Lesson 11 - Introduction to Managerial Accounting

Raw Materials Inventory

A category of inventory in a manufacturing business which includes the costs of acquiring and obtaining direct and indirect materials until those materials are requisitioned and placed into production.

Administrative Expenses

Administrative costs that benefit current period operations are accounted for as expenses of the period. Included as part of "operating expenses" in a multi-step formatted income statement.

Period Costs

All costs associated with the operations of a business, excluding product costs. These costs are alternatively referred to as a company's "selling and administrative costs" and are accounted for as expenses in the period in which they benefit the company's operations.

Work in Process Inventory

Also referred to as "work in progress inventory" or simply as "WIP" or "WIP inventory." WIP is a category of inventory for a manufacturing business that includes all manufacturing product costs (direct materials, direct labor and manufacturing overhead) from the point production is initiated through the time of product completion and transfer to finished goods inventory.

Selling and Administrative Costs

Any selling and administrative costs incurred that benefit the current period's operations. Selling and administrative expenses are often reflected as a company's "operating expenses" in a multi-step formatted income statement.

Direct Labor Costs

Costs incurred in either salaries or wages to employees who are involved in hands-on labor in the making or assembling of a manufactured product. These costs are included in work in process inventory (WIP) until the product's manufacturing process is completed, at which time the costs are transferred to finished goods inventory and then to cost of goods sold upon subsequent product sale.

Indirect Materials

Raw materials or supplies which are not incorporated directly into a manufactured product but are used to support or maintain the manufacturing process in some way.

Manufacturing Overhead Costs

All costs incurred in the manufacture of products excluding direct material and direct labor costs. Typically include the costs of any indirect materials, indirect labor and any other costs incurred as a result of operating a manufacturing facility such as building and equipment depreciation, utility costs, insurance costs and property taxes. Companies using a job order cost system maintain a manufacturing overhead account to accumulate all actual manufacturing overhead costs incurred during a period until those costs can be applied to WIP through use of a predetermined overhead rate. Upon completion, a product's manufacturing overhead costs are transferred from WIP to finished goods inventory and then to cost of goods sold upon subsequent product sale

Managerial Accounting

The system of accounting designed to provide information useful to a company's managers in improving operations. This information is rarely made public and is not governed by any rules of accounting or GAAP. The SEC has no role in managerial accounting information. Management reports are often produced daily and may include considerable detail required in the day-to-day monitoring of business operations. Much of managerial accounting information involves budgets and forecasts for planning purposes along with follow-up reports noting budget and actual variances. Whereas financial accounting is based entirely on historical reporting of completed operations, much of managerial accounting focuses on the future.

Selling Costs

Any costs incurred in the marketing of a company's goods or services to customers. These costs include any salaries, wages and commissions paid to employees or representatives of the company that are involved in product marketing, sales or sales support. In addition, building and equipment costs (i.e., rent, utilities, depreciation, property taxes, etc.) and any other costs incurred to accommodate and support product sales to customers are part of a company's selling costs. Even costs incurred in shipping or delivering goods to customers and any bad debt expenses would be properly considered part of a company's selling costs. Selling costs do not include product costs. Product costs are separately accounted for as inventory and then as an expense (cost of goods sold) at the time of product sales.

Indirect Labor Costs

Costs incurred for salaries and wages of employees of a manufacturing company involved in supervision, quality control, factory maintenance and any other activity in support of the manufacturing process. Exclude costs of direct labor, which represent salaries and wages of employees involved in the hands-on labor of making or assembling a manufactured product. Indirect labor costs are accounted for as part of manufacturing overhead and applied to WIP Inventory in a job order cost system through a predetermined overhead rate.

Direct Material Costs

Costs incurred in the acquisition of any raw materials or component parts to be directly incorporated into a manufactured product, including any freight or other costs incurred in actually obtaining the materials or component parts from vendors. Included in a manufacturing company's raw materials inventory until the materials are requisitioned and placed into a product's manufacturing process, at which time the costs are transferred to work in process inventory (WIP). Upon product completion and subsequent sale, the associated direct material costs are transferred to finished goods inventory and then to cost of goods sold.

Finished Goods Inventory

A category of inventory for a manufacturing business that includes all product costs (direct materials, direct labor and manufacturing overhead costs) for manufactured goods that have been completed and are available for sale to customers. Upon sale, the costs of the finished goods sold are transferred to an expense (cost of goods sold).

Product Costs

The cost of a company's inventory. In a merchandising business, product costs are the purchase price and any freight or other costs associated with actually obtaining inventory from vendors. In a manufacturing business, product costs include any direct material, direct labor and manufacturing overhead costs incurred in the manufacturing process. These costs are accumulated and accounted for in three stages of inventory: raw materials, work in process (WIP) and finished goods inventory. Upon sale of a company's inventory to customers, the product costs are recorded as an expense (cost of goods sold).

Cost of Goods Sold

An expense account sometimes referred to simply as "cost of sales." Reflects the cost of any products sold to customers. A company's product costs are first accounted for as assets (inventory) until the products are actually sold and become an expense of the business (cost of goods sold). In a merchandising business, a product's cost is its purchase price and any freight or other costs associated with actually obtaining the product from a supplier or vendor. In a manufacturing business, a product's cost includes any direct material, direct labor and manufacturing overhead costs incurred in making the product.

Inventory

An asset reflecting the cost of a company's products held for sale to customers. These product costs are deducted from inventory and recorded as expenses (cost of goods sold) when products are sold. For merchandising businesses, a product's cost is its purchase price and any freight or other costs associated with actually obtaining the product from a vendor. In a manufacturing business, product costs include any direct material, direct labor and manufacturing overhead costs incurred in the manufacturing process. Manufacturing businesses have three stages of inventory: raw materials, work in process (WIP) and finished goods inventory. Raw materials inventory includes the costs of acquiring any direct and indirect materials to be used in the manufacturing process and includes any freight or other costs incurred in actually obtaining the materials from vendors. These costs of direct and indirect materials are then transferred to work in process (WIP) inventory when the materials are actually requisitioned and used in the production process. WIP includes the costs of these materials plus any direct labor and other manufacturing overhead costs incurred in the manufacturing process. Upon completion of production, these costs are transferred to finished goods inventory and then expensed as cost of goods sold upon subsequent product sales.

Administrative Costs

Any cost incurred in managing the overall operations of a business. These costs exclude a company's product and selling costs. For example, the salary of a company's CEO is an administrative cost while the salaries of the V.P. of Manufacturing and the V.P. of Sales and Marketing would be classified as product and selling costs, respectively. Administrative costs typically include the costs of a company's accounting, information systems and personnel departments including any costs of salaries, wages, supplies, depreciation of equipment, allocations of utilities, rent and other costs of operating those departments.

Indirect Material Costs

Costs incurred in the acquisition of raw materials or other supplies which are not incorporated directly into a manufactured product but are used to support or maintain the manufacturing process. These costs include any freight or other costs incurred in actually obtaining the materials or supplies from vendors. Included in a manufacturing company's raw materials inventory until the materials are requisitioned and used in support of the manufacturing process. Upon requisition and use, these costs are transferred to the manufacturing overhead account and then applied to WIP inventory in a job order cost system through a predetermined overhead rate. In a job order cost system, some direct materials are accounted for as indirect materials when they are insignificant in amount and are difficult to account for directly on a job-by-job basis.