are period costs. Period costs, unlike product costs described above, are expensed during the period they are used. Remember from financial accounting matching revenue with expenses. Period costs included, but are not limited to sales commissions, secretary salaries, executive salaries,...

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