Financial Management
Chapter 15
Accounting information is often classified into two types: financial and managerial.
Financial accounting is the branch of accounting that is concerned with recording
transactions using generally accepted accounting principles (GAAP) for a business or other
economic unit and with a periodic preparation of various statements from such records.
Managerial accounting is the type of accounting that deals with information designed to
meet the specific needs of a company's management.
This information includes the following:
o Historical data, which provide objective measures of past operations
o Estimated data, which provide subjective estimates about future decisions
Managerial accounting in the organization.
The departments in a company can be viewed as having either of the following:
o Line responsibilities
o Staff responsibilities
Line department is a unit that is directly involved in the basic objectives of an organization.
Staff department is a unit that provides services, assistance, and advice to the departments
with line or other staff responsibilities.
Controller is the chief management accountant of a division or other segment of a business.
The controller's staff consists of a variety of other accountants who are responsible for
specialized accounting functions such as the following:
, o Systems and procedures
o General accounting
o Budgets and budget analysis
o Special reports and analysis
o Taxes
o Cost accounting
The management process has the following five basic phases:
o Planning
o Directing
o Controlling
o Improving
o Decision making
Planning is a phase of the management process whereby objectives are outlined and courses
of action determined.
Planning may be classified as follows:
o Strategic planning, which is developing long-term actions to achieve the company's
objectives. These long-term actions are called strategies, which often involve periods
of 5 to 10 years.
o Operational planning, which develops short-term actions for managing the day-to-
day operations of the company.
Directing is the process by which managers, given their assigned level of responsibilities, run
day-to-day operations.
Controlling is a phase in the management process that consists of monitoring the operating
results of implemented plans and comparing the actual results with the expected results.
This philosophy of controlling by comparing actual and expected results is called
management by exception.
Improving (Continuous process improvement) is the philosophy of continually improving
employees, business processes, and products. The objective of continuous improvement is
, to eliminate the source of problems in a process. In this way, the right products (services)
are delivered in the right quantities at the right time.
Decision making is a component inherent in the other management processes of planning,
directing, controlling, and improving.
Nature of manufacturing
Cost is a payment of cash (or a commitment to pay cash in the future) for the purpose of
generating revenues.
In managerial accounting, costs are classified according to the decision-making needs of
management. Costs are often classified by their relationship to a segment of operations,
called a cost object. A cost object may be a product, a sales territory, a department, or an
activity, such as research and development. Costs identified with cost objects are either
direct costs or indirect costs.
Direct costs are costs that can be traced directly to a cost object.
Indirect costs are costs that cannot be traced directly to a cost object.
Manufacturing costs:
o Direct materials
o Direct labor
o Factory overhead
Direct material cost
Manufactured products begin with raw materials that are converted into finished products,
The cost of any material that is an integral part of the finished product is classified as a direct
material cost.
Direct labor cost
Most manufacturing processes use employees to convert materials into finished products.
The cost of employee wages that is an integral part of the finished product is classified as
direct labor cost.
The direct material and direct labor costs must meet both of the following:
1. An integral part of the finished product.
2. A significant portion of the total cost of the product
Factory overhead cost
Costs other than direct materials and direct labor that are incurred in the manufacturing
Chapter 15
Accounting information is often classified into two types: financial and managerial.
Financial accounting is the branch of accounting that is concerned with recording
transactions using generally accepted accounting principles (GAAP) for a business or other
economic unit and with a periodic preparation of various statements from such records.
Managerial accounting is the type of accounting that deals with information designed to
meet the specific needs of a company's management.
This information includes the following:
o Historical data, which provide objective measures of past operations
o Estimated data, which provide subjective estimates about future decisions
Managerial accounting in the organization.
The departments in a company can be viewed as having either of the following:
o Line responsibilities
o Staff responsibilities
Line department is a unit that is directly involved in the basic objectives of an organization.
Staff department is a unit that provides services, assistance, and advice to the departments
with line or other staff responsibilities.
Controller is the chief management accountant of a division or other segment of a business.
The controller's staff consists of a variety of other accountants who are responsible for
specialized accounting functions such as the following:
, o Systems and procedures
o General accounting
o Budgets and budget analysis
o Special reports and analysis
o Taxes
o Cost accounting
The management process has the following five basic phases:
o Planning
o Directing
o Controlling
o Improving
o Decision making
Planning is a phase of the management process whereby objectives are outlined and courses
of action determined.
Planning may be classified as follows:
o Strategic planning, which is developing long-term actions to achieve the company's
objectives. These long-term actions are called strategies, which often involve periods
of 5 to 10 years.
o Operational planning, which develops short-term actions for managing the day-to-
day operations of the company.
Directing is the process by which managers, given their assigned level of responsibilities, run
day-to-day operations.
Controlling is a phase in the management process that consists of monitoring the operating
results of implemented plans and comparing the actual results with the expected results.
This philosophy of controlling by comparing actual and expected results is called
management by exception.
Improving (Continuous process improvement) is the philosophy of continually improving
employees, business processes, and products. The objective of continuous improvement is
, to eliminate the source of problems in a process. In this way, the right products (services)
are delivered in the right quantities at the right time.
Decision making is a component inherent in the other management processes of planning,
directing, controlling, and improving.
Nature of manufacturing
Cost is a payment of cash (or a commitment to pay cash in the future) for the purpose of
generating revenues.
In managerial accounting, costs are classified according to the decision-making needs of
management. Costs are often classified by their relationship to a segment of operations,
called a cost object. A cost object may be a product, a sales territory, a department, or an
activity, such as research and development. Costs identified with cost objects are either
direct costs or indirect costs.
Direct costs are costs that can be traced directly to a cost object.
Indirect costs are costs that cannot be traced directly to a cost object.
Manufacturing costs:
o Direct materials
o Direct labor
o Factory overhead
Direct material cost
Manufactured products begin with raw materials that are converted into finished products,
The cost of any material that is an integral part of the finished product is classified as a direct
material cost.
Direct labor cost
Most manufacturing processes use employees to convert materials into finished products.
The cost of employee wages that is an integral part of the finished product is classified as
direct labor cost.
The direct material and direct labor costs must meet both of the following:
1. An integral part of the finished product.
2. A significant portion of the total cost of the product
Factory overhead cost
Costs other than direct materials and direct labor that are incurred in the manufacturing
