Chapter 1 Introduction to Managerial Accounting Review Questions 1. The primary purpose of managerial accounting is to provide information to help managers plan, direct, control, and make decisions. 2. Financial accounting and managerial accounting differ on the following 6 dimensions: (1) primary users, (2) purpose of information, (3) focus and time dimension of the information, (4) rules and restrictions, (5) scope of information, and (6) behavioral. 3. Line positions are directly involved in providing goods or services to customers. Staff positions support line positions. 4. Planning means choosing goals and deciding how to achieve them. Directing involves running the day-to-day operations of a business. Controlling is the process of monitoring operations and keeping the company on track. 5. The four IMA standards of ethical practice and a description of each follow. I. Competence. • Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills. • Perform professional duties in accordance with relevant laws, regulations, and technical standards. • Provide decision support information and recommendations that are accurate, clear, concise, and timely. • Recognise and help mange risk. II. Confidentiality. • Keep information confidential except when disclosure is authorized or legally required. • Inform all relevant parties regarding appropriate use of confidential information. Monitor to ensure compliance. • Refrain from using confidential information for unethical or illegal advantage. III. Integrity. • Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. • Refrain from engaging in any conduct that would prejudice carrying out duties ethically. • Abstain from engaging in or supporting any activity that might discredit the profession. • Contribute to a positive ethical culture and place integrity of the profession above personal interest. © 2021 Pearson Education, Inc. 1-1 5, cont. IV. Credibility. • Communicate information fairly and objectively. • Provide all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. • Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law. • Communicate any professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. 6. Service companies sell time, skills, and knowledge. Examples of service companies include phone service companies, banks, cleaning service companies, accounting firms, law firms, medical physicians, and online auction services. 7. Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory of products, and managers are accountable for the purchasing, storage, and sale of the products. Examples of merchandising companies include toy stores, grocery stores, and clothing stores. 8. Merchandising companies resell products they previously bought from suppliers, whereas manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into new finished products. In contrast to merchandising companies, manufacturing companies have a broad range of production activities that require tracking costs on three kinds of inventory. 9. The three inventory accounts used by manufacturing companies are Raw Materials Inventory, Workin-Process Inventory, and Finished Goods Inventory. Raw Materials Inventory includes materials used to manufacture a product. Work-in-Process Inventory includes goods that have been started in the manufacturing process but are not yet complete. Finished Goods Inventory includes completed goods that have not yet been sold. 10. A direct cost is a cost that can be easily and cost-effectively traced to a cost object (which is anything for which managers want a separate measurement of cost). An indirect cost is a cost that cannot be easily or cost-effectively traced to a cost object. 11. The three manufacturing costs for a manufacturing company are direct materials, direct labor, and manufacturing overhead. Direct materials are materials that become a physical part of a finished product and whose costs are easily traceable to the finished product. Direct labor is the labor cost of the employees who convert materials into finished products. Manufacturing overhead includes all manufacturing costs except direct materials and direct labor, such as indirect materials, indirect labor, factory depreciation, factory rent, and factory property taxes. © 2021 Pearson Education, Inc. 1-2 12. Examples of manufacturing overhead include costs of indirect materials, indirect labor, repair and maintenance in factory, factory utilities, factory rent, factory insurance, factory property taxes, manufacturing plant managers’ salaries, and depreciation on manufacturing buildings and equipment. 13. Prime costs are direct materials plus direct labor. Conversion costs are direct labor plus manufacturing overhead. Note that direct labor is classified as both a prime cost and a conversion cost. 14. Product costs are the cost of purchasing or making a product. These costs are recorded as an asset and not expensed until the product is sold. Product costs include direct materials, direct labor, and manufacturing overhead. 15. Period costs are non-manufacturing costs that are expensed in the same accounting period in which they are incurred, whereas product costs are recorded as an asset and not expensed until the accounting period in which the product is sold. 16. Cost of Goods Manufactured is calculated as Beginning Work-in-Process Inventory + Total Manufacturing Costs Incurred during the Year – Ending Work-in-Process Inventory. Total Manufacturing Costs Incurred during the Year = Direct Materials Used + Direct Labor + Manufacturing Overhead. 17. For a manufacturing company, the activity in the Finished Goods Inventory account provides the information for determining Cost of Goods Sold. A manufacturing company calculates Cost of Goods Sold as Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending Finished Good Inventory. In addition, a manufacturing company must track costs from Raw Materials Inventory and Work-in-Process Inventory in order to compute Cost of Goods Manufactured used in the previous equation. For a merchandising company, the activity in the Merchandise Inventory account provides the information for determining Cost of Goods Sold. A merchandising company calculates Cost of Goods Sold as Beginning Merchandise Inventory + Purchases and Freight In – Ending Merchandise Inventory. 18. A manufacturing company calculates unit product cost as Cost of Goods Manufactured / Total number of units produced. 19. A service company calculates unit cost per service as Total operating costs / Total number of services provided. 20. A merchandising company calculates unit cost per item as Total cost of goods sold / Total number of items sold. © 2021 Pearson Education, Inc. 1-3 Short Exercises S-M:1-1 a. b. c. d. e. FA MA MA FA FA S-M:1-2 a. b. c. d. e. Confidentiality Integrity Competence (skipping the session); Integrity (company-paid conference) Competence Credibility; Integrity S-M:1-3 a. b. c. d. e. f. g. 2 4 1 5 4 5 3 S-M:1-4 Glue for frames Plant depreciation Plant foreman’s salary Plant janitor’s wages Oil for manufacturing equipment Total manufacturing overhead $ 250 7,500 3,500 1,300 150 $ 12,700 © 2021 Pearson Education, Inc. 1-4 S-M:1-5 a. b. c. d. e. Period cost Product cost Product cost Period cost Product cost f. g. h. i. Period cost Product cost Product cost Period cost S-M:1-6 Beginning merchandise inventory Purchases Freight in Cost of goods available for sale Ending merchandise inventory Cost of goods sold $ 8,600 $ 47,000 2,400 49,400 58,000 (5,500) $ 52,500 S-M:1-7 Calculations: (a) Solutions: $13,200 (b) $63,200 $61,000 + $2,200 (c) $28,000 $40,000 – $12,000 (d) $200,800 (e) $60,000 $89,000 – $29,000 (f) $86,800 $89,000 – $2,200 (g) $30,000 $114,000 – $84,000 $63,200 [b, below] – $50,000 $86,800 [f, below] + 114,000 Order of calculations: Smith, Inc.: (b), (a), (c) Allen, Inc.: (e), (f), (d), and (g) © 2021 Pearson Education, Inc. 1-5 S-M:1-8 Beginning Direct Materials Purchases of Direct Materials Freight In Direct Materials Available for Use Ending Direct Materials Direct Materials Used $ 4,100 $ 6,300 400 6,700 10,800 (1,300) $ 9,500 S-M:1-9 Beginning Work-in-Process Inventory Direct Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Incurred during the Year Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 1,000 $ 12,000 9,000 21,000 42,000 43,000 (5,000) $ 38,000 S-M:1-10 Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold $ 30,000 165,000 195,000 (10,000) $ 185,000 S-M:1-11 1. 2. 3. 4. 5. d. c. e. a. b. S-M:1-12 Cost of one haircut = Total operating costs / Total number of haircuts = [$950 + $548 + $190 + $60] / 190 haircuts = $1,748 / 190 haircuts = $9.20 per haircut © 2021 Pearson Education, Inc. 1-6 Exercises E-M:1-13 a. b. c. d. e. f. g. Financial Creditors and Stockholders Controlling Managers Financial Managerial Planning E-M:1-14 Students’ responses will vary. Illustrative answers follow. Requirement 1 A new employee who has engaged in this behavior is unlikely to become a valued and trusted employee. This type of behavior is unethical, and Sue Peters should consider beginning the process to terminate the employee. Any company policies with respect to discipline and termination should be followed. As controller, Sue Peters probably hired Dale, and she is also responsible for the lack of controls that permitted a new employee to commit this theft. She will need to supervise Dale and subsequent bookkeepers more carefully. Requirement 2 Being a new employee, Sue Peters may want to discuss the situation with her immediate supervisor or the company’s president if appropriate. Unless Sue can obtain additional information, she may want to indicate to Dale that this behavior will not be tolerated in the future. Sue should establish better controls and closer supervision. © 2021 Pearson Education, Inc. 1-7 E-M:1-15 Cost a. Metal used for rims Product DM DL MOH X Prime Period Conversion Admin X b. Sales salaries c. Rent on factory d. Wages of assembly workers e. Salary of production supervisor f. Depreciation on office equipment g. Salary of CEO Selling X X X X X X X X X X h. Delivery expense X © 2021 Pearson Education, Inc. 1-8 E-M:1-16 Company A is a manufacturing company. Company B is a service company. Company C is a merchandising company. E-M:1-17 Company A (all amounts in millions): Net Sales Revenue Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Selling Expenses Administrative Expenses Total Selling and Administrative Expenses Operating Income $ 48 23 25 $ 4 7 11 $ 14 Company B (all amounts in millions): Service Revenue Expenses: Wages Expense Rent Expense Total Expenses Operating Income $ 65 $ 12 12 24 $ 41 Company C (all amounts in millions): Net Sales Revenue Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Selling Expenses Administrative Expenses Total Selling and Administrative Expenses Operating Income $ 75 25 50 $ 8 4 12 $ 38 © 2021 Pearson Education, Inc. 1-9 E-M:1-18 Company A (all amounts in millions): Cash Accounts Receivable Raw Materials Inventory Work-in-Process Inventory Finished Goods Inventory Total current assets $ 6 14 6 9 10 $ 45 Company B (all amounts in millions): Cash Accounts Receivable Total current assets $ 34 8 $ 42 Company C (all amounts in millions): Cash Accounts Receivable Merchandise Inventory Total current assets $ 25 19 12 $ 56 © 2021 Pearson Education, Inc. 1-10 E-M:1-19 (a) Total Manufacturing Costs to Account For Total Manufacturing Costs Incurred during the Year Beginning Work-in-Process Inventory $ 55,400 (45,200) $ 10,200 (b) Total Manufacturing Costs Incurred during the Year Direct Materials Used Direct Labor Manufacturing Overhead $ 45,200 (14,400) (10,300) $ 20,500 (c) Total Manufacturing Costs to Account For Cost of Goods Manufactured Ending Work-in-Process Inventory $ 55,400 (50,500) $ 4,900 (d) Direct Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Incurred during the Year $ 35,900 20,100 10,000 $ 66,000 (e) Beginning Work-in-Process Inventory Total Manufacturing Costs Incurred during the Year [d, above] Total Manufacturing Costs to Account For $ 40,800 66,000 $ 106,800 (f) Total Manufacturing Costs to Account For [e, above] Ending Work-in-Process Inventory Cost of Goods Manufactured $ 106,800 (25,500) $ 81,300 © 2021 Pearson Education, Inc. 1-11 E-M:1-19, cont. (g) Total Manufacturing Costs Incurred during the Year [h, below] Direct Labor Manufacturing Overhead Direct Materials Used $ 6,100 (1,900) (900) $ 3,300 (h) Total Manufacturing Costs to Account For Beginning Work-in-Process Inventory Total Manufacturing Costs Incurred During the Year $ 8,300 (2,200) $ 6,100 (i) Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured © 2021 Pearson Education, Inc. $ 8,300 (2,600) $ 5,700 1-12 E-M:1-20 Requirement 1 WILSON CORP. Schedule of Cost of Goods Manufactured Year Ended December 31, 2024 Beginning Work-in-Process Inventory Direct Materials Used: Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used Direct Labor Manufacturing Overhead: Depreciation, plant building and equipment Insurance on plant Repairs and maintenance—plant Indirect labor Total Manufacturing Overhead Total Manufacturing Costs Incurred During the Year Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 109,000 $ 59,000 151,000 210,000 (23,000) $ 187,000 121,000 16,000 24,000 10,000 39,000 89,000 397,000 506,000 (62,000) $ 444,000 Requirement 2 Unit product cost = Cost of goods manufactured / Total units produced = $444,000 / 3,700 lamps = $120 per lamp © 2021 Pearson Education, Inc. 1-13 E-M:1-21 Beginning Work-in-Process Inventory Direct Materials Used: Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Incurred During the Year Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold $ 40,000 $ 27,000 73,000 100,000 (28,000) $ 72,000 88,000 43,000 203,000 243,000 (32,000) $ 211,000 $ 18,000 211,000 [above] 229,000 (25,000) $ 204,000 E-M:1-22 a. b. c. d. JIT TQM ERP E-Commerce © 2021 Pearson Education, Inc. 1-14 E-M:1-23 a. People b. Planet c. Planet d. Profit E16–24 Requirement 1 Grooming Revenue Expenses: Wages Expense Grooming Supplies Expense Building Rent Expense Utilities Expense Depreciation Expense—Equipment Total Expenses Operating Income $ 16,300 $ 4,061 1,675 900 305 55 6,996 $ 9,304 Requirement 2 Cost of Service to Groom One Dog = Total operating expenses / Total number of dogs groomed = $6,996 / 660 dogs = $10.60 per dog © 2021 Pearson Education, Inc. 1-15 E-M:1-25 Requirement 1 Net Sales Revenue Cost of Goods Sold: Beginning Merchandise Inventory Purchases Cost of Goods Available for Sale Ending Merchandise Inventory Cost of Goods Sold Gross Profit Selling and Administrative Expenses Operating Income $ 151,800 $ 7,920 85,800 93,720 (11,748) 81,972 69,828 47,058 $ 22,770 Requirement 2 Unit cost for one brush = Cost of goods sold / Total units sold = $81,972 / 6,600 brushes = $12.42 per brush © 2021 Pearson Education, Inc. 1-16 Problems (Group A) P-M:1-26A Students’ responses will vary. Illustrative answers follow. Requirement 1 a. If the goods have been received, postponing recording of the purchases understates liabilities. This is unethical and inconsistent with the IMA standards even if the suppliers agree to delay billing. b. The software has not been sold. Therefore, it would be inconsistent with the IMA standards to record it as sales. c. Delaying year-end closing incorrectly records next year’s sales in this year’s sales. This is unethical and inconsistent with the IMA standards. d. The appropriate allowance for bad debts is a difficult judgment. The decision should not be driven by the desire to meet a profit goal. It should be based on the likelihood that the company will not collect the debts. We cannot determine this without more information. However, since the company emphasizes earnings growth, which can lead to sales to customers with weaker credit records, reducing the allowance seems questionable. It is not clear whether this strategy is inconsistent with the IMA standards. e. If the maintenance is postponed, there is no transaction to record. This strategy is beyond the responsibility of the controller, so it does not violate IMA standards. Requirement 2 The inconsistencies noted for Smart Software, Inc. particularly impact the financial statement information provided by financial accounting to external users, such as creditors and stockholders. They will be led to believe the operating performance (profitability) of the company is better than it really is. This misrepresentation may result in the investors holding the stock when they may have sold it with the correct information. Similarly, creditors may grant credit to the company with the false income information when they may not grant credit with the correct income information. Requirement 3 The controller should resist attempts to implement a, b, and c and should gather more information about d. If the President ignores Wallace, then Wallace needs to consider if she wants to work for a company that engages in unethical behavior. Accountants should not be associated with any unethical behavior, and Wallace should resign. © 2021 Pearson Education, Inc. 1-17 P-M:1-27A Requirement 1 Period costs are non-manufacturing costs that are expensed in the accounting period in which they are incurred. Product costs are all costs of purchasing or making a product. These costs are recorded as an asset (inventory) on the balance sheet until the asset is sold. The cost is then transferred to an expense account (Cost of Goods Sold) on the income statement. Product costs include direct materials, direct labor, and manufacturing overhead. On the income statement, Cost of Goods Sold (product cost) is subtracted from Net Sales Revenue to determine gross profit. The period costs are then subtracted to determine operating income. Requirement 2 Period Cost Cost: Product Cost Direct Direct Manufacturing Materials Labor Overhead Shaft and handle of weed trimmer X Motor of weed trimmer X Factory labor for workers assembling weed trimmers X Nylon thread used by the weed trimmer (not traced to the product) X Glue to hold housing together X Plant janitorial wages X Depreciation on factory equipment X Rent on plant X Sales commissions X Administrative salaries X Plant utilities X Shipping costs to deliver finished weed trimmers to customers X © 2021 Pearson Education, Inc. 1-18 P-M:1-28A Requirement 1 Service companies sell services rather than products. They sell time, skills, and knowledge. Merchandising companies resell products previously bought from suppliers. Manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into new finished products. Requirement 2 Company A is a merchandising company. Company B is a manufacturing company. The company types can be determined by the account names in the ledger. Requirement 3 Company A: Beginning Merchandise Inventory Purchases (net) Cost of Goods Available for Sale Ending Merchandise Inventory Cost of Goods Sold $ 10,600 154,500 165,100 (13,100) $ 152,000 Company B: Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold $ 15,000 214,500 229,500 (11,700) $ 217,800 © 2021 Pearson Education, Inc. 1-19 P-M:1-29A Requirement 1 GOURMET BONES Schedule of Cost of Goods Manufactured Year Ended December 31, 2024 Beginning Work-in-Process Inventory Direct Materials Used: Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used Direct Labor Manufacturing Overhead: Plant janitorial services Utilities for plant Rent on plant Total Manufacturing Overhead Total Manufacturing Costs Incurred during the Year Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 0 $ 13,500 36,000 49,500 (7,500) $ 42,000 23,000 700 1,300 17,000 © 2021 Pearson Education, Inc. 19,000 84,000 84,000 (3,500) $ 80,500 1-20 P-M:1-29A, cont. Requirement 2 GOURMET BONES Income Statement Year Ended December 31, 2024 Net Sales Revenue Cost of Goods Sold: Beginning Finished Goods Inventory Cost of Goods Manufactured* Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Sales Salaries Expense Delivery Expense Customer Service Hotline Expense Total Selling and Administrative Expenses Operating Income (Loss) $ 107,000 $ 0 80,500 80,500 (5,200) 75,300 31,700 6,000 1,300 1,200 8,500 $ 23,200 * From the Schedule of Cost of Goods Manufactured in Requirement 1. Requirement 3 For a manufacturing company, cost of goods sold on the income statement is based on cost of goods manufactured and the change in Finished Goods Inventory. For a merchandising company, cost of goods sold on the income statement is based on cost of merchandise purchased (including freight in) and the change in Merchandise Inventory. Requirement 4 Unit product cost = Cost of goods manufactured / Total units produced = $80,500 / 17,900 units = $4.50 per unit (rounded to nearest cent) © 2021 Pearson Education, Inc. 1-21 P-M:1-30A ELLY MANUFACTURING COMPANY Schedule of Cost of Goods Manufactured Month Ended June 30, 2024 Beginning Work-in-Process Inventory Direct Materials Used: Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Incurred During the Month Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 27,000 $ 28,000 56,000 84,000 (20,000) 64,000 72,000 44,000 180,000 207,000 (25,000) $ 182,000 Missing Amounts: Beginning Direct Materials Direct Materials Available for Use Purchases of Direct Materials Beginning Direct Materials $ 84,000 (56,000) $ 28,000 Direct Materials Used: Direct Materials Available for Use Ending Direct Materials Direct Materials Used $ 84,000 (20,000) $ 64,000 Direct Labor: Total Manufacturing Costs Incurred During the Month Manufacturing Overhead Direct Materials Used [calculated above] Direct Labor $ 180,000 (44,000) (64,000) $ 72,000 © 2021 Pearson Education, Inc. 1-22 P-M:1-30A, cont. Total Manufacturing Costs to Account For: Beginning Work-in-Process Inventory Total Manufacturing Costs Incurred During the Month Total Manufacturing Costs to Account For $ 27,000 180,000 $ 207,000 Cost of Goods Manufactured: Total Manufacturing Costs to Account For [calculated above] Ending Work-in-Process Inventory Cost of Goods Manufactured $ 207,000 (25,000) $ 182,000 ELLY MANUFACTURING COMPANY Income Statement Month Ended June 30, 2024 Net Sales Revenue Cost of Goods Sold: Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Selling Expenses Administrative Expenses Total Selling and Administrative Expenses Operating Income $ 490,000 $ 110,000 182,000 292,000 (60,000) 232,000 258,000 98,000 62,000 160,000 $ 98,000 Missing Amounts: Net Sales Revenue: Cost of Goods Sold Gross Profit Net Sales Revenue $ 232,000 258,000 $ 490,000 © 2021 Pearson Education, Inc. 1-23 P-M:1-30A, cont. Cost of Goods Manufactured: [From the Schedule of Cost of Goods Manufactured] Cost of Goods Available for Sale: Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale $ 110,000 182,000 $ 292,000 Ending Finished Goods Inventory: Cost of Goods Available for Sale [calculated above] Cost of Goods Sold Ending Finished Goods Inventory $ 292,000 (232,000) $ 60,000 Administrative Expenses: Total Selling and Administrative Expenses Selling Expenses Administrative Expenses $ 160,000 (98,000) $ 62,000 Operating Income: Gross Profit Total Selling and Administrative Expenses Operating Income $ 258,000 (160,000) $ 98,000 © 2021 Pearson Education, Inc. 1-24 P-M:1-31A Requirement 1 Cost of direct materials purchased: Direct = Materials Used Beginning Direct Materials + Purchases of Direct Materials – Ending Direct Materials Solving for cost of direct materials purchased: Purchases of Direct Materials = Direct Materials Used + Ending Direct Materials – Beginning Direct Materials = $2,000,000 + $800,000 – $700,000 = $2,100,000 Beginning = Work-in-Process Inventory + Total Manufacturing Costs Incurred = $1,500,000 + $26,300,000 = $26,600,000 = Beginning Finished Goods Inventory + Cost of Goods Manufactured = $400,000 + = $26,400,000 Requirement 2 Cost of goods manufactured for the year: Cost of Goods Manufactured Ending – Work-in-Process Inventory – $1,200,000 – Ending Finished Goods Inventory – $600,000 Requirement 3 Cost of goods sold for the year: Cost of Goods Sold $26,600,000 [calculated in 2] © 2021 Pearson Education, Inc. 1-25 P-M:1-32A Requirement 1 THE WINDSHIELD DOCTORS Income Statement Month Ended March 31, 2024 Revenues: Net Service Revenue Expenses: Salaries and Wages Expense Materials Expense Depreciation Expense—Truck Depreciation Expense—Building and Equipment Supplies Expense Utilities Expense Total Expenses Operating Income $ 23,000 $ 12,000 4,600 300 1,200 300 460 18,860 $ 4,140 Requirement 2 Unit cost = Total operating expenses / Total windshields repaired = $18,860 / 500 windshields = $37.72 per windshield Requirement 3 Yes. The actual unit cost per windshield of $37.72 is less than $50. © 2021 Pearson Education, Inc. 1-26 P-M:1-33A Requirement 1 CLYDE’S PETS Income Statement Year Ended December 31, 2024 Net Sales Revenue Cost of Goods Sold: Beginning Merchandise Inventory Purchases of Merchandise Cost of Goods Available for Sale Ending Merchandise Inventory Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Utilities Expense Rent Expense Sales Commission Expense Total Selling and Administrative Expenses Operating Income $ 56,000 $ 15,900 25,000 40,900 (10,100) 30,800 25,200 3,300 4,100 2,650 10,050 $ 15,150 Requirement 2 Unit cost = Cost of goods sold / Total units sold = $30,800 / 3,850 units = $8.00 per unit © 2021 Pearson Education, Inc. 1-27 Problems (Group B) P-M:1-34B Students’ responses will vary. Illustrative answers follow. Requirement 1 a. If the goods have been received, postponing recording of the purchases understates liabilities. This is unethical and inconsistent with the IMA standards even if the suppliers agree to delay billing. b. The software has not been sold. Therefore, it would be inconsistent with the IMA standards to record it as sales. c. Delaying year-end closing incorrectly records next year’s sales in this year’s sales. This is unethical and inconsistent with the IMA standards. d. The appropriate allowance for bad debts is a difficult judgment. The decision should not be driven by the desire to meet a profit goal. It should be based on the likelihood that the company will not collect the debts. We cannot determine this without more information. However, since the company emphasizes earnings growth, which can lead to sales to customers with weaker credit records, reducing the allowance seems questionable. It is not clear whether this strategy is inconsistent with the IMA standards. e. If the maintenance is postponed, there is no transaction to record. This strategy is beyond the responsibility of the controller, so it does not violate IMA standards. Requirement 2 The inconsistencies noted for Halo Software, Inc. particularly impact the financial statement information provided by financial accounting to external users, such as creditors and stockholders. They will be led to believe the operating performance (profitability) of the company is better than it really is. This misrepresentation may result in the investors holding the stock when they may have sold it with the correct information. Similarly, creditors may grant credit to the company with the false income information when they may not grant credit with the correct income information. Requirement 3 The controller should resist attempts to implement a, b, and c and should gather more information about d. If the President ignores Borzi, then Borzi needs to consider if she wants to work for a company that engages in unethical behavior. Borzi should not be associated with unethical behavior and should resign. © 2021 Pearson Education, Inc. 1-28 P-M:1-35B Requirement 1 Period costs are non-manufacturing costs that are expensed in the accounting period in which they are incurred. Product costs are the costs of purchasing or making a product. These costs are recorded as an asset (inventory) on the balance sheet until the asset is sold. The cost is then transferred to an expense account (Cost of Goods Sold) on the income statement. Product costs include direct materials, direct labor, and manufacturing overhead. On the income statement, Cost of Goods Sold (product cost) is subtracted from Net Sales Revenue to determine gross profit. The period costs are then subtracted from gross profit to determine operating income. Requirement 2 Period Cost Cost: Product Cost Direct Direct Manufacturing Materials Labor Overhead Handle and shaft of edger X Motor of edger X Factory labor for workers assembling edgers X Lubricant used on bearings in the edger (not traced to the product) X Glue to hold housing together X Plant janitorial wages X Depreciation on factory equipment X Rent on plant X Sales commissions X Administrative salaries X Plant utilities X Shipping costs to deliver finished edgers to customers X © 2021 Pearson Education, Inc. 1-29 P-M:1-36B Requirement 1 Service companies sell services rather than products. They sell time, skills, and knowledge. Merchandising companies resell products previously bought from suppliers. Manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into new finished products. Requirement 2 Company 1 is a merchandising company. Company 2 is a manufacturing company. The company type can be determined by the account names in the ledger. Requirement 3 Company 1: Beginning Merchandise Inventory Purchases (net) Cost of Goods Available for Sale Ending Merchandise Inventory Cost of Goods Sold $ 11,600 152,500 164,100 (12,400) $ 151,700 Company 2: Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold $ 15,400 214,500 229,900 (11,300) $ 218,600 © 2021 Pearson Education, Inc. 1-30 P-M:1-37B Requirement 1 CHEWY BONES Schedule of Cost of Goods Manufactured Year Ended December 31, 2024 Beginning Work-in-Process Inventory Direct Materials Used: Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used Direct Labor Manufacturing Overhead: Plant janitorial services Utilities for plant Rent on plant Total Manufacturing Overhead Total Manufacturing Costs Incurred during the Year Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 0 $ 13,400 39,000 52,400 (10,500) $ 41,900 16,000 900 1,200 9,000 © 2021 Pearson Education, Inc. 11,100 69,000 69,000 (1,500) $ 67,500 1-31 P-M:1-37B, cont. Requirement 2 CHEWY BONES Income Statement Year Ended December 31, 2024 Net Sales Revenue Cost of Goods Sold: Beginning Finished Goods Inventory Cost of Goods Manufactured* Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Sales Salaries Expense Delivery Expense Customer Service Hotline Expense Total Selling and Administrative Expenses Operating Income (Loss) $ 115,000 $ 0 67,500 67,500 (5,400) 62,100 52,900 5,100 1,700 1,600 8,400 $ 44,500 * From the Schedule of Cost of Goods Manufactured in Requirement 1. Requirement 3 For a manufacturing company, cost of goods sold on the income statement is based on cost of goods manufactured and the change in Finished Goods Inventory. For a merchandising company, cost of goods sold on the income statement is based on cost of merchandise purchased (including freight in) and the change in Merchandise Inventory. Requirement 4 Unit cost = Cost of goods manufactured / Total units produced = $67,500 / 17,500 units = $3.86 per unit (rounded to the nearest cent) © 2021 Pearson Education, Inc. 1-32 P-M:1-38B CHARLIE MANUFACTURING COMPANY Schedule of Cost of Goods Manufactured Month Ended June 30, 2024 Beginning Work-in-Process Inventory Direct Materials Used: Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Incurred During the Month Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 26,000 $ 30,000 51,000 81,000 (26,000) $ 55,000 72,000 50,000 177,000 203,000 (29,000) $ 174,000 Missing Amounts: Beginning Direct Materials: Direct Materials Available for Use Purchases of Direct Materials Beginning Direct Materials $ 81,000 (51,000) $ 30,000 Direct Materials Used: Direct Materials Available for Use Ending Direct Materials Direct Materials Used $ 81,000 (26,000) $ 55,000 Direct Labor: Total Manufacturing Costs Incurred During the Month Manufacturing Overhead Direct Materials Used [calculated above] Direct Labor $ 177,000 (50,000) (55,000) $ 72,000 © 2021 Pearson Education, Inc. 1-33 P-M:1-38B, cont. Total Manufacturing Costs to Account For: Beginning Work-in-Process Inventory Total Manufacturing Costs Incurred During the Month Total Manufacturing Costs to Account For $ 26,000 177,000 $ 203,000 Cost of Goods Manufactured: Total Manufacturing Costs to Account For [calculated above] Ending Work-in-Process Inventory Cost of Goods Manufactured $ 203,000 (29,000) $ 174,000 CHARLIE MANUFACTURING COMPANY Income Statement Month Ended June 30, 2024 Net Sales Revenue Cost of Goods Sold: Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale Ending Finished Goods Inventory Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Selling Expenses Administrative Expenses Total Selling and Administrative Expenses Operating Income $ 500,000 $ 118,000 174,000 292,000 (60,000) 232,000 268,000 90,000 60,000 150,000 $ 118,000 Missing Amounts: Net Sales Revenue: Cost of Goods Sold Gross Profit Net Sales Revenue $ 232,000 268,000 $ 500,000 © 2021 Pearson Education, Inc. 1-34 P-M:1-38B, cont. Cost of Goods Manufactured: [From the Schedule of Cost of Goods Manufactured] Cost of Goods Available for Sale: Beginning Finished Goods Inventory Cost of Goods Manufactured Cost of Goods Available for Sale $ 118,000 174,000 $ 292,000 Ending Finished Goods Inventory: Cost of Goods Available for Sale [calculated above] Cost of Goods Sold Ending Finished Goods Inventory $ 292,000 (232,000) $ 60,000 Administrative Expenses: Total Selling and Administrative Expenses Selling Expenses Administrative Expenses $ 150,000 (90,000) $ 60,000 Operating Income: Gross Profit Total Selling and Administrative Expenses Operating Income $ 268,000 (150,000) $ 118,000 © 2021 Pearson Education, Inc. 1-35 P-M:1-39B Requirement 1 Cost of direct materials purchased during the year: Direct = Materials Used Beginning Direct Materials + Purchases of Direct Materials – Ending Direct Materials Solving for cost of direct materials purchased: Purchases of Direct Materials = Direct Materials Used + Ending Direct Materials – Beginning Direct Materials = $2,600,000 + $800,000 – $700,000 = $2,700,000 Beginning = Work-in-Process Inventory + Total Manufacturing Costs Incurred = $1,500,000 + $21,900,000 = $21,400,000 = Beginning Finished Goods Inventory + Cost of Goods Manufactured = $1,100,000 + = $21,420,000 Requirement 2 Cost of goods manufactured for the year: Cost of Goods Manufactured Ending – Work-in-Process Inventory – $2,000,000 – Ending Finished Goods Inventory – $1,080,000 Requirement 3 Cost of goods sold for the year: Cost of Goods Sold $21,400,000 [calculated in 2] © 2021 Pearson Education, Inc. 1-36 P-M:1-40B Requirement 1 THE GLASS DOCTORS Income Statement Month Ended July 31, 2024 Revenues: Net Service Revenue Expenses: Salaries and Wages Expense Materials Expense Depreciation Expense—Truck Depreciation Expense—Building and Equipment Supplies Expense Utilities Expense Total Expenses Operating Income $ 25,000 $ 10,000 4,100 500 900 450 4,550 20,500 $ 4,500 Requirement 2 Unit cost = Total operating expenses / Total windshields repaired = $20,500 / 250 windshields = $82.00 per windshield Requirement 3 No. The actual unit cost per windshield of $82.00 is greater than $80. © 2021 Pearson Education, Inc. 1-37 P-M:1-41B Requirement 1 DILLON’S PETS Income Statement Year Ended December 31, 2024 Net Sales Revenue Cost of Goods Sold: Beginning Merchandise Inventory Purchases of Merchandise Cost of Goods Available for Sale Ending Merchandise Inventory Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Utilities Expense Rent Expense Sales Commission Expense Total Selling and Administrative Expenses Operating Income $ 56,000 $ 16,000 25,000 41,000 (10,500) 30,500 25,500 3,200 4,100 2,750 10,050 $ 15,450 Requirement 2 Unit cost = Cost of goods sold / Total units sold = $30,500 / 5,550 units = $5.50 per unit (rounded to the nearest cent) © 2021 Pearson Education, Inc. 1-38 Using Excel The student templates for Using Excel are available online in MyLab Accounting in the Multimedia Library or at http://www.pearsonhighered.com/Horngren. The solution to Using Excel is located in MyLab Accounting in the Instructor Resource Center or at http://www.pearsonhighered.com/Horngren. © 2021 Pearson Education, Inc. 1-39 Continuing Problem P-M:1-42 PIEDMONT COMPUTER COMPANY Schedule of Cost of Goods Manufactured Month Ended January 31, 2024 Beginning Work-in-Process Inventory Direct Materials Used: Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used Direct Labor Manufacturing Overhead: Plant janitorial services Utilities for plant Rent on plant Total Manufacturing Overhead Total Manufacturing Costs Incurred during the Month Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 0 $ 10,500 16,000 26,500 (9,700) $ 16,800 210,000 500 16,000 9,000 © 2021 Pearson Education, Inc. 25,500 252,300 252,300 (17,000) $ 235,300 1-40 Critical Thinking Tying It All Together Case M:1–1 Requirement 1 Winnebago’s finished goods inventory is such a relatively small portion of total inventory because Winnebago manufactures the RVs and then sells them to dealerships for resale to consumers. The company does not own or operate dealerships. Therefore, Winnebago has a relatively small portion of Finished Goods Inventory. As soon as RVs are complete, Winnebago will want to sell them to the dealerships. The majority of Winnebago’s inventory is in Raw Materials Inventory that will be used in the manufacturing process and Work–in–Process Inventory of the RVs started but not yet completed. Requirement 2 Average cost of goods sold = Average sales price × Cost of goods sold % = $96,000 × 85% = $81,600. Average gross profit = Average sales price – Average cost of goods sold = $96,000 – $81,600 = $14,400. Requirement 3 Average cost of goods sold = Average sales price × Cost of goods sold % = $96,000 × 82% = $78,720. Average gross profit = Average sales price – Average cost of goods sold = $96,000 – $78,720 = $17,280. Profits would increase by $2,880 ($17,280 – $14,400) per motor home sold. Requirement 4 Total increase in operating income = Average increase in profits per motor home × Number of motor homes = $2,880 per motor home × 9,548 motor homes = $27,498,240. Requirement 5 Managerial accounting provides detailed information on all costs incurred by the company. Managers can use the information provided to analyze different types of costs, such as product costs and period costs, to determine where actual costs exceeded expected costs and then consider options to reduce those costs. © 2018Pearson Education, Inc. 16-41 Decision Case M:1-1 Requirement 1 Shown in the schedule, below, the ending inventories are: Direct Materials, $143,000; Work-in-Process Inventory, $239,000; and Finished Goods Inventory, $150,000. POWERSWITCH, INC. Flow of Costs Schedule For the 1st Quarter Raw Materials Inventory** Beginning DM + Purchases of DM = Direct Materials Available for Use − Ending DM = Direct Materials Used $ 113,000 * 476,000 * 589,000 143,000 f $ 446,000 e Work-in-Process Inventory Beginning WIP Inventory $ 229,000 * + Direct Materials 446,000 e Used + Direct Labor 505,000 * + Manufacturing Overhead 245,000 * = Total Manufacturing Costs to Account For 1,425,000 * 239,000 d − Ending WIP Inventory = Cost of Goods $ 1,186,000 c Manufactured Finished Goods Inventory Beginning FG Inventory $ 154,000 * + Cost of Goods 1,186,000 c Manufactured = Cost of Goods Available for Sale 1,340,000 * 150,000 b − Ending FG Inventory = Cost of Goods $ 1,190,000 a Sold * Denotes amounts given in the case. **Direct materials portion only Calculations for amounts denoted with a superscript letters are provided on the next two pages. © 2018Pearson Education, Inc. 16-42 Decision Case M:1-1, cont. Calculations: a b Cost of Goods Sold: Sales ´ (1 – Gross Profit %) = Cost of Goods Sold $1,700,000 ´ (1 – 30%) = $1,190,000 $1,700,000 ´ 70% = $1,190,000 Ending Finished Goods Inventory: Cost of Goods Available for Sale – Ending Finished Goods Inventory = Cost of Goods Sold $1,340,000 – Ending Finished Goods Inventory = $1,190,000 Ending Finished Goods Inventory = $150,000 Therefore: c Cost of Goods Manufactured: Beginning Finished Goods Inventory + Cost of Goods Manufactured = Cost of Goods Available for Sale $154,000 + Cost of Goods Manufactured = $1,340,000 Cost of Goods Manufactured = $1,186,000 Therefore: d Ending Work-in-Process Inventory: Total Manufacturing Costs to Account For – $1,425,000 – Therefore: Ending Work-in-Process Inventory = Cost of Goods Manufactured Ending Work-in-Process Inventory = $1,186,000 Ending Work-in-Process Inventory = $ 239,000 © 2018Pearson Education, Inc. 16-43 Decision Case M:1-1, cont. e Direct Materials Used: Beginning Work-in-Process Inventory $229,000 Direct + Direct + Manufacturing + Materials Labor Overhead Used = Total Manufacturing Costs to Account For Direct + $505,000 + $245,000 + Materials Used = $1,425,000 = $ 446,000 Therefore: f Direct Materials Used Ending Direct Materials: Direct Materials Available for Use – Ending Direct Materials = Direct Materials Used $589,000 – Ending Direct Materials = $446,000 Ending Direct Materials = $143,000 Therefore: Requirement 2 Inventory lost in the flood: Direct Materials Work-in-Process Inventory Finished Goods Inventory Total Inventory $ 143,000 239,000 150,000 $ 532,000 © 2018Pearson Education, Inc. 16-44 Ethical Issue M:1-1 Students’ responses will vary. Illustrative answers follow. a. The ethical issue facing Becky is deciding what to do about the owner’s gifts to the regional sales managers. Although small “courtesy” gifts are accepted practice in the world of sales, the regular basis and the high value of these items (especially jewelry) suggest that the owner is bribing the sales managers and other sales executives to receive a large allocation of cars. b. The options include: (1) Do nothing, (2) Discuss the matter with the owner, (3) Resign if the owner will not stop the practice, or (4) Inform the manufacturer. c. The possible consequences include: 1. If Becky does nothing, her job and those of the other employees may remain secure for the time being. However, as controller she could be held accountable for laundering a bribe if the scheme became public. A lawsuit brought by other dealers who did not receive a fair share of available cars could name her as an involved party. If Becky is a CPA, she could also lose her CPA license. There are also potential tax consequences to consider. Since the jewelry expenditures are being recorded as selling expenses, it is likely that this amount is being deducted on the company’s tax return. The IRS limits deductions of gifts to $25 per person per year. Since a Rolex watch far exceeds the cost of $25, Becky’s failure to disclose the true nature of the expense may make her liable for underreporting the company’s tax liability. 2. If Becky discusses the matter with the owner, she might find out that there is another side to the story and in fact there is no wrongdoing or ethical dilemma. However, this seems unlikely given the facts. It also seems unlikely that the owner will end this practice since it enhances the dealership’s profits. However, Becky may have some influence on Mueller if she explains the dangers of continuing the bribes. Mueller could be sued by other dealers, or the manufacturer could cancel his dealership. Such outcomes would affect all the dealership’s employees, not just Mueller. If Mueller refuses to change his ways, then Becky is in an even more difficult position because she now has direct knowledge of the bribery. © 2018Pearson Education, Inc. 16-45 Ethical Issue M:1-1, cont. 3. By resigning, Becky loses her job but protects her integrity and avoids being involved in a subsequent action against the dealership if the bribery becomes known. 4. Perhaps an even more difficult question is whether Becky should inform the manufacturer about the bribery. If Becky has not already resigned, Mueller probably would fire her for taking this action. d. Accountants should never become party to, or appear to be involved in, an unethical (and possibly illegal) situation such as this. This is especially true for persons with fiduciary responsibilities like a controller. Becky should discuss her concerns with the owner. If Mueller is indeed bribing the sales representatives and refuses to stop this practice, Becky should inform the manufacturer, or she should resign. Communication Activity M:1-1 Period costs are operating costs that are expensed in the same accounting period in which they are incurred, whereas product costs are recorded as an asset and not expensed until the accounting period in which the product is sold. Period costs are all costs not considered product costs. Manufacturing companies track costs on three kinds of inventory. Raw Materials Inventory includes materials used to manufacture a product. Work-in-Process Inventory includes goods that have been started in the manufacturing process but are not yet complete. Finished Goods Inventory includes completed goods that have not yet been sold. © 2018Pearson Education, Inc. 16-46 Chapter 1 Introduction to Managerial Accounting Chapter Overview The chapter introduces students to managerial accounting as distinguished from financial accounting. Students learn about the information that managers—the decision makers inside the business—must know and use in order to effectively plan and control the business. The differences between financial and managerial accounting are delineated. The role of the manager as well as managerial accounting functions are emphasized. The chapter continues with a discussion of the professional ethical standards for management accountants: competence, confidentiality, integrity, and credibility. Cost classification categories are explained, including direct/indirect costs, product/period costs, and types of manufacturing product costs (direct materials, direct labor, and manufacturing overhead), which can be alternatively categorized as prime costs (direct materials and direct labor) or conversion costs (direct labor and manufacturing overhead). Service companies, merchandising companies, and manufacturing companies are discussed, and a balance sheet and income statement examples are provided for each. The calculation of cost of goods manufactured is presented, and a schedule example is provided. Exhibits help students visualize the flow of costs through a manufacturing company’s accounting system to the income statement. A discussion of today’s business environment points out that recent trends include a shift toward a service economy, competing in the global marketplace, timed-based competition, advanced information systems, e-commerce, just-in-time management, advances in technology, the total quality movement, and integrated economic, social, and environmental reporting. The chapter concludes with a discussion on how to calculate cost per unit for a merchandising business and cost per service for a service business. An Ethics feature provides an ethical dilemma that can be used for discussion purposes. A Tying It All Together feature provides a look into the balance sheet and income statement of Winnebago Industries, Inc. The Review section includes Things You Should Know which highlights the information students should have acquired from the chapter. A Check Your Understanding Problem reviews product/period cost categorization and calculation of cost of goods manufactured, cost of goods sold, and cost per unit. A list of Key Terms is provided. A Quick Check gives students a chance to assess their knowledge of the chapter learning objectives. Chapter 1: Learning Objectives LO 1. Define managerial accounting and understand how it is used LO 2. Classify costs used in managerial accounting LO 3. Prepare financial statements for a manufacturer, including a balance sheet, income statement, and schedule of cost of goods manufactured LO 4. Describe business trends affecting managerial accounting LO 5. Describe how managerial accounting is used in service and merchandising companies Copyright © 2021 Pearson Education, Inc. 1-2 Chapter 1: Teaching Outline with Lecture Notes LO 1. Define managerial accounting and understand how it is used § Exhibit M:1-1: Financial Accounting Versus Managerial Accounting a) Managers’ role in the organization § Exhibit M:1-2: Organizational Chart for Smart Touch Learning (Partial) b) Managerial accounting functions § Exhibit M:1-3: Pathways Vision Model c) Ethical standards of managers § Exhibit M:1-4: IMA Statement of Ethical Professional Practice (Excerpt) Lecture Notes: Students are not as familiar with managerial accounting as they are financial accounting. Emphasize the key difference: Managerial accounting is focused on internal users of financial information for decision making, while financial accounting is focused on external users for financial reporting. Managers throughout the organization rely on managerial accounting to help plan, direct, control, and make decisions about the business. The Pathways Vision Model provides a visual way for students to more clearly understand the role of managerial accounting in making good decisions. The Institute of Management Accountants (IMA) has developed ethical standards requiring managerial accountants to maintain their professional competence, preserve the confidentiality of the information they handle, and act with integrity and credibility. Suggested In-Class Exercise: E-M:1-13 LO 2. Classify costs used in managerial accounting a) Manufacturing companies b) Direct and indirect costs c) Manufacturing costs § Exhibit M:1-5: Manufacturing Costs d) Prime and conversion costs § Exhibit M:1-6: Prime and Conversion Costs Copyright © 2021 Pearson Education, Inc. 1-3 e) Product and period costs § Exhibit M:1-7: Period Versus Product Costs § Exhibit M:1-8: Period and Product Costs for Smart Touch Learning Lecture Notes: Point out the distinction between direct and indirect manufacturing costs. Direct costs are added to WIP, whereas indirect costs are usually collected in one or more Manufacturing Overhead accounts and then applied to WIP using a predetermined overhead rate. Therefore, when materials are used, you must know whether they are indirect or direct. When labor is incurred, you must know whether it is direct or indirect. The recording of labor in an asset account (WIP) may need additional explanation. Students might want to expense labor because it was expensed in previous chapters. Remind students that manufacturing companies add all product costs to inventory, and they are expensed (COGS) when inventory is sold. Distinguish between product costs and period costs. GAAP requires that all manufacturing costs be treated as costs of making the product, which means these manufacturing costs (raw materials, manufacturing labor, and manufacturing overhead) are “attached” to the product. All nonmanufacturing costs go directly to the income statement in the period in which they occur. Consider an oversimplified company that has a factory in your local community and corporate offices in New York City (or some other major urban center). Everything that goes on at the factory in your local community is a manufacturing cost that becomes attached to the product by accumulating those costs in WIP. Everything that goes on in the corporate offices is a period cost that is charged directly to the income statement in the period in which it occurs. While this is an oversimplification (for example, sales offices or research labs can be located in a factory setting), it serves to fix the distinction in students’ minds. Overhead includes all manufacturing costs other than direct materials and direct labor. Therefore, students must know whether a cost is manufacturing or nonmanufacturing. For example, “depreciation” will no longer suffice. Is it manufacturing or nonmanufacturing? As discussed for labor above, students may want to expense all indirect costs, such as depreciation, insurance, etc., because they were expensed in previous chapters. Remind students that manufacturing companies add all product costs to inventory—first to WIP, which is transferred to FG, and then as COGS when inventory is sold. Suggested In-Class Exercise: E-M:1-15 LO 3. Prepare financial statements for a manufacturer, including a balance sheet, income statement, and schedule of cost of goods manufactured a) Balance sheet § Exhibit M:1-9: Balance Sheet Comparison b) Income statement § Exhibit M:1-10: Income Statement Comparison Copyright © 2021 Pearson Education, Inc. 1-4 c) Flow of product costs in a manufacturing company § Exhibit M:1-11: Flow of product Costs in a Manufacturing Company d) Calculating cost of goods manufactured i. Step 1: Calculate direct materials used. ii. Step 2: Calculate total manufacturing costs incurred during the year. iii. Step 3: Calculate cost of goods manufactured. § Exhibit M:1-12: Schedule of Costs of Goods Manufactured e) Calculating cost of goods sold § Exhibit M:1-13: Income Statement—Manufacturing Company f) Flow of product costs through the inventory accounts § Exhibit M:1-14: Flow of Product Costs Through Smart Touch Learning’s Inventory Accounts g) Using the schedule of cost of goods manufactured to calculate unit product cost Lecture Notes: Emphasize that management accounting concepts apply to all types of companies, not just manufacturing companies. Much attention is focused on manufacturing businesses because they are more complex and less familiar. Nonetheless, the product costing concepts discussed in relation to manufacturing can be applied to service costing and activity costing in the other types of companies. Students will probably be able to relate to service companies and merchandising companies (such as auto repair shops and grocery stores) more easily than they can relate to manufacturing companies. Service companies and merchandising companies have already been discussed in the textbook. It may be helpful to ask students to provide examples of each type of company, especially merchandising and manufacturing, to assess their knowledge of the differences. Ask if anyone has toured a factory when it is operating. When introducing inventory accounts, remind students how the Merchandise Inventory account works. Merchandise is purchased (increase Merchandise Inventory with a debit). Then when the inventory is sold, take it out of Merchandise Inventory and off the balance sheet (decrease Merchandise Inventory with a credit) and charge it to the income statement as the expense Cost of Goods Sold (increase the expense with a debit). If more merchandise is purchased than sold, the difference remains in Merchandise Inventory as the ending balance and is reported as an asset on the balance sheet. It then becomes next period’s beginning inventory. Emphasize the basic generic inventory relationship: Beginning + Additions – Ending balance = Amount used, manufactured, or sold Copyright © 2021 Pearson Education, Inc. 1-5 Manufacturers have three inventory accounts: Raw Materials Inventory (RM), Work-in-Process Inventory (WIP), and Finished Goods Inventory (FG). All three are assets on the balance sheet. Inventory is removed from FG and from the balance sheet when sold and then charged to the income statement as the expense Cost of Goods Sold (COGS). The WIP account is an accumulation account that collects product costs as they are added in the production process—direct materials, direct labor, and manufacturing overhead. Explain that WIP represents the product as it is being assembled on the factory floor. After the product comes off the production line and is boxed up and moved to the finished product warehouse, the related dollars are taken out of the WIP account and moved to the FG account. Demonstrate that inventory accounts all function in the same way as the generic inventory account previously discussed: Beginning balance + Additions – Ending balance = Amount used, manufactured, or sold Point out that the increases in WIP represent the accumulation of direct materials, direct labor, and manufacturing overhead costs that become attached to the product being assembled. Suggested In-Class Exercises: E-M:1-16, E-M:1-17, and E-M:1-18 LO 4. Describe business trends affecting managerial accounting a) Shift toward a service economy b) Global competition c) Time-based competition d) Advances in technology e) Total quality management § Exhibit M:1-15: Value Chain f) The triple bottom line Suggested In-Class Exercise: E-M:1-22 LO 5. Describe how managerial accounting is used in service and merchandising companies a) Calculating cost per service b) Calculating cost per item Suggested In-Class Exercise: E-M:1-24, E-M:1-25 Copyright © 2021 Pearson Education, Inc. 1-6 Chapter 1: Handout for Student Notes LO 1. Why is managerial accounting important? o Manager’s role in the organization o Managerial accounting functions o Ethical standards of managers LO 2. How are costs classified? o Manufacturing companies o Direct and indirect costs o Manufacturing costs o Prime and conversion costs o Product and period costs LO 3. How do manufacturing companies prepare financial statements? o Balance sheet o Income statement Copyright © 2021 Pearson Education, Inc. 1-7 o Flow of product costs in a manufacturing company o Calculating cost of goods manufactured o Calculating cost of goods sold o Flow of product costs through the inventory accounts o Using the schedule of costs of goods manufactured to calculate unit product cost LO 4. What are business trends that are affecting managerial accounting? o Shift toward a service economy o Global competition o Time-based competition o Advances in technology o Total quality management o The triple bottom line Copyright © 2021 Pearson Education, Inc. 1-8 LO 5. How is managerial accounting used in service and merchandising companies? o Calculating cost per service o Calculating cost per item Copyright © 2021 Pearson Education, Inc. 1-9 Chapter 1: Student Chapter Summary LO 1. Define managerial accounting and understand how it is used Financial accounting prepares reports for external users, such as investors, creditors, and government agencies. Managerial accounting provides information for internal managers, such as department heads, division managers, chief executive officers, and vice presidents. This managerial accounting data helps managers plan, direct, control, and make decisions about the business. Managerial accountants may obtain professional certifications, such as Certified Management Accountant (CMA) or Chartered Global Management Accountant (CGMA ). The IMA Standards of Ethical Professional Practice include competence, confidentiality, integrity, and credibility. LO 2. Classify costs used in managerial accounting Direct costs can be easily traced directly to a cost object, whereas indirect costs cannot. Manufacturing costs, also known as product costs, are all costs incurred in the manufacture of final products. The three categories of manufacturing costs are direct materials, direct labor, and manufacturing overhead. Prime costs are direct materials and direct labor. Conversion costs are direct labor and manufacturing overhead. Product costs are first recorded as inventory and are not expensed until the product is sold. Period costs are all costs not considered product costs. Period costs are expensed in the accounting period incurred. LO 3. Prepare financial statements for a manufacturer, including a balance sheet, income statement, and schedule of cost of goods manufactured Manufacturers have three inventory accounts: Raw Materials Inventory (RM), Work-in-Process Inventory (WIP), and Finished Goods Inventory (FG). All three are assets on the balance sheet. Inventory costs are removed from FG and from the balance sheet when the product is sold and then charged to the income statement as the expense Cost of Goods Sold (COGS). The WIP account is an accumulation account that collects product costs as they are added in the production process—direct materials, direct labor, and manufacturing overhead. WIP represents the cost of the product as it is being assembled on the factory floor. After the product comes off the production line and is boxed up and moved to the finished product warehouse, the related dollars are taken out of the WIP account and moved to the FG account. Calculating cost of goods manufactured and cost of goods sold requires knowledge of how product costs flow through a manufacturing company. Cost of goods manufactured is calculated in three steps: Step 1: Calculate direct materials used. Step 2: Calculate total manufacturing costs incurred during the year. Step 3: Calculate cost of goods manufactured. Copyright © 2021 Pearson Education, Inc. 1-10 Cost of goods sold represents the cost of the Finished Goods Inventory that has been sold. All inventory accounts function in the same way: Beginning balance + Additions – Ending balance = Amount used, manufactured, or sold LO 4. Describe business trends affecting managerial accounting The shift toward a service economy, global competition, time-based competition, advances in technology, Total Quality Management (TQM), and the triple bottom line are business trends affecting managerial accounting today. Managers in the service industry need to understand the cost of providing services, supporting customers, and planning for future customer and service needs. Companies are moving operations to other countries to be closer to new markets or partnering with foreign companies to meet local needs. Companies have also developed the timesaving responses to keep up with the pace of business in the instant messaging age, such as advanced information systems, e-commerce, and just-in-time management. Recent advances in technology can provide businesses with a competitive advantage. Software tools allow accountants to work with information technology teams to analyze large quantities of data and use the analysis to make more-informed decisions, while robotic process automation (RPA) and artificial intelligence (AI) use technology to improve operational efficiency and decrease costs. TQM is a philosophy of continuous improvement of products and processes leading to fewer defects and higher customer satisfaction. Companies are also recognizing that they have multiple responsibilities—economic, social, and environmental—and that generating profits for owners and investors is only one aspect of being a socially responsible organization. LO 5. Describe how managerial accounting is used in service and merchandising companies Managerial accounting isn’t just for manufacturing companies. Service companies and merchandising companies also use managerial accounting. o Unit cost per service = Total operating costs / Total number of services provided o Unit cost per item = Total cost of goods sold / Total number of items sold Copyright © 2021 Pearson Education, Inc. 1-11 Chapter 1: Assignment Grid and Other Materials S-M:1-1 S-M:1-2 S-M:1-3 S-M:1-4 S-M:1-5 S-M:1-6 S-M:1-7 S-M:1-8 S-M:1-9 S-M:1-10 S-M:1-11 S-M:1-12 E-M:1-13 E-M:1-14 E-M:1-15 E-M:1-16 E-M:1-17 E-M:1-18 E-M:1-19 E-M:1-20 E-M:1-21 E-M:1-22 E-M:1-23 E-M:1-24 E-M:1-25 P-M:1-26A, P-M:1-34B P-M:1-27A, P-M:1-35B P-M:1-28A, P-M:1-36B P-M:1-29A, P-M:1-37B P-M:1-30A, P-M:1-38B P-M:1-31A, P-M:1-39B P-M:1-32A, P-M:1-40B P-M:1-33A, P-M:1-41B LO 1 X X LO 2 LO 3 LO 4 LO 5 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X S – Short Exercises (Easy) E – Exercises (Moderate) P – Problems (Difficult) Copyright © 2021 Pearson Education, Inc. 1-12 Other End-of-Chapter Materials: Continuing Problem P-M:1-42 Tying It All Together Case 1-1 Decision Case 1-1 Ethical Issue 1-1 Communication Activity 1-1 Copyright © 2021 Pearson Education, Inc. 1-13 CHAPTER 1 TEN-MINUTE QUIZ Circle the letter of the best response. 1. Which of the following is a characteristic of managerial accounting information? A. Provides information that is useful to external decision makers B. Usually reported on a quarterly or annual basis C. Not required to follow GAAP D. Focuses on past results 2. Which of the following is a software system representing an advance in technology used to analyze large quantities of data for more-informed decisions? A. Enterprise Value Chain B. Tableau C. Advanced information systems D. Just-in-time management systems 3. Which of the following characteristics of today’s business environment is most closely associated with the philosophy of continuous improvement? A. Global competition B. Total Quality Management C. Time-based competition D. E-commerce 4. Which of the following accounts is used by a manufacturing company but not by a service company? A. Cost of Goods Sold B. Salaries Payable C. Supplies Expense D. Retained Earnings 5. Goods available for sale that are not part of Cost of Goods Sold are included in A. Work-in-Process Inventory beginning balance. B. Work-in-Process Inventory ending balance. C. Finished Goods Inventory beginning balance. D. Finished Goods Inventory ending balance. 6. Which of the following is an indirect cost of manufacturing a car? A. Salary of an assembly line worker who assembles the cars B. Salary of the plant supervisor who plans the factory production schedule C. Cost of a car engine D. Cost of a car door Copyright © 2021 Pearson Education, Inc. 1-14 7. Which of the following is a product cost? A. Advertising expense B. Insurance on plant and equipment in the factory C. Depreciation on computer equipment at the corporate headquarters D. Sales commissions Questions 8 and 9 use the data in the following table, which has been provided by a bakery: Beginning Direct Materials Ending Direct Materials Beginning Work-in-Process Inventory Ending Work-in-Process Inventory Beginning Finished Goods Inventory Ending Finished Goods Inventory Manufacturing Overhead Direct labor Direct materials used in production $ 6,000 9,000 12,000 17,000 3,000 5,000 21,000 30,000 95,000 8. What is cost of direct materials purchased? A. $ 3,000 B. $ 92,000 C. $ 98,000 D. $110,000 9. What is the cost of goods manufactured? A. $125,000 B. $141,000 C. $146,000 D. $151,000 10. A management accountant who communicates information fairly and objectively is practicing the ethical standard of A. integrity. B. confidentiality. C. competence. D. credibility. Copyright © 2021 Pearson Education, Inc. 1-15 Answer Key to Ten-Minute Quiz: 1. C 2. B 3. B 4. A 5. D 6. B 7. B 8. C Beginning Direct Materials Purchases of Direct Materials Direct Materials Available for Use Ending Direct Materials Direct Materials Used $ 6,000 ? ? (9,000) $ 95,000 Direct Materials Available for Use = Direct Materials Used + Ending Direct Materials = $95,000 + $9,000 = $104,000 Purchases of Direct Materials = Direct Materials Available for Use – Beginning Direct Materials = $104,000 − $6,000 = $98,000 9. B Beginning Work-in-Process Inventory Direct Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Incurred during the Period Total Manufacturing Costs to Account For Ending Work-in-Process Inventory Cost of Goods Manufactured $ 12,000 $ 95,000 30,000 21,000 146,000 158,000 (17,000) $ 141,000 10. D Copyright © 2021 Pearson Education, Inc. 1-16 Extra Critical Thinking Questions Decision Case 16-2 The IMA’s Statement of Ethical Professional Practice can be applied to more than just managerial accounting. It is also relevant to college students. Explain at least one situation that shows how each IMA standard in Exhibit M:1-4 is relevant to your experiences as a student. For example, the ethical standard of competence would suggest not cutting classes! Decision Case 16-2: Solution Students’ responses will vary. Illustrative answers follow: • • • • Competence. Students have a responsibility to build their professional competence by attending classes, conscientiously completing homework, and studying for exams. Confidentiality. When friends or family members share intimate information or highly personal information, you should respect the trust they have placed in you and keep that information confidential, as is appropriate for the situation. Integrity. Students have a responsibility to act with integrity and not to cheat. Students also should help ensure the integrity of the process. For example, students should inform the instructor if they suspect other students have a copy of an upcoming exam. Credibility. Be honest and straightforward when communicating with others. Do not lie or deliberately mislead others. Fraud Case 1-1 Juan Gomez was the fastest-rising star of a small CPA firm in West Palm Beach, Florida. Most of his clients traveled in stratospheric circles of wealth, and Juan knew that fitting in with this crowd was essential to his career. Although he made good money, it wasn’t enough to live that kind of lifestyle. Meanwhile, Juan had become friends with one of his clients, Tony Russo. Knowing Russo’s books inside and out and being on close terms with him, Juan asked Tony for a personal loan. Juan was sure he’d be able to pay it back when he got his next bonus, but things stretched out, and additional loans were made. Two years later, Tony’s company hit some losses, and the numbers were looking grim. Tony reminded Juan that it would not look good for his career if his CPA firm knew Juan had borrowed from a client, and so Juan changed a few numbers and signed off on clean financials for Tony’s firm. This went on for three years, until one morning when Juan got a call. Russo had died; his sons had gone through the books, and the whole scheme came out. Juan did some prison time and lost his license, but he was repentant and made an instructional video for accounting students to warn them of the temptations they may encounter in the real world of business. Copyright © 2021 Pearson Education, Inc. 1-17 Requirements 1. Although the central character of this story worked in public accounting, please refer to the IMA Statement of Ethical Professional Practice in Exhibit M:1-4 and discuss which of those issues are reflected in this case. 2. Could Juan have removed himself from his situation? How? Fraud Case 1-1: Solution Students’ responses will vary. Illustrative answers follow. Requirement 1 This case reflects a clear conflict of interest in that Juan Gomez, as a public accountant, was supposed to be independent of his client but was, in fact, financially involved. This is a clear violation of integrity. It also involves the issue of credibility, in that Juan “cooked the books” for his client and thus sanctioned the publication of false financial information. Requirement 2 Juan would first have to pay back the loan he took from his client. Then he would have to remove himself from the engagement with this client, admit his actions, and possibly resign from his firm because the falsified financial information would become apparent to whomever followed Juan on the engagement. These actions might, or might not, shield Juan from criminal or civil prosecution. The bottom line is that once Juan took the money, his career was in irreversible jeopardy. Team Project 1-1 Search the Internet for a nearby company that has a Web site. Arrange an interview for your team with a managerial accountant, a controller, or another accounting/finance officer of the company. Requirements Before your team conducts the interview, answer the following questions: 1. Is this a service, merchandising, or manufacturing company? What is its primary product or service? 2. Is the primary purpose of the company’s Web site to provide information about the company and its products, to sell online, or to provide financial information for investors? 3. Are parts of the company’s Web site restricted so that you need password authorization to enter? What appears to be the purpose of limiting access? 4. Does the Web site provide an e-mail link for contacting the company? At the interview, begin by clarifying your team’s answers to Questions 1 through 4 and ask the following additional questions: Copyright © 2021 Pearson Education, Inc. 1-18 5. If the company sells over the Internet, what benefits has the company derived? Did the company perform a cost/benefit analysis before deciding to begin Web sales? Or If the company does not sell over the Internet, why not? Has the company performed a cost/benefit analysis and decided not to sell over the Web? 6. What is the biggest cost of operating the Web site? 7. Does the company make any purchases over the Internet? What percentage? 8. How has e-commerce affected the company’s managerial accounting system? Have the managerial accountant’s responsibilities become more or less complex? More or less interesting? 9. Does the company use Web-based accounting applications, such as accounts receivable or accounts payable? 10. Does the company use an ERP system? If so, do managers view the system as a success? What have been the benefits? The costs? Your team should summarize your findings in a short paper. Provide any exhibits that enhance your explanation of key items. Provide proper references and a works cited page. Team Project 1-1: Solution Students’ responses will vary. However, following are some observations. The person interviewed could be identified through a connection of one of the students, a connection made by the instructor, or a connection through the school. Requiring students to answer the first four questions before the interview will help ensure that they are prepared for the interview. It is important that students be prepared so they can make a favorable impression on the interviewee (for the school and future employment!) and so they do not waste the interviewee’s time. If the company is of any reasonable size, students should be able to gather information from the library or the Internet. While it would be unusual for a company not to have a Web site, the role of its Web site in the company’s business plan can vary significantly. The site may simply provide information about the company and/or its products and, for a manufacturer, a dealer locator. Other Web sites are designed to sell products. Certain Web pages may be designed for sales to the general public, while other parts of the site may require a password and offer sales to specific customers on prearranged terms. The Web site might not give a full indication of the extent to which a company relies on the Internet. For example, a company may rely on the Internet for purchasing, budgeting, or communicating within the firm. Increasing dependence on the Internet has implications for management accounting. A full-featured Web site may cost millions of dollars, so the CFO will likely be involved in the investment decision and in monitoring and evaluating the success of this investment. Management accountants will collect and analyze new types of data, such as the number of unique customers at the company’s Web site and the length of time each customer spends at the site. Copyright © 2021 Pearson Education, Inc. 1-19 Accounting applications also may follow the underlying transactions to the Web. For example, when a company moves business-to-business sales to the Web, it also may adopt Internet-based receivables management software to reduce billing costs and speed up collection. The company also may install an ERP system to further integrate and speed up its transaction processing. Copyright © 2021 Pearson Education, Inc. 1-20 Chapter 2 Job Order Costing Chapter Overview The chapter presents a detailed discussion of job order costing, a special accounting system used for product costing by companies that manufacture unique products as individual units or in distinct batches. Job order costing also applies to companies that provide specialized services. The job order costing system is described, including details concerning the job cost record, which accumulates costs of direct materials, direct labor, and manufacturing overhead associated with a specific job. Procedures are explained for tracing direct materials and direct labor costs to specific jobs, based on information provided in related materials requisitions and labor time records. Next, an overview of how overhead costs flow through the job order costing system is provided, including the calculation and use of a predetermined overhead allocation rate. The disposition of underallocated or overallocated manufacturing overhead is examined. Journal entries for all transactions are illustrated. A Data Analytics in Accounting feature highlights how Granite Construction Incorporated uses data analytics to minimize costs and maximize profits. The chapter discussion ends with an overview of job order costing in a manufacturing company as contrasted with job costing in a service company. A Decisions feature addresses using job order costing in a service company. A Tying It All Together feature provides a look into job costing and Granite Construction Incorporated. The Review section includes Things You Should Know which highlights the information students should have acquired from the chapter. A Check Your Understanding problem reviews calculating a predetermined overhead allocation rate, journalizing and posting transactions, and adjusting for overallocated or underallocated overhead. A list of Key Terms is provided. A Quick Check gives students a chance to assess their knowledge of the chapter learning objectives. Chapter 2: Learning Objectives LO 1. Distinguish between job order costing and process costing LO 2. Record materials and labor costs in a job order costing system LO 3. Record actual and allocated overhead costs in a job order costing system LO 4. Record the completion and sales of finished goods LO 5. Adjust for overallocated and underallocated overhead LO 6. Calculate cost of goods manufactured and cost of goods sold LO 7. Calculate job costs for a service company Copyright © 2021 Pearson Education, Inc. 2-2 Chapter 2: Teaching Outline with Lecture Notes LO 1. Distinguish between job order costing and process costing a) Job order costing b) Process costing § Exhibit M:2-1: Job Order Costing Versus Processing Lecture Notes: Throughout the chapter, emphasize the four step method to track product costs: accumulate, assign, allocate, and adjust. Suggested In-Class Exercise: E-M:2-17 LO 2. Record materials and labor costs in a job order costing system b) Overview of the job cost record § Exhibit M:2-2: Job Cost Record, Job 27, Completed § Exhibit M:2-3: Flow of Product Costs in Job Order Costing c) Materials i. Purchasing materials § Exhibit M:2-4: Raw Materials Subsidiary Ledger ii. Using materials § Exhibit M:2-5: Material Requisition § Exhibit M:2-6: Job Cost Record—Direct Materials Recorded d) Labor § Exhibit M:2-7: Job Cost Record—Direct Labor Recorded Lecture Notes: As a reminder from Chapter 16, direct costs are recorded in WIP, and indirect costs are recorded in Manufacturing Overhead and then applied to each job. Material and labor must be divided into direct and indirect for proper classification. Each job will have a job cost record that records materials, labor, and overhead added to the job. Therefore, a company could have multiple job cost records but will still have just one WIP account. The WIP account balance should equal the total of all the outstanding job cost records. Suggested In-Class Exercise: E-M:2-20 Copyright © 2021 Pearson Education, Inc. 2-3 LO 3. Record actual and allocated overhead costs in a job order costing system a) Before the period—Calculating the predetermined overhead allocation rate Predetermined overhead allocation rate = Total estimated overhead costs / Total estimated quantity of the overhead allocation base b) During the period—Allocating overhead Allocated manufacturing overhead cost = Predetermined overhead allocation rate × Actual quantity of allocation base used by each job § Exhibit M:2-8: Job Cost Record, Job 27, Completed Unit product cost = Cost of goods manufactured / Total units produced Lecture Notes: Actual overhead costs are moved into the Manufacturing Overhead account with a debit, and various accounts are credited, depending on the source of the overhead costs. Next, allocated overhead costs are moved to WIP with a debit to the WIP account and a credit to the Manufacturing Overhead account, typically using a predetermined overhead allocation rate multiplied by the actual quantity of the allocation base (measured as labor hours, machine hours, or some other activity basis). The predetermined overhead allocation rate is based on estimated overhead costs and estimated quantities of the allocation base. The company has to apply overhead from day one and cannot wait until the end of the year, when the actual costs and quantities are known. Instead of allocating actual overhead costs every month, which may increase or decrease erratically, the use of the predetermined overhead allocation rate serves to normalize, or smooth out, overhead costs for every job throughout the year. Suggested In-Class Exercise: E-M:2-21 LO 4. Record the completion and sales of finished goods a) Transferring costs to Finished Goods Inventory b) Transferring costs to Cost of Goods Sold Lecture Notes: In a job order system, how do you know what cost amount to transfer from WIP to FG when a job is complete? Look at the specific job cost record. How do you know what cost amount to transfer from FG to COGS when a job is sold? Look at the specific job cost record. Suggested In-Class Exercise: E-M:2-23 LO 5. Adjust for overallocated and underallocated overhead a) At the end of the period—Adjusting for overallocated and underallocated overhead § Exhibit M:2-9: Accounting for Manufacturing Overhead Lecture Notes: If the allocated overhead for the year is less than actual overhead for the year, the Manufacturing Overhead account has an ending debit balance and is underallocated. If the allocated Copyright © 2021 Pearson Education, Inc. 2-4 overhead is more than actual overhead, the Manufacturing Overhead account has an ending credit balance and is overallocated. The year-ending balance of unallocated overhead, debit or credit, is closed to COGS at the end of the period. Therefore, an underallocation will increase COGS for the additional amount of actual costs. Similarly, an overallocation will decrease COGS because too much overhead costs were allocated during the year. Suggested In-Class Exercise: E-M:2-25 LO 6. Calculate cost of goods manufactured and cost of goods sold a) Summary of journal entries § Exhibit M:2-10: Summary of Journal Entries b) Cost of goods manufactured and cost of goods sold § Exhibit M:2-11: Schedule of Cost of Goods Manufactured § Exhibit M:2-12: Income Statement Lecture Notes: Having provided a complete overview of the process for accounting for Manufacturing Overhead, students find it helpful to see a brief summary recap of that process. Before the period, the predetermined overhead allocation rate is calculated. During the period, jobs are completed. Costs of direct materials and direct labor are traced directly to the jobs in which they are used. Costs of indirect materials, indirect labor, and other indirect costs are accumulated in the Manufacturing Overhead account, from which overhead costs are allocated to jobs. After all work for the period is completed, at the end of the period, the remaining balance in the Manufacturing Overhead account is closed (adjusted to a zero balance) to COGS. Suggested In-Class Exercise: E-M:2-29 LO 7. Calculate job costs for a service company Lecture Notes: Service companies can use job order costing; they still incur labor and overhead. Ask students how an accounting firm or law firm knows what to bill each specific client. They have tracked specific charges to that client by using a job order system. They have also allocated indirect costs. Help students understand indirect costs for a service company by giving examples, such as depreciation on office equipment, rent on the office, indirect labor of the receptionist, etc. Suggested In-Class Exercise: E-M:2-30 Copyright © 2021 Pearson Education, Inc. 2-5 Chapter 2: Handout for Student Notes LO 1. How do manufacturing companies use job order costing and process costing systems? o Job order costing o Process costing LO 2. How do materials and labor costs flow through the job order costing system? o Materials § Purchasing materials § Using materials o Labor LO 3. How do overhead costs flow through the job order costing system? o Before the period—Calculating the predetermined overhead allocation rate o During the period—Allocating overhead Copyright © 2021 Pearson Education, Inc. 2-6 LO 4. What happens with products are completed and sold? o Transferring costs to Finished Goods Inventory o Transferring costs to Cost of Goods Sold LO 5. How is the Manufacturing Overhead account adjusted? o At the end of the period—Adjusting for overallocated and underallocated overhead LO 6. How is cost of goods manufactured and cost of goods sold calculated? o Summary of journal entries o Cost of goods manufactured and cost of goods sold LO 7. How do service companies use a job order costing system? Copyright © 2021 Pearson Education, Inc. 2-7 Chapter 2: Student Chapter Summary LO 1. Distinguish between job order costing and process costing Businesses need to know the costs of their products or services. Job order costing is used by companies that manufacture unique products or provide specialized services. Process costing is used by companies that produce identical units through a series of uniform processes. The four steps for tracking product costs are accumulate, assign, allocate, and adjust. LO 2. Record materials and labor costs in a job order costing system Transaction 1—Materials Purchased Raw Materials Inventory: Increase with a debit Accounts Payable: Increase with a credit Transaction 2—Materials Used Work-in-Process Inventory (direct materials): Increase with a debit Manufacturing Overhead (indirect materials): Increase with a debit Raw Materials Inventory: Decrease with a credit Transaction 3—Labor Costs Incurred Work-in-Process Inventory (direct labor): Increase with a debit Manufacturing Overhead (indirect labor): Increase with a debit Wages Payable: Increase with a credit LO 3. Record actual and allocated overhead costs in a job order costing system Because actual overhead costs are not known until the end of the year, a predetermined overhead allocation rate is calculated at the beginning of the year so that each job will bear its fair share of the total overhead costs, where: Predetermined overhead allocation rate = Total estimated overhead costs / Total estimated quantity of the overhead allocation base The overhead allocation base is the primary factor that causes overhead costs to occur. It is a measure of activity such as direct labor hours, direct labor cost, machine hours, or other measure of activity that a company deems appropriate. During the year, actual overhead costs are accumulated in the Manufacturing Overhead account and systematically allocated to jobs using the predetermined overhead allocation rate. Transaction 4—Actual Overhead Costs Incurred, Depreciation Manufacturing Overhead: Increase with a debit Accumulated Depreciation: Increase with a credit Transaction 5—Actual Overhead Costs Incurred, Plant Utilities Manufacturing Overhead: Increase with a debit Cash: Decrease with a credit Copyright © 2021 Pearson Education, Inc. 2-8 Transaction 6—Actual Overhead Costs Incurred, Prepaid Plant Insurance Manufacturing Overhead: Increase with a debit Prepaid Insurance: Decrease with a credit Transaction 7—Actual Overhead Costs Incurred, Property Taxes Incurred Manufacturing Overhead: Increase with a debit Property Taxes Payable: Increase with a credit Transaction 8—Overhead Allocation Work-in-Process Inventory: Increase with a debit Manufacturing Overhead: Decrease with a credit LO 4. Record the completion and sales of finished goods During the year, jobs are completed and sold to customers. Transaction 9—Jobs Completed Finished Goods Inventory: Increase with a debit Work-in-Process Inventory: Decrease with a credit Transaction 10—Jobs Sold Accounts Receivable: Increase with a debit Sales Revenue: Increase with a credit Transaction 11—Cost of Jobs Sold Cost of Goods Sold: Increase with a debit Finished Goods Inventory: Decrease with a credit LO 5. Adjust for overallocated and underallocated overhead At the end of the year, an adjustment is required if overhead is more than or less than actual costs— that is, if overhead is overallocated or underallocated. Transaction 12—Adjust Manufacturing Overhead (underallocated) Cost of Goods Sold: Increase with a debit Manufacturing Overhead: Decrease with a credit Or: Transaction 12—Adjust Manufacturing Overhead (overallocated) Manufacturing Overhead: Increase with a debit Cost of Goods Sold: Decrease with a credit LO 6. Calculate cost of goods manufactured and cost of goods sold At the end of the year, financial statements are prepared that show the costs for all jobs manufactured and sold. A schedule of costs of goods manufactured is prepared to determine total product costs for the period. Cost of goods sold is calculated on the income statement. In summary, accounting for costs that flow through the job order cost system is a four-step process of accumulating, assigning, allocating, and adjusting. Copyright © 2021 Pearson Education, Inc. 2-9 LO 7. Calculate job costs for a service company Service companies have direct and indirect costs. Direct costs are assigned to jobs. Indirect costs are allocated to jobs using the predetermined overhead allocation rate. Knowing the full cost of a job allows for better pricing decisions. Copyright © 2021 Pearson Education, Inc. 2-10 Chapter 2: Assignment Grid and Other Materials S-M:2-1 S-M:2-2 S-M:2-3 S-M:2-4 S-M:2-5 S-M:2-6 S-M:2-7 S-M:2-8 S-M:2-9 S-M:2-10 S-M:2-11 S-M:2-12 S-M:2-13 S-M:2-14 S-M:2-15 S-M:2-16 E-M:2-17 E-M:2-18 E-M:2-19 E-M:2-20 E-M:2-21 E-M:2-22 E-M:2-23 E-M:2-24 E-M:2-25E-M:2 E-M:2-26 E-M:2-27 E-M:2-28 E-M:2-29 E-M:2-30 E-M:2-31A, P-M:237B P-M:2-32A, P-M:238B P-M:2-33A, P-M:239B LO 1 X LO 2 LO 3 LO 4 LO 5 LO 6 LO 7 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Copyright © 2021 Pearson Education, Inc. 2-11 LO 1 P-M:2-34A, P-M:240B P-M:2-35A, P-M:241B P-M:2-36A, P-M:242B LO 2 LO 3 X LO 4 LO 5 X LO 6 X X X X X LO 7 X S – Short Exercises (Easy) E – Exercises (Moderate) P – Problems (Difficult) Other End-of-Chapter Materials: Continuing Problem P-M:2-43 Tying It All Together Case 2-1 Decision Case 2-1 Fraud Case 2-1 Copyright © 2021 Pearson Education, Inc. 2-12 CHAPTER 2 TEN-MINUTE QUIZ Circle the letter of the best response. 1. Would a chemical company use job costing or process costing? What about a building contractor? A. Chemical company—process costing; building contractor—process costing B. Chemical company—job order costing; building contractor—job order costing C. Chemical company—process costing; building contractor—job order costing D. Chemical company—job order costing; building contractor—process costing 2. When a manufacturing company uses direct labor, it assigns the cost by crediting A. Raw Materials Inventory. B. Wages Payable. C. Work-in-Process Inventory. D. Manufacturing Overhead. 3. When a manufacturing company uses indirect labor, it assigns the cost by debiting A. Work-in-Process Inventory. B. Indirect Materials. C. Raw Materials Inventory. D. Manufacturing Overhead. 4. After a manufacturing company completes a job then sells the product to a customer, it accounts for the cost of the job by crediting A. Work-in-Process Inventory. B. Manufacturing Overhead. C. Direct Labor. D. Finished Goods Inventory. 5. When a manufacturing company underallocates manufacturing overhead, it adjusts the account balances by A. debiting Manufacturing Overhead. B. debiting Work-in-Process Inventory. C. crediting Manufacturing Overhead. D. crediting Cost of Goods Sold. Copyright © 2021 Pearson Education, Inc. 2-13 6. At the beginning of the year, Vuncor, Inc., determined that estimated overhead costs would be $600,000, while actual overhead cost for the year totaled $650,000. Furthermore, it was determined that the estimated allocation basis would be 60,000 direct labor hours, while direct laborers actually worked 62,000 hours. What was the dollar amount of underallocated or overallocated manufacturing overhead? A. $50,000 underallocated B. $30,000 underallocated C. $30,000 overallocated D. $20,000 overallocated 7. Which of the following is not a step in tracking product costs? A. Amortize B. Assign C. Adjust D. Accumulate 8. FooRah Company is a consulting firm that uses a job order costing system. The firm expects to have $120,000 in indirect costs and $80,000 in direct labor costs. The cost of direct labor is $40 per hour. What is the predetermined overhead allocation rate for FooRah? A. $30 per direct labor hour B. $40 per direct labor hour C. $50 per direct labor hour D. $60 per direct labor hour 9. Xell Corp is a sign company that uses a job order costing system. The firm expects to have $48,000 in indirect costs and $72,000 in direct labor costs. The cost of direct labor is $60 per hour. At the end of the period, overhead was overallocated by $35,000. What was Xell’s actual manufacturing overhead cost if work completed during the period required 3,800 direct labor hours? A. $117,000 B. $187,000 C. $345,000 D. $415,000 10. BoSun Manufacturing uses a job order costing system. During last period, direct labor costs totaled $150,000, based on $50 per hour, and actual overhead costs for the period totaled $212,000. The inventory value of completed product transferred out of Finished Goods Inventory was $432,000. If the predetermined overhead allocation rate for last period was $44 per direct labor hour and all Finished Goods Inventory was sold, what was the amount of Cost of Goods Sold reported on the income statement for last period? A. $794,000 B. $644,000 C. $512,000 D. $424,000 Copyright © 2021 Pearson Education, Inc. 2-14 Answer Key to Ten-Minute Quiz: 1. C 2. B 3. D 4. D 5. C 6. B Predetermined overhead allocation rate = Total estimated overhead costs / Total estimated quantity of the overhead allocation base = $600,000 / 60,000 direct labor hours = $10 per direct labor hour Allocated manufacturing overhead cost = Predetermined overhead allocation rate × Actual quantity of the allocation base used by each job = $10 per direct labor hour × 62,000 direct labor hours = $620,000 Manufacturing Overhead Total Actual Costs 650,000 620,000 Total Allocated Costs Unadj. Bal. 30,000 Total Actual Costs > Total Allocated Costs, so Manufacturing Overhead is underallocated. 7. A 8. D Predetermined overhead allocation rate = Total estimated overhead costs / Total estimated quantity of the overhead allocation base* = $120,000 / 2,000 direct labor hours = $60 per direct labor hour *Total estimated quantity of the overhead allocation base = Total estimated cost of overhead allocation base / Cost per unit of the overhead allocation base $80,000 in direct labor cost / $40 per direct labor hour = 2,000 direct labor hours Copyright © 2021 Pearson Education, Inc. 2-15 9. A Predetermined overhead allocation rate = Total estimated overhead costs / Total estimated quantity of the overhead allocation base* = $48,000 / 1,200 direct labor hours = $40 per direct labor hour *Total estimated quantity of the overhe...
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