When a table is sold, the average price of the table is transferred from the Inventory account to the Cost of Goods Sold (Cost) account. The $4,000 cost of goods sold reported on the income statement includes a portion of the materials, labor, and overhead costs incurred by Patillo during the year.
Manufacturing Product Cost Summary
The cost of utilities cannot be directly traced to each specific piece of furniture, but the piece of furniture that requires the most work is also likely to consume more of the cost of utilities. Using this line of reasoning, it is rational to allocate utility cost to the two pieces of furniture based on direct labor hours at a rate of $15 per hour ($120 4 8 hours).
UPSTREAM AND DOWNSTREAM COSTS
PRODUCT COSTING IN SERVICE AND MERCHANDISING COMPANIES
- Indirect labor such as the cost of salaries paid to production supervisors, inspectors, and mainte- nance personnel
- Rental cost for manufacturing facilities and equipment
- Utility costs
- Depreciation
- Security
- The cost of preparing equipment for the manufacturing process (i.e., setup costs)
- Maintenance cost for the manufacturing facility and equipment
Similarly, most of the labor and overhead costs incurred by trading companies result from providing assistance to customers. Like managers of manufacturing companies, managers of service and trading businesses can benefit from cost analysis to satisfy their customers.
CHECK YOURSELF 1.3
For example, Ernst & Young, a large accounting firm, must pay employees (labor costs), use office supplies (material costs), and incur utilities, depreciation, etc. (overhead costs) while conducting audits. For example, Wendy's, a service company, might benefit from knowing how much a hamburger costs, just as Bayer Corporation, a manufacturing company, might benefit from knowing how much a bottle of aspirin costs.
JUST-IN-TIME INVENTORY
In contrast, products made by manufacturing companies can be held in the form of inventory until they are sold to consumers. Indeed, trading companies are often viewed as service companies rather than as a separate business category.
Just-in-Time Illustration
30 roses a week, she managed to convince a local florist to match her current costs. With this arrangement, Paula was able to buy roses just in time to meet customer demand.
CORPORATE GOVERNANCE
The Motive to Manipulate
CHECK YOURSELF 1.4
The $4,000 of design and planning costs are classified as selling and ad- ministrative expenses
The $4,000 of design and planning costs are classified as product costs, meaning they are first accumulated in the Inventory account and then
However, the temporary effects on the financial statements can affect the (1) availability of financing, (2) motivations of management and (3) timing of income tax payments. In fact, managers may be tempted to misclassify costs in order to manipulate the content of financial statements.
Statement of Ethical Professional Practice
In general, more favorable financial statements improve a company's ability to obtain financing from creditors or investors. Since income tax expense is calculated as a designated percentage of taxable income, managers attempt to minimize taxes by reporting the minimum amount of taxable income.
The Fraud Triangle
The availability of an opportunity
Opportunity is shown at the apex of the triangle because without opportunity fraud could not exist. Disclose any relevant information that might reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations. Exhibit 1.17 contains an overview of many of the internal control policies and procedures that have gained wide acceptance.
For example, only 25 percent of observed incidents involving the alteration of financial data were reported to regulators or whistleblower hotlines, and only 54 percent of observed bribes were reported.
REALITY BYTES
Fifty-seven percent of respondents reported that they had observed unethical behavior in the past year. The definition of ethical misconduct used in the study was quite broad and ranged from behavior such as an individual putting their personal interest before the interest of the organization to sexual harassment and accepting bribes. More serious crimes, such as discrimination or bribery, were reported much less frequently than activities such as lying to customers, vendors, or the public.
The survey also found that only 18 percent of public entities have ethics and compliance programs in place that could be considered well-implemented.
Sarbanes-Oxley Act of 2002
Also, the company's external auditors must confirm the accuracy of the internal audit report. SOX places ultimate responsibility on the CEO and CFO for the accuracy of the company's annual accounts and related disclosures. In general, companies audited under United States Auditing Standards follow the standards set by the Financial Accounting Standards Board.
Most companies outside the United States follow the standards of the International Accounting Standards Board.
FOCUS ON INTERNATIONAL ISSUES
This chapter has already explained some of the conceptual differences between financial and management accounting, but these differences also affect international companies. For example, the United States is one of the few countries whose GAAP permits the use of the LIFO inventory cost flow assumption. In contrast, most of the management accounting concepts presented in this course can be used by businesses in any country.
Meanwhile, a study published in Accountancy Ireland* found that approximately a third of companies surveyed in Ireland, the United Kingdom and New Zealand were also using ABC, or were considering adopting it.
A Look Back <<
A Look Forward >>
APPENDIX A
Emerging Trends in Managerial Accounting
Companies can also gain competitive advantage by identifying and eliminating non-value-added activities and providing products of comparable quality at lower costs than competitors.
Value Chain Analysis Across Companies
Paid $136,000 for rent and utility costs on the manufacturing facility
Paid $41,000 for inventory holding expenses for completed headsets (rental of warehouse space, salaries of warehouse personnel, and other general storage costs)
Tuscan started and completed 20,000 headset units during 20 The company sold 18,400 headsets at a price of $38 per unit
Compute the average product cost per unit and recognize the appropriate amount of cost of goods sold
Show how these events affect the balance sheet and income statement by recording them on a horizontal financial statement model. The company's president believes Toscan can save money by buying the inventory it currently does. The warehouse supervisor said that this would not be possible because the purchase price of $27 per unit was above the average cost of $26 per unit of producing the product.
The average cost per unit of product is determined by dividing the total product cost by the number of headsets produced.
Nonvalue-added
Opportunity cost 15
Identifying financial versus managerial accounting items Required
Identifying product versus general, selling, and administrative costs Required
- Why is cost classification important to managers?
- What is cost allocation? Give an example of a cost that needs to be allocated
- How has the Institute of Management Accountants res ponded to the need for
- What are some of the common ethical conl icts that accountants encounter?
- What costs should be considered in deter- mining the sales price of a product?
- What is a just-in-time (JIT) inventory sys- tem? Name some inventory costs that can
- What does the term reengineering mean?
- What does the term activity-based manage- ment mean? (Appendix A)
Classifying Costs: Product or SG&A /Asset or Expense Required
Identify effect of product versus selling, general, and administrative costs on financial statements
Exercise 1-4A Identifying effect of product versus selling, general, and
Identifying product costs in a manufacturing company
Identifying product versus selling, general, and administrative costs A review of the accounting records of Rayford Manufacturing indicated that the company
Recording product versus selling, general, and administrative costs in a financial statements model
- Recognized depreciation on ofi ce furniture
- Recognized revenue from cash sale of products
- Recognized cost of goods sold from sale referenced in Event 3
- Acquired cash by issuing common stock
- Paid cash to purchase raw materials that were used to make products
- Paid wages to production workers
Use the following horizontal accounting model to show how each event affects the balance sheet and income statement. Indicate whether the event increases (I), decreases (D) or has no effect (NA) on each element of the financial statements. Note: Show accumulated depreciation as a decrease in the book value of the relevant asset account.).
Allocating product costs between ending inventory and cost of goods sold
- Wages of production workers—$3,530
- Salaries of administrative and sales personnel—$1,995
- Depreciation on manufacturing equipment—$4,370
Financial statement effects for manufacturing versus service organizations
Explain why recognizing depreciation on equipment used in a manufacturing business affects the financial statements differently than recognizing depreciation on equipment used in a service organization.
Identifying the effect of product versus selling, general, and administrative cost on the income statement
Upstream and downstream costs
Identify the effect of a just-in-time inventory system on financial statements
Explain how Bearden's implementation of a 100 percent efficient just-in-time inventory system could have resulted in Mr.
Using JIT to minimize waste and lost opportunity
Using JIT to minimize holding costs
Applications of the Sarbanes-Oxley Act
Professional conduct and code of ethics
Top management at the time of Rudman's investigation had been replaced and the company reported a loss of US$59.8 billion in 2008. Identify and comment on which ethical principles were violated by the CFO and the controller.
Value chain analysis (Appendix)
Product versus selling, general, and administrative costs
Effect of product versus period costs on financial statements
Product versus selling, general, and administrative costs
Service versus manufacturing companies
How likely is it that the actual cost of the 907th unit of the product is exactly the same as the cost of producing the 908th unit of the product.
Importance of cost classification
Using JIT to reduce inventory holding costs
Using JIT to minimize waste and lost opportunity
CHECK FIGURES
To ensure that enough books are available, CMA Review usually orders 10 percent more than expected. In other words, CMA Review cannot order some of the books using the regular copying process and the rest using the high-speed process. Prepare an income statement under the JIT system assuming 95 students enroll in a course.
Assume the same facts as in Claim c about a JIT system that enables immediate delivery of books at a cost of $65 each.
Internal control procedures
However, demand occasionally exceeds expectations by more than 10 percent and there are not enough books available for students. Determine the amount of lost profits resulting from the inability to serve five additional students. Assume that textbooks can be produced using a rapid copying process that allows for delivery right at the start of class.
CHECK FIGURES
Value chain analysis (Appendix)
Financial versus managerial accounting items Required
Identifying product versus selling, general, and administrative costs Required
Classifying costs: product or period / asset or expense Required
Effect of product versus selling, general, and administrative costs on financial statements
Effect of product versus selling, general, and administrative cost on financial statements
Product costs in a manufacturing company
Product versus selling, general, and administrative costs
Recording product versus selling, general, and administrative costs in a financial statements model
Use a horizontal accounting model to show how each event affects the balance sheet and income statement. Indicate whether the event increases (I), decreases (D) or does not affect (NA) each element of the financial statements.
Allocating product costs between ending inventory and cost of goods sold
Financial statement effects for manufacturing versus service organizations
Effect of product versus selling, general, and administrative cost on the income statement
Upstream and downstream costs
Effect of a just-in-time inventory system on financial statements In reviewing Kopplin Company’s financial statements for the past two years, Nancy Martin, a
Using JIT to minimize waste and lost opportunity
Using JIT to minimize holding costs
The fraud triangle
Value chain analysis (Appendix)
Product versus selling, general, and administrative costs
Effect of product versus selling, general, and administrative costs on financial statements
Explain how the provisions of Sarbanes-Oxley would protect a whistleblower like Greg Madrid. Explain how these events would affect the balance sheet and income statement by recording them in a horizontal financial statement model, as shown here.
Product versus selling, general, and administrative costs
Service versus manufacturing companies
How likely is it that the actual cost of the 500th unit of product was exactly the same as the cost of producing the 501st unit of product.
Importance of cost classification
Using JIT to reduce inventory holding costs
Using JIT to minimize waste and lost opportunity
Assume the same facts as in Claim c about a JIT system that requires overhead labor costing $20 per day. Explain how the JIT system can be able to improve customer satisfaction as well as profitability.
The fraud triangle, ethics, and the Sarbanes-Oxley Act
Value chain analysis (Appendix)
Identify at least three value-added and three non-value-added activities suggested in this scenario.
Business Applications Case Financial versus managerial accounting The following information was taken from the 2008 and 2009 Form 10-Ks for Dell, Inc
Group Assignment Product versus upstream and downstream costs
- Paid a $258,000 cash dividend to owners
- Paid $80,000 to set up manufacturing equipment for production
- Paid a one-time $186,000 restructuring cost to redesign the production process to implement a just-in-time inventory system
- Made 69,400 units of product and sold 60,000 units at a price of $70 each
The policy cost $72,000 and was valid for one year with an effective date of May 1. The four policies cost $72,000 and were valid for one year with an effective date of May 1. Four employees work in the research and development department and eight employees in the sales and administrative department. That person should go to the board and list the costs involved in determining the cost of goods sold. Anyone in the other groups who disagrees with one of the classifications given by the person on the committee must raise an objection and explain why the item should be classified differently.
After the amount of the cost of goods sold has been determined, the student at the board constructs the part of the income statement that shows the determination of gross margin.
Research Assignment Identifying product costs at Snap-on Inc
Assign the 1st task to the first part of the groups, the 2nd task to the second part of the groups and the 3rd task to the third part of the groups. Select a member of one of the groups who is assigned the task of the first group to identify the cost of the product. The exercise continues in a similar way with representatives from other departments explaining the composition of costs at the beginning and end of the chain.
In the first accounting course, you learned about a class of inventory called merchandise inventory.
Writing Assignment Emerging practices in managerial accounting An annual report of the Maytag Corporation contained the following excerpt
Does the level of detail that Snap-on provides regarding the costs incurred in manufacturing its products suggest that the company's financial statements are designed primarily to meet the needs of external or internal users.
Ethical Dilemma Product cost versus selling and administrative expense Emma Emerson is a proud woman with a problem. Her daughter has been accepted into a pres-
Spreadsheet Assignment Using Excel
Spreadsheet Assignment Mastering Excel
- Administrative expenses consisting of ofi ce rental and salaries amounted to $71,950
As an example of the formulas in column S (net income), the formula in cell S7 is 5O72Q7. Label the purchase of the equipment as Event 2a and the recognition of depreciation as Event 2b. Label the recognition of the sale as Event 7a and the cost of goods sold as Event 7b.
Label the purchase of the equipment as Event 9a and the recognition of depreciation as Event 9b.
MAGNIFICENT MODEMS, INC
