Unit 1

Learning Journal

The Learning Journal is a space where you should reflect upon what was learned during
the week. How it applies to your daily life and will help you with your life (career) goals.

For this week’s reflection, please write three complete and well composed paragraphs
where you use, as an example, a company that operates where you live and describe how
the job order costing would help the business owners manage their business.

This week’s exploration into financial and managerial accounting, along with the concepts of
cost-of-goods-sold, manufacturing inventory accounts, and job order costing, has provided me
with valuable insights into how businesses operate and manage their finances. Understanding the
differences between financial and managerial accounting is crucial for any business, as financial
accounting focuses on external reporting, providing a snapshot of a company's financial health to
stakeholders, while managerial accounting is used internally to guide decision-making
(Heisinger & Hoyle, 2012). In South Africa, where businesses face unique challenges and
opportunities, these concepts are particularly relevant.

For example, consider a custom furniture manufacturing company named Homewood Furniture
in Johannesburg. This company specializes in creating bespoke furniture pieces for individual
clients (Homewood Furniture, 2024). The use of job order costing would be essential for this
business because each piece of furniture is unique and requires different materials, labor, and
overhead costs. By implementing job order costing, the business owners can accurately track the
costs associated with each order, ensuring that they can price their products appropriately to
cover costs and generate profit. This method allows the company to allocate costs specifically to
each job, rather than averaging costs across all products, which is crucial for maintaining
profitability in a custom manufacturing environment.

Furthermore, job order costing would provide the company with detailed insights into which
types of products or customizations are most profitable, helping to inform future business
decisions. By analyzing the cost data associated with different jobs, the owners can identify areas
where they may be able to reduce costs or improve efficiency, such as by negotiating better
prices with suppliers or optimizing labor allocation. This approach not only aids in better
financial management but also supports the company’s long-term growth and sustainability in a
competitive market like South Africa.

End of Chapter Questions

Question 1: Describe the characteristics of managerial accounting and financial
accounting.

Managerial Accounting:

 Internal Focus: Managerial accounting is primarily used by internal stakeholders, such

as managers, to make informed business decisions.
 Forward-Looking: It often emphasizes future projections, budgets, and forecasts rather
than just historical data.
 Detailed and Specific: Managerial accounting provides detailed reports specific to
different departments, projects, or segments within the company.
 Flexible and Unregulated: Unlike financial accounting, managerial accounting is not
governed by any specific standards like GAAP or IFRS, allowing for more flexibility in
reporting.

Financial Accounting:

 External Focus: Financial accounting is aimed at providing information to external

stakeholders, such as investors, creditors, and regulatory bodies.
 Historical Data: It focuses on recording and reporting past financial performance,
primarily through financial statements.
 Standardized and Regulated: Financial accounting must comply with specific standards
like GAAP or IFRS to ensure consistency and comparability.
 Summary Level: It provides a broad overview of the company’s financial position, often
summarizing data across the entire organization.

Question 2: What are nonfinancial measures of performance? Provide several examples.

Nonfinancial measures of performance are metrics that assess aspects of a business that are not
expressed in monetary terms but are still crucial for evaluating the company’s overall
performance. These measures can include operational efficiency, customer satisfaction, and
employee engagement, among others.

Examples:

 Customer Satisfaction Scores: Surveys and feedback mechanisms to measure how

satisfied customers are with the company's products or services.
 Employee Turnover Rate: The rate at which employees leave the company, which can
indicate job satisfaction and organizational culture.
 On-Time Delivery Rate: A measure of how often products or services are delivered on
time, reflecting operational efficiency.
  Defect Rate: The percentage of products that fail to meet quality standards, which is
crucial for maintaining product quality.
 Market Share: The percentage of total sales in an industry that a company holds,
indicating its competitive position.

Question 3: Which accountant (financial or managerial) would prepare each of the

following reports:
a. Income statement for the Chevrolet division of General Motors

Managerial Accountant: This report is specific to a division, which is typically used for internal
decision-making.

b. Balance sheet for PepsiCo prepared in accordance with U.S. GAAP

Financial Accountant: This is a formal financial statement intended for external reporting.

c. The Boston Symphony Orchestra’s budgeted income statement for next quarter

Managerial Accountant: This is a budget, which is a forward-looking internal report.

d. Defect rate of computer chips produced by Intel

Managerial Accountant: This nonfinancial performance measure is used internally to monitor

and improve operations.

e. Statement of cash flows for Hewlett-Packard prepared in accordance with U.S. GAAP

Financial Accountant: This statement is part of the required financial reports for external
stakeholders.

Question 4: Describe the planning and control functions performed by most managers.
Planning:

 Setting Objectives: Managers establish goals and objectives for the organization or
specific departments.
 Developing Strategies: Managers create strategies to achieve the set objectives, such as
budgeting, forecasting, and resource allocation.
  Identifying Resources: Managers determine the resources needed, including personnel,
equipment, and finances, to implement the strategies.

Control:

 Monitoring Performance: Managers track and evaluate actual performance against the
planned objectives using various metrics and reports.
 Taking Corrective Action: If there are deviations from the plan, managers take
corrective actions to align performance with the objectives.
 Feedback and Adjustment: Managers use feedback from performance monitoring to
make adjustments to strategies, plans, and operations as needed.

Question 5: What is the controller’s primary responsibility?

The controller’s primary responsibility is to oversee the company’s accounting functions,

including financial reporting, budgeting, and internal controls. The controller ensures that all
financial statements are accurate, comply with regulatory standards, and provide reliable
information for both internal and external stakeholders. Additionally, the controller may also be
involved in strategic planning and cost management.

Question 6: How do the treasurer’s responsibilities differ from those of the controller?

The treasurer’s responsibilities are focused on managing the company’s financial assets and
liabilities, including cash management, investment strategies, and financing activities. The
treasurer is responsible for maintaining the company’s liquidity, managing debt, and overseeing
financial risk management.

Question 7: Explain why ethical behavior is so important for finance and accounting
personnel.

Ethical behavior is crucial for finance and accounting personnel because they handle sensitive
financial information and are responsible for reporting it accurately and fairly. Ethical behavior
ensures the integrity of financial reports, which stakeholders rely on to make informed decisions.
Unethical practices, such as misrepresentation of financial data or fraud, can lead to significant
legal consequences, financial loss, and damage to the company’s reputation. Ethical behavior
helps maintain trust in the financial system, supports regulatory compliance, and promotes long-
term business sustainability.

Question 8: What is an enterprise resource planning system?

An Enterprise Resource Planning (ERP) system is an integrated software platform that
consolidates various business processes and functions into a single unified system. ERP systems
allow companies to manage core business activities such as finance, human resources,
procurement, supply chain management, and customer relationship management in a centralized
database. The integration provided by ERP systems improves data accuracy, enhances
communication across departments, and supports better decision-making by providing real-time
access to information.

Question 9: Why do manufacturing companies use product costing systems to track costs
throughout the production process?

Manufacturing companies use product costing systems to accurately track and allocate costs
associated with producing goods. These systems help in determining the cost of each product,
which is essential for pricing, budgeting, and profitability analysis. By tracking costs throughout
the production process, companies can monitor and control expenses, identify inefficiencies, and
make informed decisions on cost reduction and process improvements. Accurate product costing
also ensures that the company can maintain competitive pricing while covering costs and
generating profit.

Question 10: Describe manufacturing costs and nonmanufacturing costs. Provide examples
of each.

Manufacturing Costs:

 These are costs directly associated with the production of goods. They include:
o Direct Materials: Raw materials used to create the final product (e.g., wood used
to make furniture).
o Direct Labor: Wages paid to workers who are directly involved in manufacturing
(e.g., wages of carpenters).
o Manufacturing Overhead: Indirect costs related to production, such as factory
utilities, maintenance, and depreciation of equipment.

Nonmanufacturing Costs:

 These are costs not directly related to the production process but are necessary for the
overall operation of the business. They include:
o Selling Expenses: Costs associated with marketing and selling the products (e.g.,
advertising, sales commissions).
 o General and Administrative Expenses: Costs related to the general operation of
the company (e.g., office salaries, rent, and utilities).

Question 11: Describe the difference between direct materials and direct labor versus
indirect materials and indirect labor.

Direct Materials and Direct Labor:

 Direct Materials: Raw materials that can be directly traced to the production of a
specific product (e.g., steel used to manufacture a car).
 Direct Labor: The wages paid to workers who can be directly traced to the production of
a specific product (e.g., wages of assembly line workers in a car manufacturing plant).

Indirect Materials and Indirect Labor:

 Indirect Materials: Materials that are used in the production process but cannot be
directly traced to a specific product (e.g., lubricants used in machinery).
 Indirect Labor: Wages paid to workers who support the production process but whose
work cannot be directly traced to a specific product (e.g., wages of maintenance
workers).

Question 12: Why are the terms product costs and period costs used to describe
manufacturing costs and nonmanufacturing costs?

Product Costs:

 These costs are associated with the production of goods and are capitalized as inventory
on the balance sheet until the products are sold. Once sold, they are recognized as Cost of
Goods Sold on the income statement. The term "product costs" is used because these
costs are tied directly to the products being manufactured.

Period Costs:

 These costs are expensed in the period in which they are incurred, regardless of whether
any goods are produced. They are not tied to the production process and include selling,
general, and administrative expenses. The term "period costs" reflects the fact that these
costs are recognized in the period they occur, rather than being attached to the production
of inventory.
Question 13: How does the timing of recording expenses differ between product and period
costs?

 Product Costs: These are recorded as inventory on the balance sheet when incurred and
are not expensed until the product is sold. At that point, they are transferred to the income
statement as Cost of Goods Sold.

 Period Costs: These are expensed immediately in the period in which they are incurred
and appear on the income statement as operating expenses (e.g., selling, general, and
administrative expenses).

Question 14: Describe the three inventory accounts used to record product costs.

 Raw Materials Inventory: This account tracks the cost of materials that have been
purchased but not yet used in production. It includes direct and indirect materials that are
stored until needed for manufacturing.
 Work-in-Process (WIP) Inventory: This account records the costs of products that are
partially completed. It includes direct materials, direct labor, and manufacturing overhead
costs that have been applied to the products that are still in production.
 Finished Goods Inventory: This account represents the costs of completed products that
are ready for sale but have not yet been sold. Once sold, the costs are transferred to Cost
of Goods Sold on the income statement.

Question 15: What are the three categories of product costs that flow through the
work-in-process inventory account? Describe each one.

 Direct Materials: The raw materials that are used directly in the production of goods. As
these materials are used, their costs are transferred from the Raw Materials Inventory to
the Work-in-Process Inventory.
 Direct Labor: The wages paid to workers who are directly involved in manufacturing the
products. As labor is applied to production, the associated costs are added to the Work-in-
Process Inventory.
 Manufacturing Overhead: Indirect production costs that cannot be traced directly to
specific products but are necessary for manufacturing (e.g., factory rent, utilities,
equipment depreciation). These costs are allocated to Work-in-Process Inventory as
production progresses.
 Question 16: When is the cost of goods sold account (often called cost of sales) used,
and how is the dollar amount recorded in this account determined?

The Cost of Goods Sold (COGS) account is used when products are sold. It represents the
direct costs associated with the goods that were sold during the period. The dollar amount
recorded in the COGS account is determined by the total costs of the products that were
in the Finished Goods Inventory and then sold. This includes the costs of direct materials,
direct labor, and manufacturing overhead that were incurred to produce those goods.

Question 17: How does a merchandising company income statement differ from a
manufacturing company income statement?

Merchandising Company Income Statement:

 COGS: The Cost of Goods Sold is based on the purchase price of the goods that were
resold during the period.
 Inventory: Only one type of inventory account is typically shown, which is the
Merchandise Inventory.

Manufacturing Company Income Statement:

 COGS: The Cost of Goods Sold includes direct materials, direct labor, and
manufacturing overhead associated with the goods produced and sold.
 Inventory: Three types of inventory accounts are involved (Raw Materials, Work-in-
Process, and Finished Goods), reflecting the different stages of production.

Reference

 Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. Creative Commons by-nc-
sa 3.0. https://open.umn.edu/opentextbooks/textbooks/managerial-accounting

 Homewood Furniture. (2024, January 18). Custom Furniture Manufacturer | Homewood

Crafted Luxury | SA. Homewood. https://homewood.co.za/custom-furniture-
manufacturer/