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Chapter 15 (1) Introduction to Managerial Accounting 314
OBJECTIVE 4
Describe and illustrate financial statements for a manufacturing business, including the
balance sheet, statement of cost of goods manufactured and income statement.
SYNOPSIS
The income statement and balance sheet of a manufacturing business are more complex than service and
merchandising businesses. A manufacturing business has three types of inventory accounts. The materials
inventory account consists of direct and indirect materials that have not yet entered the manufacturing
process. Materials that have entered the manufacturing process but are not yet complete are called the
work in process inventory. The finished goods inventory includes products that have gone completely
through the manufacturing process but have not yet been sold. The income statement for a manufacturing
business primarily differs in the reporting of the goods available for sale. First, the cost of finished goods
available for sale is computed as beginning finished goods inventory + cost of goods manufactured during
the period = cost of finished goods available for sale. After that number is determined, the cost of goods
sold is determined by cost of finished goods available for sale—ending finished goods inventory = cost of
goods sold. The cost of goods manufactured is a separate statement that summarizes the cost of goods
manufactured during the period. An example of the statement of cost of goods manufactured is illustrated
in Exhibit 16 along with its connection to the income statement.
Key Terms and Definitions
Cost of Goods Manufactured—The total cost of making and finishing a product.
Cost of Goods Sold—The cost of finished goods available for sale minus the ending finished
goods inventory.
process.
Merchandise Available for Sale—The cost of merchandise available for sale to customers
calculated by adding the beginning merchandise inventory to net purchases.
Statement of Cost of Goods Manufactured—The income statement of manufacturing
companies.
products that have not been finished.
Relevant Check Up Corner and Exhibits
Exhibit 14—Balance Sheet Presentation of Inventory in Manufacturing and Merchandising
Companies
Exhibit 15—Income Statements for Merchandising and Manufacturing Businesses
Manufactured
Exhibit 17—Flow of Manufacturing Costs
Check Up Corner 15-3 – Manufacturing Financial Statements
Chapter 15 (1) Introduction to Managerial Accounting 315
SUGGESTED APPROACH
Contrast a merchandising and manufacturing business. Use your local gas station as a merchandising
business. It buys and then sells students gasoline without doing anything to the product. This type of
business will have one type of inventory—gasoline, if they do not sell anything else. For a manufacturing
business, use something such as the local sub/sandwich shop at your school; they manufacture or produce
preparation ahead of time.
The income statement is the first statement that needs preparation in any type of business; so it is with a
manufacturing-type business. Cost of merchandise sold for a merchandising business is figured as shown
below:
Beginning inventory
+ Purchases
= Merchandise available for sale
– Ending inventory
= Cost of merchandise sold
The statement of cost of goods manufactured shows the flow of costs into and out of raw materials
inventory, then the flow of costs into work in process, and the work in process inventory into finished
goods inventory. [See TM 15(1)-7.]
The calculations involved are:
Beginning Inventory—Raw Materials
+ Net Purchases
= Total Raw Materials Available for Use
– Ending Inventory—Raw Materials
= Raw Materials Placed in Production
Beginning Work in Process
+ Raw Materials Placed in Production
+ Labor Charged to Work in Process
+ Overhead Charged to Work in Process
– Ending Work In Process
= Cost of Goods Manufactured
Chapter 15 (1) Introduction to Managerial Accounting 316
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The income statement shows the flow of finished goods inventory into the cost of goods sold. [See TM
15-8.]
The calculations are:
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
= Cost of Finished Goods Available for Sale
– Ending Finished Goods Inventory
= Cost of Goods Sold
.
ADM OBJECTIVE
Describe and measure utilization in evaluating performance for a service company
SYNOPSIS
The service sector makes up nearly 80% of U.S. economic activity (GDP). Exhibit 18 provides some
example of service industries and the services they provide. Services are activities that do not result in the
transfer, possession, or ownership of goods. As such, accounting measures in service industries differ
from those in manufacturing industries. Exhibit 19 breaks down some of the distinctions between
Manufacturing and Service companies. An important measurement tool in many services companies is
utilization, which can differ among firms.
Key Terms and Definitions
Utilization—A measure used in many service companies to measure the use of a fixed assets in
serving customers relative to the asset’s capacity.
Relevant Check Up Corner and Exhibits
Exhibit 18 – Examples of Service Industries, Services, and Companies
Exhibit 19 – Managerial Accounting Distinctions Between Manufacturing and Service
Companies
Make a Decision - Utilization
Handout 15(1)-1
Managerial Accounting Scenario 1
The manager of a fabric store has noticed a considerable increase in the amount of
defective fabric being scrapped by his store. Clerks notice the defects (such as
irregularities in the weave or color of fabric) when they cut yardage from bolts of fabric.
These defects usually affect only a small portion of the fabric on a bolt. Therefore, when
a clerk discovers a defect, the “bad spot” is cut from the bolt. The clerk fills out a defect
slip, which includes the amount of defective fabric (in yards), the retail price per yard,
and the inventory control number. The defect slip is attached to the fabric and put in a
inventory in the accounting records.
What information could the manager request from the management accounting
department that might help in attacking the problem of increasing defects?
Handout 15(1)-2
Managerial Accounting Scenario 2
The top management of a fast-food hamburger chain is considering installing point-of-
What information could the management accounting department supply to assist
management with this decision?
Handout 15(1)-3
Managerial Accounting Scenario 3
B Squared Inc. manufactures and sells awnings all over the southeastern United States.
accounting department to help confirm or negate these accusations?
Handout 15(1)-4
Managerial Accounting Scenario 4
in building this report?
Handout 15(1)-5
Managerial Accounting Scenario 5
building this report?
Type Item Description Video Excel CLGL LO(s) Difficulty Time Est BUSPROG AICPA
ACBSP - Primary Bloom's ADM Service Real World
Writing
Ethics
MC 1 1 Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
MC 2 1 Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
MC 3 2 Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
MC 4 2 Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
MC 5 4 Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
LREX 1 Management process x 1 Easy 5 min. Analytic FN - Measurement Management Functions Remembering
LREX 2 Direct materials, direct labor, and factory overhead x 2 Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
LREX 3 Prime and conversion costs x 2 Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
LREX 4 Product and period costs x 2 Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
LREX 5 Cost of goods sold, cost of goods manufactured x 4 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
PP Problem n/a Moderate 10 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
DQ 1 n/a Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
DQ 2 n/a Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
DQ 3 n/a Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
DQ 4 n/a Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
DQ 5 n/a Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
DQ 6 n/a Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
DQ 7 n/a Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
DQ 8 n/a Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
DQ 9 n/a Easy 5 min. Analytic FN - Measurement Managerial Characteristics/Terminology Remembering
DQ 10 n/a Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
BE 1 Management process x 1 Easy 5 min. Analytic FN - Measurement Management Functions Remembering
BE 2 Direct materials, direct labor, and factory overhead x 2 Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
BE 3 Prime and conversion costs x 2 Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
BE 4 Product and period costs x 2 Easy 5 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
BE 5 Cost of goods sold, cost of goods manufactured x 4 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
EX 1 Classifying costs as materials, labor, or factory overhead 2 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
EX 2 Classifying costs as materials, labor, or factory overhead 2 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering x
EX 3 Classifying costs as factory overhead 2 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering x
EX 4 Classifying costs as product or period costs 2 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering x
EX 12
Cost of direct materials used in production for a manufacturing co
x 4 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Applying
EX 13 Costs of good manufactured for a manufacturing company x 4 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Applying
EX 14 Costs of good manufactured for a manufacturing company x 4 Easy 10 min. Analytic FN - Measurement Managerial Accounting Features/Costs Applying
PR 4A
Manufacturing income statement, statement of cost of goods man
x 4 Challenging 1.5 hours Analytic FN - Measurement Managerial Accounting Features/Costs Applying
PR 5A
Statement of cost of goods manufactured and income statement
x x 4 Challenging 1 hour Analytic FN - Measurement Managerial Accounting Features/Costs Applying
PR 1B Classifying costs 2 Moderate 45 min. Analytic FN - Measurement Managerial Accounting Features/Costs Remembering
ADM 4 Passenger load on a flight ADM Challenging 30 min. Analytic FN - Measurement Managerial Accounting Features/Costs Evaluating x x
TIF 1 Ethics in action n/a Easy 15 min. Ethics FN - Measurement Managerial Accounting Features/Costs Evaluating x x
TIF 2 Team activity n/a Moderate 2 hours Analytic FN - Measurement Managerial Accounting Features/Costs Applying x
Focus
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