CHAPTER 14

Managerial Accounting
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives Questions Brief E x ercises Do It! Exercises A Pro b lems B Problems * 1. Explain the distinguishing features of managerial accounting. 1, 2, 3 1 1 1 * 2. Identify the three broad functions of manag e ment. 4, 5, 6, 7, 8 2, 3 1 *

3. Dene the three classes of manufacturing costs. 11, 12 4, 5, 7 2 2, 3, 4, 5, 6 1A, 2A 1B, 2B * 4. Distinguis h between product and period costs. 13 6 2 3, 4, 5, 7, 13 1A, 2A 1B, 2B * 5. Explain the difference between a merchandising and a manufacturing i n come statement. 9, 14 8, 12, 13, 14, 15, 17 3A, 4A, 5A 3B, 4B, 5B * 6. Indicate how cost of goods manufactured is determined.

15, 16, 17, 18 8, 10, 11 3 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 3A, 4A, 5A 3B, 4B, 5B * 7. Explain the difference between a merchandising and a manufacturing ba l ance sheet. 10, 19, 20, 21 9 14, 15, 16, 17 3A, 4A 3B, 4B * 8. Identify trends in managerial accounting. 22, 23, 24 25, 26 4 18 *9. Prepare a worksheet and closing entries for a manufacturing company. 27, 28, 29 12 19

6A *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter. 14 2
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ASSIGNMENT CHARACTERISTICS TABLE

Problem Number Description Difculty Level Time Allotted (min.) 1A Classify manu facturing costs into different categories and compute the unit cost. Simple 20 () !

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ANSWERS TO QUESTIONS
1. (a) Disagree. Managerial accounting is a eld of accounting that provides economic and nancial information for managers and other internal u s ers. (b) Joe is incorrect. Managerial accounting applies to all types of businesses service, merchandising , and manufa c turing. 2. (a) Financial accounting is concerned primarily with external users such as stockholders, creditors , and regulators. In contrast, managerial accounting is concerned primarily with internal users such as ofcers and managers. (b) F inancial statements are the end product of nancial accounting. The statements are prepared quarterly and annually. In managerial accounting, internal reports may be prepared as frequently as needed

. (c) The purpose of nancial accounting is to provide general purpose information for all users. The purpose of managerial accounting is to provide special purpose information for specic dec i sions. 3. Differences in the content of the reports are as follows: Financial Managerial # Pertains to business as a whole and is high ly aggr e gated. # Limited to double entry accounting and cost data. # Generally a c cepted accounting princ i ples. #

Pertains to subunits of the business and may be very detailed. # Extends beyond double entry accounting system to any rel e vant data. # Standard is relevance to d e cisions. In nancial accounting, nancial statements are veried annually through an independent audit b y certied public accountants. There are no independent audits of internal reports issued by manag e rial accountants. 4. Budgets are prepared by companies to provide future direction. Because the budget is also used as an evaluation tool, some managers try to game the budgeting process by underestimating their division"s predicted performance so that it will be easier to meet their performance targets. On the other hand, if the budget is set at unattainable levels, managers sometimes take unethical actions to meet targets to receive higher compensation or in some cases to keep their jobs. 5. Linda should know that the ma

nagement of an organization performs three broad functions: (1) Planning requires management to look ahead and to establish obje c tives. (2) Directing involves coordinating the diverse activities and human resources of a company to produce a smooth runnin g operation. (3) Controlling is the process of keeping the company"s activities on track. 6. Disagree. Decision making is not a separate management function. Rather, decision making involves the exercise of good judgment in performing the three management functions explained in the answer to question ve above. 7. Employees with line positio ns are directly involved in the company"s primary revenue generating operating activities. Examples would include plant managers and supervisors, and the vice president of operations. In contrast, employees with staff positions are not directly involved in revenue generating operating activities, but rather serve in a support capacity to line employees. Examples i n

clude employees in nance, legal, and human resources.

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Questions Chapter 14 (Continued) 8. CEOs and CFOs must now certify that nancial statements give a fair presentation of the company"s operating results and its nancial condition and that the company maintains an adequate system of internal controls. In addition, the composition of the board of directors and audit committees receives more scrutiny, and penalties for misconduct have increased. 9. The differences between income statements are in the computation of the cost of goods sold as fo l lows: Manufacturing company: Beginning n ished goods inventory plus cost of goods manufactured minus ending nished goods inventory = cost of goods sold. Merchandising company: Beginning merchandise inventory plus cost of goods purchased minus en

d ing merchandise inventory = cost of goods sold . 10 . The difference in balance sheets pertains to the presentation of inventories in the current asset section. In a merchandising company, only merchandise inventory is shown. In a manufacturing company, three inventory accounts are shown: nished goo ds, work in process, and raw mater i als . 11. Manufacturing costs are classied as either direct materials, direct labor, or manufacturing ove r head . 12. No, Mel is not correct. The distinction between direct and indirect materials is based on two criteria : (1) physical association and (2) the convenience of making the physical association. Materials which cannot be easily associated with the nished product are considered indirect mater i als . 13. Product costs, or inventoriable costs, are costs that are a ne cessary and integral part of producing

the nished product. Period costs are costs that are identied with a specic time period rather than with a salable product. These costs relate to nonmanufacturing costs and therefore are not inve n t o riable costs . 14. A merchandising company has beginning merchandise inventory, cost of goods purchased, and ending merchandise inventory. A manufacturing company has beginning nished goods inventory , cost of goods manufa c tured, and ending nished goods inventory. 15. (a) X = total cost of work in process. (b) X = cost of goods manufactured. 16. Raw materials inventory, beginning ................................ ................................ ....... $ 12,000 Raw materials purchases ................................ ................................ ....................... 170,000

Total raw materials available for use ................................ ................................ ...... 182,000 Raw materials inventory, ending ................................ ................................ ............ (15,000 ) Direct materials used ................................ ................................ .................... $167,000 17. Direct materials used ................................ ................................ ............................. $240,000 Direct labor used ................................ ................................ ................................ .... 220,000 Total manufacturing overhead ................................ ................................ ............... 180,000 Total manufacturing costs ................................ ................................

............. $640,000 18. (a) Total cost of work in process ($26,000 + $640,000) ................................ ...... $666,000 (b) Cost o f goods manufactured ($666,000 $32,000) ................................ ...... $634,000 19. The order of listing is nished goods inventory, work in process inventory, and raw materials inve n tory.
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Questions Chapter 14 (Continued) 20. The products differ in how each are consumed by the cu stomer. Services are consumed

immediately; the product is not put into inventory. Meals at a restaurant are the best example where they are consumed immediately by the customer. There could be a long lead time before the product is consumed in a manufactur ing environment. 21. Yes, product costing techniques apply equally well to manufacturers and service companies. Each needs to keep track of the cost of services in order to know whether it is generating a prot. The techniques shown in this chapter, to accumulate manufacturing costs to determine manufacturing inventory, are equally useful for determining the cost of services. 22. The value chain refers to all activities associated with providing a product or service. For a manufac turer, these include research and development, product design, acquisition of raw materials, production, sales and marketing, delivery, customer relations, and subsequent service. 23. An enterprise resource planning (ERP) system is an integrated software system that provides a compr e hensive, centralized resource for information. Its primary benets are that it replaces the many individual systems typically used for receivables, payables, inventory, human resources, etc. Also, it can be used to get information from, and provi de information to, the company"s customers and suppliers.

24. In a just in time inventory system the company has no extra inventory stored. Consequently, if some units that are produced are defective, the company will not have enough units to deliver to custo m ers. 25. The balanced scorecard is called balanced because it strives to not over emphasize any one performance measure, but rather uses both nancial and non nancial measures to evaluate all aspects of a company"s oper a tions in an integrated fashion. 26 . Activity based costing is an approach used to allocate overhead based on each product"s relative use of activities in making the product. Activity based costing is benecial because it results in more accurate product costing and in more ca reful scrutiny of all activities in the value chain. *27.

The accounting cycle for a manufacturing company is the same as for a merchandising co m pany when a periodic inventory system is used . *28. The account balances carried into the cost of goods manuf actured columns are beginning and end ing work in process and raw materials inventories, raw materials purchases, direct labor, ind i rect labor, factory repairs, factory utilities, factory depreciation, and factory insu r ance. *29. (a) The closing entry for the two inventories is: Dec. 31 Work in Process Inventory ................................ ..................... XX Raw Materials Inventory ................................ ......................... XX Manufacturing Summary ................................ ................ XX (b)

The closing entry for manufacturing summary is: Dec. 31 Income Summary ................................ ................................ ... XX Manufacturing Summary ................................ ................ XX
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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 14 1 Financial A c counting Managerial Accoun t ing

Primary users External users Internal users Types of r e ports Financial statements Internal reports Frequency of r e ports Quarterly and ann u ally A s frequently as needed Purpose of reports General purpose Special purpose information for specic dec i sions Content of reports Generally accepted

a c counting principles Relevance to dec i sions Verication process Annual audit by certied public accountant No independent audits BRIEF EXERCISE 14 2 One implication of SOX was to clarify top management"s responsibility for the company"s nancial statements. CEOs and CFOs must now certify that nancial statements give a fair pr esentation of the company"s operating results and its nancial condition. In addition, top managers must certify that the company maintains an adequate system of internal controls to safeguard the company"s assets and ensure accurate nancial reports. A lso ,

more attention is now paid to the composition of the company"s board of directors. In particular, the audit committee of the board of directors must be comprised entirely of independent members (that is, non employees) and must contain at least one nancial expert. Finally, to increase the likelihood of compliance with these and other new rules, the penalties for misconduct were substa n tially increased. BRIEF EXERCISE 14 3 (a) 1. Planning. (b) 2. Directing. (c) 3. Controlling.

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BRIEF EXERCISE 14 4 (a) DM Frames and tires used in manufacturing bic y cles. (b) DL Wages paid to production workers. (c) MO Insurance on factory equipment and machi n ery. (d) MO Depreciation on factory equipment. BRIEF EXERCISE 14 -

6 (a) Product. (b) Period. (c) Period. (d) Period. (e) Product. (f) Product. BRIEF EXERCISE 14 7 Product Costs Direct Mat e r i als Direct Labor Fa c tory

Ove r head (a) (b) (c) (d) X X X X

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BRIEF EXERCISE 14 8 (a) Direct materials used ................................ ........................... $180,000 Direct labor

................................ ................................ ............ 209,000 Total manufacturing overhead ................................ ............. 208, 000 Total manufacturing costs ................................ ........... $597,000 (b) Beginning work in process ................................ .................. $ 25,000 Total manufacturing costs ................................ ................... 597,000 Total cost of work in process ................................ ....... $622,000 BRIEF EXERCISE 14

9 RUIZ COMPANY Balance Sheet December 31, 2012 Current assets Cash ................................ ................................ ... $ 62,000 Accounts receivable ................................ ......... 200,000 Inventories Finished goods ................................ .......... $91,000 Work in process ................................ ........ 87,000 Raw materials ................................ ............ 73,000

251,000 Prepaid expenses ................................ ............. 38,000 Total current assets .......................... $551,000 BRIEF EXERCISE 14 10 Direct Materials Use d Direct Labor Used Factory Ove r head Total Man u facturing Costs (1) (2) (3)

$81,000 $144,000 $151,000

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BRIEF EXERCISE 14 11 Total Manufactu r ing Costs Work in Process (January 1) Work in Process (Dece m ber 31) Cost of Goods

Man u factured (1) (2) (3) $151,000 $123,000 $158,000 $189,000 *BRIEF EXERCISE 14 12 Account Worksheet Column Finished Goods Inve n tory Work in Process Inventory Raw Materials Purchases Direct Labor Income statement (DR) Cost of goods m anufa c tured (DR) Cost of goods manufa c

tured (DR) Cost of goods manufa c tured (DR) SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 14 1 1. False 2. False 3. False 4. True 5. True 6. True DO IT! 14 2 Period costs : Advertising Salaries of sales repres entatives

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DO IT! 14 2 (Continued) Product costs: Blank CDs (DM) Depreciation of CD image burner (MO) Salary of factory manager (MO) Factory supplies used (MO) Paper inserts for CD cases (DM) CD plastic cases (DM) Salaries of factory maintenance employe es (MO) Salaries of employees who burn music onto CDs (DL) DO IT! 14 3 FISHEL MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended April 30 Work in process, April 1

................................ $ 5,000 Direct materials ................................ .............. Raw materials, April 1 ............................... $ 10,000 Raw materials purchases .......................... 98,000 Total raw materials available for use ........ 108,000 Less: Raw materials, April 30 .................. 14,000 Direct materials used ................................ $ 94,000 Direct labor ................................ ..................... 80,000 Manufacturing overhead ................................ 180,000 Total manufacturing cos

t s ............................ 354,000 Total cost of work in process ........................ $359,000 Less: Work in process, April 30 ................... 3,500 Cost of goods manufacture d ........................ $355,500 DO IT! 14 4 1. f 2. a 3. c 4. d 5. e 6.

b
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SOLUTIONS TO EXERCISES
EXERCISE 14 1 EXERCISE 14 2

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EXERCISE 14 5

1. 2. (c) (c) 3. 4. (a) (c) 5. 6. (b)* (d) 7. 8. (a) (b) 9. 10. (c) (c) *or sometimes (c), depending on the circumstances. EXERCISE 14 6 1. (b) 2. (c)

3. (a) 4. (c) 5. (c) 6. (c) 7. (c) 8. (c) 9. (c) 10. (c) EXERCISE 14 7

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PROBLEM 14 4A (Continued)

(b) CLARKSON MANUFACTURING COMPANY (Partial) Income Statement For the Year Ended June 30, 2012 Sales revenues Sales ................................ ........................... $534,000 Less: Sales discounts ............................... 4,200 Net sales ................................ ..................... $529,800 Cost of goods sold Finished goods inventory, July 1, 2011 ................................ ............. 96,000 Cost of goods manufactured ..................... 386,910 Cost of goods available for sale ...............

482,910 Less: Finished goods inventory, June 30, 2012 ................................ . 75,900 Cost of goods sold ............................. 407,010 Gross prot ................................ ................ $122,790 (c) CLARKSON MANUFACTURING COMPANY (Partial) Balance Sheet June 30, 2012 Assets Current assets Cash ................................ ............................ $ 32,000 Accounts receivable ................................ ..

27,000 Inventories Fin ished goods ................................ ... $75,900 Work in process ................................ .. 18,600 Raw materials ................................ ..... 39,600 134,100 Total current assets .................... $193,100
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PROBLEM 14

5A (a) PHILLIPS COMPANY Cost of Goods Manufactured Schedule For the Month Ended October 31, 2012 Work in proce ss, October 1 .............. $ 16,000 Direct materials Raw materials inventory, October 1 ................................ $ 18,000 Raw materials purchases ............................... 264,000 Total raw materials available for use ................................ ..... 282,000 Less: Raw materials inventory,

October 31 ....................... 29,000 Direct materials used ................. $253,000 Direct labor ................................ ......... 190,000 Manufacturing overhead Factory facility rent .................... 60,000 Depreciation on factory equipment ............................... 31,000 Indirect labor .............................. 28,000 Factory utilities* ......................... 9,000 Factory insurance** .................... 4,800

To tal manufacturing overhead .......................... 132,800 Total manufacturing costs ................ 575,800 Total cost of work in process ........... 591,800 Less: Work in process, October 31 ..... 14,000 Cost of goods manufactured ............ $577,800 * *$12,000 X 75% = $9,000 **$8,000 X 60% = $4,800

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BYP 14 5 (Continued) I have also modied the form of the income statement to recognize the di s tinction between product costs (cost of goods sold) and period costs (opera t ing expenses) as required by generally accepted accounting princ i ples. Thanks for letting me help. If I can be of further assistance, don"t hesitate

to call. I hope you nd a replacement for your controller soon. Sincerely,

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BYP 14 7 ALL ABOUT YOU ACTIVITY Student responses will vary. We have provided some basic examples that may represent common responses. (a) Individuals must often make purchase decision s which involve choosing between an item that has a more expensive initial purchase price, but is expected to either last longer, or provides some form of cost savings .

The question that the individual faces is whether the cost savings or additional bene t justies the additional initial cost. For example, more expensive dishwashers and refrigerators also tend to be more energy efcient. The labels on these appliances provide information regarding the energy savings which can be used to make a break even evalu a tion. (b) In order to increase control over their nancial situation and reduce t he probability of nancial hardship all people should prepare personal budgets. Preparation of a personal budget requires the individual to plan for the future and to prioritize expend i tures. (c)

Companies employ the balanced scorecard as a mechanism to ensure that their nancial goals are consistent with their efforts. Use of the balanced scorecard requires clear articulation of goals, priorities, and strategies. By employing these same techniques in their everyday life indi viduals can be better assured that they will expend effort on those things that really matter to them, rather than wasting efforts on less important di s tractions . (d) Capital budgeting involve s nancial evaluation of long term assets. Compa nies routinely make capital budgeting decisions, but so do individuals.

The purchase of a home or car is a decision that has implications for your nances for many subsequent years. Buying a house or car i sa very personal decision, inuenced by many personal, nonnancial, preferences . However, these decisions should also be subjected to a nancial evaluation using capital budgeting techniques to ensure that the choice makes good economic sense.