Managerial Accounting, Third Canadian Edition Class Notes
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Chapter 1
Introduction to Managerial Accounting
LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be able to:
1. Identify managers’ four primary responsibilities.
2. Distinguish financial accounting from managerial accounting.
3. Describe organizational structure and the roles and skills required of management accountants
within the organization.
4. Describe the role of CPA Canada and apply its guidelines for ethical behavior.
5. Discuss and analyze the implications of regulatory and business trends.
6. Describe a lean production system.
7. Describe and use the costs of quality framework.
OVERVIEW
This chapter provides an overview of the focus of management accounting and its role in organizations.
Section One: The chapter introduces managerial accounting along with the fundamental principle
of the text, which is the importance of using managerial accounting data in
decision-making. Students are introduced to the importance of cost of goods sold
and decision-making by discussing the primary responsibilities of a managerial
accountant: planning, directing, controlling, and decision-making.
Section Two: To help students understand the managerial accounting focus, financial and
managerial accounting are contrasted and compared. Managerial accounting has
internal users relying on relevant information prepared specifically for
management’s needs and financial accounting has external users using reliable and
objective information in the form of financial statements.
Section Three: The importance of using managerial accounting for decision-making is illustrated
through the presentation of organizational structures and the roles and skills
required of management accountants. In addition to their traditional costing and
Introduction to Managerial Accounting
LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be able to:
1. Identify managers’ four primary responsibilities.
2. Distinguish financial accounting from managerial accounting.
3. Describe organizational structure and the roles and skills required of management accountants
within the organization.
4. Describe the role of CPA Canada and apply its guidelines for ethical behavior.
5. Discuss and analyze the implications of regulatory and business trends.
6. Describe a lean production system.
7. Describe and use the costs of quality framework.
OVERVIEW
This chapter provides an overview of the focus of management accounting and its role in organizations.
Section One: The chapter introduces managerial accounting along with the fundamental principle
of the text, which is the importance of using managerial accounting data in
decision-making. Students are introduced to the importance of cost of goods sold
and decision-making by discussing the primary responsibilities of a managerial
accountant: planning, directing, controlling, and decision-making.
Section Two: To help students understand the managerial accounting focus, financial and
managerial accounting are contrasted and compared. Managerial accounting has
internal users relying on relevant information prepared specifically for
management’s needs and financial accounting has external users using reliable and
objective information in the form of financial statements.
Section Three: The importance of using managerial accounting for decision-making is illustrated
through the presentation of organizational structures and the roles and skills
required of management accountants. In addition to their traditional costing and
Chapter 1
Introduction to Managerial Accounting
LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be able to:
1. Identify managers’ four primary responsibilities.
2. Distinguish financial accounting from managerial accounting.
3. Describe organizational structure and the roles and skills required of management accountants
within the organization.
4. Describe the role of CPA Canada and apply its guidelines for ethical behavior.
5. Discuss and analyze the implications of regulatory and business trends.
6. Describe a lean production system.
7. Describe and use the costs of quality framework.
OVERVIEW
This chapter provides an overview of the focus of management accounting and its role in organizations.
Section One: The chapter introduces managerial accounting along with the fundamental principle
of the text, which is the importance of using managerial accounting data in
decision-making. Students are introduced to the importance of cost of goods sold
and decision-making by discussing the primary responsibilities of a managerial
accountant: planning, directing, controlling, and decision-making.
Section Two: To help students understand the managerial accounting focus, financial and
managerial accounting are contrasted and compared. Managerial accounting has
internal users relying on relevant information prepared specifically for
management’s needs and financial accounting has external users using reliable and
objective information in the form of financial statements.
Section Three: The importance of using managerial accounting for decision-making is illustrated
through the presentation of organizational structures and the roles and skills
required of management accountants. In addition to their traditional costing and
Introduction to Managerial Accounting
LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be able to:
1. Identify managers’ four primary responsibilities.
2. Distinguish financial accounting from managerial accounting.
3. Describe organizational structure and the roles and skills required of management accountants
within the organization.
4. Describe the role of CPA Canada and apply its guidelines for ethical behavior.
5. Discuss and analyze the implications of regulatory and business trends.
6. Describe a lean production system.
7. Describe and use the costs of quality framework.
OVERVIEW
This chapter provides an overview of the focus of management accounting and its role in organizations.
Section One: The chapter introduces managerial accounting along with the fundamental principle
of the text, which is the importance of using managerial accounting data in
decision-making. Students are introduced to the importance of cost of goods sold
and decision-making by discussing the primary responsibilities of a managerial
accountant: planning, directing, controlling, and decision-making.
Section Two: To help students understand the managerial accounting focus, financial and
managerial accounting are contrasted and compared. Managerial accounting has
internal users relying on relevant information prepared specifically for
management’s needs and financial accounting has external users using reliable and
objective information in the form of financial statements.
Section Three: The importance of using managerial accounting for decision-making is illustrated
through the presentation of organizational structures and the roles and skills
required of management accountants. In addition to their traditional costing and
reporting roles, management accountants also play an important role in developing
budgets that influence the organization’s culture and strategy.
Section Four: The importance of ethics is underscored. Ethical dilemmas are discussed and the Code
of Professional Ethics for Management Accountants is outlined.This section also
looks at Management accountants’ professional associations. Professional
accountants are now represented by the Chartered Professional Accountants of
Canada (CPA Canada) in addition to the provincial associations (eg CPA Ontario).
The three legacy accounting bodies in Canada are also discussed.
Section Five: The next section of the chapter presents the implications of regulatory and business
trends. These include the Sarbanes-Oxley Act of 2002, IFRS, XBRL, the shift
towards a service economy, competition in the global marketplace, sustainability
and social responsibility, time-based competition, advanced information systems,
and e-commerce.
Section Six: Traditional production systems are compared to lean production systems. The
advantages and drawbacks of lean production are discussed and the concept of just-
in-time inventories is introduced. Total quality management is presented as a key
to succeeding in the global economy and ISO 9001:2008 is also
discussed.Differences between traditional and lean production systems are presented
including the differences in equipment arrangement between the two systems.
Section Seven: The chapter concludes with a discussion of the costs of quality framework and the
four costs of quality: prevention, appraisal, internal failure, and external failure
costs. This framework is used to aid managers in their decision making
budgets that influence the organization’s culture and strategy.
Section Four: The importance of ethics is underscored. Ethical dilemmas are discussed and the Code
of Professional Ethics for Management Accountants is outlined.This section also
looks at Management accountants’ professional associations. Professional
accountants are now represented by the Chartered Professional Accountants of
Canada (CPA Canada) in addition to the provincial associations (eg CPA Ontario).
The three legacy accounting bodies in Canada are also discussed.
Section Five: The next section of the chapter presents the implications of regulatory and business
trends. These include the Sarbanes-Oxley Act of 2002, IFRS, XBRL, the shift
towards a service economy, competition in the global marketplace, sustainability
and social responsibility, time-based competition, advanced information systems,
and e-commerce.
Section Six: Traditional production systems are compared to lean production systems. The
advantages and drawbacks of lean production are discussed and the concept of just-
in-time inventories is introduced. Total quality management is presented as a key
to succeeding in the global economy and ISO 9001:2008 is also
discussed.Differences between traditional and lean production systems are presented
including the differences in equipment arrangement between the two systems.
Section Seven: The chapter concludes with a discussion of the costs of quality framework and the
four costs of quality: prevention, appraisal, internal failure, and external failure
costs. This framework is used to aid managers in their decision making
reporting roles, management accountants also play an important role in developing
budgets that influence the organization’s culture and strategy.
Section Four: The importance of ethics is underscored. Ethical dilemmas are discussed and the Code
of Professional Ethics for Management Accountants is outlined.This section also
looks at Management accountants’ professional associations. Professional
accountants are now represented by the Chartered Professional Accountants of
Canada (CPA Canada) in addition to the provincial associations (eg CPA Ontario).
The three legacy accounting bodies in Canada are also discussed.
Section Five: The next section of the chapter presents the implications of regulatory and business
trends. These include the Sarbanes-Oxley Act of 2002, IFRS, XBRL, the shift
towards a service economy, competition in the global marketplace, sustainability
and social responsibility, time-based competition, advanced information systems,
and e-commerce.
Section Six: Traditional production systems are compared to lean production systems. The
advantages and drawbacks of lean production are discussed and the concept of just-
in-time inventories is introduced. Total quality management is presented as a key
to succeeding in the global economy and ISO 9001:2008 is also
discussed.Differences between traditional and lean production systems are presented
including the differences in equipment arrangement between the two systems.
Section Seven: The chapter concludes with a discussion of the costs of quality framework and the
four costs of quality: prevention, appraisal, internal failure, and external failure
costs. This framework is used to aid managers in their decision making
budgets that influence the organization’s culture and strategy.
Section Four: The importance of ethics is underscored. Ethical dilemmas are discussed and the Code
of Professional Ethics for Management Accountants is outlined.This section also
looks at Management accountants’ professional associations. Professional
accountants are now represented by the Chartered Professional Accountants of
Canada (CPA Canada) in addition to the provincial associations (eg CPA Ontario).
The three legacy accounting bodies in Canada are also discussed.
Section Five: The next section of the chapter presents the implications of regulatory and business
trends. These include the Sarbanes-Oxley Act of 2002, IFRS, XBRL, the shift
towards a service economy, competition in the global marketplace, sustainability
and social responsibility, time-based competition, advanced information systems,
and e-commerce.
Section Six: Traditional production systems are compared to lean production systems. The
advantages and drawbacks of lean production are discussed and the concept of just-
in-time inventories is introduced. Total quality management is presented as a key
to succeeding in the global economy and ISO 9001:2008 is also
discussed.Differences between traditional and lean production systems are presented
including the differences in equipment arrangement between the two systems.
Section Seven: The chapter concludes with a discussion of the costs of quality framework and the
four costs of quality: prevention, appraisal, internal failure, and external failure
costs. This framework is used to aid managers in their decision making
CHAPTER 1: OUTLINE
1. Identify managers’ four primary responsibilities{LO 1}
Management accounting can be described as the process of identifying, measuring, accumulating,
analyzing, preparing, interpreting, and communicating information that helps managers fulfill
organizational objectives.
Management accounting can be further divided into processes of planning and control. Planning
entails setting objectives and specifying how those objectives will be attained. Controlling entails
implementing plans and using feedback to attain objectives.
The management accountant’s role can be broken down into the following activities:
1. Planning:This involves setting goals and objectives for the company and determining how
to achieve them. This aspect quantifies the likely results of possible courses of action and
often recommends the best course of action to follow. Problem-solving is especially
important for long-range planning and special decisions.
2. Directing: This means overseeing the day to day operations of a company. Involves the
reporting and interpreting of information that helps managers focus on operational
problems, imperfections, inefficiencies and opportunities.
3. Controlling: This means evaluating the results of business operations against the plan and
making adjustments to meet its goals. Scorekeeping enables both internal and external
parties to evaluate the organization’s performance and position.
4. Decision Making: is central to all of the above activities. Managerial accounting gathers,
summarizes, and reports cost and revenue data relevant to the decisions being made in the
planning, directing and controlling phases.
TEACHING TIPS {LO1}
TIP #1 Exhibit 1-1 highlights Managers Four Primary Responsibilities. May want to draw this
table on the board (or show on PPT) and then discuss and write the main points of each type
of responsibility.
TIP #2: After covering managers’ four primary responsibilities, consider offering the following
example:
A manager may wish to expand a company’s custodial service from only cleaning private
homes to also cleaning corporate offices and plants. This goal is then developed into a
budget (planning). That budget is analyzed thoroughly to determine both the price points
and how to market the service (directing). After comparing the budget to the actual results,
the managerial accountant determines that the expansion into the new market is somewhat
slower than expected and decides to change its marketing strategy (controlling). Decision-
making is the fourth responsibility and occurs at all levels of the process. For example, if
the marketing strategy works and the corporation proceeds toward meeting its goals, the
managerial accountant focuses attention on which new services will be offered, how much
to charge for the services, and if loyalty discounts should be given to existing customers
who purchase these services (decision-making).
TIP#3 In teams or in partners, have students complete E1-26B Managers’ Responsibilities,
which should take about five minutes. Call on a student to give the answers.
1. Identify managers’ four primary responsibilities{LO 1}
Management accounting can be described as the process of identifying, measuring, accumulating,
analyzing, preparing, interpreting, and communicating information that helps managers fulfill
organizational objectives.
Management accounting can be further divided into processes of planning and control. Planning
entails setting objectives and specifying how those objectives will be attained. Controlling entails
implementing plans and using feedback to attain objectives.
The management accountant’s role can be broken down into the following activities:
1. Planning:This involves setting goals and objectives for the company and determining how
to achieve them. This aspect quantifies the likely results of possible courses of action and
often recommends the best course of action to follow. Problem-solving is especially
important for long-range planning and special decisions.
2. Directing: This means overseeing the day to day operations of a company. Involves the
reporting and interpreting of information that helps managers focus on operational
problems, imperfections, inefficiencies and opportunities.
3. Controlling: This means evaluating the results of business operations against the plan and
making adjustments to meet its goals. Scorekeeping enables both internal and external
parties to evaluate the organization’s performance and position.
4. Decision Making: is central to all of the above activities. Managerial accounting gathers,
summarizes, and reports cost and revenue data relevant to the decisions being made in the
planning, directing and controlling phases.
TEACHING TIPS {LO1}
TIP #1 Exhibit 1-1 highlights Managers Four Primary Responsibilities. May want to draw this
table on the board (or show on PPT) and then discuss and write the main points of each type
of responsibility.
TIP #2: After covering managers’ four primary responsibilities, consider offering the following
example:
A manager may wish to expand a company’s custodial service from only cleaning private
homes to also cleaning corporate offices and plants. This goal is then developed into a
budget (planning). That budget is analyzed thoroughly to determine both the price points
and how to market the service (directing). After comparing the budget to the actual results,
the managerial accountant determines that the expansion into the new market is somewhat
slower than expected and decides to change its marketing strategy (controlling). Decision-
making is the fourth responsibility and occurs at all levels of the process. For example, if
the marketing strategy works and the corporation proceeds toward meeting its goals, the
managerial accountant focuses attention on which new services will be offered, how much
to charge for the services, and if loyalty discounts should be given to existing customers
who purchase these services (decision-making).
TIP#3 In teams or in partners, have students complete E1-26B Managers’ Responsibilities,
which should take about five minutes. Call on a student to give the answers.
Loading page 4...
2. Distinguish Financial Accounting from Managerial Accounting {LO 2}
At this point, the accounting student has most likely only been exposed to financial accounting.
Students sometimes have a difficult time making the adjustment from financial to managerial
accounting.
This is a great time to review the role of financial accountants in our society and then
explain the role of management accountants. In doing so, be sure to also point out some of the
similarities between financial and management accounting, as this will help students understand
that their study of management accounting focuses on external decision-makers, whereas
managerial accounting focuses on internal decision-makers.
TEACHING TIPS:{LO 2}
TIP #1: Use Exhibit 1-2 to emphasize the differences between financial and managerial
accounting. Consider presenting the following summarized version of the chart:
Managerial Accounting Financial Accounting
Users Internal (e.g. managers) External (e.g. banks)
Purpose To assist in management decision
making
To help external users make
investing and lending decisions
Primary
Accounting
Product
Any internal accounting report
worthwhile by management
Financial Statements
Content/Format Management determines what is
needed in report and how it is
formatted
Standards (IFRS, ASPE) must be
followed
Focus Future-oriented Historical basis
Emphasis Relevant Data Reliable and Objective Data
Business unit Segmented Information Company as a whole
Frequency of
Reports
Dependent on management’s needs Annually and quarterly
Audit requirement Not required Independent certified public
accountants audit required
Information
required by
outside group
No Yes. Each province has its own
security commissions that require
companies to issue audited
financial statements
Employee
Behavioural
Implications
Considered
Carefully Considered First concern is adequacy and
disclosure; behavioural
implications are secondary.
TIP#2: Use the following example: A manager is setting the price of items in the store. In order to
make this decision, the manager needs to know the cost of the items, the other
organizational costs, the sales prices for other similar items, etc. Of course, these matters
are of great importance to an internal management accountant. An external accountant
would not make the same decisions; instead, he/she would make decisions based on
information contained in the financial statements.
TIP #3: Have students complete E1-28B Identify users of accounting information (10 minutes).
Point out that most decisions impact non-accountants and stress theimportance for non-
accounting majors to understand managerial accounting.
3. Describe Organizational Structure and the Roles and Skills Required of
At this point, the accounting student has most likely only been exposed to financial accounting.
Students sometimes have a difficult time making the adjustment from financial to managerial
accounting.
This is a great time to review the role of financial accountants in our society and then
explain the role of management accountants. In doing so, be sure to also point out some of the
similarities between financial and management accounting, as this will help students understand
that their study of management accounting focuses on external decision-makers, whereas
managerial accounting focuses on internal decision-makers.
TEACHING TIPS:{LO 2}
TIP #1: Use Exhibit 1-2 to emphasize the differences between financial and managerial
accounting. Consider presenting the following summarized version of the chart:
Managerial Accounting Financial Accounting
Users Internal (e.g. managers) External (e.g. banks)
Purpose To assist in management decision
making
To help external users make
investing and lending decisions
Primary
Accounting
Product
Any internal accounting report
worthwhile by management
Financial Statements
Content/Format Management determines what is
needed in report and how it is
formatted
Standards (IFRS, ASPE) must be
followed
Focus Future-oriented Historical basis
Emphasis Relevant Data Reliable and Objective Data
Business unit Segmented Information Company as a whole
Frequency of
Reports
Dependent on management’s needs Annually and quarterly
Audit requirement Not required Independent certified public
accountants audit required
Information
required by
outside group
No Yes. Each province has its own
security commissions that require
companies to issue audited
financial statements
Employee
Behavioural
Implications
Considered
Carefully Considered First concern is adequacy and
disclosure; behavioural
implications are secondary.
TIP#2: Use the following example: A manager is setting the price of items in the store. In order to
make this decision, the manager needs to know the cost of the items, the other
organizational costs, the sales prices for other similar items, etc. Of course, these matters
are of great importance to an internal management accountant. An external accountant
would not make the same decisions; instead, he/she would make decisions based on
information contained in the financial statements.
TIP #3: Have students complete E1-28B Identify users of accounting information (10 minutes).
Point out that most decisions impact non-accountants and stress theimportance for non-
accounting majors to understand managerial accounting.
3. Describe Organizational Structure and the Roles and Skills Required of
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ManagementAccountants within the Organization
{LO 3}
Describes the levels of the organization, starting with the highest level, the Board of Directors.
Role Responsibility
Board of Directors Elected by shareholders to oversee the company
Chief Executive Officer Manages company on a daily basis.
Chief Financial Officer All the company’s financial concerns
Chief Operating Officer The company’s operations, such as R&D, production and distribution
Treasurer Raising capital (through issuing stocks and bonds) and investing funds.
Controller General financial accounting, managerial accounting and tax reporting
Internal Audit Function To ensure that the company’s internal controls and risk management
policies are functioning properly
Audit Committee Oversees the internal audit department. Independent auditors report
directly to the audit committee.
Management
Accountants
Act as internal business advisors. They provide the financial information
and in-depth analysis that managers need to make good business decisions.
Management accountants needs the following skills:
Solid knowledge of both financial and managerial accounting
Problem-solving and decision making skills
Knowledge of how a business functions
Ability to lead and to work on a team
Professionalism and ethical standards
Oral and written communication skills
TEACHING TIPS:{LO3}
Tip #1: Exhibit 1-3 depicts the Typical Organization Structure
Tip #2: Use Exhibit 1-4 to discuss The Skills Required of Management Accountants
4. Describe the Role of CPA Canada and apply its guidelines for ethical behaviour {LO 4}
Professional accountants in Canada are represented by the Chartered Professional Accountants of
Canada (CPA Ontario) in addition to provincial accounting associations (e.g. CPA Ontario).
Prior the unification process, which began in 2013, there were three professional accounting
designations in Canada. The purpose of unification was to bring strength of training, knowledge and
practice in one accounting body which is now the CPA. There are three legacy professional accounting
organizations in Canada. The Canadian Institute of Chartered Accountants(CICA)which regulated
Chartered Accountants (CA).The Society of Management Accountants of Canada, governed
Certified Management Accountants (CMAs). The Certified General Accountants Association of
Canada awarded members the CGA (Certified General Accountant) designation.
In addition to preparing you for a position in an accounting department, studying accounting, and
working as a management accountant, can prepare you for the very highest levels of management, such
as CEO.
A. Standards of ethical conduct
A summary of CPA Guidelines for Ethical Behaviour inExhibit 1-5 includes:
Adhering to Rules of Professional Conduct
Competencies
{LO 3}
Describes the levels of the organization, starting with the highest level, the Board of Directors.
Role Responsibility
Board of Directors Elected by shareholders to oversee the company
Chief Executive Officer Manages company on a daily basis.
Chief Financial Officer All the company’s financial concerns
Chief Operating Officer The company’s operations, such as R&D, production and distribution
Treasurer Raising capital (through issuing stocks and bonds) and investing funds.
Controller General financial accounting, managerial accounting and tax reporting
Internal Audit Function To ensure that the company’s internal controls and risk management
policies are functioning properly
Audit Committee Oversees the internal audit department. Independent auditors report
directly to the audit committee.
Management
Accountants
Act as internal business advisors. They provide the financial information
and in-depth analysis that managers need to make good business decisions.
Management accountants needs the following skills:
Solid knowledge of both financial and managerial accounting
Problem-solving and decision making skills
Knowledge of how a business functions
Ability to lead and to work on a team
Professionalism and ethical standards
Oral and written communication skills
TEACHING TIPS:{LO3}
Tip #1: Exhibit 1-3 depicts the Typical Organization Structure
Tip #2: Use Exhibit 1-4 to discuss The Skills Required of Management Accountants
4. Describe the Role of CPA Canada and apply its guidelines for ethical behaviour {LO 4}
Professional accountants in Canada are represented by the Chartered Professional Accountants of
Canada (CPA Ontario) in addition to provincial accounting associations (e.g. CPA Ontario).
Prior the unification process, which began in 2013, there were three professional accounting
designations in Canada. The purpose of unification was to bring strength of training, knowledge and
practice in one accounting body which is now the CPA. There are three legacy professional accounting
organizations in Canada. The Canadian Institute of Chartered Accountants(CICA)which regulated
Chartered Accountants (CA).The Society of Management Accountants of Canada, governed
Certified Management Accountants (CMAs). The Certified General Accountants Association of
Canada awarded members the CGA (Certified General Accountant) designation.
In addition to preparing you for a position in an accounting department, studying accounting, and
working as a management accountant, can prepare you for the very highest levels of management, such
as CEO.
A. Standards of ethical conduct
A summary of CPA Guidelines for Ethical Behaviour inExhibit 1-5 includes:
Adhering to Rules of Professional Conduct
Competencies
Loading page 6...
Assessing the Situation
Integrity
Conclude/Advise/Communicate
Standards of ethical conduct have been adopted by professional accounting organizations
because of the reliance by so many parties on the product of accountants. See page 13for the
CPA Canada Principles of Ethical Conduct which includes:
Professional Behaviour
Integrity and Due Care
Professional Competence
Confidentiality
Objectivity
B. Ethical dilemmas
Competing obligations to shareholders, customers, suppliers, fellow managers, society, and
self and family create ethical dilemmas for management accountants. Many companies have
formal codes of ethical conduct that must be signed by employees. However, ethical standards
are personal and depend on the values of the individual. Four ethical dilemmas are provided in
the textbook (pages 11-12)
TEACHING TIPS:{LO4}
TIP #1: Many students love to discuss ethical issues. Sometimes students may have ethical issues
presented to them in a casual way.
Example: A supervisor requests that you don’t record your overtime on your timesheet.
This will allow the supervisor to stay within the budget, but it doesn’t properly reflect what
is happening within the organization. You feel pressure from the supervisor. Ask students
what ethical issues are involved in this example.
Ask students how many of them were left unsupervised when they first started a new job.
How accurate was their work? Would the students feel responsible for making an error if
they had been properly trained?
TIP #2: Ask students to assume they work for a company. In this scenario, they will have heard that
their company is being sold. The information is confidential, and they can’t speak about it.
What would they do if their best friend wanted to buy stock?
TIP #3: use E1-31B Ethical dilemma (5 minutes) as a group or partner exercise.
Integrity
Conclude/Advise/Communicate
Standards of ethical conduct have been adopted by professional accounting organizations
because of the reliance by so many parties on the product of accountants. See page 13for the
CPA Canada Principles of Ethical Conduct which includes:
Professional Behaviour
Integrity and Due Care
Professional Competence
Confidentiality
Objectivity
B. Ethical dilemmas
Competing obligations to shareholders, customers, suppliers, fellow managers, society, and
self and family create ethical dilemmas for management accountants. Many companies have
formal codes of ethical conduct that must be signed by employees. However, ethical standards
are personal and depend on the values of the individual. Four ethical dilemmas are provided in
the textbook (pages 11-12)
TEACHING TIPS:{LO4}
TIP #1: Many students love to discuss ethical issues. Sometimes students may have ethical issues
presented to them in a casual way.
Example: A supervisor requests that you don’t record your overtime on your timesheet.
This will allow the supervisor to stay within the budget, but it doesn’t properly reflect what
is happening within the organization. You feel pressure from the supervisor. Ask students
what ethical issues are involved in this example.
Ask students how many of them were left unsupervised when they first started a new job.
How accurate was their work? Would the students feel responsible for making an error if
they had been properly trained?
TIP #2: Ask students to assume they work for a company. In this scenario, they will have heard that
their company is being sold. The information is confidential, and they can’t speak about it.
What would they do if their best friend wanted to buy stock?
TIP #3: use E1-31B Ethical dilemma (5 minutes) as a group or partner exercise.
Loading page 7...
5. Discuss and Analyze the Implications of Regulatory and Business Trends{LO 5}
1. Sarbanes-Oxley Act:
Teaching Tip: Remember that many of today’s students probably don’t
remember businesses before accounting scandals. Students have likely become
cynical about accounting practices based on news media. Ask students to
identify what would give them confidence in the accounting decisions of an
organization.
2. International Financial Reporting Standards (IFRS):
Teaching Tip: students may be familiar with GAAP depending on when they
took their financial course. Explain the impact of globalization and how it
created a need for consistent reporting standards. The securities commissions of
many countries have recently moved to adopt IFRS for all publicly traded
companies.
3. Extensible Business Reporting Language (XBRL):
Teaching Tip: consider presenting advantages of XBRL in chart format.
XBRL allows companies to release financial and business information in a
format that can be more easily analysed by different users.
4. Shifting Economy:
Teaching Tip:ask students if they think Apple manufactures its own
headphones or if they are manufactured by an outside company. Ask them what
information might be part of Apple’s decision: How much it would cost Apple
to make the headphones? How much would it cost to have someone else make
them? If someone else made them, could that manufacturing space be used for
additional funds?
5. Social Responsibility and the Triple Bottom Line
Sustainability – ability to meet the needs of the present without compromising the
ability of future generations to meet their own needs.
Triple Bottom Line – company’s performance should not only be viewed in terms
of its ability to generate economic profit for its owners, but also by its impact on
people and the planet.
Sustainability has three factors: profit, people, planet.
Green initiatives (environmental responsibility) – companies are finding ways of
doing business that have fewer negative consequences for the earth’s resources.
6. E-Commerce:
Teaching Tip: In order to survive in a competitive, globally wired economy,
companies use the internet in budgeting, planning, selling and customer service.
Discuss with the students how e-commerce is an important means of supply-
chain management.
Ask how many students bought their textbooks online. Why/why not?
1. Sarbanes-Oxley Act:
Teaching Tip: Remember that many of today’s students probably don’t
remember businesses before accounting scandals. Students have likely become
cynical about accounting practices based on news media. Ask students to
identify what would give them confidence in the accounting decisions of an
organization.
2. International Financial Reporting Standards (IFRS):
Teaching Tip: students may be familiar with GAAP depending on when they
took their financial course. Explain the impact of globalization and how it
created a need for consistent reporting standards. The securities commissions of
many countries have recently moved to adopt IFRS for all publicly traded
companies.
3. Extensible Business Reporting Language (XBRL):
Teaching Tip: consider presenting advantages of XBRL in chart format.
XBRL allows companies to release financial and business information in a
format that can be more easily analysed by different users.
4. Shifting Economy:
Teaching Tip:ask students if they think Apple manufactures its own
headphones or if they are manufactured by an outside company. Ask them what
information might be part of Apple’s decision: How much it would cost Apple
to make the headphones? How much would it cost to have someone else make
them? If someone else made them, could that manufacturing space be used for
additional funds?
5. Social Responsibility and the Triple Bottom Line
Sustainability – ability to meet the needs of the present without compromising the
ability of future generations to meet their own needs.
Triple Bottom Line – company’s performance should not only be viewed in terms
of its ability to generate economic profit for its owners, but also by its impact on
people and the planet.
Sustainability has three factors: profit, people, planet.
Green initiatives (environmental responsibility) – companies are finding ways of
doing business that have fewer negative consequences for the earth’s resources.
6. E-Commerce:
Teaching Tip: In order to survive in a competitive, globally wired economy,
companies use the internet in budgeting, planning, selling and customer service.
Discuss with the students how e-commerce is an important means of supply-
chain management.
Ask how many students bought their textbooks online. Why/why not?
Loading page 8...
6. Describe a Lean Production System {LO 6}
Traditional Production Systems (“push systems”):once the production schedule has
been determined, products are pushed through the manufacturing process and then stored in
finished goods inventory until sold.
Lean Production:primary goal is to eliminate the waste of time and money that
accompanies large inventories. Lean companies adopt a just-in-time (JIT) inventory
system where materials are purchased just in time to be used in production and finished
goods are made just in time for customer delivery.
JIT is a demand-pull system where raw materials are ordered when the customer places the
order. Then, small batches of product are made quickly to meet the customer needs. The
quick production and low inventory maintained in a JIT system requires a quality product
be produced in order to have the product reach the customer in a timely manner.
Companies that adopt lean production have several common characteristics that help
minimize the amount of inventory on hand yet enable the company to meet customer needs.
Characteristics include:
1. Production occurs in self-sustained cells
2. Broad employee roles
3. Small batches produced just in time
4. Shortened set up times
5. Shortened manufacturing cycle times
6. Emphasis on quality
7. Supply-chain management
While there are many advantages to a lean production system, companies leave themselves
vulnerable as there are no inventory buffers. If their supplier runs out of raw materials, the
company will not be able to meet their production needs.
TEACHING TIPS:
TIP#1: JIT management is easily illustrated by using milk as an example. If a company
bought more milk than the space allowed on a store shelf, where would it be
kept? Can it be kept cold? Is it worth paying for the refrigeration? How long
can it be held to keep it fresh? JIT is more economical if the store does not buy
large quantities of milk, but instead buys small amounts of milk more often.
TIP #2: Use Exhibit 1-8 to demonstrate the differences between a traditional and lean production
system.
TIP #3: Use Exhibit 1-9 to demonstrate the equipment arrangement in Traditional and Lean
Production Systems.
TIP #4: Have students complete E1-35B Lean Production Cost-Benefit Analysis (5 minutes) in
teams or partners.
TIP #5: Have students complete E1-36B Differentiate between Traditional and Lean Production (5
minutes) in teams or partners.
Traditional Production Systems (“push systems”):once the production schedule has
been determined, products are pushed through the manufacturing process and then stored in
finished goods inventory until sold.
Lean Production:primary goal is to eliminate the waste of time and money that
accompanies large inventories. Lean companies adopt a just-in-time (JIT) inventory
system where materials are purchased just in time to be used in production and finished
goods are made just in time for customer delivery.
JIT is a demand-pull system where raw materials are ordered when the customer places the
order. Then, small batches of product are made quickly to meet the customer needs. The
quick production and low inventory maintained in a JIT system requires a quality product
be produced in order to have the product reach the customer in a timely manner.
Companies that adopt lean production have several common characteristics that help
minimize the amount of inventory on hand yet enable the company to meet customer needs.
Characteristics include:
1. Production occurs in self-sustained cells
2. Broad employee roles
3. Small batches produced just in time
4. Shortened set up times
5. Shortened manufacturing cycle times
6. Emphasis on quality
7. Supply-chain management
While there are many advantages to a lean production system, companies leave themselves
vulnerable as there are no inventory buffers. If their supplier runs out of raw materials, the
company will not be able to meet their production needs.
TEACHING TIPS:
TIP#1: JIT management is easily illustrated by using milk as an example. If a company
bought more milk than the space allowed on a store shelf, where would it be
kept? Can it be kept cold? Is it worth paying for the refrigeration? How long
can it be held to keep it fresh? JIT is more economical if the store does not buy
large quantities of milk, but instead buys small amounts of milk more often.
TIP #2: Use Exhibit 1-8 to demonstrate the differences between a traditional and lean production
system.
TIP #3: Use Exhibit 1-9 to demonstrate the equipment arrangement in Traditional and Lean
Production Systems.
TIP #4: Have students complete E1-35B Lean Production Cost-Benefit Analysis (5 minutes) in
teams or partners.
TIP #5: Have students complete E1-36B Differentiate between Traditional and Lean Production (5
minutes) in teams or partners.
Loading page 9...
7. Describe and use the Costs of Quality Framework {LO 7}
Lean companies strive for high-quality production as the system only produces what is
needed. As such, companies implement total quality management (TQM). The goal of
TQM is to provide customers with superior products and services.
As part of TQM, companies prepare Cost of Quality Reports. These reports categorize
and list the costs incurred by the company related to quality. Quality related costs fall into
four categories:
1. Prevention costs – costs incurred to avoid producing poor quality goods or
services.
2. Appraisal costs – costs incurred to detect poor quality goods or services.
3. Internal failure costs – costs incurred on defective units before delivery to
customers.
4. External failure costs – costs incurred because the defective goods or services are
not detected until after delivery to customers.
TEACHING TIPS {LO7}
TIP #1: Make it clear to students that the goal of total quality management (TQM) is to
provide customers with superior products and services. This is accomplished by
each business function in the value chain examining its own activities, improving
quality, and eliminating defects and waste.
TIP #2: Students can better understand the benefits of TQM if they understand that the
quality costs and benefits are hard to measure. Explain to student that the biggest
benefit of TQM is the reduction of unhappy customers who would never return.
Unhappy customers do not appear directly in the accounting records, so TQM
programs emphasize nonfinancial measures such as the number of customer
complaints.
TIP #3: Use EXHIBIT 1-10 to provide examples of the four types of quality costs.
TIP #4: Have students complete E1-37B Prepare a Cost of Quality Report (15 minutes).
Lean companies strive for high-quality production as the system only produces what is
needed. As such, companies implement total quality management (TQM). The goal of
TQM is to provide customers with superior products and services.
As part of TQM, companies prepare Cost of Quality Reports. These reports categorize
and list the costs incurred by the company related to quality. Quality related costs fall into
four categories:
1. Prevention costs – costs incurred to avoid producing poor quality goods or
services.
2. Appraisal costs – costs incurred to detect poor quality goods or services.
3. Internal failure costs – costs incurred on defective units before delivery to
customers.
4. External failure costs – costs incurred because the defective goods or services are
not detected until after delivery to customers.
TEACHING TIPS {LO7}
TIP #1: Make it clear to students that the goal of total quality management (TQM) is to
provide customers with superior products and services. This is accomplished by
each business function in the value chain examining its own activities, improving
quality, and eliminating defects and waste.
TIP #2: Students can better understand the benefits of TQM if they understand that the
quality costs and benefits are hard to measure. Explain to student that the biggest
benefit of TQM is the reduction of unhappy customers who would never return.
Unhappy customers do not appear directly in the accounting records, so TQM
programs emphasize nonfinancial measures such as the number of customer
complaints.
TIP #3: Use EXHIBIT 1-10 to provide examples of the four types of quality costs.
TIP #4: Have students complete E1-37B Prepare a Cost of Quality Report (15 minutes).
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CHAPTER1:STUDENTSUMMARYHANDOUT
1. Managers’ four primary responsibilities
a. Planning
b. Directing
c. Controlling
d. Decision-Making
2. Differences between Financial AccountingandManagerialAccounting
3. Organizational structure and how management accountants fit in
a. Changing roles
b. Skillsrequired
4. The CPA and ethical guidelines
a. Professional Behaviour
b. Integrity and Due Care
c. Competence
d. Confidentiality
e. Objectivity
5. Regulatory and business trends
a. Competition in today’s global marketplace
6. Describe a lean production system.
7. Describe and use the costs of quality framework.
1. Managers’ four primary responsibilities
a. Planning
b. Directing
c. Controlling
d. Decision-Making
2. Differences between Financial AccountingandManagerialAccounting
3. Organizational structure and how management accountants fit in
a. Changing roles
b. Skillsrequired
4. The CPA and ethical guidelines
a. Professional Behaviour
b. Integrity and Due Care
c. Competence
d. Confidentiality
e. Objectivity
5. Regulatory and business trends
a. Competition in today’s global marketplace
6. Describe a lean production system.
7. Describe and use the costs of quality framework.
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CHAPTER1:ASSIGNMENTGRID
Assignment Topic(s) Learning
Objective(s)
Estimated
Time in
Minutes
Level of
Difficulty
Available in
Excel
Templates
ShortExercises
S1-1 Rolesof managers 1 5 Easy
S1-2 Contrastmanagerialand
financialaccounting 2 5 Easy
S1-3 Accountingrolesinthe
organization 3 5 Easy
S1-4 Roleofinternalauditf
unction 3 5 Easy
S1-5 Importanceofethical
standards 4 5 Easy
S1-6 Violationsofethical
standards 4 5 Easy
S1-7 Identifycurrentcompetitive
tools 5 5 Easy
S1-8 Understand key terms 6 & 7 5 Easy
S1-9 Identify lean production
characteristics 6
5 Easy
S1-10 Classify costs of quality 7 5 Easy
S1-11 Quality initiative decisions 7 10 Medium
S1-12 Categorize different costs
of quality 7 5 Easy
Exercises(SetA)
E1-13A Manager'sresponsibilities 1 5 Easy X
E1-14A Definekeyterms 1&2 5 Easy
E1-15A Identifyusersofaccounting
Information 3 10 Easy
E1-16A Classifyroleswithinthe
Organization 3 5 Easy
E1-17A Professionalorganization
andcertification 4 5 Easy
E1-18A Ethicaldilemma 4 5 Easy
E1-19A Classifyethical
Responsibilities 4 10 Easy
E1-20A Definekeyterms 5 10 Easy
E1-21A SummarizetheSarbanes-
OxleyAct 5 10 Medium
E1-22A Leanproductioncost-benefit
Analysis 6 5 Medium
E1-23A Differentiate between
traditional and lean
production
6 5 Medium
E1-24A Prepare a Cost of Quality
Report 7 30 Difficult
E1-25A Classify costs and make a
quality-initiative decision 7 10 Medium
Exercises(SetB)
Assignment Topic(s) Learning
Objective(s)
Estimated
Time in
Minutes
Level of
Difficulty
Available in
Excel
Templates
ShortExercises
S1-1 Rolesof managers 1 5 Easy
S1-2 Contrastmanagerialand
financialaccounting 2 5 Easy
S1-3 Accountingrolesinthe
organization 3 5 Easy
S1-4 Roleofinternalauditf
unction 3 5 Easy
S1-5 Importanceofethical
standards 4 5 Easy
S1-6 Violationsofethical
standards 4 5 Easy
S1-7 Identifycurrentcompetitive
tools 5 5 Easy
S1-8 Understand key terms 6 & 7 5 Easy
S1-9 Identify lean production
characteristics 6
5 Easy
S1-10 Classify costs of quality 7 5 Easy
S1-11 Quality initiative decisions 7 10 Medium
S1-12 Categorize different costs
of quality 7 5 Easy
Exercises(SetA)
E1-13A Manager'sresponsibilities 1 5 Easy X
E1-14A Definekeyterms 1&2 5 Easy
E1-15A Identifyusersofaccounting
Information 3 10 Easy
E1-16A Classifyroleswithinthe
Organization 3 5 Easy
E1-17A Professionalorganization
andcertification 4 5 Easy
E1-18A Ethicaldilemma 4 5 Easy
E1-19A Classifyethical
Responsibilities 4 10 Easy
E1-20A Definekeyterms 5 10 Easy
E1-21A SummarizetheSarbanes-
OxleyAct 5 10 Medium
E1-22A Leanproductioncost-benefit
Analysis 6 5 Medium
E1-23A Differentiate between
traditional and lean
production
6 5 Medium
E1-24A Prepare a Cost of Quality
Report 7 30 Difficult
E1-25A Classify costs and make a
quality-initiative decision 7 10 Medium
Exercises(SetB)
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E1-26B Manager'sresponsibilities 1 5 Easy
E1-27B Definekeyterms 1&2 5 Easy
E1-28B Identifyusersofaccounting
Information 3 10 Easy X
E1-29B Classifyroleswithinthe
Organization 3 5 Easy
E1-30B Professionalorganization
andcertification 4 5 Easy
E1-31B Ethicaldilemma 4 5 Easy
E1-32B Classifyethical
responsibilities 4 10 Easy
E1-33B Definekeyterms 5 10 Easy
E1-34B SummarizetheSarbanes- 5 10 Medium
Assignment Topic(s) Learning
Objective(s)
Estimated
Time in
Minutes
Level of
Difficulty
Available in
Excel
Templates
OxleyAct
E1-35B Leanproductioncost-benefit
Analysis 6 5 Medium
E1-36B Differentiate between
traditional and lean
production
production
6 10 Medium
E1-37B Prepare a Cost of Quality
Report 7 30 Difficult
E1-38B Classify cost and make a
quality-initiative decision 7 15 Medium
Problems(SetA)
P1-39A Managementprocessesan
daccountinginformation 1&2
P1-40A Ethicaldilemmas 4 10 Medium
P1-41A ERP,cost-benefitanalysis 5 15-20 Medium
P1-42A E-commercecost-benefit
Analysis 5 10 Medium X
P1-43A ContinuationofP1-42A:
revisedestimates 5 15 Difficult
Problems(SetB)
P1-44B Managementprocessesand
accountinginformation 1&2 10 Easy
P1-45B Ethicaldilemmas 4 10 Medium
P1-46B ERPcost-benefitanalysis 5 20 Medium X
P1-47B E-commercecost-benefit
Analysis 5 10 Medium
P1-48B ContinuationofP1-47B:
revisedestimates 5 15 Difficult
Other
Decision
Case
A1-49
Ethicalstandards 4 5 Easy
E1-27B Definekeyterms 1&2 5 Easy
E1-28B Identifyusersofaccounting
Information 3 10 Easy X
E1-29B Classifyroleswithinthe
Organization 3 5 Easy
E1-30B Professionalorganization
andcertification 4 5 Easy
E1-31B Ethicaldilemma 4 5 Easy
E1-32B Classifyethical
responsibilities 4 10 Easy
E1-33B Definekeyterms 5 10 Easy
E1-34B SummarizetheSarbanes- 5 10 Medium
Assignment Topic(s) Learning
Objective(s)
Estimated
Time in
Minutes
Level of
Difficulty
Available in
Excel
Templates
OxleyAct
E1-35B Leanproductioncost-benefit
Analysis 6 5 Medium
E1-36B Differentiate between
traditional and lean
production
production
6 10 Medium
E1-37B Prepare a Cost of Quality
Report 7 30 Difficult
E1-38B Classify cost and make a
quality-initiative decision 7 15 Medium
Problems(SetA)
P1-39A Managementprocessesan
daccountinginformation 1&2
P1-40A Ethicaldilemmas 4 10 Medium
P1-41A ERP,cost-benefitanalysis 5 15-20 Medium
P1-42A E-commercecost-benefit
Analysis 5 10 Medium X
P1-43A ContinuationofP1-42A:
revisedestimates 5 15 Difficult
Problems(SetB)
P1-44B Managementprocessesand
accountinginformation 1&2 10 Easy
P1-45B Ethicaldilemmas 4 10 Medium
P1-46B ERPcost-benefitanalysis 5 20 Medium X
P1-47B E-commercecost-benefit
Analysis 5 10 Medium
P1-48B ContinuationofP1-47B:
revisedestimates 5 15 Difficult
Other
Decision
Case
A1-49
Ethicalstandards 4 5 Easy
Loading page 13...
EthicalIssue
I1-50 Ethicaldilemma 4 5-10 Easy
TeamProject
T1-51
Interviewingalocal
companyaboutecommerce 5 60 Difficult
Discussion
andAnalysis All 60 Medium
Application
andAnalysis All 30-60 Medium
I1-50 Ethicaldilemma 4 5-10 Easy
TeamProject
T1-51
Interviewingalocal
companyaboutecommerce 5 60 Difficult
Discussion
andAnalysis All 60 Medium
Application
andAnalysis All 30-60 Medium
Loading page 14...
Name
Date
Section
CHAPTER1
TEN-MINUTEQUIZ
Circle the letter of the best response.
1. Which of the following are a manager’sfour primary responsibilities?
A. Budgeting, Directing, Controlling,Decision-Making
B. Budgeting, Planning, Controlling,Decision-Making
C. Planning, Directing, Controlling, Decision-Making
D. Budgeting, Planning, Directing, Controlling
2. Which of the following is an example of controlling?
A. Management decides to open a new storage facility in Canada.
B. After comparing budget to actual, management adjusts its plan to keep the
company on goal.
C. After reviewing the daily sales, management revises its staffing schedule.
D. Management sets goals to meetin the next fiscal year.
3. Which of the following is TRUE about managerial accounting vs. financial accounting?
A. Both managerial and financial reports are prepared quarterly and annually.
B. Managerial accounting is primarily utilized by internal users, while financial
accounting is primarily utilized by external users.
C. The primary information characteristics for managerial accounting are reliability
and objectivity, while the primary information characteristic for financial
accounting is relevance.
D. The CPA requires managerial accounting reportsand the SEC requires financial
accounting reports.
4. Which of the following statements is FALSE?
A. Managers are concerned with the internal use of accounting information.
B. Managerial accounting information relies heavily on its reliability and objectivity.
C. Managerial accounting reports are not required by any authoritative body.
D. Managerial accounting information must be relevant.
5. Which of the following statements is FALSE?
A. The treasurer and controller report directly to the CFO.
B. The COO is responsible for the company’s operations.
C. The board of directors hires the CEO to manage the company on a daily basis.
D. The internal audit departmentreportssolely to the CFO.
6. The individual responsible for managing all ofthe operations of the organization, such as
Date
Section
CHAPTER1
TEN-MINUTEQUIZ
Circle the letter of the best response.
1. Which of the following are a manager’sfour primary responsibilities?
A. Budgeting, Directing, Controlling,Decision-Making
B. Budgeting, Planning, Controlling,Decision-Making
C. Planning, Directing, Controlling, Decision-Making
D. Budgeting, Planning, Directing, Controlling
2. Which of the following is an example of controlling?
A. Management decides to open a new storage facility in Canada.
B. After comparing budget to actual, management adjusts its plan to keep the
company on goal.
C. After reviewing the daily sales, management revises its staffing schedule.
D. Management sets goals to meetin the next fiscal year.
3. Which of the following is TRUE about managerial accounting vs. financial accounting?
A. Both managerial and financial reports are prepared quarterly and annually.
B. Managerial accounting is primarily utilized by internal users, while financial
accounting is primarily utilized by external users.
C. The primary information characteristics for managerial accounting are reliability
and objectivity, while the primary information characteristic for financial
accounting is relevance.
D. The CPA requires managerial accounting reportsand the SEC requires financial
accounting reports.
4. Which of the following statements is FALSE?
A. Managers are concerned with the internal use of accounting information.
B. Managerial accounting information relies heavily on its reliability and objectivity.
C. Managerial accounting reports are not required by any authoritative body.
D. Managerial accounting information must be relevant.
5. Which of the following statements is FALSE?
A. The treasurer and controller report directly to the CFO.
B. The COO is responsible for the company’s operations.
C. The board of directors hires the CEO to manage the company on a daily basis.
D. The internal audit departmentreportssolely to the CFO.
6. The individual responsible for managing all ofthe operations of the organization, such as
Loading page 15...
product packaging, is the:
A.
B.
C.
D.
COO.
CFO.
CEO.
CPA.
7. Which of the following skills is NOT required of management accountants?
A.
B.
C.
D.
Analytical skills
Ability to work on a team
Oral and written communication skills
Speak a foreign language
8. Management accountants must comply with all ofthe following ethical standards
EXCEPT:
A. Reporting ethical breaches to the CMA.
B. Maintaining professional competence.
C. Performing duties with credibility.
D. Preserving confidentiality of information.
10. Which of the following is NOT an important result of the Sarbanes-Oxley Act of 2002?
A. Stiffer penalties and imprisonment were instituted for white collar crimes.
B. The audit committee must be independent and include a financial expert.
C. Employees are responsible for the financial reporting completed in their
department.
D. CA firms have limitations on non-audit service for audit clients.
ANSWERKEYTOCHAPTER1QUIZ
1. C
2. B
3. B
4. B
5. D
6. A
7. D
8. A
9. B
10. C
9. Which of the following is NOT a current business trend?
A. Total Quality Management
B. Inventoriesdeliveredinlarge quantities at a discount
C. Time sensitivity for purchase, delivery, & service
D. ISO quality standards
A.
B.
C.
D.
COO.
CFO.
CEO.
CPA.
7. Which of the following skills is NOT required of management accountants?
A.
B.
C.
D.
Analytical skills
Ability to work on a team
Oral and written communication skills
Speak a foreign language
8. Management accountants must comply with all ofthe following ethical standards
EXCEPT:
A. Reporting ethical breaches to the CMA.
B. Maintaining professional competence.
C. Performing duties with credibility.
D. Preserving confidentiality of information.
10. Which of the following is NOT an important result of the Sarbanes-Oxley Act of 2002?
A. Stiffer penalties and imprisonment were instituted for white collar crimes.
B. The audit committee must be independent and include a financial expert.
C. Employees are responsible for the financial reporting completed in their
department.
D. CA firms have limitations on non-audit service for audit clients.
ANSWERKEYTOCHAPTER1QUIZ
1. C
2. B
3. B
4. B
5. D
6. A
7. D
8. A
9. B
10. C
9. Which of the following is NOT a current business trend?
A. Total Quality Management
B. Inventoriesdeliveredinlarge quantities at a discount
C. Time sensitivity for purchase, delivery, & service
D. ISO quality standards
Loading page 16...
Chapter 2
Building Blocks of Managerial Accounting
LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be able to:
1. Distinguish among service, merchandising, and manufacturing companies.
2. Describe the value chain and its elements.
3. Distinguish between direct and indirect costs.
4. Identify the inventoriable product costs and period costs of merchandising and
manufacturing firms.
5. Prepare the financial statements for service, merchandising, and manufacturing
companies.
6. Describe costs that are relevant and irrelevant for decision making.
7. Classify costs as fixed or variable and calculate total and average costs at different
volumes.
OVERVIEW
This chapter examines different cost classifications. Managers and management accountants need
to have a common understanding of concepts to ensure the right type of information is provided for
the decision being made. They must have a clear understanding of the situation and the types of
costs that are relevant.
Section One: Distinguishes the three types of sectors: service, manufacturing and
merchandising.The handling of inventories and costs for both merchandising and
manufacturing firms are covered (product and period costs). The three levels of
inventory of manufacturers are identified.
Section Two: Describes the different components of the value chain and how these
components are coordinated.
Section Three: Describes a cost object and distinguishes between indirect and direct costs
explaining the difference between traced and allocated. Also, describes factors
influencing costs.
Section Four: Describes the three manufacturing cost categories, Direct Materials, Direct
Labour and Factory Overhead. Prime costs and Conversion costs are defined
and explained.
Building Blocks of Managerial Accounting
LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be able to:
1. Distinguish among service, merchandising, and manufacturing companies.
2. Describe the value chain and its elements.
3. Distinguish between direct and indirect costs.
4. Identify the inventoriable product costs and period costs of merchandising and
manufacturing firms.
5. Prepare the financial statements for service, merchandising, and manufacturing
companies.
6. Describe costs that are relevant and irrelevant for decision making.
7. Classify costs as fixed or variable and calculate total and average costs at different
volumes.
OVERVIEW
This chapter examines different cost classifications. Managers and management accountants need
to have a common understanding of concepts to ensure the right type of information is provided for
the decision being made. They must have a clear understanding of the situation and the types of
costs that are relevant.
Section One: Distinguishes the three types of sectors: service, manufacturing and
merchandising.The handling of inventories and costs for both merchandising and
manufacturing firms are covered (product and period costs). The three levels of
inventory of manufacturers are identified.
Section Two: Describes the different components of the value chain and how these
components are coordinated.
Section Three: Describes a cost object and distinguishes between indirect and direct costs
explaining the difference between traced and allocated. Also, describes factors
influencing costs.
Section Four: Describes the three manufacturing cost categories, Direct Materials, Direct
Labour and Factory Overhead. Prime costs and Conversion costs are defined
and explained.
Loading page 17...
Section Five: Describes and explains product and period costs for the preparation of financial
statements. This section also demonstrates the flow of costs through inventory
accounts facilitated by preparation of the schedule of cost of goods
manufactured.
Section Six: Defines relevance and provides examples of when costs are relevant for decision
making. Sunk costs are also presented.
Section Seven: The behavior of variable and fixed costs is discussed. Variable costs change in
proportion to changes in the cost driver, whereas fixed costs in total are
unaffected by cost-driver activity.
statements. This section also demonstrates the flow of costs through inventory
accounts facilitated by preparation of the schedule of cost of goods
manufactured.
Section Six: Defines relevance and provides examples of when costs are relevant for decision
making. Sunk costs are also presented.
Section Seven: The behavior of variable and fixed costs is discussed. Variable costs change in
proportion to changes in the cost driver, whereas fixed costs in total are
unaffected by cost-driver activity.
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CHAPTER 2: OUTLINE
1. Distinguish among service, merchandising, and manufacturing
companies. {LO. 1}
Service
in business to sell intangible services
Generally, do not have inventory. If there is inventory it is generally for supplies
and used in operations (not to make profit).
Example: health care, insurance, banking, consulting
Merchandising
resell tangible products they buy from suppliers.
Wholesalers: buy products in bulk from manufacturers, mark up the prices and then
sell these products to retailers.
Retailers: buys products from their suppliers and sells them to consumers (i.e. you
and me)
They have inventory
Manufacturing
use labour, plant, and equipment to convert raw materials into new finished
products.
Typically sell products to retailers or wholesalers at a price that is high enough to
cover their costs and generate a profit.
While merchandising companies have a single inventory item (finished goods inventory) listed
on their balance sheets, manufacturing companies have the following categories:
Direct-Materials Inventory – materials on hand and awaiting use in the production process.
Work-In-Process Inventory – goods undergoing the production process but not yet fully
completed. Costs include appropriate amounts of the three major manufacturing costs (i.e.,
direct material, direct labor, and factory overhead).
Finished-Goods Inventory – goods fully completed but not yet sold.
TEACHING TIPS: {LO1}
TIP #1:Exhibit 2-2 provides a summary of the three types of companies, provides examples of
each, and indicates the type of inventory they have.
TIP# 2:Students need to understand that manufacturing companies have a broad range of
production activities that require tracking in three kinds of inventory: raw materials
(RM), work in process (WIP), and finished goods (FG). Students should
understand that all three of these inventories are assets.
TIP #3:Have students work in teams or with a partner and complete E2-33B Identify types of
companies and their inventories (5 minutes). Call on a student to report the
answers.
1. Distinguish among service, merchandising, and manufacturing
companies. {LO. 1}
Service
in business to sell intangible services
Generally, do not have inventory. If there is inventory it is generally for supplies
and used in operations (not to make profit).
Example: health care, insurance, banking, consulting
Merchandising
resell tangible products they buy from suppliers.
Wholesalers: buy products in bulk from manufacturers, mark up the prices and then
sell these products to retailers.
Retailers: buys products from their suppliers and sells them to consumers (i.e. you
and me)
They have inventory
Manufacturing
use labour, plant, and equipment to convert raw materials into new finished
products.
Typically sell products to retailers or wholesalers at a price that is high enough to
cover their costs and generate a profit.
While merchandising companies have a single inventory item (finished goods inventory) listed
on their balance sheets, manufacturing companies have the following categories:
Direct-Materials Inventory – materials on hand and awaiting use in the production process.
Work-In-Process Inventory – goods undergoing the production process but not yet fully
completed. Costs include appropriate amounts of the three major manufacturing costs (i.e.,
direct material, direct labor, and factory overhead).
Finished-Goods Inventory – goods fully completed but not yet sold.
TEACHING TIPS: {LO1}
TIP #1:Exhibit 2-2 provides a summary of the three types of companies, provides examples of
each, and indicates the type of inventory they have.
TIP# 2:Students need to understand that manufacturing companies have a broad range of
production activities that require tracking in three kinds of inventory: raw materials
(RM), work in process (WIP), and finished goods (FG). Students should
understand that all three of these inventories are assets.
TIP #3:Have students work in teams or with a partner and complete E2-33B Identify types of
companies and their inventories (5 minutes). Call on a student to report the
answers.
Loading page 19...
2. Describe the value chain and its elements.{LO. 2}
a. Research and development - researching and developing new or improved products or
services and the processes for producing them.
b. Design – detailed engineering of products and services and the processes for producing
them.
c. Production or purchases – resources used to produce a product or service or to purchase
finished merchandise intended for resale.
d. Marketing – promotion and advertising of products or services.
e. Distribution – delivery of products or services to consumers.
f. Customer service – support provided for customers after sale.
Coordinating activities across the value chain
Most of the value chain activities occur in the above order. However, each element is not
worked on independently without considering other elements. For example, managers
consider the customer service they are able to provide to customers and how the product
could be marketed in the R & D phase.
3. Distinguish between direct and indirect costs.{LO. 3}
Cost - a sacrifice or giving up of resources for a particular purpose.
Cost Object -is something for which managers want a separate measurement of the cost of
(e.g., a product, a department, a sales region, a program, or something else for which decisions
are made).
Direct Costs –a cost that can be easily traced to the cost object;identified specifically and
exclusively with a given cost objective in an economically feasible way.
Indirect Costs - not identified specifically and exclusively with a given cost objective in an
economically feasible way
Managers prefer to classify many costs as direct whenever it is "economically feasible"
because it gives them greater confidence in their costs of products and services (i.e., less
subjectivity). A particular cost can be direct for one cost objective but indirect for others.
TEACHING TIPS {LO 3}
TIP #1 Determining if costs are direct or indirect depends on the cost object. Use Exhibit 2-4
to demonstrate this concept. Also consider the following example: ABC
Entertainment Store sells DVD’s and CD’s. The store subscribes to a monthly DVD
magazine which discusses the most current titles. If the cost object is the entire DVD
product line, the cost of the magazine subscription can be classified as a direct cost.
However, if the cost object is a single DVD (pick a current popular movie to explain
to students), the magazine subscription cost can no longer be directly traced to that
single DVD. It would be classified as an indirect cost of the single DVD.
a. Research and development - researching and developing new or improved products or
services and the processes for producing them.
b. Design – detailed engineering of products and services and the processes for producing
them.
c. Production or purchases – resources used to produce a product or service or to purchase
finished merchandise intended for resale.
d. Marketing – promotion and advertising of products or services.
e. Distribution – delivery of products or services to consumers.
f. Customer service – support provided for customers after sale.
Coordinating activities across the value chain
Most of the value chain activities occur in the above order. However, each element is not
worked on independently without considering other elements. For example, managers
consider the customer service they are able to provide to customers and how the product
could be marketed in the R & D phase.
3. Distinguish between direct and indirect costs.{LO. 3}
Cost - a sacrifice or giving up of resources for a particular purpose.
Cost Object -is something for which managers want a separate measurement of the cost of
(e.g., a product, a department, a sales region, a program, or something else for which decisions
are made).
Direct Costs –a cost that can be easily traced to the cost object;identified specifically and
exclusively with a given cost objective in an economically feasible way.
Indirect Costs - not identified specifically and exclusively with a given cost objective in an
economically feasible way
Managers prefer to classify many costs as direct whenever it is "economically feasible"
because it gives them greater confidence in their costs of products and services (i.e., less
subjectivity). A particular cost can be direct for one cost objective but indirect for others.
TEACHING TIPS {LO 3}
TIP #1 Determining if costs are direct or indirect depends on the cost object. Use Exhibit 2-4
to demonstrate this concept. Also consider the following example: ABC
Entertainment Store sells DVD’s and CD’s. The store subscribes to a monthly DVD
magazine which discusses the most current titles. If the cost object is the entire DVD
product line, the cost of the magazine subscription can be classified as a direct cost.
However, if the cost object is a single DVD (pick a current popular movie to explain
to students), the magazine subscription cost can no longer be directly traced to that
single DVD. It would be classified as an indirect cost of the single DVD.
Loading page 20...
4. Identify the inventoriable product costs and period costs of
merchandising and manufacturing firms. {LO. 4}
Direct-Materials Costs–the primary raw materials that are physically identified as a part of
the finished product and that may be traced to the manufactured goods in an economically
feasible way.
Direct-Labour Costs - the cost of compensating employees who physically convert raw
materials into the finished product; the labor costs that can be traced specifically and
exclusively to the manufactured goods in an economically feasible way
Manufacturing Overhead Costs (Indirect Manufacturing Costs or Manufacturing
Overhead) - include all costs other than direct material or direct labor that are associated with
the manufacturing process (e.g., power, supplies, indirect labor, supervisory salaries, property
taxes, rent, insurance, and depreciation); has three components: indirect materials, indirect
labour, and other indirect manufacturing costs.
Product Costs - costs (e.g., direct materials, direct labor, and factory overhead) initially
identified with goods produced or purchased for resale (i.e., inventory) and become expenses
(i.e., cost of goods sold) only when the inventory is sold.
Period Costs - costs (called operating expenses, or selling, general and administration
expenses) that are deducted as expenses during the current period without going
through the inventory stage.
Prime costs – include Direct Materials Costs and Direct Labour Costs.
Conversion costs - include Direct Labour Costs and Manufacturing Overhead Costs.
TEACHING TIPS: {LO4}
TIP #1:EXHIBIT 2-6 depicts total costs, inventoriable product costs, and period costs.
TIP #2:EXHIBIT 2-9 summarizes the accounting treatment for inventoriable and period costs for
each type of sector. Note that manufacturing companies have three categories of
product costs while only one is present for merchandisers.
TIP #3:Break down manufacturing overhead into three sub-categories to help students remember
what types of costs are classified as overhead. The following subcategories can be
used: (1) indirect materials (i.e. lubricant for machines), (2) indirect labor (i.e.
factory supervisor), and (3) other (all other costs needed to run the factory such as
power).
TIP #4:After discussing product costs (DM, DL, MOH), period costs, prime costs and
conversion costs, have students complete E2-37B Classify and calculate a
manufacturer’s costs (10 minutes) in teams and report their answers.
5. Prepare the financial statements for service, merchandising, and
merchandising and manufacturing firms. {LO. 4}
Direct-Materials Costs–the primary raw materials that are physically identified as a part of
the finished product and that may be traced to the manufactured goods in an economically
feasible way.
Direct-Labour Costs - the cost of compensating employees who physically convert raw
materials into the finished product; the labor costs that can be traced specifically and
exclusively to the manufactured goods in an economically feasible way
Manufacturing Overhead Costs (Indirect Manufacturing Costs or Manufacturing
Overhead) - include all costs other than direct material or direct labor that are associated with
the manufacturing process (e.g., power, supplies, indirect labor, supervisory salaries, property
taxes, rent, insurance, and depreciation); has three components: indirect materials, indirect
labour, and other indirect manufacturing costs.
Product Costs - costs (e.g., direct materials, direct labor, and factory overhead) initially
identified with goods produced or purchased for resale (i.e., inventory) and become expenses
(i.e., cost of goods sold) only when the inventory is sold.
Period Costs - costs (called operating expenses, or selling, general and administration
expenses) that are deducted as expenses during the current period without going
through the inventory stage.
Prime costs – include Direct Materials Costs and Direct Labour Costs.
Conversion costs - include Direct Labour Costs and Manufacturing Overhead Costs.
TEACHING TIPS: {LO4}
TIP #1:EXHIBIT 2-6 depicts total costs, inventoriable product costs, and period costs.
TIP #2:EXHIBIT 2-9 summarizes the accounting treatment for inventoriable and period costs for
each type of sector. Note that manufacturing companies have three categories of
product costs while only one is present for merchandisers.
TIP #3:Break down manufacturing overhead into three sub-categories to help students remember
what types of costs are classified as overhead. The following subcategories can be
used: (1) indirect materials (i.e. lubricant for machines), (2) indirect labor (i.e.
factory supervisor), and (3) other (all other costs needed to run the factory such as
power).
TIP #4:After discussing product costs (DM, DL, MOH), period costs, prime costs and
conversion costs, have students complete E2-37B Classify and calculate a
manufacturer’s costs (10 minutes) in teams and report their answers.
5. Prepare the financial statements for service, merchandising, and
Loading page 21...
manufacturing companies.{LO. 5}
a. Service company – simplest income statement as they do not sell products, thus there is
no cost of goods sold.
b. Merchandising companies – income statement includes cost of goods sold (CoGS),
which is generally the largest cost on the income statement. Cost of goods sold is the
cost of the the products that the company purchases from its suppliers.
Cost of goods sold = beginning finished goods inventory + purchases – ending inventory
c. Manufacturing companies – income statement includes cost of goods sold, however the
calculation is different from a merchandising firm as a manufacturing company makes
their goods instead of buying them. Before the company can determine the cost of
products sold (to include on the income statement), they must first determine the cost of
all the finished products during the period, referred to as cost of goods manufactured.
i. Cost of goods manufactured (CoGM) – summarizes the cost of activities that take
place in a manufacturing plant over the period.
CoGM = direct materials used + direct labor + manufacturing overhead +beginning
work in process – ending work in process
Essentially, CoGM is the cost of all the products that left the production factory
during the period and were transferred to the finished goods warehouse (or retail
store).
CoGS = beginning finished goods inventory + CoGM – ending finished goods
inventory
Typically, manufacturing and merchandising companies treat selling and
administrative expenses in the same manner, but the detail of COGS differs.
ii. Flow of costs through inventory accounts – all product costs (raw materials,
direct labor, and manufacturing overhead) of a manufacturing company flow
from the balance sheet (through inventory accounts) and eventually are expensed
on the income statement once the goods are sold (expensed as cost of goods
sold).
d. Balance sheet comparisons - while merchandising companies have a single inventory item
listed on their balance sheets, manufacturing companies have three (raw materials, work in
progress, finished goods)
a. Service company – simplest income statement as they do not sell products, thus there is
no cost of goods sold.
b. Merchandising companies – income statement includes cost of goods sold (CoGS),
which is generally the largest cost on the income statement. Cost of goods sold is the
cost of the the products that the company purchases from its suppliers.
Cost of goods sold = beginning finished goods inventory + purchases – ending inventory
c. Manufacturing companies – income statement includes cost of goods sold, however the
calculation is different from a merchandising firm as a manufacturing company makes
their goods instead of buying them. Before the company can determine the cost of
products sold (to include on the income statement), they must first determine the cost of
all the finished products during the period, referred to as cost of goods manufactured.
i. Cost of goods manufactured (CoGM) – summarizes the cost of activities that take
place in a manufacturing plant over the period.
CoGM = direct materials used + direct labor + manufacturing overhead +beginning
work in process – ending work in process
Essentially, CoGM is the cost of all the products that left the production factory
during the period and were transferred to the finished goods warehouse (or retail
store).
CoGS = beginning finished goods inventory + CoGM – ending finished goods
inventory
Typically, manufacturing and merchandising companies treat selling and
administrative expenses in the same manner, but the detail of COGS differs.
ii. Flow of costs through inventory accounts – all product costs (raw materials,
direct labor, and manufacturing overhead) of a manufacturing company flow
from the balance sheet (through inventory accounts) and eventually are expensed
on the income statement once the goods are sold (expensed as cost of goods
sold).
d. Balance sheet comparisons - while merchandising companies have a single inventory item
listed on their balance sheets, manufacturing companies have three (raw materials, work in
progress, finished goods)
Loading page 22...
TEACHING TIPS: {LO5}
TIP #1: Students can never review too many financial statements. The coverage of the
management accountant’s role in service, merchandising and manufacturing
companies is a great time to review the income statement. This can be done by
reviewing Exhibits 2-11, 2-12, and 2-13 and by contrasting the differences.
Emphasize the logical flow of all three types of income statements.
TIP #2: The schedule of cost of goods manufactured summarizes the activities that take
place in a manufacturing plant over the period (Exhibit 2-15). Emphasize that the
schedule of cost of goods manufactured must be prepared before the income
statement as it’s needed to compute cost of goods sold for a manufacturer (Exhibit
2-13). Work through an example (E2-26A) of a schedule and the cost of goods sold
calculation on the board. When presenting the CoGM Schedule, break it down into
four parts to help students remember the sections needed (1. Direct materials, 2.
Direct Labor, 3. Factory Overhead and 4. Analysis of WIP Inventory accounts).
TIP #3: Use Exhibits 2-14 and 2-16 to explain the logical flow of costs in a manufacturing
environment. Point out that the first two inventories (RM and WIP) show up on the
schedule, while the third inventory (FG) shows up on theincome statement (as part
of the cost of goods sold calculation). It may be helpful to show the flow of costs
through use of T-accounts (rather than using numbers, write descriptions in the T-
account). This will set a good foundation when journal entries for a
manufacturing company are presented in the chapter on job-costing.
6. Describe costs that are relevant and irrelevant for decision making.
{LO6}
Controllable vs. uncontrollable costs
Controllable – management is able to influence or change them.
Uncontrollable – costs that are “locked in” due to previous decisions.
Relevant and irrelevant costs
Relevant information is the predicted future costs and revenues that will differ among
alternatives. Although past data may be helpful in predicting future costs and revenues,
past data is irrelevant in making future decisions.
i. Differential cost – difference in cost between two alternatives (relevant cost).
ii. Sunk cost – costs that have already been incurred. Future decisions cannot
change past costs. Thus, sunk costs are classified as irrelevant and not considered
in decision making.
TIP #1: Students can never review too many financial statements. The coverage of the
management accountant’s role in service, merchandising and manufacturing
companies is a great time to review the income statement. This can be done by
reviewing Exhibits 2-11, 2-12, and 2-13 and by contrasting the differences.
Emphasize the logical flow of all three types of income statements.
TIP #2: The schedule of cost of goods manufactured summarizes the activities that take
place in a manufacturing plant over the period (Exhibit 2-15). Emphasize that the
schedule of cost of goods manufactured must be prepared before the income
statement as it’s needed to compute cost of goods sold for a manufacturer (Exhibit
2-13). Work through an example (E2-26A) of a schedule and the cost of goods sold
calculation on the board. When presenting the CoGM Schedule, break it down into
four parts to help students remember the sections needed (1. Direct materials, 2.
Direct Labor, 3. Factory Overhead and 4. Analysis of WIP Inventory accounts).
TIP #3: Use Exhibits 2-14 and 2-16 to explain the logical flow of costs in a manufacturing
environment. Point out that the first two inventories (RM and WIP) show up on the
schedule, while the third inventory (FG) shows up on theincome statement (as part
of the cost of goods sold calculation). It may be helpful to show the flow of costs
through use of T-accounts (rather than using numbers, write descriptions in the T-
account). This will set a good foundation when journal entries for a
manufacturing company are presented in the chapter on job-costing.
6. Describe costs that are relevant and irrelevant for decision making.
{LO6}
Controllable vs. uncontrollable costs
Controllable – management is able to influence or change them.
Uncontrollable – costs that are “locked in” due to previous decisions.
Relevant and irrelevant costs
Relevant information is the predicted future costs and revenues that will differ among
alternatives. Although past data may be helpful in predicting future costs and revenues,
past data is irrelevant in making future decisions.
i. Differential cost – difference in cost between two alternatives (relevant cost).
ii. Sunk cost – costs that have already been incurred. Future decisions cannot
change past costs. Thus, sunk costs are classified as irrelevant and not considered
in decision making.
Loading page 23...
7. Classify costs as fixed or variable and calculate total and average
costs at different volumes. {LO. 7}
Variable and fixed costs refer to how cost behaves with respect to changes in a particular cost
driver.
Fixed Costs:
stay constant in total over a wide range of activity levels.
Examples include real estate taxes, real estate insurance, many executive salaries, and
space rentals.
See EXHIBIT 2-19 for a graph of fixed cost behavior within the relevant range.
Variable Costs:
a cost that changes in direct proportion to changes in the cost driver. Each unit costs
the same, however, as activity increases, total cost increases.
Examples include the costs of materials, merchandise, parts, supplies, commissions,
and many types of labor.
See EXHIBIT 2-20for a graph of variable cost behavior within a relevant range.
Relevant Range - the limits (i.e. time period and/or activity) of cost-driver activity within
which a specific relationship between costs and the cost driver is valid.
TEACHING TIPS {LO7}:
TIP #1: Describe variable and fixed costs with an example familiar to students. You can use
the costs required to operate their vehicle. Explain how each liter of gas costs the
same, however, the more kilometers driven, their total cost of gas will increase (given
the same price of gas). The cost of gas is considered a variable cost. On the other
hand, their insurance company provides a yearly insurance rate. Regardless of
whether they drive 10km, 100km or 1000km, the cost of insurance stays constant,
making it a fixed cost.
TIP #2: Explain the concept of relevant range and fixed costs. For example, a clothing
manufacturing company, has the capacity to make 1000 shirts each month. The
relevant range for cost classification is 0 to 1000 shirts. In this range, fixed costs
remain constant. However, if the company wants to double production, they will need
to purchase more sewing machines and have to rent a bigger factory. Once the
company operates outside the relevant range, total fixed costs will increase.
TIP #3: Use the following chart to summarize variable and fixed costs. The understanding
and ability to differentiate between these costs will remain crucial for subsequent
topics.
Cost In Total Per Unit
Fixed Cost Remains Constant regardless
of activity
Inverse relationship with activity
(decreases as activity increases)
Variable Cost Increases as activity increases Remains Constant
costs at different volumes. {LO. 7}
Variable and fixed costs refer to how cost behaves with respect to changes in a particular cost
driver.
Fixed Costs:
stay constant in total over a wide range of activity levels.
Examples include real estate taxes, real estate insurance, many executive salaries, and
space rentals.
See EXHIBIT 2-19 for a graph of fixed cost behavior within the relevant range.
Variable Costs:
a cost that changes in direct proportion to changes in the cost driver. Each unit costs
the same, however, as activity increases, total cost increases.
Examples include the costs of materials, merchandise, parts, supplies, commissions,
and many types of labor.
See EXHIBIT 2-20for a graph of variable cost behavior within a relevant range.
Relevant Range - the limits (i.e. time period and/or activity) of cost-driver activity within
which a specific relationship between costs and the cost driver is valid.
TEACHING TIPS {LO7}:
TIP #1: Describe variable and fixed costs with an example familiar to students. You can use
the costs required to operate their vehicle. Explain how each liter of gas costs the
same, however, the more kilometers driven, their total cost of gas will increase (given
the same price of gas). The cost of gas is considered a variable cost. On the other
hand, their insurance company provides a yearly insurance rate. Regardless of
whether they drive 10km, 100km or 1000km, the cost of insurance stays constant,
making it a fixed cost.
TIP #2: Explain the concept of relevant range and fixed costs. For example, a clothing
manufacturing company, has the capacity to make 1000 shirts each month. The
relevant range for cost classification is 0 to 1000 shirts. In this range, fixed costs
remain constant. However, if the company wants to double production, they will need
to purchase more sewing machines and have to rent a bigger factory. Once the
company operates outside the relevant range, total fixed costs will increase.
TIP #3: Use the following chart to summarize variable and fixed costs. The understanding
and ability to differentiate between these costs will remain crucial for subsequent
topics.
Cost In Total Per Unit
Fixed Cost Remains Constant regardless
of activity
Inverse relationship with activity
(decreases as activity increases)
Variable Cost Increases as activity increases Remains Constant
Loading page 24...
CHAPTER2:STUDENTSUMMARYHANDOUT
1. The three most common types of companies
a. Service
b. Merchandising
i. Retailers
ii. Wholesalers
c. Manufacturing
i. Rawmaterials
ii. Work in process
iii. Finished goods
2. Value Chain
a. Research and Development
b. Design
c. Production or Purchases
d. Marketing
e. Distribution
f. Customer Service
3. Cost Objects
a. Direct Costs
b. Indirect Costs
4. Costs for internal decision making and external reporting
a. Total costs for internal decision making
b. Inventoriable product costsfor external reporting
i. Specified inventoriable costs
ii. Period costs (operating expenses)
5. Inventoriable Product Costsfor Merchandising Companies
a. Cost of the merchandise itself
b. Freight-in and any import duties
6. Inventoriable Product Costs for Manufacturing Companies
a. Direct Materials
b. Direct Labour
c. Manufacturing Overhead
i. Indirect materials
ii. Indirectlabour
iii. Other indirect manufacturing costs
d. Prime and Conversion costs
e. Additional labour compensation costs
1. The three most common types of companies
a. Service
b. Merchandising
i. Retailers
ii. Wholesalers
c. Manufacturing
i. Rawmaterials
ii. Work in process
iii. Finished goods
2. Value Chain
a. Research and Development
b. Design
c. Production or Purchases
d. Marketing
e. Distribution
f. Customer Service
3. Cost Objects
a. Direct Costs
b. Indirect Costs
4. Costs for internal decision making and external reporting
a. Total costs for internal decision making
b. Inventoriable product costsfor external reporting
i. Specified inventoriable costs
ii. Period costs (operating expenses)
5. Inventoriable Product Costsfor Merchandising Companies
a. Cost of the merchandise itself
b. Freight-in and any import duties
6. Inventoriable Product Costs for Manufacturing Companies
a. Direct Materials
b. Direct Labour
c. Manufacturing Overhead
i. Indirect materials
ii. Indirectlabour
iii. Other indirect manufacturing costs
d. Prime and Conversion costs
e. Additional labour compensation costs
Loading page 25...
7. Income Statements
a. Service Companies
b. Merchandising Companies
c. Manufacturing Companies
i. Calculating Cost of Goods Manufactured
ii. Flow of costs through the accounts
8. Comparing Balance Sheets
9. Other Cost Terms
a. Controllable versus uncontrollable costs
b. Relevant and irrelevant costs
c. Fixed and variable costs
d. Calculating total and average costs
a. Service Companies
b. Merchandising Companies
c. Manufacturing Companies
i. Calculating Cost of Goods Manufactured
ii. Flow of costs through the accounts
8. Comparing Balance Sheets
9. Other Cost Terms
a. Controllable versus uncontrollable costs
b. Relevant and irrelevant costs
c. Fixed and variable costs
d. Calculating total and average costs
Loading page 26...
CHAPTER2:ASSIGNMENTGRID
Assignment Topic(s) Learning
Objective(s)
Estimated
Time in
Minutes(s)
Level of
Difficulty
AvailableinE
xcelTemplate
s
ShortExercises
S2-1 Identifytypeofcompany
frombalancesheets
1 5 Easy
S2-2 Identifytypesofcompanies
&inventories
1 5 Easy
S2-3 Labelvaluechainfunctions 2 5 Easy
S2-4 Classifycostsby valuechain
functions
2 5 Easy
S2-5 Classifycostsaseitherdirect
or indirect
orindirect
3 5 Easy
S2-6 Classifyinventoriable
productcostsandperiod
costs
4 5 Easy
S2-7 Classifya manufacturer’s
cost
4 5 Easy
S2-8 Classify costs incurred by
a dairy processing
company
4 5 Easy
S2-9 Determine total
manufacturing overhead
4 5 Easy
S2-10 Compute Cost of Goods
Sold for a merchandiser
5 5 Easy
S2-11 Prepare a retailer’s
income statement
5 5 Easy
S2-12 Calculate direct materials
used
5 5 Easy
S2-13 Compute Cost of Goods
Manufactured
5 5 Easy
S2-14 Consider relevant
information
6 5 Easy
S2-15 Classify costs as fixed or
variable
7 5 Easy
Exercises(SetA)
E2-16A Identify types of
companies and their
inventories
1 5 Easy
E2-17A Classify costs along the
value chain for a retailer
2 10 Easy
E2-19A Classify costs along the
value chain for a
2&3 10 Easy
Assignment Topic(s) Learning
Objective(s)
Estimated
Time in
Minutes(s)
Level of
Difficulty
AvailableinE
xcelTemplate
s
ShortExercises
S2-1 Identifytypeofcompany
frombalancesheets
1 5 Easy
S2-2 Identifytypesofcompanies
&inventories
1 5 Easy
S2-3 Labelvaluechainfunctions 2 5 Easy
S2-4 Classifycostsby valuechain
functions
2 5 Easy
S2-5 Classifycostsaseitherdirect
or indirect
orindirect
3 5 Easy
S2-6 Classifyinventoriable
productcostsandperiod
costs
4 5 Easy
S2-7 Classifya manufacturer’s
cost
4 5 Easy
S2-8 Classify costs incurred by
a dairy processing
company
4 5 Easy
S2-9 Determine total
manufacturing overhead
4 5 Easy
S2-10 Compute Cost of Goods
Sold for a merchandiser
5 5 Easy
S2-11 Prepare a retailer’s
income statement
5 5 Easy
S2-12 Calculate direct materials
used
5 5 Easy
S2-13 Compute Cost of Goods
Manufactured
5 5 Easy
S2-14 Consider relevant
information
6 5 Easy
S2-15 Classify costs as fixed or
variable
7 5 Easy
Exercises(SetA)
E2-16A Identify types of
companies and their
inventories
1 5 Easy
E2-17A Classify costs along the
value chain for a retailer
2 10 Easy
E2-19A Classify costs along the
value chain for a
2&3 10 Easy
Loading page 27...
Assignment Topic(s) Learning
Objective(s)
Estimated
Time in
Minutes(s)
Level of
Difficulty
Availablein
ExcelTemp
lates
manufacturer
E2-20A Classify costs as direct or
indirect
3 5 Easy X
E2-21A Define cost terms 3&4 10 Easy
E2-22A Classify andcalculate a
manufacturer’s costs
3&4 10 Easy
E2-23A Prepare the current assets
section of the balance
sheet
5 10 Medium X
E2-24A Prepare a retailer’s
income statement
5 10 Medium X
E2-25A Compute direct materials
used and cost of goods
manufactured
5 10 Medium
E2-26A Compute cost of goods
manufactured and cost of
goods sold
5 10 Medium
E2-27A Continues E2-26A:
Prepare income statement
5 10 Medium
E2-28A Work backwards to find
missing amounts
5 10 Medium
E2-29A Determine whether
information is relevant
6 5 Easy
E2-30A Describe other cost terms 6&7 5 Easy
E2-31A Classify costs as fixed or
variable
7 10 Medium X
E2-32A Compute total and
averagecosts
7 10 Medium
Exercises(SetB)
E2-33B Identify types of
companies and their
inventories
1 5 Easy
E2-34B Classify costs along the
value chain for a retailer
2 10 Easy
E2-36B Classify costs along the
value chain for a
manufacturer
2&3 10 Easy
E2-37B Classify costs as direct or
indirect
3 5 Easy
E2-38B Define cost terms 3&4 10 Easy
E2-39B Classify andcalculate a
manufacturer’s costs
3&4 10 Easy
Objective(s)
Estimated
Time in
Minutes(s)
Level of
Difficulty
Availablein
ExcelTemp
lates
manufacturer
E2-20A Classify costs as direct or
indirect
3 5 Easy X
E2-21A Define cost terms 3&4 10 Easy
E2-22A Classify andcalculate a
manufacturer’s costs
3&4 10 Easy
E2-23A Prepare the current assets
section of the balance
sheet
5 10 Medium X
E2-24A Prepare a retailer’s
income statement
5 10 Medium X
E2-25A Compute direct materials
used and cost of goods
manufactured
5 10 Medium
E2-26A Compute cost of goods
manufactured and cost of
goods sold
5 10 Medium
E2-27A Continues E2-26A:
Prepare income statement
5 10 Medium
E2-28A Work backwards to find
missing amounts
5 10 Medium
E2-29A Determine whether
information is relevant
6 5 Easy
E2-30A Describe other cost terms 6&7 5 Easy
E2-31A Classify costs as fixed or
variable
7 10 Medium X
E2-32A Compute total and
averagecosts
7 10 Medium
Exercises(SetB)
E2-33B Identify types of
companies and their
inventories
1 5 Easy
E2-34B Classify costs along the
value chain for a retailer
2 10 Easy
E2-36B Classify costs along the
value chain for a
manufacturer
2&3 10 Easy
E2-37B Classify costs as direct or
indirect
3 5 Easy
E2-38B Define cost terms 3&4 10 Easy
E2-39B Classify andcalculate a
manufacturer’s costs
3&4 10 Easy
Loading page 28...
E2-40B Prepare the current assets
section of the balance
sheet
5 10 Medium
E2-41B Prepare a retailer’s
income statement
5 10 Medium
E2-42B Compute direct materials
used and cost of goods
manufactured
5 10 Medium
E2-43B Compute cost of goods
manufactured and cost of
goods sold
5 10 Medium
E2-44B Continues E2-43B:
Prepare income statement
5 10 Medium
E2-45B Work backwards to find
missing amounts
5 10 Medium
E2-46B Determine whether
information is relevant
6 5 Easy
E2-47B Describe other cost terms 6&7 5 Easy
E2-48B Classify costs as fixed or
variable
7 10 Medium
E2-49B Compute total and
averagecosts
7 10 Medium
Problems(SetA)
P2-50A Classify costs along the
value chain
2 &4 10 Medium
P2-51A Prepareincome
statements
5 10 Difficult
P2-52A Fill in missing amounts 5 15 Medium
P2-53A Identify relevant
information
6 15-20 Difficult
P2-54A Calculate the total and
averagecosts
7 15 Difficult
Problems(SetB)
P2-55B Classify costs along the
value chain
2 &4 10 Medium
P2-56B Prepareincome
statements
5 10 Difficult
section of the balance
sheet
5 10 Medium
E2-41B Prepare a retailer’s
income statement
5 10 Medium
E2-42B Compute direct materials
used and cost of goods
manufactured
5 10 Medium
E2-43B Compute cost of goods
manufactured and cost of
goods sold
5 10 Medium
E2-44B Continues E2-43B:
Prepare income statement
5 10 Medium
E2-45B Work backwards to find
missing amounts
5 10 Medium
E2-46B Determine whether
information is relevant
6 5 Easy
E2-47B Describe other cost terms 6&7 5 Easy
E2-48B Classify costs as fixed or
variable
7 10 Medium
E2-49B Compute total and
averagecosts
7 10 Medium
Problems(SetA)
P2-50A Classify costs along the
value chain
2 &4 10 Medium
P2-51A Prepareincome
statements
5 10 Difficult
P2-52A Fill in missing amounts 5 15 Medium
P2-53A Identify relevant
information
6 15-20 Difficult
P2-54A Calculate the total and
averagecosts
7 15 Difficult
Problems(SetB)
P2-55B Classify costs along the
value chain
2 &4 10 Medium
P2-56B Prepareincome
statements
5 10 Difficult
Loading page 29...
Assignment Topic(s) Learning
Objective(s)
Estimated
Timein
Minutes(s)
Levelof
Difficulty
Availablein
Excel
Templates
P2-57B Fill in missing amounts 5 15 Medium
P2-58B Identify relevant
information
6 15-20 Difficult
P2-59B Calculate the total and
averagecosts
7 15 Difficult
Other
DecisionCase
A2-60
Determine ending
inventory balances
5 15 Medium
Discussion
andAnalysis All 60 Medium
Application
andAnalysis
All 30-60 Medium
Objective(s)
Estimated
Timein
Minutes(s)
Levelof
Difficulty
Availablein
Excel
Templates
P2-57B Fill in missing amounts 5 15 Medium
P2-58B Identify relevant
information
6 15-20 Difficult
P2-59B Calculate the total and
averagecosts
7 15 Difficult
Other
DecisionCase
A2-60
Determine ending
inventory balances
5 15 Medium
Discussion
andAnalysis All 60 Medium
Application
andAnalysis
All 30-60 Medium
Loading page 30...
Name
Date
Section
CHAPTER2
TEN-MINUTEQUIZ
Circle the letter of the best response.
1. A portion of a company’s inventory is shown below:
Sales $350,000
Cost of Goods Sold:
Beginning Inventory $ 15,000
Purchases 250,000
Cost of Goods Available for Sale 265,000
Less: Ending Inventory 13,000
Cost of Goods Sold 252,000
Gross Profit $ 98,000
What type ofcompany is illustrated?
A. Service Corporation
B. Merchandising Corporation
C. Manufacturing Corporation
D. Not-for-profit Corporation
2. Which of the following is NOT a value chain activity?
A. Research&Development
B. Production
C. Distribution
D. Quality Control
3. Which of the following is a direct cost in the production oftire jacks for a machine
shop?
A. Utilities
B. Taxes
C. Steel
D. Rent
4. Which of the following is an indirect costin the construction cost of a home for a
buildingcompany?
A. Insurance
B. Paint
C. Lumber
D. Carpeting
Date
Section
CHAPTER2
TEN-MINUTEQUIZ
Circle the letter of the best response.
1. A portion of a company’s inventory is shown below:
Sales $350,000
Cost of Goods Sold:
Beginning Inventory $ 15,000
Purchases 250,000
Cost of Goods Available for Sale 265,000
Less: Ending Inventory 13,000
Cost of Goods Sold 252,000
Gross Profit $ 98,000
What type ofcompany is illustrated?
A. Service Corporation
B. Merchandising Corporation
C. Manufacturing Corporation
D. Not-for-profit Corporation
2. Which of the following is NOT a value chain activity?
A. Research&Development
B. Production
C. Distribution
D. Quality Control
3. Which of the following is a direct cost in the production oftire jacks for a machine
shop?
A. Utilities
B. Taxes
C. Steel
D. Rent
4. Which of the following is an indirect costin the construction cost of a home for a
buildingcompany?
A. Insurance
B. Paint
C. Lumber
D. Carpeting
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Subject
Accounting