CHAPTER 1
INTRODUCTION TO MANAGERIAL ACCOUNTING
DISCUSSION QUESTIONS
1. Managerial accounting is the process of developing information and management tools to achieve
an organization’s objectives. The management process is composed of four basic functions: strategic
planning, measurement, evaluation, and control. Strategic planning is the process of developing
long-term objectives. Measurement is the process of developing and agreeing upon performance
metrics on how well the company is achieving its objectives. Evaluation is the process by which
management monitors operations by comparing actual and expected results. Control is the
process by which management takes actions to encourage specific behaviors or outcomes.
2. Financial accounting and managerial accounting are different in several ways. Financial
accounting information is reported in statements that are useful to persons or groups outside of
a company. These statements objectively report the results of operations for fixed periods of
time and the financial condition of the business under generally accepted accounting principles.
Managerial accounting information uses both subjective and objective information to meet the
specific needs of management. This non-GAAP information can be reported periodically or as
needed by management and can be reported for the entire entity or for segments of the organization.
This information includes (i) historical data, which provide objective measures of past operations,
and (ii) estimated data, which provide subjective estimates about future decisions.
3. a. Vertical units are structured as separate businesses within a company and normally develop
and sell products directly to customers. Horizontal units are not responsible for developing and
selling products, but provide services to other horizontal and vertical units within the company.
b. The accounting and legal departments are horizontal units within a company.
c. A consumer products division would be considered a vertical unit within a company.
4. Direct materials cost
5. Prime costs are the combination of direct materials and direct labor costs, while conversion
costs are the combination of direct labor costs and manufacturing overhead costs.
6. Product costs are composed of three elements of manufacturing costs: direct materials cost, direct
labor cost, and manufacturing overhead cost. These costs are treated as assets until the product is sold.
Period costs consist of selling and administrative expenses that are used in generating revenue
during the current period. They are recognized as expenses on the current period’s income statement.
7. The three inventory accounts for a manufacturing business are as follows:
a. Finished goods inventory consists of completed (or finished) products that have not been sold.
b. Work in process inventory consists of the direct materials, direct labor, and manufacturing
overhead costs for products that have entered the manufacturing process, but are not yet
completed.
c. Materials inventory consists of the costs of the direct and indirect materials that have not
entered the manufacturing process.
8. The cost of finished goods and the cost of work in process include the following:
a. Direct materials—the costs of materials that enter directly into the finished product.
b. Direct labor—the wages of factory workers who convert materials into a finished product.
c. Manufacturing overhead—the costs, other than direct materials and direct labor, that are
incurred in the manufacturing process.
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, CHAPTER 1 Introduction to Managerial Accounting
DISCUSSION QUESTIONS (Continued)
9. The manufacturing costs incurred during a period include direct materials used in production plus
the direct labor and manufacturing overhead costs incurred during the period. The cost of goods
manufactured for a period is computed by adjusting the manufacturing costs incurred during the
period for the effects of beginning and ending work in process. Beginning work in process inventory
is added and ending work in process is subtracted from the manufacturing costs incurred during a
period to arrive at the cost of goods manufactured for the period.
10. A merchandising business purchases merchandise (products) in a finished state for resale to
customers. The cost of product sold is called cost of goods sold. A manufacturer makes the product it
sells using direct materials, direct labor, and manufacturing overhead, which make up the cost of
goods manufactured included in the “Cost of goods sold” section of the income statement.
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© 2026 .
, CHAPTER 1 Introduction to Managerial Accounting
BASIC EXERCISES
BE 1–1
Strategic planning (a)
Evaluation (c)
Control (b)
BE 1–2
a. Direct Materials
b. Direct Labor
c. Manufacturing Overhead
d. Manufacturing Overhead
BE 1–3
a. P
b. B
c. C
d. C
BE 1–4
a. Period cost
b. Product cost
c. Period cost
d. Product cost
BE 1–5
a. Work in process inventory, June 1……………………………… $ 70,200
Cost of direct materials used in production…………………… $260,000
Direct labor………………………………………………………… 340,000
Manufacturing overhead………………………………………… 182,300
Total manufacturing costs incurred in June………………… 782,300
Total manufacturing costs………………………………………… $852,500
Work in process inventory, June 30…………………………… (74,000)
Cost of goods manufactured…………………………………… $778,500
b. Finished goods inventory, June 1……………………………… $ 33,300
Cost of goods manufactured…………………………………… 778,500
Cost of finished goods available for sale……………………… $811,800
Finished goods inventory, June 30……………………………… (44,100)
Cost of goods sold………………………………………………… $767,700
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© 2026 .
, CHAPTER 1 Introduction to Managerial Accounting
BE 1–6
a. Number of Guests Nights per Visit Guest Nights
4,400 1 4,400
1,800 2 3,600
750 3 2,250
600 4 2,400
20 5 100
12,750
b. 15,000 available room nights (500 rooms × 30 nights in June)
Guest Nights
c. Occupancy Rate =
Available Room Nights
12,750
Occupancy Rate = = 85%
15,000
d. The utilization (occupancy) rate has improved from 82% in the prior year to 85% in
the current year.
1-4
© 2026 .
INTRODUCTION TO MANAGERIAL ACCOUNTING
DISCUSSION QUESTIONS
1. Managerial accounting is the process of developing information and management tools to achieve
an organization’s objectives. The management process is composed of four basic functions: strategic
planning, measurement, evaluation, and control. Strategic planning is the process of developing
long-term objectives. Measurement is the process of developing and agreeing upon performance
metrics on how well the company is achieving its objectives. Evaluation is the process by which
management monitors operations by comparing actual and expected results. Control is the
process by which management takes actions to encourage specific behaviors or outcomes.
2. Financial accounting and managerial accounting are different in several ways. Financial
accounting information is reported in statements that are useful to persons or groups outside of
a company. These statements objectively report the results of operations for fixed periods of
time and the financial condition of the business under generally accepted accounting principles.
Managerial accounting information uses both subjective and objective information to meet the
specific needs of management. This non-GAAP information can be reported periodically or as
needed by management and can be reported for the entire entity or for segments of the organization.
This information includes (i) historical data, which provide objective measures of past operations,
and (ii) estimated data, which provide subjective estimates about future decisions.
3. a. Vertical units are structured as separate businesses within a company and normally develop
and sell products directly to customers. Horizontal units are not responsible for developing and
selling products, but provide services to other horizontal and vertical units within the company.
b. The accounting and legal departments are horizontal units within a company.
c. A consumer products division would be considered a vertical unit within a company.
4. Direct materials cost
5. Prime costs are the combination of direct materials and direct labor costs, while conversion
costs are the combination of direct labor costs and manufacturing overhead costs.
6. Product costs are composed of three elements of manufacturing costs: direct materials cost, direct
labor cost, and manufacturing overhead cost. These costs are treated as assets until the product is sold.
Period costs consist of selling and administrative expenses that are used in generating revenue
during the current period. They are recognized as expenses on the current period’s income statement.
7. The three inventory accounts for a manufacturing business are as follows:
a. Finished goods inventory consists of completed (or finished) products that have not been sold.
b. Work in process inventory consists of the direct materials, direct labor, and manufacturing
overhead costs for products that have entered the manufacturing process, but are not yet
completed.
c. Materials inventory consists of the costs of the direct and indirect materials that have not
entered the manufacturing process.
8. The cost of finished goods and the cost of work in process include the following:
a. Direct materials—the costs of materials that enter directly into the finished product.
b. Direct labor—the wages of factory workers who convert materials into a finished product.
c. Manufacturing overhead—the costs, other than direct materials and direct labor, that are
incurred in the manufacturing process.
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© 2026 .
, CHAPTER 1 Introduction to Managerial Accounting
DISCUSSION QUESTIONS (Continued)
9. The manufacturing costs incurred during a period include direct materials used in production plus
the direct labor and manufacturing overhead costs incurred during the period. The cost of goods
manufactured for a period is computed by adjusting the manufacturing costs incurred during the
period for the effects of beginning and ending work in process. Beginning work in process inventory
is added and ending work in process is subtracted from the manufacturing costs incurred during a
period to arrive at the cost of goods manufactured for the period.
10. A merchandising business purchases merchandise (products) in a finished state for resale to
customers. The cost of product sold is called cost of goods sold. A manufacturer makes the product it
sells using direct materials, direct labor, and manufacturing overhead, which make up the cost of
goods manufactured included in the “Cost of goods sold” section of the income statement.
1-2
© 2026 .
, CHAPTER 1 Introduction to Managerial Accounting
BASIC EXERCISES
BE 1–1
Strategic planning (a)
Evaluation (c)
Control (b)
BE 1–2
a. Direct Materials
b. Direct Labor
c. Manufacturing Overhead
d. Manufacturing Overhead
BE 1–3
a. P
b. B
c. C
d. C
BE 1–4
a. Period cost
b. Product cost
c. Period cost
d. Product cost
BE 1–5
a. Work in process inventory, June 1……………………………… $ 70,200
Cost of direct materials used in production…………………… $260,000
Direct labor………………………………………………………… 340,000
Manufacturing overhead………………………………………… 182,300
Total manufacturing costs incurred in June………………… 782,300
Total manufacturing costs………………………………………… $852,500
Work in process inventory, June 30…………………………… (74,000)
Cost of goods manufactured…………………………………… $778,500
b. Finished goods inventory, June 1……………………………… $ 33,300
Cost of goods manufactured…………………………………… 778,500
Cost of finished goods available for sale……………………… $811,800
Finished goods inventory, June 30……………………………… (44,100)
Cost of goods sold………………………………………………… $767,700
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© 2026 .
, CHAPTER 1 Introduction to Managerial Accounting
BE 1–6
a. Number of Guests Nights per Visit Guest Nights
4,400 1 4,400
1,800 2 3,600
750 3 2,250
600 4 2,400
20 5 100
12,750
b. 15,000 available room nights (500 rooms × 30 nights in June)
Guest Nights
c. Occupancy Rate =
Available Room Nights
12,750
Occupancy Rate = = 85%
15,000
d. The utilization (occupancy) rate has improved from 82% in the prior year to 85% in
the current year.
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© 2026 .
