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Managerial Accounting
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
A
Problems
B
Problems
*1.
1, 2, 3
*2.
4, 5, 6, 7,
8
2, 3
*3.
11, 12
4, 5, 7
2, 3, 4,
5, 6
1A, 2A
1B, 2B
*4.
Distinguish between
product and period costs.
13
3, 4, 5,
7, 13
1A, 2A
1B, 2B
*5.
9, 14
3A, 4A, 5A
3B, 4B, 5B
*6.
8, 10, 11
8, 9, 10, 11,
12, 13, 14,
15, 16, 17
3A, 4A, 5A
3B, 4B, 5B
*7.
10, 19
14, 15,
16, 17
3A, 4A
3B, 4B
*8.
20, 21, 22
23, 24
*9.
25, 26, 27
18
12
19
6A
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix
to the chapter.
1-1
Description
Difficulty
Level
Time
Allotted (min.)
1A
Simple
2030
2A
Simple
2030
3A
Moderate
3040
4A
Moderate
3040
5A
Moderate
3040
1B
Simple
2030
2B
Simple
2030
3B
Moderate
3040
4B
Moderate
3040
5B
Moderate
3040
*6A
Complex
4050
1-2
1-3
Q1-26
Q1-23
Q1-24
E1-18
E1-19
P1-6A
BE1-9
E1-14
E1-16
Q1-15
Q1-16
Q1-17
Q1-18
BE1-8
BE1-10
E1-8
E1-12
E1-13
E1-4
E1-5
E1-7
BE1-7 E1-4
E1-2
E1-5
E1-3
E1-6
Q1-8
BE1-2
BE1-3
Real-World Focus
Q1-25
Q1-27
BE1-12
Q1-20
Q1-21
Q1-22
E1-15
Q1-10
E1-15
Q1-9
Q1-14
E1-15
Q1-13
BE1-6
E1-3
Q1-12
BE1-4
BE1-5
Q1-11
Q1-4
Q1-5
Q1-6
Q1-7
BE1-1
E1-1
Comprehension
Q1-1
Q1-2
Q1-3
Knowledge
Study Objective
BE1-11
E1-8
E1-9
E1-10
E1-11
E1-12
E1-14
E1-17
P1-4A
E1-13
P1-1A
P1-2A
P1-1A
P1-2A
P1-1B
Application
P1-5B
E1-8
E1-10
E1-11
P1-3A
P1-5A
P1-3B
Decision Making
Across the
Organization
Communication
Managerial Analysis
Exploring the Web
E1-17 P1-3A
P1-4A P1-3B
P1-4B
E1-13
E1-14
E1-16
E1-17
P1-4A
P1-4B
P1-5B
P1-4B P1-3A
P1-5A
P1-3B
P1-1B
P1-2B
P1-2B
Analysis
Ethics Case
All About
You
Synthesis Evaluation
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
STUDY OBJECTIVES
1. EXPLAIN THE DISTINGUISHING FEATURES OF
MANAGERIAL ACCOUNTING.
2. IDENTIFY THE THREE BROAD FUNCTIONS OF
MANAGEMENT.
3. DEFINE THE THREE CLASSES OF MANUFACTURING
COSTS.
4. DISTINGUISH BETWEEN PRODUCT AND PERIOD
COSTS.
5. EXPLAIN THE DIFFERENCE BETWEEN A MERCHANDISING AND A MANUFACTURING INCOME
STATEMENT.
6. INDICATE HOW COST OF GOODS MANUFACTURED IS
DETERMINED.
7. EXPLAIN THE DIFFERENCE BETWEEN A MERCHANDISING AND A MANUFACTURING BALANCE SHEET.
8. IDENTIFY TRENDS IN MANAGERIAL ACCOUNTING.
1-4
CHAPTER REVIEW
Managerial Accounting Basics
1.
(S.O. 1) Managerial accounting is a field of accounting that provides economic and financial
information for managers and other internal users. Managerial accounting applies to all types
of businessesservice, merchandising, and manufacturingand to all forms of business
organizationsproprietorships, partnerships and corporations. Moreover, managerial accounting
is needed in not-for-profit entities as well as in profit-oriented enterprises.
There are both similarities and differences between managerial and financial accounting.
a. Both fields of accounting deal with the economic events of a business and require that the
results of that companys economic events be quantified and communicated to interested
parties.
b. The principal differences are the (1) primary users of reports, (2) types and frequency of
reports, (3) purpose of reports, (4) content of reports, and (5) verification process.
3.
The role of the managerial accountant has changed in recent years. Whereas in the past their
primary concern used to be collecting and reporting costs to management, today they also
evaluate how well the company is using its resources and providing information to crossfunctional teams comprised of personnel from production, operations, marketing, engineering, and
quality control.
Management Functions
4.
Organizational Structure
5.
In order to assist in carrying out management functions, most companies prepare organization
charts to show the interrelationships of activities and the delegation of authority and responsibility
with the company.
Stockholders own the corporation but manage the company through a board of directors. The
chief executive officer (CEO) has overall responsibility for managing the business. The chief
financial officer (CFO) is responsible for all of the accounting and finance issues the company
faces. The CFO is supported by the controller and the treasurer.
Business Ethics
6.
All employees are expected to act ethically in their business activities and an increasing number
of organizations provide their employees with a code of business ethics.
7.
Due to many fraudulent activities in recent years, U.S. Congress passed the Sarbanes-Oxley Act
of 2002 which resulted in many implications for managers and accountants. CEOs and CFOs
must certify the fairness of financial statements, top management must certify they maintain an
adequate system of internal controls, and other matters.
1-5
Manufacturing Costs
8.
(S.O. 3) Manufacturing consists of activities and processes that convert raw materials into
finished goods.
9.
Manufacturing costs are typically classified as either (a) direct materials, (b) direct labor or
(c) manufacturing overhead.
10.
Direct materials are raw materials that can be physically and conveniently associated with the
finished product during the manufacturing process. Indirect materials are materials that (a) do
not physically become a part of the finished product or (b) cannot be traced because their physical
association with the finished product is too small in terms of cost. Indirect materials are accounted
for as part of manufacturing overhead.
11.
The work of factory employees that can be physically and conveniently associated with converting
raw materials into finished goods is considered direct labor. In contrast, the wages of maintenance
people, timekeepers, and supervisors are usually identified as indirect labor because their efforts
have no physical association with the finished product, or it is impractical to trace the costs to the
goods produced. Indirect labor is classified as manufacturing overhead.
12.
Manufacturing overhead consists of costs that are indirectly associated with the manufacture of
the finished product. Manufacturing overhead includes items such as indirect materials, indirect
labor, depreciation on factory buildings and machines, and insurance, taxes, and maintenance on
factory facilities.
(S.O. 4) Product costs are costs that are a necessary and integral part of producing the finished
product. Period costs are costs that are matched with the revenue of a specific time period rather
than included as part of the cost of a salable product. These are nonmanufacturing costs. Period
costs include selling and administrative expenses.
15.
The cost of goods sold section of the income statement for a manufacturing company shows:
Beginning
Finished Goods
Inventory
Cost of
Goods
Manufactured
Ending
Finished Goods
Inventory
Cost of
Goods Sold
(S.O. 6) The determination of the cost of goods manufactured consists of the following:
a.
b.
Beginning Work
in Process
Inventory
Total Cost of
Work in
Process
Total Current
Manufacturing
Costs
Ending
Work in Process =
Inventory
1-6
Total Cost of
Work in Process
Cost of Goods
Manufactured
17.
The costs assigned to the beginning work in process inventory are the manufacturing costs
incurred in the prior period.
18.
Total manufacturing costs is the sum of the direct materials costs, direct labor costs, and
manufacturing overhead incurred in the current period.
19.
Because a number of accounts are involved, the determination of costs of goods manufactured is
presented in a Cost of Goods Manufactured Schedule. The cost of goods manufactured schedule
shows each of the cost factors above. The format for the schedule is:
Beginning work in process ..................................................................
Direct materials used............................................................................
Direct labor .............................................................................................
Manufacturing overhead ......................................................................
Total manufacturing costs ...................................................................
Total cost of work in process ..............................................................
Less: Ending work in process............................................................
Cost of goods manufactured...............................................................
$XXXX
$XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
$XXXX
(S.O. 7) The balance sheet for a manufacturing company may have three inventory accounts:
finished goods inventory, work in process inventory, and raw materials inventory.
21.
The manufacturing inventories are reported in the current asset section of the balance sheet.
a. The inventories are generally listed in the order of their expected realization in cash.
b. Thus, finished goods inventory is listed first.
22.
Each step in the accounting cycle for a merchandising company is applicable to a manufacturing
company.
a. For example, prior to preparing financial statements, adjusting entries are required.
b. Adjusting entries are essentially the same as those of a merchandising company.
c. The closing entries for a manufacturing company are also similar to those of a merchandising
company.
Contemporary Developments
23.
(S.O. 8) Contemporary developments in managerial accounting involve: (a) a U.S. economy that
has in general shifted toward an emphasis on providing services, rather than goods; and (b)
efforts to manage the value chain and supply chain.
24.
Many companies have significantly lowered inventory levels and costs using just-in-time (JIT)
inventory methods. Under a just-in-time method, goods are manufactured or purchased just in
time for use. In addition, many companies have installed total quality management (TQM)
systems to reduce defects in finished products.
25.
Activity-based costing (ABC) is a popular method for allocating overhead that obtains more
accurate product costs. The theory of constraints is a specific approach used to identify and
manage constraints in order to achieve the company goals. The balanced scorecard is a
performance-measurement approach that uses both financial and nonfinancial measures to
evaluate all aspects of a companys operations in an integrated fashion.
1-7
*Worksheet
*26. (S.O. 9) When a worksheet is used in preparing financial statements, two additional columns are
needed for the cost of goods manufactured schedule.
a. The columns are labeled Cost of Goods Manufactured.
b. The columns are inserted before the income statement columns.
*27. In the cost of goods manufactured columns,
a. The beginning inventories of raw materials and work in process and all manufacturing costs
are entered as debits.
b. The ending inventories of raw materials and work in process are entered as credits.
c. The balancing amount for these columns is the cost of goods manufactured and is entered as
a credit. The same amount is also entered in the income statement debit columns.
*28. The income statement and balance sheet columns are basically the same as for a merchandising
company.
a. Beginning finished goods inventory is entered in the income statement debit column.
b. Ending finished goods inventory is entered in the income statement credit column and the
balance sheet debit column.
*29. In preparing closing entries, a Manufacturing Summary account is used to close all accounts that
appear in the cost of goods manufactured schedule.
a. Ending inventories of raw materials and work in process are debited and Manufacturing
Summary is credited.
b. Beginning inventories of raw materials and work in process and all manufacturing cost
accounts are credited and Manufacturing Summary is debited.
c. The balance in Manufacturing Summary is closed by debiting Income Summary and crediting
Manufacturing Summary.
*30. As in the case of a merchandise company, all accounts shown in the income statement for a
manufacturing company are closed to Income Summary.
1-8
LECTURE OUTLINE
A.
B.
b.
c.
d.
e.
1-9
C.
Management Functions.
1. Managers activities and responsibilities can be classified into three
broad functions:
TEACHING TIP
D.
a.
b.
c.
Organizational Structure.
1. Most companies prepare organization charts to show the interrelationships of activities and the delegation of authority and responsibility within
the company.
2. Stockholders own the corporation, but they manage it indirectly through
a board of directors they elect.
3. The chief executive officer (CEO) has overall responsibility for managing
the business, but delegates responsibility to other officers.
4. Responsibilities within a company are classified as either: line positions
employees directly involved in the companys primary revenue-generating
operating activities, or staff positionsemployees involved in activities
that support line employees efforts.
1-10
5. The chief financial officer (CFO) is responsible for all of the companys
accounting and finance issues, and is supported by the controller and
the treasurer. Also serving the CFO is the internal audit staff who review
the reliability and integrity of financial information provided by the controller and treasurer.
E.
Business Ethics.
1. Companies use complex systems to control and evaluate managers
actions. Unfortunately these systems and controls unwittingly create
incentives for managers to take unethical actions sometimes.
2. Ethical business scandals (Enron, Worldcom) involving fraudulent activities of managers caused the U.S. Congress to enact the SarbanesOxley Act of 2002. This act requires that CEOs and CFOs certify that the
financial statements give a fair presentation of the companys operating
results and its financial condition.
3. Top managers must certify that the company maintains an adequate
system of internal controls to safeguard the companys assets and
ensure accurate financial reports.
4. The Institute of Management Accountants (IMA) has developed a code
of ethical standards to provide guidance for managerial accountants.
This code states that management accountants should not commit acts
or condone acts by others in violation of these standards.
F.
Manufacturing Costs.
TEACHING TIP
1-11
Manufacturing costs are classified as (1) direct materials, (2) direct labor, or
(3) manufacturing overhead.
1. Direct materials are raw materials that can be physically and directly
associated with the finished product during the manufacturing process.
a.
Indirect materials:
(1) Do not physically become part of the finished product or,
(2) Cannot be traced because their physical association with the
finished product is too small in terms of cost (i.e. lock washers).
b.
2. Direct labor is the work of factory employees that can be physically and
directly associated with converting raw materials into finished goods.
a.
b.
G.
3. Period costs are costs that are matched with the revenue of a specific
time period rather than included as part of the cost of a salable product.
4. Period costs include selling and administrative expenses and companies
deduct them from revenues in the period in which they are incurred.
H.
TEACHING TIP
ILLUSTRATION 1-4 contrasts the cost of goods sold sections on the income
statements of a merchandiser and a manufacturer.
3. To determine the cost of goods manufactured, companies add the cost
of the beginning work in process to the total manufacturing costs for the
current year to find the total cost of work in process for the year.
Companies then subtract the ending work in process from the total cost
of work in process to find the cost of goods manufactured.
TEACHING TIP
1-13
4. The balance sheet for a manufacturing company may have three inventory accounts:
a.
b.
c.
TEACHING TIP
1-14
1-16
20 MINUTE QUIZ
Circle the correct answer.
True/False
1.
2.
The primary users of managerial accounting information are external users who are
stockholders, creditors, and regulatory agencies.
True
3.
False
10.
False
The sum of the direct materials costs, direct labor costs, and manufacturing overhead
incurred is the total manufacturing costs for the current period.
True
9.
False
8.
False
Indirect materials, indirect labor, and maintenance on factory facilities are all included in
manufacturing overhead.
True
7.
False
Finished Goods Inventory plus Work in Process Inventory constitutes Cost of Goods
Available for Sale.
True
6.
False
5.
False
4.
False
False
The finished goods inventory for a manufacturing company is the equivalent of the
merchandise inventory for a merchandising company.
True
False
1-17
Multiple Choice
1.
Which of the following does not apply to the content of managerial reports?
a. Reporting standard is relevance to the decision to be made.
b. May extend beyond double-entry accounting system.
c. Pertains to subunits of the entity and may be very detailed.
d. Pertains to the entity as a whole and is highly aggregated.
2.
3.
4.
If direct materials for one unit of product are $9.00, direct labor for one hour is $15.00,
manufacturing overhead costs are $5.00 per direct labor hour, and one-fourth hour of
direct labor is required to produce one unit of product, how much are the conversion
costs for one unit of product?
a. $5.00.
b. $2.50.
c. $20.00.
d. $15.00.
5.
1-18
ANSWERS TO QUIZ
True/False
1.
2.
3.
4.
5.
False
False
True
False
False
6.
7.
8.
9.
10.
True
False
True
False
True
Multiple Choice
1.
2.
3.
4.
5.
d.
d.
b.
a.
b.
1-19
ILLUSTRATION 1-1
DIFFERENCES BETWEEN FINANCIAL AND
MANAGERIAL ACCOUNTING
Financial Accounting
External users:
stockholders, creditors,
and regulators.
Financial statements.
Issued quarterly and annually.
An
Re nual
po
rt
Managerial Accounting
Primary Users
of Reports
Types and Frequency
of Reports
Internal users:
officers and managers.
Internal reports.
Issued as frequently as needed.
General-purpose.
Purpose of Reports
Content of Reports
Verification Process
Standard is relevance
to decisions.
1-20
No independent audits.
Manager
ILLUSTRATION 1-2
MANAGEMENT FUNCTIONS
1-21
1-22
Manufacturing Overhead
Direct Labor
Direct Materials
Product Costs
Manufacturing Costs
All Costs
Administrative
Expenses
Selling
Expenses
Period Costs
Nonmanufacturing Costs
ILLUSTRATION 1-3
PRODUCT VERSUS PERIOD COSTS
ILLUSTRATION 1-4
COST OF GOODS SOLD SECTIONS
MERCHANDISER VS. MANUFACTURER
Merchandiser Company
Income Statement
For the Year Ended
December 31, 2008
Manufacturer Company
Income Statement
For the Year Ended
December 31, 2008
Cost of goods sold
Merchandise inventory,
December 31
710,000
250,000
$460,000
1-23
525,000
$410,000
ILLUSTRATION 1-5
COST OF GOODS MANUFACTURED SCHEDULE
MANUFACTURER COMPANY
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2008
Work in process, January 1
Direct materials
Raw materials inventory, January 1
Raw materials purchases
Total raw materials available for use
Less: Raw materials inventory
December 31
Direct materials used
Direct labor
Manufacturing overhead
Indirect labor
Factory repairs
Factory utilities
Factory depreciation
Factory insurance
Total manufacturing overhead
Total manufacturing costs
Total cost of work in process
Less: Work in process, December 31
Cost of goods manufactured
1-24
$ 24,200
$ 17,500
168,400
185,900
23,900
$162,000
181,000
15,300
13,400
11,600
10,700
8,500
59,500
402,500
426,700
26,700
$400,000
ILLUSTRATION 1-6
CURRENT ASSETS SECTIONS
MERCHANDISER VS. MANUFACTURER
Merchandiser Company
Current Assets Section
December 31, 2008
Current assets
Cash
Manufacturer Company
Current Assets Section
December 31, 2008
Current assets
$ 24,600 Cash
Prepaid expenses
Total current assets
1-25
$ 28,400
82,000
165,600
1,500
$277,500