Chapter M:1
Introduction to Managerial Accounting
Chapter M:1: Overview
The chapter introduces students to managerial accounting as distinguished from financial accounting.
Students learn about the information that managers—the decision makers inside the business—must know
and use in order to effectively plan and control the business. The differences between financial and
managerial accounting are delineated. The role of the manager as well as managerial accounting functions
are emphasized. The chapter continues with a discussion of the professional ethical standards for
management accountants: competence, confidentiality, integrity, and credibility.
Cost classification categories are explained, including direct/indirect costs, product/period costs, and types
of manufacturing product costs (direct materials, direct labor, and manufacturing overhead), which can be
alternatively categorized as prime costs (direct materials and direct labor) or conversion costs (direct labor
and manufacturing overhead). Service companies, merchandising companies, and manufacturing
companies are discussed, and a balance sheet and income statement examples are provided for each. The
calculation of cost of goods manufactured is presented, and a schedule example is provided. Exhibits help
students visualize the flow of costs through a manufacturing company’s accounting system to the income
statement. A discussion of today’s business environment points out that recent trends include a shift
toward a service-based economy, competing in the global marketplace, time-based competition, advanced
information systems, e-commerce, just-in-time management, advances in technology, cloud-based
services, total quality management, and integrated economic, social, and environmental reporting (the
triple bottom line). The chapter concludes with a discussion on how to calculate cost per item sold for a
merchandising business and cost per service for a service business.
An Ethics feature provides an ethical dilemma that can be used for discussion purposes. A Tying It All
Together feature provides a look into the balance sheet and income statement of Winnebago Industries,
Inc. The Review section includes Things You Should Know, which highlights the information students
should have acquired from the chapter. A Check Your Understanding Problem reviews product/period
cost categorization and calculation of cost of goods manufactured, cost of goods sold, and cost per unit.
A list of Key Terms is provided. A Quick Check gives students a chance to assess their knowledge of the
chapter learning objectives.
Copyright © 2027 Pearson Education, Inc. M:1-1
,Chapter M:1: Learning Objectives
LO 1. Define managerial accounting and understand how it is used
LO 2. Classify costs used in managerial accounting
LO 3. Prepare financial statements for a manufacturer, including a balance sheet, income statement, and
schedule of cost of goods manufactured
LO 4. Describe business trends affecting managerial accounting
LO 5. Describe how managerial accounting is used in service and merchandising companies
Copyright © 2027 Pearson Education, Inc. M:1-2
,Chapter M:1: Teaching Outline with Lecture Notes
LO 1. Define managerial accounting and understand how it is used
§ Exhibit M:1-1: Financial Accounting Versus Managerial Accounting
a) Managers’ role in the organization
§ Exhibit M:1-2: Organizational Chart for Smart Touch Learning (Partial)
b) Managerial accounting
§ Exhibit M:1-3: Pathways Vision Model
§ Exhibit M:1-4: Technical Skills on CMA Exam
c) Ethical standards of managerial accountants
§ Exhibit M:1-5: IMA Statement of Ethical Professional Practice (Excerpt)
Lecture Notes: Students are not as familiar with managerial accounting as they are financial
accounting. Emphasize the key difference: Managerial accounting is focused on internal users of
financial information for decision making, while financial accounting is focused on external users for
financial reporting. Managers throughout the organization rely on managerial accounting to help plan,
direct, control, and make decisions about the business. The Pathways Vision Model provides a visual
way for students to more clearly understand the role of managerial accounting in making good
decisions.
The CMA exam covers skills used internally in organizations to enhance decision making. The
Institute of Management Accountants (IMA) has developed ethical standards requiring managerial
accountants to maintain their professional competence, preserve the confidentiality of the information
they handle, and act with integrity and credibility.
Suggested In-Class Exercise: E-M:1-13
LO 2. Classify costs used in managerial accounting
a) Service companies
b) Manufacturing companies
c) Direct and indirect costs
d) Manufacturing costs
§ Exhibit M:1-6: Manufacturing Costs
e) Prime and conversion costs
Copyright © 2027 Pearson Education, Inc. M:1-3
, § Exhibit M:1-7: Prime and Conversion Costs
f) Product and period costs
§ Exhibit M:1-8: Period Versus Product Costs
§ Exhibit M:1-9: Period and Product Costs for Smart Touch Learning
Lecture Notes: Point out the distinction between direct and indirect manufacturing costs. Direct costs
are added to WIP, whereas indirect costs are usually collected in one or more Manufacturing Overhead
accounts and then applied to WIP using a predetermined overhead rate. Therefore, when materials are
used, you must know whether they are indirect or direct. When labor is incurred, you must know
whether it is direct or indirect. The recording of labor in an asset account (WIP) may need additional
explanation. Students might want to expense labor because it was expensed in previous chapters.
Remind students that manufacturing companies add all product costs to inventory, and they are
expensed (COGS) when inventory is sold.
Distinguish between product costs and period costs. GAAP requires that all manufacturing costs be
treated as costs of making the product, which means these manufacturing costs (raw materials,
manufacturing labor, and manufacturing overhead) are “attached” to the product. All
nonmanufacturing costs go directly to the income statement in the period in which they occur.
Consider an oversimplified company that has a factory in your local community and corporate offices
in New York City (or some other major urban center). Everything that goes on at the factory in your
local community is a manufacturing cost that becomes attached to the product by accumulating those
costs in WIP. Everything that goes on in the corporate offices is a period cost that is charged directly
to the income statement in the period in which it occurs. While this is an oversimplification (for
example, sales offices or research labs can be located in a factory setting), it serves to fix the distinction
in students’ minds.
Overhead includes all manufacturing costs other than direct materials and direct labor. Therefore,
students must know whether a cost is manufacturing or nonmanufacturing. For example,
“depreciation” will no longer suffice. Is it manufacturing or nonmanufacturing? As discussed for labor
above, students may want to expense all indirect costs, such as depreciation, insurance, etc., because
they were expensed in previous chapters. Remind students that manufacturing companies add all
product costs to inventory—first to WIP, which is transferred to FG, and then as COGS when
inventory is sold.
Suggested In-Class Exercise: E-M:1-15
LO 3. Prepare financial statements for a manufacturer, including a balance sheet, income statement, and
schedule of cost of goods manufactured
a) Balance sheet
§ Exhibit M:1-10: Balance Sheet Comparison
b) Income statement
Copyright © 2027 Pearson Education, Inc. M:1-4
Introduction to Managerial Accounting
Chapter M:1: Overview
The chapter introduces students to managerial accounting as distinguished from financial accounting.
Students learn about the information that managers—the decision makers inside the business—must know
and use in order to effectively plan and control the business. The differences between financial and
managerial accounting are delineated. The role of the manager as well as managerial accounting functions
are emphasized. The chapter continues with a discussion of the professional ethical standards for
management accountants: competence, confidentiality, integrity, and credibility.
Cost classification categories are explained, including direct/indirect costs, product/period costs, and types
of manufacturing product costs (direct materials, direct labor, and manufacturing overhead), which can be
alternatively categorized as prime costs (direct materials and direct labor) or conversion costs (direct labor
and manufacturing overhead). Service companies, merchandising companies, and manufacturing
companies are discussed, and a balance sheet and income statement examples are provided for each. The
calculation of cost of goods manufactured is presented, and a schedule example is provided. Exhibits help
students visualize the flow of costs through a manufacturing company’s accounting system to the income
statement. A discussion of today’s business environment points out that recent trends include a shift
toward a service-based economy, competing in the global marketplace, time-based competition, advanced
information systems, e-commerce, just-in-time management, advances in technology, cloud-based
services, total quality management, and integrated economic, social, and environmental reporting (the
triple bottom line). The chapter concludes with a discussion on how to calculate cost per item sold for a
merchandising business and cost per service for a service business.
An Ethics feature provides an ethical dilemma that can be used for discussion purposes. A Tying It All
Together feature provides a look into the balance sheet and income statement of Winnebago Industries,
Inc. The Review section includes Things You Should Know, which highlights the information students
should have acquired from the chapter. A Check Your Understanding Problem reviews product/period
cost categorization and calculation of cost of goods manufactured, cost of goods sold, and cost per unit.
A list of Key Terms is provided. A Quick Check gives students a chance to assess their knowledge of the
chapter learning objectives.
Copyright © 2027 Pearson Education, Inc. M:1-1
,Chapter M:1: Learning Objectives
LO 1. Define managerial accounting and understand how it is used
LO 2. Classify costs used in managerial accounting
LO 3. Prepare financial statements for a manufacturer, including a balance sheet, income statement, and
schedule of cost of goods manufactured
LO 4. Describe business trends affecting managerial accounting
LO 5. Describe how managerial accounting is used in service and merchandising companies
Copyright © 2027 Pearson Education, Inc. M:1-2
,Chapter M:1: Teaching Outline with Lecture Notes
LO 1. Define managerial accounting and understand how it is used
§ Exhibit M:1-1: Financial Accounting Versus Managerial Accounting
a) Managers’ role in the organization
§ Exhibit M:1-2: Organizational Chart for Smart Touch Learning (Partial)
b) Managerial accounting
§ Exhibit M:1-3: Pathways Vision Model
§ Exhibit M:1-4: Technical Skills on CMA Exam
c) Ethical standards of managerial accountants
§ Exhibit M:1-5: IMA Statement of Ethical Professional Practice (Excerpt)
Lecture Notes: Students are not as familiar with managerial accounting as they are financial
accounting. Emphasize the key difference: Managerial accounting is focused on internal users of
financial information for decision making, while financial accounting is focused on external users for
financial reporting. Managers throughout the organization rely on managerial accounting to help plan,
direct, control, and make decisions about the business. The Pathways Vision Model provides a visual
way for students to more clearly understand the role of managerial accounting in making good
decisions.
The CMA exam covers skills used internally in organizations to enhance decision making. The
Institute of Management Accountants (IMA) has developed ethical standards requiring managerial
accountants to maintain their professional competence, preserve the confidentiality of the information
they handle, and act with integrity and credibility.
Suggested In-Class Exercise: E-M:1-13
LO 2. Classify costs used in managerial accounting
a) Service companies
b) Manufacturing companies
c) Direct and indirect costs
d) Manufacturing costs
§ Exhibit M:1-6: Manufacturing Costs
e) Prime and conversion costs
Copyright © 2027 Pearson Education, Inc. M:1-3
, § Exhibit M:1-7: Prime and Conversion Costs
f) Product and period costs
§ Exhibit M:1-8: Period Versus Product Costs
§ Exhibit M:1-9: Period and Product Costs for Smart Touch Learning
Lecture Notes: Point out the distinction between direct and indirect manufacturing costs. Direct costs
are added to WIP, whereas indirect costs are usually collected in one or more Manufacturing Overhead
accounts and then applied to WIP using a predetermined overhead rate. Therefore, when materials are
used, you must know whether they are indirect or direct. When labor is incurred, you must know
whether it is direct or indirect. The recording of labor in an asset account (WIP) may need additional
explanation. Students might want to expense labor because it was expensed in previous chapters.
Remind students that manufacturing companies add all product costs to inventory, and they are
expensed (COGS) when inventory is sold.
Distinguish between product costs and period costs. GAAP requires that all manufacturing costs be
treated as costs of making the product, which means these manufacturing costs (raw materials,
manufacturing labor, and manufacturing overhead) are “attached” to the product. All
nonmanufacturing costs go directly to the income statement in the period in which they occur.
Consider an oversimplified company that has a factory in your local community and corporate offices
in New York City (or some other major urban center). Everything that goes on at the factory in your
local community is a manufacturing cost that becomes attached to the product by accumulating those
costs in WIP. Everything that goes on in the corporate offices is a period cost that is charged directly
to the income statement in the period in which it occurs. While this is an oversimplification (for
example, sales offices or research labs can be located in a factory setting), it serves to fix the distinction
in students’ minds.
Overhead includes all manufacturing costs other than direct materials and direct labor. Therefore,
students must know whether a cost is manufacturing or nonmanufacturing. For example,
“depreciation” will no longer suffice. Is it manufacturing or nonmanufacturing? As discussed for labor
above, students may want to expense all indirect costs, such as depreciation, insurance, etc., because
they were expensed in previous chapters. Remind students that manufacturing companies add all
product costs to inventory—first to WIP, which is transferred to FG, and then as COGS when
inventory is sold.
Suggested In-Class Exercise: E-M:1-15
LO 3. Prepare financial statements for a manufacturer, including a balance sheet, income statement, and
schedule of cost of goods manufactured
a) Balance sheet
§ Exhibit M:1-10: Balance Sheet Comparison
b) Income statement
Copyright © 2027 Pearson Education, Inc. M:1-4
