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Chapter 18
Managerial Accounting
Concepts and Principles
QUESTIONS
1. The managerial accountant plays an important role in preparing the information
necessary for effective planning and control decisions. One example is the budget,
2.
Financial Accounting
Managerial Accounting
(a) Users and decision
makers
Investors, creditors, and
other users external to the
organization
Managers, employees, and
decision makers internal to
the organization
(b) Purpose of
information
Assist external users in
making investment, credit,
and other decisions
Assist managers in making
planning and control
decisions
(c) Flexibility of practice
Structured and often
controlled by GAAP
Relatively flexible (no
GAAP)
(d) Time dimension
Historical information with
minimum predictions
Many projections and
estimates; historical
information also presented
(e) Focus of information
Emphasis on whole
organization
Emphasis on projects,
processes, and subdivision
of an organization
(f) Nature of
information
Monetary information
Mostly monetary; but also
nonmonetary information
Fundamental Accounting Principles, 21st Edition
1026
3. A customer orientation has led companies to adopt the principles of the lean
business model in response to consumer demands. The essence of customer
4. Direct labor refers to the efforts of employees who physically convert materials to
5. Factory overhead is limited to indirect costs that are incurred in the production
process. That is, it consists of activities that support the production process, such
6. Direct materials are raw materials that physically become part of the product and
can be clearly traced to specific units or batches of product. Indirect materials are
7. Direct labor can be either a prime cost or a conversion cost.
8. Direct costs include: costs of materials such as tires, seats, fuel tanks, tracks and
instruments, as well as the labor of workers who assemble the products.
9. Management should be evaluated on the basis of controllable costs. This is
10. Management usually must be able to predict financial performance to be successful.
11. Product costs are capitalized because they represent a future value (an asset) to the
12. A manufacturing business produces a product, whereas in a merchandising or
service business this is not the case. In making a product, the manufacturing
13. To run a successful business, management must make predictions and estimates
14. A manufacturing firm converts raw materials into finished products. A
manufacturing company would report three types of inventories on its balance
sheet: raw materials, goods in process, and finished goods. The finished goods are
15. Manufacturers’ balance sheets usually include small tools, factory buildings, factory
16. Manufacturing firms have inventories at various states of completion. Manufacturing
a product requires raw materials, which are converted to finished goods.
17. Manufacturing activities of a company are described in the manufacturing
18. The three categories of manufacturing costs are: direct materials, direct labor, and
factory overhead.
19. Examples of factory overhead costs include: indirect materials, indirect labor,
depreciation of the factory equipment and plant, amortization of patents, the cost of
Fundamental Accounting Principles, 21st Edition
1028
20.
Components of Manufacturing Statement
Polaris Examples
Direct material ................................................................
Tracks, tires, seats
Direct labor ................................................................
Wages of production employees
Factory overhead ..............................................................
Factory heat, factory lighting
Computation of cost of goods manufactured .................
Computation (see Exhibit 18.16)
21.
Arctic Cat
Manufacturing Statement
For Year Ended December 31, 2011
The date matches the period of the income statement. The “manufacturing
statement” supports the income statement in computing cost of goods available for
sale for the cost of goods sold section.
22. The income statement describes the revenues and expenses for the year. Included
in the calculation of the cost of goods sold is a line item identified as the cost of
23. Raw materials inventory turnover and days’ sales in raw materials inventory can be
used to assess raw materials inventory management. Raw materials inventory
24. Yes. Polaris can use the concepts and measures of cycle time and cycle efficiency
to evaluate performance on its product offerings.
25.
Inventory Components ($ millions)
Dell (February 3, 2012)
Production materials ........................................................
$ 753
Work in process ................................................................
239
Finished goods ................................................................
412
Total inventories ...............................................................
$1,404
QUICK STUDIES
Quick Study 18-1 (5 minutes)
Quick Study 18-2 (10 minutes)
1. Managerial accounting
Quick Study 18-3 (5 minutes)
Quick Study 18-4 (5 minutes)
Quick Study 18-5 (5 minutes)
1. Indirect cost
Quick Study 18-6 (5 minutes)
Fundamental Accounting Principles, 21st Edition
1030
Quick Study 18-7 (10 minutes)
Finished goods inventory, December 31, 2012 ..........................
$ 345,000
Plus cost of goods manufactured ...............................................
918,700
Cost of goods available for sale ..................................................
1,263,700
Less finished goods inventory, December 31, 2013 ..................
283,600
Cost of goods sold ........................................................................
$ 980,100
Quick Study 18-8 (10 minutes)
Answer is 3.
Cost of goods sold is computed as:
Beginning finished goods inventory .................................................
$ 500
Cost of goods manufactured ..............................................................
4,000
Goods available for sale .....................................................................
4,500
Ending finished goods inventory .......................................................
750
Cost of goods sold ..............................................................................
$3,750
Quick Study 18-9 (5 minutes)
Production activities
2
Sales activities
3
Materials activities
1
Quick Study 18-10 (15 minutes)
Briton Company
Manufacturing Statement
For Year Ended December 31, 2013
Direct materials .....................................................................................
$190,500
Direct labor ...........................................................................................
63,150
Factory overhead costs ........................................................................
24,000
Total manufacturing costs ..................................................................
277,650
Add goods in process, December 31, 2012 ........................................
157,600
Total cost of goods in process ............................................................
435,250
Less goods in process, December 31, 2013 .......................................
142,750
Cost of goods manufactured ...............................................................
$292,500
Quick Study 18-11 (10 minutes)
Quick Study 18-12 (5 minutes)
(Amounts in millions of Swiss francs)
Raw materials inventory, beginning ..........................................
3,243
Plus raw materials purchased ....................................................
16,200
Raw materials available for use .................................................
19,443
Less raw materials inventory, ending ........................................
3,904
Raw materials used .....................................................................
15,539
Quick Study 18-13 (10 minutes)
(in millions of Swiss francs)
Cost of raw materials used** ....................................................
15,539
Beginning raw materials inventory ..........................................
3,243
Ending raw materials inventory ...............................................
3,904
Total beginning plus ending raw materials inventory............
7,147
Average raw materials inventory (Total / 2) ............................
3,574*
Inventory turnover (RM used** / Average inventory) .............
4.35*
Days’ sales in inventory [(Ending inv./RM used*) x 365] ...........
91.7*
*Rounded
**Beginning RM + Purchased RM – RM used = Ending RM
3,243 + 16,200 – RM used = 3,904
15,539 = RM used
EXERCISES
Exercise 18-1 (15 minutes)
Financial Accounting
Managerial Accounting
1. Time
dimension
Historical information with
minimum predictions.
Many projections and estimates;
historical information also
presented.
2. Users and
decision
makers
Investors, creditors and
other users external to the
organization.
Managers, employees, and
decision makers internal to the
organization.
3. Timeliness of
information
Often available only after
the audit is complete.
Available quickly without the need
to wait for an audit.
4. Purpose of
information
Assist external users in
making investment, credit,
and other decisions.
Assist managers in making
planning and control decisions.
5. Nature of
information
Monetary information.
Mostly monetary; some
nonmonetary information.
6. Flexibility of
practice
Structured and often
controlled by GAAP.
Relatively flexible (no GAAP).
7. Focus of
information
Emphasis on whole
organization.
Emphasis on projects, processes,
and subdivisions of an
organization.
Exercise 18-2 (10 minutes)
1) Short-term planning usually covers a period of one year.
Exercise 18-3 (10 minutes)
Primary Information Source
Business Decision
Managerial
Financial
1. Determine amount of dividends to pay stockholders ...
X
X
2. Evaluate a purchasing department’s performance ....
X
3. Report financial performance to board of directors ......
X
X
4. Estimate product cost for new line of shoes ..............
X
5. Plan the budget for next quarter ..................................
X
6. Measure profitability of all individual stores ..............
X
X
7. Prepare financial reports according to GAAP ............
X
8. Determine location and size for a new plant ..............
X
Exercise 18-4 (15 minutes)
1. Five cost classifications are
(a)
Behavior
(c)
Controllability
(e)
Function
(b)
Traceability
(d)
Relevance
2. Two purposes of identifying these separate cost classifications:
(a) Cost classifications provide a standardized framework for using cost
accounting information by management.
(b) Cost classifications are useful in different types of management
analysis. For example, cost accounting is used to evaluate
Fundamental Accounting Principles, 21st Edition
1034
Exercise 18-5 (20 minutes)
1.
Cost by Behavior
Cost by Traceability
Product Cost
Variable
Fixed
Direct
Indirect
1. Leather cover for soccer balls ............
X
X
2. Annual flat fee paid for office
security ...............................................
X
X
3. Coolants for machinery........................
X
X
4. Wages of assembly workers ...............
X
X
5. Lace to hold the leather together ........
X
X
6. Taxes on factory ................................
X
X
7. Machinery depreciation .......................
X
X
2. Most fixed costs are indirect. Fixed costs normally are resources
acquired to support the production process rather than being traceable
to individual products or batches of product. However, not all indirect
costs are fixed. Some, like indirect materials, are variable.
Exercise 18-6 (20 minutes)
Product Cost
Period
Cost
Direct
Cost
Indirect
Cost
Prime
Conversion
Direct
Materials
Direct
Labor
Direct
Labor
Over-
head
1. Factory utilities
X
X
2. Advertising
X
3. Amortization of patents on
factory machine
X
X
4. State and federal income tax
X
5. Office supplies used
X
6. Bad debts expense
X
7. Small tools used
X
X
8. Payroll taxes for production
supervisor
X
X
9. Accident insurance on
factory workers*
X
X
X
10. Depreciation—Factory bldg
X
X
11. Wages to assembly
workers**
X
X
X
12. Direct materials used
X
X
* There are certain costs that can be classified as direct for one company and indirect
for another. The specific classification depends on the materiality and cost benefit of
Exercise 18-7 (20 minutes)
Part 1
Company 1, Sun Fresh Foods, is a merchandising firm with only one
inventory item, merchandise inventory. Company 2, Salomon Skis Mfg., is
a manufacturing company with three inventory categories (raw materials,
goods in process, and finished goods).
Part 2
Company 1
Sun Fresh Foods
Current Asset Section
December 31, 2013
Cash ..............................................................................................................
$ 7,000
Accounts receivable ....................................................................................
62,000
Merchandise inventory ................................................................................
45,000
Prepaid expenses ........................................................................................
1,500
Total current assets .....................................................................................
$115,500
Company 2
Salomon Skis Mfg.
Current Asset Section
December 31, 2013
Cash ..............................................................................................................
$ 5,000
Accounts receivable ....................................................................................
75,000
Raw materials inventory .............................................................................
42,000
Goods in process inventory ................................................................
30,000
Finished goods inventory ................................................................
50,000
Prepaid expenses ........................................................................................
900
Total current assets .....................................................................................
$202,900
Discussion: The current asset section of the balance sheet for these two
companies differs because one is a merchandiser and one is a
Exercise 18-8 (30 minutes)
Garcia
Company
Culpepper
Company
1. COST OF GOODS MANUFACTURED
Direct materials
Beginning raw materials inventory .................
$ 7,250
$ 9,000
Raw materials purchases ................................
33,000
52,000
Raw materials available for use ......................
40,250
61,000
Less ending raw materials inventory ..............
5,300
7,200
Direct materials used .......................................
34,950
53,800
Direct labor ...........................................................
19,000
35,000
Factory overhead
Rental cost on factory equipment ...................
27,000
22,750
Factory utilities .................................................
9,000
12,000
Factory supplies used ......................................
8,200
3,200
Indirect labor .....................................................
1,250
7,660
Repairs—Factory equipment ...........................
4,780
1,500
Total factory overhead .....................................
50,230
47,110
Total manufacturing costs ................................
104,180
135,910
Beginning goods in process inventory .............
14,500
19,950
Total cost of goods in process ...........................
118,680
155,860
Less ending goods in process inventory ..........
22,000
16,000
Cost of goods manufactured ..............................
$ 96,680
$139,860
2. COST OF GOODS SOLD
Beginning finished goods inventory .................
$ 12,000
$ 16,450
Cost of goods manufactured ..............................
96,680
139,860
Cost of goods available for sale .........................
108,680
156,310
Less ending finished goods inventory ..............
17,650
13,300
Cost of goods sold ..............................................
$ 91,030
$143,010
Exercise 18-9 (20 minutes)
Merchandising Business
VIKING RETAIL
Partial Income Statement
For Year Ended December 31, 2013
Cost of goods sold
Merchandise inventory, December 31, 2012 ............................
$ 275,000
Merchandise purchases .............................................................
500,000
Goods available for sale ............................................................
775,000
Less merchandise inventory, December 31, 2013 ...................
115,000
Cost of goods sold ................................................................
$ 660,000
Manufacturing Business
LOG HOMES MANUFACTURING
Partial Income Statement
For Year Ended December 31, 2013
Cost of goods sold
Finished goods inventory, December 31, 2012....................
$ 450,000
Cost of goods manufactured .................................................
900,000
Goods available for sale ........................................................
1,350,000
Less finished goods inventory, December 31, 2013 ...........
375,000
Cost of goods sold ................................................................
$ 975,000
Exercise 18-10 (15 minutes)
Direct materials used
in production
$502,500
Factory overhead
used in production
$750,000
Ending raw
materials inventory
$175,000
Beginning raw
materials inventory
$145,500
Raw materials available
for use in production
$677,500
Raw materials
purchases
$532,000
Production
Activity
Sales
Activity
Materials
Activity
Direct labor used
in production
$350,000
Ending goods in
process inventory
$93,500
Total goods in
process
$1,687,000
Beginning goods in
process inventory
$84,500
Ending finished
goods inventory
$139,950
Finished goods sold
$1,600,300
Beginning finished
goods inventory
$146,750
Finished goods
available for sale
$1,740,250
Finished goods
manufactured
$1,593,500
