Mgrl Acctg–Ch02–Text HW Comments–2015–01–02.Docx
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Managerial Accounting, ACC116B
Text and Homework Comments by Rex A Schildhouse
Adapted from
Managerial Accounting, 4th Edition, Braun & Tietz, Pearson
Chapter 2, Building Blocks of Managerial Accounting
Screen prints extracted from Managerial Accounting, 4th Edition by Braun &
Tietz are copyrighted by Pearson
Contents
Conventions ……………………………………………………………………………………………………………………………….. 3
Service Business …………………………………………………………………………………………………………………………. 3
Merchandising Business ………………………………………………………………………………………………………………. 3
Manufacturing Business ……………………………………………………………………………………………………………….. 3
Conglomerates ……………………………………………………………………………………………………………………………. 4
Value Chain ……………………………………………………………………………………………………………………………….. 4
Research and Development …………………………………………………………………………………………………………… 4
Design ……………………………………………………………………………………………………………………………………….. 4
Production or Purchase ………………………………………………………………………………………………………………... 4
Marketing …………………………………………………………………………………………………………………………………… 4
Distribution ………………………………………………………………………………………………………………………………… 4
Customer Service ………………………………………………………………………………………………………………………… 4
Sustainability and the Value Chain ………………………………………………………………………………………………… 5
Research & Development …………………………………………………………………………………………………………. 5
Designing ……………………………………………………………………………………………………………………………….. 5
Adopting Sustainable Practices ………………………………………………………………………………………………….. 5
Marketing with Integrity …………………………………………………………………………………………………………… 5
Distributing Fossil-Fuel Alternatives and Carbon Offsets ……………………………………………………………… 5
Customer Service Above and Beyond ………………………………………………………………………………………… 6
Cost Object…………………………………………………………………………………………………………………………………. 6
Direct Costs ………………………………………………………………………………………………………………………………… 6
Direct Materials ………………………………………………………………………………………………………………………….. 6
Direct Labor ……………………………………………………………………………………………………………………………….. 6
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Factory or Manufacturing Overhead ………………………………………………………………………………………………. 6
Raw Materials …………………………………………………………………………………………………………………………….. 6
Inventoriable Part ………………………………………………………………………………………………………………………… 6
Work-in–Process …………………………………………………………………………………………………………………………. 6
Semi-Finished Goods Inventory ……………………………………………………………………………………………………. 7
Finished Goods …………………………………………………………………………………………………………………………… 7
Indirect Costs ……………………………………………………………………………………………………………………………… 7
Total Cost …………………………………………………………………………………………………………………………………… 7
Point-of-Sale ………………………………………………………………………………………………………………………………. 7
Period Costs ……………………………………………………………………………………………………………………………….. 7
Inventoriable Costs ……………………………………………………………………………………………………………………… 7
Merchandising Inventoriable Costs ……………………………………………………………………………………………….. 8
Manufacturing Overhead or Factory Overhead ……………………………………………………………………………….. 8
Indirect Materials …………………………………………………………………………………………………………………….. 8
Indirect Labor………………………………………………………………………………………………………………………….. 8
Other Indirect Costs …………………………………………………………………………………………………………………. 8
Manufacturing Inventoriable Costs ………………………………………………………………………………………………… 8
Prime Cost ………………………………………………………………………………………………………………………………….. 8
Conversion Cost ………………………………………………………………………………………………………………………….. 8
Allocating MOH …………………………………………………………………………………………………………………………. 8
Service Company Income Statement ……………………………………………………………………………………………… 9
Merchandising Company Income Statement …………………………………………………………………………………… 9
Manufacturing Company Income Statement …………………………………………………………………………………. 11
Controllable / Uncontrollable Costs ……………………………………………………………………………………………… 15
Relevant / Irrelevant Costs ………………………………………………………………………………………………………….. 15
Differential Cost………………………………………………………………………………………………………………………… 16
Sunk Costs ……………………………………………………………………………………………………………………………….. 16
Fixed Costs ………………………………………………………………………………………………………………………………. 16
Variable Costs …………………………………………………………………………………………………………………………… 16
Mixed Costs ……………………………………………………………………………………………………………………………… 16
Total Costs and Average Costs ……………………………………………………………………………………………………. 16
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Marginal Cost……………………………………………………………………………………………………………………………. 17
Basic Formula …………………………………………………………………………………………………………………………… 17
Managerial Accounting, Chapter 2 Homework Comments ……………………………………………………………… 18
Conventions – As a matter of convention I will attempt to show the references to general ledger
accounts in title case. Here is an example “When you receive cash from a customer for a sale you will
debit Cash and credit Sales Revenue.” And I will attempt to give full journal entries when appropriate.
These will include a date, at least two accounts, debits will equal credits, and a memo or text line will be
included. Here is an example: When you receive $1,000 in cash in your business on January 3, 2012, for a
sale you write a journal entry something like this:
Jan 03, 2012 Cash 1,000
Sales Revenue 1,000
Received cash for sale of merchandise
Textbook accounting and MyAccountingLab (MAL) by Pearson does not always like proper journal
entries which include proper dates and memo or text lines. In some “journal entries” MAL will ask for
only the account titles and the values. In others MAL may ask for a day such as “July 7” with statements
like “record the journal entries for the year of 2012. “July 7” is a day, not a date. In other challenges MAL
may ask for the day such as “7” by saying “record the journal entries for the month of July.” The issue is
the third line in the header of a financial statement which reads something such as “Month Ended June 30,
2012.” If you do not provide the journal entry with the month (June, July, August, etc.), a day (7, 8, 9,
etc.), and the year (2011, 2012, 2013, etc.) what financial report does this journal entry fit into? Be aware
of what MAL is asking for. If you put in “June 3, 2012,” when MAL is asking for the journal entries in
June (2012) and this one’s day is “3” I will usually restore the lost points.
Service Business – Lawn care, medical, dental, car washing. As a service business you can sell
inventory however those revenues should not be a substantial element of your revenues. Labor is the most
significant cost of their services.
Merchandising Business – We all know retailers, they are also called resellers. They basically
buy from the supply chain and sell to the final user, the retail customer. They may manipulate the product
slightly – buy in bulk sell as packaged like a butcher shop. A wholesaler buys in mega-sized lot and sells
to retailers in smaller lots. A retailer sells to the final consumer.
Manufacturing Business – The distinction is they materially change the input into something
else. A cereal company would purchase raw grains and process them into cereal. A manufacturing
company may also be an assembly operation. They basically take in raw materials, convert it into work–
in–process, and end up with a finished good. This is what they sell. One company’s finished goods may be
another company’s raw materials.
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Conglomerates – These are companies that are in many areas and doing many things. Many of our
larger companies are conglomerates. One that comes to mind owns entertainment networks, jet engine
manufacturing companies, appliance manufacturing companies, light bulb manufacturing companies, and
a commercial finance company as well as other ventures.
Value Chain is the process of increasing the value of the product as perceived by the customer
through activities. Using Page 49, Managerial Accounting, 4e, Braun, Pearson as a reference, these
activities could be:
Research and Development – Taking an idea, maybe for a new toaster, and seeing if it
can be made.
Design – Figuring out how the left end and the cover fit together for manufacturing.
Production or Purchase – We are now making a new concept toaster. We can also
contract to have it made for us or we can purchase sub-assemblies and merely assemble it.
Marketing – In the days of old and bold engineering came up with an idea, figured it out, had
production make warehouses full of it and then sales was told “Sell it!” No longer. Now
marketing and sales are involved from the first step. We may build small quantities for
inventory but most units are built to fill sales orders. And if we cannot sell them, we do not
build them.
Distribution – One of the most fun things for an accountant to work with. There are many
many options. Company owned trucks, leased trucks, contracted trucking company, USPS
flat–rate, taxicabs, trains, customer pickup only, etc. What is the cost? What is the image?
What is the time delay? How secure and safe is it? When does title transfer? Who files the
claims for damage in transit?
Customer Service – This is becoming more and more visible and sensitive in the U.S. Does
the company support its product once it is in the customer’s hands? How does it do that? As
an instructor I call MAL for customer support. The vast majority of the time I am speaking to
a non-native English speaker. After asking a question I will be put on hold for three to five
minutes. Then I will be asked another question and put on hold again. After a total of thirty
minutes I am told my call will have to escalated and I can expect an e–mail solution in three
to five business days. If I go for the on-line chat option it is the same drill with delays and
questions and then an escalation. What do I tell other instructors considering MAL? Does my
opinion affect Pearson’s sales of MAL contracts? There is an old saying that has been
revalidated by recent studies. You treat me good and I tell less than three people. You treat
me bad and I tell seventeen people and post it on at least to social network sites.
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Customer service costs are often called hidden costs as they are not allowances, discounts, or
returns. They may be sales lost to your customers that you were never aware were even
possible.
Sustainability and the Value Chain – Using Page 50, Managerial Accounting, 4e, Braun,
Pearson as a reference.
Research & Development – Environmentally safe – Several years ago one MAJOR fast–
food operation was cited (referenced, not fined) as a major contributor to landfill trash that
has decomposition lives exceeding one thousand years. The chain redesigned the packaging
and advertised the new, earth friendly packaging.
Designing – Life cycle is the new buzz phrase – It is called “birth–to–grave.” What is the effect
of this product starting with the generation of raw materials and going all the way through to
complete recovery and disposal when its useful life is over? The kicker here is, what is
planned is not necessarily what is done.
Another buzz phrase is biomimicry practices. It means watch nature and follow it where you
can, do what it does as often as you can. This is becoming a multi-dimensional engineering
major in several colleges as it is the interaction between man, animal, and Mother Nature.
Adopting Sustainable Practices – Back to Ch01, we should not be harming tomorrow by
what we do today. Many companies are looking at the environmental cost as well as the
dollar cost of purchases. Numerous restaurants have changed their fish menus to meet this
concept.
Marketing with Integrity – More catch phrase. Some companies have always done this and
never boasted about it. Others are new on the band wagon. The EDUCATED consumer is the
final evaluator. Greenwashing is the practice of intentionally understating the adverse
environmental impact of the company whether intentionally or unknowingly.
Distributing Fossil-Fuel Alternatives and Carbon Offsets – Political trouble here.
The dinosaurs stopped dying millions of years ago and we are using them up fast. During
World War II the both the Allies and Axis powers were using synthetic fuels in airplanes,
tanks, trucks and autos. It was costly but could be produced quicker than crude oil could be
located, recovered and refined. Today we are working that arena again having basically
wasted fifty or more years of development time. If you think gasoline is expensive now wait
till you see the guy holding the last gallon.
Carbon-offsets come in many forms. Many companies are “permitted” to pollute to a certain
level without incurring a fine. So they are at 80% of their “allowance.” They can sell this
amount of “pollution negative” to someone else who is “pollution positive” so the buyer will
not get fined. Another offset goes like this “If you produce 10 tons of carbon emissions and
you document that you pay for 1,000 trees, this is an offset, no fine.”
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Customer Service Above and Beyond – This is a double-edged sword. If your warranty
is for five years and you repair a customer’s TV at six years under warranty, how do you
justify not fixing the customer with the six year and one month old TV? It may be that due to
track record you know there is life-cycle problem with power supplies. And the first customer
fit that. Screens have been very reliable and that is the second customer’s issue.
Cost Object – Something costs can be traced to. This is usually going to be a part, a sub assembly, a
product, a service, or an event.
Direct Costs – Costs that are 1) easily traced to the cost object and 2) that are not estimates or
allocations. For the construction of a building design costs and property taxes are direct costs. Direct costs
are usually absolutes – the one tire cost $89.75, the hinge cost $45.41. When the cost of that plant is
“allocated” to production it is indirect.
Direct Materials – DM – These are things on the assembly plan or blueprint. For a car this is the
cost of the left fender, the steering wheel, and the seat among other things. Pretty much, if you can hold it
and it has a part number, it is a direct material.
Direct Labor – DL – This is a musical group from the 1960s – Blood, Sweat, and Tears. Only those
who actually exerted blood, sweat, and tears making the product – the line workers. Not the supervisors,
janitors, or material handlers.
Factory or Manufacturing Overhead – FOH or MOH – These are the costs required to
produce the product but not within the categories of direct materials or direct labor. The electricity for
(only) the plant area, depreciation on the machinery, supervisor wages, janitorial costs, and material
handlers are all examples of FOH / MOH costs. These are allocated to the product.
Raw Materials – RM – Raw materials are things you bring into the company with the intent to
convert them to something else through the application of DM and FOH / MOH. You are not prohibited
from selling RM but it is not a common event.
Inventoriable Part – The Managerial Accounting, 4e, Braun, Pearson textbook does not have this
one. Every part in a manufacturing operation has a part number. You can frequently see this on the inside
of a part or printed on the box of a repair part. This item, identified by this number can “hold”
inventoriable value. Raw materials are inventoriable parts, finished goods are inventoriable parts.
Inventoriable parts can be placed in a warehouse.
Work-in–Process – WIP, pronounced “whip.” Work-in–process is the stuff in the assembly line right
now. It is between one inventoriable state such as ¼” blue wax beads classified as RM and blue wax
sticks awaiting labels. In a WIP state it is a melting mess being brought up to temperature so it can be
injected into a mold. At this point it really cannot be taken anywhere or identified by a number
appropriate to the warehouse. (Why, how, would the warehouse hold molten wax?) In textbook
accounting WIP will contain DM, DL, and FOH / MOH values.
Semi–Finished Goods Inventory – SFGI – Pronounced “siff-key.” Another term not in
Managerial Accounting, 4e, Braun, Pearson. Textbook accounting implies that you take a RM, put labor
into it, apply FOH /MOH, and product a FG. (I love acronyms.) This is not true. Many times parts are
manufactured in plants other than the plant where final assembly takes place. These parts and assemblies
have a part number, are inventoriable, and are used with other parts and assemblies to make something
bigger. The blue stick of wax taken from the mold is a SFGI item. I can finish it with Andy’s label, with
Dana’s label, or with Chris’s label later after I issue an order to “pull” it from the warehouse. If you want
to see SFGI items up close, open the hood of your car. You will find all sorts of assemblies such as wire
harnesses and hinges with part number tags on them. They are all SFGI assemblies. SFGI parts and
assemblies will contain DM, DL, and FOH / MOH values.
Finished Goods – FG – The product you intend to sell. FG assemblies will contain DM, DL, and
FOH / MOH values.
Indirect Costs – Those costs incurred and necessary to create your product such as the building,
electricity, and janitorial costs. These are “allocated” to the product. One item can be both a direct cost
and an indirect cost. Assume that a reservoir on a commercial truck needs 6.5 gallons of grease to be
installed for proper operation and lubrication. That 6.5 gallons is a direct cost. The company also uses
