The purpose of both managerial and financial accounting is to provide useful information to decision makers. The design of the company's management accounting system largely depends on the nature of the business and the organization of its internal operations.
Decision Maker
Later in this chapter we will show how to derive the cost of goods manufactured from the production report. Cost of goods sold sections for the retailer (Tele-Mart) and the manufacturer (Rocky Mountain Bikes) are shown in Exhibit 1.12 to highlight these differences. A merchant's cost of goods purchased is the cost of purchasing products for sale.
A manufacturer's costs for goods produced are the sum of direct materials, direct labor, and factory overhead costs incurred in producing products. The cost of finished goods represents the cost of the goods produced for the current period. The cost of finished goods sold is reported in the income statement as cost of goods sold.
Exhibit 1.14 shows that this item and amount is listed in the cost of goods sold section of Rocky Mountain Bikes' income statement and balance sheet.
Solution to Demonstration Problem 1
Complete the [BLANK] descriptors on the income statements of the manufacturing company and the merchandising company.
Solution to Demonstration Problem 2
Specifically, the terms finished goods and cost of goods manufactured are used to represent the production of goods, but the concepts and techniques for reporting cost of goods sold for a manufacturing company and a merchandising company are similar. A manufacturer's costs for goods produced are the sum of (a) direct material costs, (b) direct labor, and (c) factory overhead costs incurred in producing the product. The following account balances and other information are from SUNN Corporation's accounting records for the year ended December 31, 2009.
All raw materials and goods in process inventory at the end of each accounting period are considered current assets. Any unsold finished inventory is considered current assets at the end of each accounting period.
Planning the Solution
Use this information to prepare (1) a table listing factory overhead costs, (2) a production statement (show only total factory overhead costs), and (3) an income statement. Prepare a production statement for the year showing the calculation of the cost of materials used in production, the cost of direct labor, and the total factory overhead cost. When you present the overhead cost on this statement, report only the total overhead cost from the overhead cost table for the year.
Show the beginning and ending costs of goods in the process inventory to determine the cost of goods manufactured. Combine the cost of goods manufactured based on the production statement with the inventory amounts of the finished goods to calculate the cost of goods sold for the year.
Solution to Demonstration Problem 3
The main difference between income statements of manufacturers and merchants is the cost of goods sold items. A merchant adds beginning goods inventory to the cost of goods purchased and then subtracts ending goods inventory to get the cost of goods sold. A manufacturer adds beginning finished goods inventory to cost of goods manufactured and then subtracts ending finished goods inventory to get cost of goods sold.
A manufacturer adds beginning finished goods inventory to cost of goods manufactured and then subtracts ending finished goods inventory to get cost of goods sold. It begins by showing the period's costs for direct materials, direct labor, and overhead and then adjusts these numbers for the beginning and ending inventory of goods in process to yield the cost of goods manufactured.
Summary
At this stage in the process, the materials, labor and overhead costs have been incurred and the manufacturing statement is prepared. The selling activity consists of selling some or all of the finished goods available for sale. Important characteristics of management accounting include (1) focus on internal decision makers, (2) emphasis on planning and control, (3) flexibility, (4) timeliness, (5) reliance on forecasts and estimates, (6) focus on segments and projects , and (7) reporting of both monetary and nonmonetary information.
Concepts such as total quality management and just-in-time production often help in the effective application of the model. Fraud involves the use of one's employment for personal gain through the intentional misuse of the employer's assets.
Guidance Answers to Decision Maker and Decision Ethics
The purpose of management accounting is to provide useful information to management and other internal decision makers. Managerial accounting focuses on providing information to managers, officers and other decision makers in an organization. Unlike external users, internal users need managerial accounting information for planning and controlling business activities and not for external comparison.
The cost of goods sold to trading companies includes all costs of acquiring the goods; the cost of goods sold to manufacturing firms includes the three manufacturing costs: direct materials, direct labor, and overhead. Ending goods in process inventory is subtracted from the total number of goods in process to give the cost of goods manufactured for the period.
Additional Quiz Questions are available at the book’s Website
The purchasing manager's opportunity costs relate to the potential quality and delivery benefits forgone by not selecting the supplier (A). This is useful when managers consider making changes to the cost object (such as when removing a product or expanding a department). Beginning goods in process inventory is added to total manufacturing costs to derive total goods in process.
Costs that are incurred as part of the production process, but are not clearly traceable to the specific unit of product or batches of the product, are referred to. Refer to Anheuser-Busch's 2006 Annual Report (10-K) for the fiscal year ended December 31, 2006 in the SEC's EDGAR database (SEC.gov) or on its website (Anheuser-Busch.com).
Discussion Questions
Explain why product costs are capitalized but period costs are expensed in the current accounting period. Explain how business activities and inventory differ for a manufacturing company, a trading company, and a service company. How are an income statement and a balance sheet different for a manufacturing company and a trading company.
List the four components of a manufacturing statement and provide specific examples of each for Apple. Describe the relationships between the income statement, the manufacturing statement, and a detailed list of factory overheads.
QUICK STUDY
Cost of goods sold
EXERCISES
- Sources of accounting
- Characteristics of financial
- Management concepts
- Cost classifications C4
- Components of accounting
- Income statement
- Cost flows in manufacturing
- Manufacturing statement
In the chart below, compare financial accounting and managerial accounting by describing how each differs for the items listed. Calculate the cost of goods sold for each of these two companies for the year ended December 31, 2009. Using the following data, calculate (1) the cost of goods manufactured and (2) the cost of goods sold for both Jahmed Company as well as for the Kabiro company.
Assume that the income statement shows the calculation of the cost of goods sold, and the production statement shows only the total amount of factory overhead costs. Prepare a production statement for the year ended December 31, 2009, given the following selected account balances for Spalding Company.
PROBLEM SET A
- Managerial accounting role
- Lean business concepts
- Opportunity cost
- Cost classification
- Manufacturing and income
- Manufacturing cycle time and
What do you think is the total cost of plastic for the enclosures and the unit cost of the plastic for the enclosures. What do you think is the total cost of property taxes and the per unit cost of property taxes. Production time per day is 8 hours, at a cost of $2,000 per hour to run the production line.
Tip: Reread the response to Decision Maker and compare the cost savings for buying from supplier [B] to the sum of lost customer revenue from repeat business and referrals and the cost of lost production time. Calculate each company's cost of goods sold on its income statement as of December 31, 2009.
PROBLEM SET B
- Managerial accounting role
- Cost classification
- Opportunity cost estimation
- Inventory computation
- Manufacturing and income
- Manufacturing cycle time and
Calculate the (a) inventory turnover, defined as cost of goods sold divided by average inventory, and (b) days' sales in inventory, defined as 365 times ending inventory divided by cost of goods sold, for both its raw materials inventory and its finished goods inventory. To calculate turnover and days' sales in inventory for raw materials, use raw materials used rather than cost of goods sold.) Discuss some possible reasons for differences between these ratios for the two types of inventory. What you predict will be the total cost of plastic for the BDs and the per unit cost of the plastic for the BDs. What you predict will be the total cost of factory rent and the per unit cost of the factory rent.
Calculate (a) inventory turnover, defined as cost of goods sold divided by average inventory, and (b) days' sales in inventory, defined as 365 times ending inventory divided by cost of goods sold, for both its raw materials inventory and its finished goods inventory. To calculate turnover and days'. sales in inventory for raw materials, use raw materials used instead of cost of goods sold).
SERIAL PROBLEM
Prepare the company's 2009 income statement reporting separate categories for (a) selling expenses and (b) general and administrative expenses.
REPORTING IN ACTION
BEYOND THE NUMBERS
Best Buy and RadioShack are both merchandisers that rely on customer satisfaction
COMPARATIVE ANALYSIS
Identify the strategic initiatives that each company is pursuing in its desire to better compete and succeed in the marketplace. For each of these strategic initiatives for both companies, explain how it reflects (or does not reflect) a focus on customer satisfaction. The chief financial officer is concerned about having enough cash to pay the expected income tax bill due to poor cash flow management.
On November 15, the purchasing department purchased excess inventory of raw materials for CDs in anticipation of the rapid growth of this product beginning in January. To reduce the company's tax liability, the CFO tells you to record the purchase of this inventory as part of inventory and book it as an expense in the current year; this would reduce the company's tax liability by increasing costs.
ETHICS CHALLENGE
COMMUNICATING IN PRACTICE
TAKING IT TO THE NET
Each member should explain the calculation to the team in preparation for reporting to the class. What are the three major categories of production costs that Brian must monitor and control.
ENTREPRENEURIAL DECISION
HITTING THE ROAD
TEAMWORK IN ACTION
ANSWERS TO MULTIPLE CHOICE QUIZ
GLOBAL DECISION
