An Introduction to Managerial Accounting and Cost Concepts
Solutions to Questions
Managerial accounting is concerned with providing information to managers for use inside the organization. Financial accounting is concerned with providing information to stockholders, creditors, and others outside of the organization.
Managers carry out three major activities: planning, directing and motivating, and controlling. All three activities involve decision-making.
The planning and control cycle involves the following steps: formulating plans, implementing plans, measuring performance, and evaluating differences between planned and actual performance.
A line position is directly related to the achievement of the basic objectives of the organization. A staff position is not directly related to the achievement of those objectives; rather, it is supportive, providing services and assistance to other parts of the organization.
In contrast to financial accounting, managerial accounting: (1) focuses on the needs of the manager; (2) places more emphasis on the future; (3) emphasizes relevance rather than precision; (4) emphasizes the segments of an organization; (5) is not governed by GAAP; and (6) is not mandatory.
The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead.
Direct materials are an integral part of a finished product and can be conveniently traced to it.
Indirect materials are usually small items of material such as glue and nails. They may become an integral part of a finished product but are traceable to the product only at great cost or inconvenience. Indirect materials are ordinarily classified as part of manufacturing overhead.
Direct labor includes those labor costs that can be easily traced to particular products. Direct labor is also called “touch labor.”
Indirect labor includes the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but these workers do not directly work on the product.
Manufacturing overhead includes all manufacturing costs except direct materials and direct labor.
A product cost is any cost involved in purchasing or making goods for sale. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.
The income statement of a manufacturing company differs from the income statement of a merchandising company in the cost of goods sold section. The merchandising company sells finished goods that it has purchased from a supplier. These goods are listed as “Purchases” in the cost of goods sold section. Since the manufacturing company produces its goods rather than buying them from a supplier, it lists “Cost of Goods Manufactured” in place of “Purchases.” Also, the manufacturing company identifies its inventory in this section as “Finished Goods Inventory,” rather than as “Merchandise Inventory.”
The schedule of cost of goods manufactured is used to list manufacturing costs. These costs are organized under the three major heads of direct materials, direct labor, and manufacturing overhead. The total costs incurred are adjusted for any change in Work in Process inventory to determine the cost of goods manufactured (i.e. finished) during the period.
The schedule of cost of goods manufactured ties into the income statement through the Cost of Goods Sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the “Purchases” account in a merchandising company....
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