Accounting project

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Building Blocks of Managerial Accounting

Chapter 2

Objective 1

Distinguish among service, merchandising, and manufacturing companies

Three types of companies

Service

Merchandisers

Manufacturers

Service Companies

Provide a service only

No inventory

Examples

Accountants

Banks

Doctors

Lawyers

Merchandisers

Resell products purchased from suppliers

One inventory account

Examples

Amazon.com

J. C. Penney

Sears

Retailers vs. Wholesalers

Manufacturers

Use labor and other inputs to convert raw materials into finished products

Examples

Crayola Crayons

Dell Computers

Craftsman Tools

3 inventory accounts

Manufacturers

3 inventory accounts

Raw materials

Work in process

Finished goods

Objective 2

Describe the value chain and its elements

Value Chain

Activities that add value to products and services and cost money.

R&D

Production/

Purchases

Marketing

Design

Distribution

Customer Service

Now turn to E2-16A

E2-16A

Research on selling satellite radio service
Purchases of merchandise
Rearranging store layout

E2-16A

Research on selling satellite radio service	R & D
Purchases of merchandise
Rearranging store layout

E2-16A

Research on selling satellite radio service	R & D
Purchases of merchandise	Purchases
Rearranging store layout

E2-16A

Research on selling satellite radio service	R & D
Purchases of merchandise	Purchases
Rearranging store layout	Design

E2-16A (cont.)

Newspaper advertisements
Deprec. expense on delivery trucks
Payment to consultant for advice on location of new store

E2-16A (cont.)

Newspaper advertisements	Marketing
Deprec. expense on delivery trucks
Payment to consultant for advice on location of new store

E2-16A (cont.)

Newspaper advertisements	Marketing
Deprec. expense on delivery trucks	Distribution
Payment to consultant for advice on location of new store

E2-17A (cont.)

Newspaper advertisements	Marketing
Deprec. expense on delivery trucks	Distribution
Payment to consultant for advice on location of new store	R & D

E2-16A (cont.)

Freight-in
Salespersons’ salaries
Customer complaint department

E2-16A (cont.)

Freight-in	Purchases
Salespersons’ salaries
Customer complaint department

E2-16A (cont.)

Freight-in	Purchases
Salespersons’ salaries	Marketing
Customer complaint department

E2-16A (cont.)

Freight-in	Purchases
Salespersons’ salaries	Marketing
Customer complaint department	Customer service

Objective 3

Distinguish between direct and indirect costs

Cost Object

Anything for which managers want a separate measurement of cost

Direct cost

Indirect cost

Now turn to S2-4

The wages of store employees
The cost of operating the corporate payroll department
The cost of carpet steamers offered for rent
The cost of gas and oil sold at the store

S2-4

Direct

Indirect

Direct

S2-4 (cont.)

Store utilities
The CEO’s salary
The cost of chainsaws offered for rent
The cost of national advertising

Indirect

Direct

Indirect

Objective 4

Identify the inventoriable product costs and period costs of merchandising and manufacturing firms

Two definitions of product cost

Total costs – used internally only (will see this in later chapters)

Inventoriable product costs – used for external reporting

R&D

Design

Marketing

Distribution

Customer Service

Production/

Purchases

Inventoriable Product Costs

Inventoriable product costs

Period Costs: All costs incurred in the other stages of the value chain

Period Costs

Marketing

Distribution

Customer Service

R&D

Design

Inventoriable Product Costs -- Merchandiser

+ Purchase price from suppliers

+ Cost to get ready for sale

+ Freight-in

+ Import duties or tariffs

Inventoriable Product Costs -- Manufacturer

Direct materials

Direct labor

Manufacturing overhead

Direct Costs

Indirect Costs

Manufacturing Overhead

Indirect costs related to manufacturing that are not direct materials or direct labor

Indirect materials

Indirect labor

Other indirect manufacturing overhead

Now turn to S2-7

Company president’s annual bonus
Plastic gallon containers in which milk is packaged
Depreciation on marketing department’s computers
Wages and salaries paid to machine operators at dairy processing plant

S2-7

Period

Product, DM

Product, DL

Research and Development on improving milk pasteurization process
6. Cost of milk purchased from dairy farmers	Product, DM
Lubricants used in running bottling machines
Depreciation on refrigerated trucks used to collect raw milk from dairy farms

S2-7 (cont.)

Product,MOH

Period

Product,MOH

Property tax on dairy processing plant
Television advertisements for DairyPlains’ products
Gasoline used to operate refrigerated trucks used to deliver finished dairy products to grocery stores

S2-7 (cont.)

Period

Product,MOH

Period

Prime and Conversion Costs

Manufacturing Overhead

Direct Materials

Prime Costs

Direct

Labor

Conversion Costs

Direct and indirect labor costs include

Salaries and wages

Fringe benefits

Payroll taxes

Objective 5

Prepare the financial statements for service, merchandising and manufacturing companies

Income Statement – Service Company

Simplest income statement

All costs are period costs

Service Revenues

- Operating expenses

Operating income

Cost of Goods Sold Calculation – Merchandiser

+ Beginning inventory

+ Purchases

+ Import duties or tariffs

+ Freight-in

= Cost of goods available for sale

Ending inventory

= Cost of goods sold

Now turn to S2-9

S2-9

Cost of Goods Sold Computation

Beginning

inventory

$ 4,200

Purchases

$42,000

Import

duties

1,100

Freight

3,600

46,700

Cost

of goods

avail

for sale

50,900

Ending

inventory

(5,400

)

Cost of goods sold

$45,500

Income Statement – Merchandiser

+ Sales

- Cost of goods sold

= Gross profit

- Operating expenses

= Operating income

Now turn to S2-10

S2-10

Salon Secrets

Income Statement

Sales revenue

$39,330,000

Cost of goods sold:

Beginning inventory

$ 3,350,000

Purchases

23,975,000

Cost

goods avail.

27,325,000

Ending inventory

(4,315,000

)

Cost of goods sold

(23,010,000

)

Gross profit

16,290,000

Operating expenses

(6,150,000

)

Operating income

$ 10,140,000

2010 Product costs

2010 Balance Sheet

2010 Income Statement

2011 Income Statement

Cost of goods sold

Inventory

Inventory sold in 2010

Inventory sold in 2011

Product costs

Cost of Goods Manufactured Calculation – Manufacturer

+ Beginning work in process inventory

+ Direct materials used

+ Direct labor

+ Manufacturing overhead

= Total manufacturing costs to account for

Ending work in process inventory

= Cost of goods manufactured

How to calculate

Beginning Inventory + Net Purchases =

Cost of Goods Sold + Ending Inventory

Cost of Goods Sold Calculation – Manufacturer

+ Beginning finished goods inventory

+ Cost of goods manufactured

= Cost of goods available for sale

- Ending finished goods inventory

= Cost of goods sold

Now turn to E2-25A

E2-25A (COGM)

Beginning work in process inventory

$ 36,000

Add:

Direct materials used:

Beginning

raw materials inventory

$ 29,000

Purchases

of direct materials

73,000

Available

for use

102,000

Ending

raw materials inventory

(31,000

)

Direct materials used

$71,000

Direct labor

89,000

Manufacturing overhead:

Indirect labor

$ 42,000

Insurance on plant

10,500

Deprec

plant bldg & equip

13,000

Repairs and

mtnce

–

plant

4,000

69,500

Total manufacturing costs incurred

229,500

Total manufacturing costs to acct for

265,500

Less: Ending work in process inventory

(30,000

)

Cost of goods manufactured

$235,500

E2-25A (cont.)

*From schedule of cost of goods manufactured.

Quality Aquatic Company

Schedule of Cost of Goods Sold

Beginning finished goods inventory

$ 22,000

Cost of goods manufactured*

235,500

Cost of goods available for sale

257,500

Ending finished goods inventory

(28,000

)

Cost of goods sold

$229,500

Income Statement – Manufacturer

+ Sales

- Cost of goods sold

= Gross profit

- Operating expenses

= Operating income

Now turn to E2-26A

E2-26A

Quality Aquatic Company

Income Statement

For Last Year

Sales revenue (33,000

$14)

$462,000

Cost of goods sold

229,500

Gross profit

232,500

Operating expenses:

Marketing

expenses

$ 83,000

General and administrative expenses

26,500

109,500

Operating income

$ 123,000

Direct Materials Used Calculation – Manufacturer

+ Beginning raw materials inventory

+ Purchases of raw materials

+ Freight in

= Materials available for use

Ending raw materials inventory

= Direct materials used

Now turn to S2-11

S2-11

Allterrain

Computation of Direct Materials Used

Direct materials used:

Beginning

raw materials inventory

$ 3,900

Purchases of direct materials

$15,600

Import

duties

900

Freight

600

17,100

Direct

materials available for use

21,000

Ending

raw materials inventory

(2,000

)

Direct materials used

$19,000

Product and Period Costs

Type of

Company

Inventoriable

Product Costs

Period

Costs

Service Company

None

All costs along the

value chain

Merchandiser

Purchases plus cost of

freight, import duties,

etc.

All costs except total

purchases

Manufacturer

DM, DL, MOH

All costs except DM,

DL, MOH

Accounting

Treatment

Inventory on balance

sheet until sold

Immediately

expense

Manufacturing Companies’ Inventory Accounts

Raw Materials Inventory

+ Beginning inventory

+ Purchases & freight

= Ending inventory

- Materials used in work in process

Manufacturing Companies’ Inventory Accounts

Work in Process Inventory

+ Beginning inventory

+ Matls used from raw matls

= Ending inventory

- Cost of goods manufactured and sent to finished goods

+ Direct Labor

+ Manufacturing overhead

Manufacturing Companies’ Inventory Accounts

Finished Goods Inventory

+ Beginning inventory

+ Cost of goods manufactured

= Ending inventory

- Cost of goods sold

Balance Sheet Differences

Type of Company	Inventory Accounts
Service Company	None
Merchandiser	Merchandise Inventory
Manufacturer	Raw materials, work in process, and finished goods inventory

Objective 6

Describe costs that are relevant and irrelevant for decision making

Controllable and Uncontrollable Costs

Controllable	Management can influence or change cost
Uncontrollable	Management cannot change or influence cost in the short run

Relevant and Irrelevant Costs

Relevant	Differential costs, which are costs that differ between alternatives
Irrelevant	Costs which do not differ between alternatives -or- Sunk costs – costs incurred in the past which cannot be changed

Objective 7

Classify costs as fixed or variable and calculate total and average costs at different volumes

Cost Behavior

Variable costs	Change in total cost in direct proportion to changes in volume
Fixed costs	Stay constant in total cost over a wide range of activity levels

Total Variable Costs

Assume we pay 5% sales commissions on all sales.

The cost of sales commissions increases proportionately with increases in sales.

Total Fixed Costs: Stay Constant in Total Over a Wide Range of Activity Levels

Total Cost

Total cost = Fixed costs + (Variable cost per unit x number of units)

Example:

Fixed costs = $20,000

Variable cost per unit = $50 per unit

Number of units = 100

Total Cost = $20,000 + ($50 x 100)

= $25,000

Average Cost

Total cost ÷ number of units = Average cost

The average cost per unit is NOT appropriate for predicting total costs at different levels of output.

Example:

$25,000 = $250 per unit

100 units

Marginal Cost

Cost of making one more unit

End of Chapter 2

$500

$1,000

$1,500

$2,000

$2,500

$0$10,000$20,000$30,000$40,000

Total Sales

Commissions

$500

$1,000

$1,500

$2,000

$2,500

$0$10,000$20,000$30,000$40,000

Total Sales

Total Sales Salaries