Podcast
Questions and Answers
Which of the following costs would be classified as direct labor?
Which of the following costs would be classified as direct labor?
Indirect materials are materials that can be cost-effectively traced to a product.
Indirect materials are materials that can be cost-effectively traced to a product.
False (B)
Manufacturers report three types of inventories on the balance sheet: raw materials, work in process, and ____________.
Manufacturers report three types of inventories on the balance sheet: raw materials, work in process, and ____________.
finished goods
What is the main difference in reporting inventory on the balance sheet between a manufacturer and a merchandiser?
What is the main difference in reporting inventory on the balance sheet between a manufacturer and a merchandiser?
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What is direct labor?
What is direct labor?
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What is included in factory overhead costs?
What is included in factory overhead costs?
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Indirect labor costs are directly traced to finished goods.
Indirect labor costs are directly traced to finished goods.
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Period costs are expensed in the ______ when incurred.
Period costs are expensed in the ______ when incurred.
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Match the following cost classifications for a service company:
Match the following cost classifications for a service company:
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What is the formula for calculating Cost of Goods Sold for a merchandiser?
What is the formula for calculating Cost of Goods Sold for a merchandiser?
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What is the formula for calculating Cost of Goods Sold for a manufacturer?
What is the formula for calculating Cost of Goods Sold for a manufacturer?
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What is the key difference in computing Cost of Goods Sold between merchandisers and manufacturers?
What is the key difference in computing Cost of Goods Sold between merchandisers and manufacturers?
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Which of the following are factors of the fraud triangle?
Which of the following are factors of the fraud triangle?
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Ethics in accounting are beliefs that distinguish right from wrong.
Ethics in accounting are beliefs that distinguish right from wrong.
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What are direct costs?
What are direct costs?
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Indirect costs include the salary of a manufacturing supervisor, who monitors production but does not actually __________ bikes.
Indirect costs include the salary of a manufacturing supervisor, who monitors production but does not actually __________ bikes.
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Match the following accounting positions with their average annual salaries:
Match the following accounting positions with their average annual salaries:
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What is the purpose of managerial accounting?
What is the purpose of managerial accounting?
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Who primarily receives information from financial accounting?
Who primarily receives information from financial accounting?
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Managerial accounting follows rules known as GAAP for consistency.
Managerial accounting follows rules known as GAAP for consistency.
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Planning is the process of setting goals and making plans to achieve them, while control involves monitoring and evaluating an organization's activities and employees to ______________.
Planning is the process of setting goals and making plans to achieve them, while control involves monitoring and evaluating an organization's activities and employees to ______________.
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What is data analytics?
What is data analytics?
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Lean principles aim to eliminate waste and continuously improve operations.
Lean principles aim to eliminate waste and continuously improve operations.
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What does CSR stand for?
What does CSR stand for?
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Data visualization is a graphical depiction of data to help people interpret __________ meaning.
Data visualization is a graphical depiction of data to help people interpret __________ meaning.
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Match the following terms with their descriptions:
Match the following terms with their descriptions:
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What is the total factory overhead used in the schedule of cost of goods manufactured?
What is the total factory overhead used in the schedule of cost of goods manufactured?
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Compute the direct materials used: Raw materials beginning inventory of $15,500 + Raw materials purchases of $66,000 - Raw materials ending inventory of $10,600 = $__________
Compute the direct materials used: Raw materials beginning inventory of $15,500 + Raw materials purchases of $66,000 - Raw materials ending inventory of $10,600 = $__________
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What is included in the total manufacturing costs in the schedule of cost of goods manufactured?
What is included in the total manufacturing costs in the schedule of cost of goods manufactured?
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Digital manufacturing involves machines replacing humans on the factory floor.
Digital manufacturing involves machines replacing humans on the factory floor.
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What is the net income for the period?
What is the net income for the period?
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What is the cost of goods sold from the Cost Flows section?
What is the cost of goods sold from the Cost Flows section?
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Which statement best describes the Production Activity?
Which statement best describes the Production Activity?
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The cost of goods sold is always equal to the cost of finished goods sold.
The cost of goods sold is always equal to the cost of finished goods sold.
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Study Notes
Managerial Accounting Basics
- Managerial accounting provides financial and nonfinancial information to an organization's managers to aid in planning, controlling, and decision-making.
- Managerial accounting is used to determine the costs of an organization's products and services, compare actual results to planned results, and identify areas for improvement.
Purpose of Managerial Accounting
- Managerial accounting helps managers make informed decisions about product pricing, profitability analysis, and whether to make or buy a product.
- Managerial accounting involves gathering information for planning and control, which includes setting goals, making plans, and evaluating performance.
Users of Accounting Information
- Managerial accounting information is provided primarily to internal managerial and executive employees.
- Financial accounting information is provided primarily to external users, including investors, creditors, and regulators.
Flexibility of Reporting
- Financial accounting follows generally accepted accounting principles (GAAP) to provide consistency and comparability of financial statements across companies.
- Managerial accounting is more flexible and does not follow GAAP, reflecting the needs of managers to analyze, plan, and control products and processes.
Timeliness of Information
- Financial accounting provides information to external users following required time periods (such as annual and quarterly).
- Managerial accounting provides information to internal users as they request it, which can be as immediate and frequent as demanded.
Time Dimension
- Financial accounting provides historical information using information that is often months old.
- Managerial accounting provides real-time reports that are used to evaluate current performance, plan future activities, and make projections.
Focus of Information
- Financial accounting focuses on the performance of a company as a whole.
- Managerial accounting focuses on a specific activity, product, department, or division for which a manager is responsible.
Nature of Information
- Financial accounting reports have primarily monetary information.
- Managerial accounting reports have both monetary and nonmonetary information, including customer and employee satisfaction data, and product defect rates.
Fraud and Ethics in Managerial Accounting
- Fraud is a costly problem that affects all businesses, with an average U.S. business losing 5% of its revenues to fraud.
- The fraud triangle consists of opportunity, pressure, and rationalization.
- To prevent fraud, managers set up internal controls, including procedures to ensure reliable accounting, uphold company policies, protect assets, and promote efficiency.
Career Paths
- Managerial accountants are highly regarded and are in demand.
- Many accounting specialists hold certifications, such as certified management accountant (CMA), certified public accountant (CPA), certified financial manager (CFM), and certified internal auditor (CIA).
Cost Concepts
- Classifying costs is important for managers to make informed decisions about product pricing, profitability analysis, and whether to make or buy a product.
- Cost classifications include direct vs. indirect, prime vs. conversion, product vs. period, and manufacturing vs. nonmanufacturing costs.### Classifying Costs
- Costs can be classified as direct or indirect, depending on their link to a cost object.
- A cost object is a product, process, department, or customer to which costs are assigned.
- Direct costs are costs that can be cost-effectively traced to a cost object.
- Examples of direct costs for a bicycle manufacturer include:
- Direct materials (tires, frame, seat, chain, etc.)
- Direct labor (wages and benefits of workers making the bikes)
- Examples of direct costs for a bicycle manufacturer include:
- Indirect costs are costs that cannot be cost-effectively traced to a cost object.
- Examples of indirect costs for a bicycle manufacturer include:
- Salary of a manufacturing supervisor
- Wages of maintenance department employees
- Factory rent and utilities
- Examples of indirect costs for a bicycle manufacturer include:
Direct Materials, Direct Labor, and Factory Overhead
- Direct materials are materials that are crucial parts of a finished product.
- Examples of direct materials for a bicycle manufacturer include tires, seat, frame, pedals, brakes, cables, and handlebars.
- Direct labor refers to employees who directly convert materials to finished goods.
- Examples of direct labor for a bicycle manufacturer include operators directly converting raw materials into finished goods and assembly workers who attach materials.
- Factory overhead, also called manufacturing overhead or overhead, includes all manufacturing costs that are not direct materials or direct labor.
- Examples of factory overhead costs include:
- Indirect materials (screws, nuts, staples, glue, etc.)
- Indirect labor (costs of workers who assist in or supervise manufacturing, but do not assemble products)
- Factory utilities (water, gas, electricity)
- Factory rent and insurance
- Depreciation on factory buildings and equipment
- Examples of factory overhead costs include:
Prime and Conversion Costs
- Prime costs consist of direct materials costs and direct labor costs.
- Conversion costs are costs incurred in converting raw materials to finished goods.
- Conversion costs consist of direct labor and factory overhead.
Product versus Period Costs
- Product costs are production costs necessary to create a product and consist of direct materials, direct labor, and factory overhead.
- Period costs are nonproduction costs linked to a time period (not to specific products).
- Examples of period costs include:
- Selling expenses (advertising, delivery, salesperson salaries, commissions, and travel expenses)
- General and administrative expenses (office accounting, office employee wages, office rent, depreciation on office equipment, and office manager's salary)
- Examples of period costs include:
Reporting Product and Period Costs
- Product costs are added to inventory, or capitalized, during manufacturing of products.
- When products are sold, product costs are expensed as cost of goods sold.
- Period costs are expensed in the period when incurred and reported on the income statement as either selling expenses or general and administrative expenses.
Cost Concepts for Service Companies
- Managers in service companies apply cost concepts, but classification as product versus period costs is not relevant to service companies.
- Service companies can classify costs into direct materials, direct labor, overhead, selling, or general and administrative costs.
- All service company costs are expensed when incurred.
Decision Making
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Tracing costs directly to cost objects is desirable if it is cost-effective.
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If the cost of purchasing and maintaining accounting software is greater than the benefit of tracing costs, it may not be worth the investment.### Reporting Inventory on the Balance Sheet
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Companies that pursue multiple activities, such as Best Buy, report different types of inventories.
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Manufacturers report three types of inventories: raw materials, work in process, and finished goods.
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Raw materials inventory is the cost of materials acquired to make products.
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Work in process inventory consists of the costs of direct materials, direct labor, and overhead for partially completed products.
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Finished goods inventory consists of the costs of direct materials, direct labor, and overhead of completed products ready for sale.
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Manufacturer balance sheets differ from those of merchandising and service companies.
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The current assets section of a manufacturer's balance sheet reports three types of inventory, whereas a merchandiser reports only merchandise inventory, and a service company usually reports no inventory.
Reporting Cost of Goods Sold on the Income Statement
- The main difference between the income statement of a manufacturer and that of a merchandiser is the content of cost of goods sold.
- Merchandisers add cost of merchandise purchased to beginning merchandise inventory and subtract ending merchandise inventory to compute cost of goods sold.
- Manufacturers add cost of goods manufactured to beginning finished goods inventory and subtract ending finished goods inventory to compute cost of goods sold.
- Key differences between merchandisers and manufacturers include:
- Merchandisers have merchandise inventory, while manufacturers have finished goods inventory.
- Merchandisers have cost of merchandise purchased, while manufacturers have cost of goods manufactured.
- Service companies do not report cost of goods sold because they do not make or buy inventory to sell.
Cost Flows and Cost of Goods Manufactured
- The flow of manufacturing activities and their cost flows are shown in Exhibit 18.13.
- Manufacturing activities and cost flows include:
- Raw materials inventory
- Work in process inventory
- Finished goods inventory
- Cost of goods manufactured
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Description
Test your knowledge of managerial accounting concepts and principles, including cost concepts, reporting, and cost flows. Learn about the basics of managerial accounting and its applications.
