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Asked by milove14
Each separate response must have approximately 200 words....
Each separate response must have approximately 200 words. Assignments vary widely; however, essays should be written in APA style, with in-text citations and a separate reference listing as needed.Basically, you need to cite and reference a relevant source for assignments that have an essay component. This means you are required to conduct research on your own outside the information provided in the text (i.e. an external reference).
Please answer each question with a minimum of 200 words:
I have attached everything you may need to answer each question thoroughly.
THIS NEED TO BE COMPLETED BY 8am on 9/16/2015
Problem 1-26B Pg. 47
1. Answer (a) and (b) in problem 1-26B
2. Distinguish between financial accounting and managerial accounting as to user groups and time horizons.
3. Why should the chief accountant of an organization have a clear understanding of both financial and managerial account?
ACCT-MBA_524...1-read.pdf
edm10890_ch01_002-053.indd Page 2 6/18/10 4:22 PM user-f497 /Users/user-f497/Desktop/MHBR165 CHAPTER 1 Management Accounting
and Corporate Governance
LEARNING OBJECTIVES W
I
L
S
O
N
, After you have mastered the material in this chapter, you will be able to: Q
1 Distinguish between managerial and financial accounting.
2 Identify the cost components of a product made byU manufacturing company: the cost of materials, labor,
a
A
S
3 Explain the effects on financial statements of product costs versus general, selling, and administrative costs.
H
4 Distinguish product costs from upstream and downstream costs.
E
5 Explain how product costing differs in service, merchandising, and manufacturing companies.
and overhead. 6 Show how just-in-time inventory can increase profitability.
1
7 Identify the key components of corporate governance.
9
8 Identify emerging trends in accounting (Appendix A). 9
7
CHAPTER OPENING
B
Andy Grove, Senior Advisor to Executive Management U Intel Corporation, is credited with the motto “Only the
of paranoid survive.” Mr. Grove describes a wide variety of concerns that make him paranoid. Specifically, he declares:
I worry about products getting screwed up, and I worry about products getting introduced prematurely. I
worry about factories not performing well, and I worry about having too many factories. I worry about hiring
the right people, and I worry about morale slacking off. And, of course, I worry about competitors. I worry
about other people figuring out how to do what we do better or cheaper, and displacing us with our customers.
Do Intel’s historically-based financial statements contain the information Mr. Grove needs? No. Financial accounting
is not designed to satisfy all the information needs of business managers. Its scope is limited to the needs of external
users such as investors and creditors. The field of accounting designed to meet the needs of internal users is called
managerial accounting. 2 edm10890_ch01_002-053.indd Page 3 6/18/10 6:42 PM user-f497 /Users/user-f497/Desktop/MHBR165 The Curious Accountant
In the first course of accounting, you learned how
retailers, such as Sears, account for the cost of equipment that lasts more than one year. Recall that the
equipment was recorded as an asset when purchased, W
I
life. The depreciation charge reduced the company’s
L
assets and increased its expenses. This approach was
S
justified under the matching principle, which seeks to
O
recognize costs as expenses in the same period that
N
the cost (resource) is used to generate revenue.
,
and then it was depreciated over its expected useful Is depreciation always shown as an expense on the income statement? The answer may surprise you. Q
U
the bicycles that it sells to Sears. In order to produce the
A
bicycles, Schwinn had to purchase a robotic machine S
that it expects can be used to produce 50,000 bicycles. H
Do you think Schwinn should account for depreciation on its manufacturing equipment the same way Sears
E
Consider the following scenario. Schwinn manufactures accounts for depreciation on its registers at the checkout counters? If not, how should Schwinn account for its
depreciation? Remember the matching principle when thinking of your answer. (Answer on page 12.)
1 9
9
7
B
U 3 edm10890_ch01_002-053.indd Page 4 6/18/10 3:35 PM user-f497 4 /Users/user-f497/Desktop/MHBR165 Chapter 1 DIFFERENCES BETWEEN MANAGERIAL
AND FINANCIAL ACCOUNTING Users and Types of Information
Financial accounting provides information used primarily by investors, creditors, and
others outside a business. In contrast, managerial accounting focuses on information
used by executives, managers, and employees who work inside the business. These two
user groups need different types of information.
Internal users need information to plan, direct, and control business operations. The
nature of information needed is related to an employee’s job level. Lower level employees use nonfinancial information such as work schedules, store hours, and customer
W
service policies. Moving up the organizational ladder, financial information becomes
increasingly important. Middle managers use a blend of financial and nonfinancial
I
information, while senior executives concentrate on financial data. To a lesser degree,
L
senior executives also use general economic data and nonfinancial operating information.
For example, an executive may consider the growth rate of the economy before deciding
S
to expand the company’s workforce.
O
External users (investors and creditors) have greater needs for general economic
information than do internal users. For example, an investor debating whether to purN
chase stock versus bond securities might be more interested in government tax policy
,
than financial statement data. Exhibit 1.1 summarizes the information needs of different user groups. Q
Level of Aggregation U
External users generally desire global information that reflects the performance of a comA
pany as a whole. For example, an investor is not so much interested in the performance of
S
a particular Sears store as she is in the performance of Sears Roebuck Company versus
that of JC Penney Company. In contrast, internal users focus on detailed information
H
about specific subunits of the company. To meet the needs of the different user groups,
E
financial accounting data are more aggregated than managerial accounting data.
1
9
EXHIBIT 1.1
9
Relationship Between Type of User and Type of Information
7
Economic data
Financial data
B
U
Investors and creditors Nonfinancial data Outsiders Distinguish between managerial
and financial accounting. While the information needs of internal and external users overlap, the needs of
managers generally differ from those of investors or creditors. Some distinguishing
characteristics are discussed in the following section. Senior executives
Insiders LO 1 Middle managers Operating employees edm10890_ch01_002-053.indd Page 5 6/18/10 3:35 PM user-f497 /Users/user-f497/Desktop/MHBR165 Management Accounting and Corporate Governance Regulation
Financial accounting is designed to generate information for the general
public. In an effort to protect the public interest, Congress established the
Securities and Exchange Commission (SEC) and gave it authority to
regulate public financial reporting practices. The SEC has delegated much
of its authority for developing accounting rules to the private sector
Financial Accounting Standards Board (FASB), thereby allowing the
accounting profession considerable influence over financial accounting
reports. The FASB supports a broad base of pronouncements and practices known as generally accepted accounting principles (GAAP). GAAP
severely restricts the accounting procedures and practices permitted in
published financial statements.
Beyond financial statement data, much of the information generated by management accounting systems is proprietary information not available to the public. Since
this information is not distributed to the public, it need not be regulated to protect
the public interest. Management accounting is restricted only by the value-added
W
principle. Management accountants are free to engage in any information gathering
I
and reporting activity so long as the activity adds value in excess of its cost. For
example, management accountants are free to provide forecasted information to
L
internal users. In contrast, financial accounting as prescribed by GAAP does not
S
permit forecasting. O
Information Characteristics
N
While financial accounting is characterized by its objectivity, reliability, consistency,
, and historical nature, managerial accounting is more concerned with relevance and
timeliness. Managerial accounting uses more estimates and fewer facts than financial
accounting. Financial accounting reports what happened yesterday; managerial
Q
accounting reports what is expected to happen tomorrow. U
Time Horizon and Reporting Frequency A
S
Financial accounting information is reported periodically, normally at the end of a
year. Management cannot wait until the end of the year to discover problems. PlanH
ning, controlling, and directing require immediate attention. Managerial accounting
E
information is delivered on a continuous basis.
Exhibit 1.2 summarizes significant differences between financial and managerial
accounting. 1
9
PRODUCT COSTING IN MANUFACTURING
9
COMPANIES
7
A major focus for managerial accountants is determining product cost.1 Managers need
B
to know the cost of their products for a variety of reasons. For example, cost-plus
2
is
pricing is a common business practice. Product costing U also used to control business
operations. It is useful in answering questions such as: Are costs higher or lower than
expected? Who is responsible for the variances between expected and actual costs?
What actions can be taken to control the variances? Components of Product Cost
A company normally incurs three types of costs when making products. Specifically,
the company must pay for (1) the materials used to make the products, (2) the labor
1 This text uses the term product in a generic sense to mean both goods and services.
Other pricing strategies will be introduced in subsequent chapters. 2 LO 2
Identify the cost components of a
product made by a manufacturing
company: the cost of materials,
labor, and overhead. 5 edm10890_ch01_002-053.indd Page 6 6/18/10 3:35 PM user-f497 6 /Users/user-f497/Desktop/MHBR165 Chapter 1 EXHIBIT 1.2
Comparative Features of Managerial versus Financial Accounting Information
Features Managerial Accounting Financial Accounting Users Insiders including executives,
managers, and operators Information type Economic and physical data
as well as financial data
Local information on subunits
of the organization
No regulation, limited only by
the value-added principle
Estimates that promote
W
relevance and enable
Itimeliness Outsiders including investors,
creditors, government
agencies, analysts, and
reporters
Financial data Level of aggregation
Regulation
Information characteristics Time horizon
Reporting frequency L Past, present, and future
S
Continuous reporting Global information on the
company as a whole
Regulation by SEC, FASB, and
other determiners of GAAP
Factual information that is
characterized by objectivity,
reliability, consistency, and
accuracy
Past only, historically based
Delayed with emphasis on
annual reports O
N
,
expended by the employees who transform the materials into products, and (3) the
overhead (other resources such as utilities and equipment consumed in the process of
making the products). If the company stores its products, the costs of the materials,
Q
labor, and overhead used in making the products are maintained in an inventory
account until the products are U
sold. For a detailed explanation of how product costs
flow through the financial statements, refer to the following example of Tabor ManA
ufacturing Company. S
H
Tabor Manufacturing Company
E
Tabor Manufacturing Company makes wooden tables. The company spent $1,000 cash to build four tables: $390 for materials, $470 for a carpenter’s labor, and $140 for
tools used in making the tables. How much is Tabor’s expense? The answer is zero. The
1
$1,000 cash has been converted into products (four tables). The cash payments for
materials, labor, and tools (overhead) were asset exchange transactions. One asset (cash)
9
decreased while another asset (tables) increased. Tabor will not recognize any expense
9
until the tables are sold; in the meantime, the cost of the tables is held in an asset
account called Finished Goods Inventory. Exhibit 1.3 illustrates how cash is transformed
7
into inventory. Average Cost per Unit B
U How much did each table made by Tabor cost? The actual cost of each of the four
tables likely differs. The carpenter probably spent a little more time on some of the tables
than others. Material and tool usage probably varied from table to table. Determining
the exact cost of each table is virtually impossible. Minute details such as a second of
labor time cannot be effectively measured. Even if Tabor could determine the exact cost
of each table, the information would be of little use. Minor differences in the cost per
table would make no difference in pricing or other decisions management needs to
make. Accountants therefore normally calculate cost per unit as an average. In the case
of Tabor Manufacturing, the average cost per table is $250 ($1,000 4 4 units). Unless
otherwise stated, assume cost per unit means average cost per unit. edm10890_ch01_002-053.indd Page 7 6/18/10 3:35 PM user-f497 /Users/user-f497/Desktop/MHBR165 Management Accounting and Corporate Governance EXHIBIT 1.3
Transforming the Asset Cash Into the Asset Finished Goods Inventory
Financial assets Manufacturing process Physical assets $390 materials Converted
$1,000 of
cash Converted $470 labor $140 overhead CHECK YOURSELF 1.1 W
I
L
S
O
N
, $1,000 of
finished goods All boxes of General Mills’ Total Raisin Bran cereal are priced at exactly the same amount in
your local grocery store. Does this mean that the actual cost of making each box of cereal was
Q
exactly the same? U
No, making each box would not cost exactly the same amount. For example, some
boxes contain slightly more or less cereal than other boxes. Accordingly, some boxes cost
A
slightly more or less to make than others do. General Mills uses average cost rather than
S
actual cost to develop its pricing strategy. Answer H
E
Costs Can Be Assets or Expenses 1
It might seem odd that wages paid to production workers are recorded as inventory
instead of being expensed. Remember, however, that expenses are assets used in the
9
process of earning revenue. The cash paid to production workers is not used to produce
9
revenue. Instead, the cash is used to produce inventory. Revenue will be earned when
the inventory is used (sold). So long as the inventory remains on hand, all product costs
7
(materials, labor, and overhead) remain in an inventory account.
B
When a table is sold, the average cost of the table is transferred from the Inventory
account to the Cost of Goods Sold (expense) account.U some tables remain unsold
If
at the end of the accounting period, part of the product costs is reported as an asset
(inventory) on the balance sheet while the other part is reported as an expense (cost of
goods sold) on the income statement.
Costs that are not classified as product costs are normally expensed in the period
in which they are incurred. These costs include general operating costs, selling and
administrative costs, interest costs, and the cost of income taxes.
To illustrate, return to the Tabor Manufacturing example. Recall that Tabor made
four tables at an average cost per unit of $250. Assume Tabor pays an employee who
sells three of the tables a $200 sales commission. The sales commission is expensed
immediately. The total product cost for the three tables (3 tables 3 $250 each 5 $750)
is expensed on the income statement as cost of goods sold. The portion of the total 7 edm10890_ch01_002-053.indd Page 8 6/18/10 3:35 PM user-f497 8 /Users/user-f497/Desktop/MHBR165 Chapter 1 EXHIBIT 1.4
Cost Classification for Tabor Manufacturing Company
Cost category Balance sheet
$1,000
Cost of finished
goods $1,000
Product cost
• Materials
• Labor
• Overhead (tools) Income statement
$750
(Products sold)
Cost of goods sold $250
(Products not sold)
Ending inventory W
I
$200
$200
General, selling,
Selling and
L
and administrative
administrative
expense
costs
S
O
N
product cost remaining in inventory is $250 (1 table 3 $250). Exhibit 1.4 shows the
,
relationship between the costs incurred and the expenses recognized for Tabor Manufacturing Company. Q Effect of Product CostsU Financial Statements
on LO 3
Explain the effects on financial
statements of product costs versus
general, selling, and administrative
costs. We illustrate accounting for product costs in manufacturing companies with Patillo
A
Manufacturing Company, a producer of ceramic pottery. Patillo, started on January 1,
S
2013, experienced the following accounting events during its first year of operations. 3
Assume that all transactions except 6, 8, and 10 are cash transactions.
H
1. Acquired $15,000 cash by issuing common stock.
E
2. Paid $2,000 for materials that were used to make products. All products started
were completed during the period.
1
3. Paid $1,200 for salaries of selling and administrative employees.
9
4. Paid $3,000 for wages of production workers.
5. Paid $2,800 for furniture used in selling and administrative offices.
9
6. Recognized depreciation on the office furniture purchased in Event 5. The furniture
7
was acquired on January 1, had a $400 estimated salvage value, and a four-year useB
ful life. The annual depreciation charge is $600 [($2,800 2 $400) 4 4].
U
7. Paid $4,500 for manufacturing equipment.
8. Recognized depreciation on the equipment purchased in Event 7. The equipment
was acquired on January 1, had a $1,500 estimated salvage value, and a three-year
useful life. The annual depreciation charge is $1,000 [($4,500 2 $1,500) 4 3].
9. Sold inventory to customers for $7,500 cash.
10. The inventory sold in Event 9 cost $4,000 to make.
3 This illustration assumes that all inventory started during the period was completed during the period. Patillo
therefore uses only one inventory account, Finished Goods Inventory. Many manufacturing companies normally
have three categories of inventory on hand at the end of an accounting period: Raw Materials Inventory, Work in
Process Inventory (inventory of partially completed units), and Finished Goods Inventory. Chapter 11 discusses
these inventories in greater detail. edm10890_ch01_002-053.indd Page 9 7/9/10 3:39 PM user-f497 /Volumes/105/PHS00142/work/indd Management Accounting and Corporate Governance 9 EXHIBIT 1.5
Effect of Product versus Selling and Administrative Costs on Financial Statements
Assets
Event
No. Cash 1 15,000 2 (2,000) 3 (1,200) 4
5 Equity 6 Inventory 1
1
1 1 Manuf.
Equip.* Com.
Stk.
15,000 1 Ret.
Earn. Rev. 2 Exp. 5 Net Inc. 3,000 (2,800) Office
Furn.* 2,000 (3,000) 1 5
5 1 5 (1,200) 2 1,200 5 (1,200) 5 (600) 2 600 5 (600) 5 7,500 2,800
(600) W
7
(4,500) 1
4,500
I
8
1,000
1
(1,000)
9
7,500
7,500
7,500
L 5
10
(4,000)
(4,000)
S 5
Totals
9,000
1
2,000
1 2,200
1
3,500
O 5 15,000 1 1,700 7,500
*Negative amounts in these columns represent accumulated depreciation. N
,
The effects of these transactions on the balance sheet and income statement are
shown in Exhibit 1.5. Study each row in this exhibit, paying particular attention to
how similar costs such as salaries for selling and administrative personnel and wages
Q
for production workers have radically different effects on the financial statements.
U
The example illustrates the three elements of product costs, materials (Event 2), labor
(Event 4), and overhead (Event 8). These events are discussed in more detail below.
A
Materials Costs (Event 2)
S
Materials used to make products are usually called raw H
materials. The cost of raw materials is first recorded in an asset account (Inventory). The cost is then transferred
from the Inventory account to the Cost of Goods SoldE
account at the time the goods
are sold. Remember that materials cost is only one component of total manufacturing
costs. When inventory is sold, the combined cost of materials, labor, and overhead
1
is expensed as cost of goods sold. The costs of materials that can be easily and
conveniently traced to products are called direct raw materials costs.
9 9
Labor Costs (Event 4)
The salaries paid to selling and administrative employees (Event 3) and the wages paid
7
to production workers (Event 4) are accounted for differently. Salaries paid to selling
B
and administrative employees are expensed immediately, but the cost of production
wages is added to inventory. Production wages are expensed as part of cost of goods sold
U
at the time the inventory is sold. Labor costs that can be easily and conveniently traced
to products are called direct labor costs. The cost flow of wages for production employees
versus salaries for selling and administrative personnel is shown in Exhibit 1.6.
Overhead Costs (Event 8)
Although depreciation cost totaled $1,600 ($600 on office furniture and $1,000 on manufacturing equipment), only the $600 of depreciation on the office furniture is expensed
directly on the income statement. The depreciation on the manufacturing equipment is
split between the income statement (cost of goods sold) and the balance sheet (inventory). The depreciation cost flow for the manufacturing equipment versus the office
furniture is shown in Exhibit 1.7. 2 4,000 5 (4,000) 2 5,800 5 1,700 edm10890_ch01_002-053.indd Page 10 6/18/10 3:35 PM user-f497 10 /Users/user-f497/Desktop/MHBR165 Chapter 1 EXHIBIT 1.6
Flow of Labor Costs
Labor costs Balance sheet
Inventory Production
wages Selling and
administrative
salaries EXHIBIT 1.7
Flow of Depreciation Costs
Overhead cost
Depreciation on
manufacturing
equipment Depreciation on
office furniture Income statement
Cost of goods sold Salaries expense W
I
L
S
O
N
,
Q
U
A
S
H
E Balance sheet
Inventory Income statement
Cost of goods sold Depreciation
expense 1
9
9
Total Product Cost. A summary of Patillo Manufacturing’s total product cost is
shown in Exhibit 1.8.
7
Financial Statements
B
The income statement and balance sheet for Patillo Manufacturing are displayed in
U
Exhibit 1.9. Product Costs. The $4,000 cost of goods sold reported on the income statement includes a portion of the materials, labor, and overhead costs incurred by Patillo during
the year. Similarly, the $2,000 of finished goods inventory on the balance sheet includes
materials, labor, and overhead costs. These product costs will be recognized as expense
in the next accounting period when the goods are sold. Initially classifying a cost as a
product cost delays, but does not eliminate, its recognition as an expense. All product
costs are ultimately recognized as expense (cost of goods sold).
Selling, General, and Administrative Costs. Selling, general, and administrative costs
(SG&A) are normally expensed in the period in which they are incurred. Because of this
recognition pattern, nonproduct expenses are sometimes called period costs. In Patillo’s edm10890_ch01_002-053.indd Page 11 7/9/10 4:41 PM user-f497 /Volumes/105/PHS00142/work/indd Management Accounting and Corporate Governance EXHIBIT 1.9 EXHIBIT 1.8 PATILLO MANUFACTURING COMPANY Schedule of Inventory Costs
Materials
Labor
Manufacturing overhead*
Total product costs
Less: Cost of goods sold
Ending inventory balance 11 $2,000
3,000
1,000
6,000
(4,000)
$2,000 *Depreciation [($4,500 2 $1,500) 4 3] case, the salaries expense for selling and administrative employees and the depreciation
on office furniture are period costs reported
directly on the income statement. Overhead Costs: A Closer Look Financial Statements
Income Statement for 2013
Sales revenue
Cost of goods sold
Gross margin
SG&A expenses
Salaries expense
Depreciation expense—office furniture
Net income $ 7,500
(4,000)
3,500
(1,200)
(600)
$ 1,700 Balance Sheet as of December 31, 2013
Cash W
Finished goods inventory
I
Office furniture
L
Accumulated depreciation
Book value
S
Manufacturing equipment
O
Accumulated depreciation
Book value
N
Total assets
,
Stockholders’ equity
Common stock
Retained earnings
Q
Total stockholders’ equity Costs such as depreciation on manufacturing
equipment cannot be easily traced to products. Suppose that Patillo Manufacturing
makes both tables and chairs. What part of
the depreciation is caused by manufacturing
tables versus manufacturing chairs? Similarly, suppose a production supervisor oversees employees who work on both tables and
chairs. How much of the supervisor’s salary
U
relates to tables and how much to chairs?
Likewise, the cost of glue used in the producA
tion department would be difficult to trace to tables versus chairs. You could count the
S
drops of glue used on each product, but the information would not be useful enough to
H
merit the time and money spent collecting the data.
Costs that cannot be traced to products and services in a cost-effective manner are
E
called indirect costs. The indirect costs incurred to make products are called manufacturing overhead. Some of the items commonly included in manufacturing overhead are
indirect materials, indirect labor, factory utilities, rent of manufacturing facilities, and
1
depreciation on manufacturing assets. 9
9
7
CHECK YOURSELF 1.2
B
Lawson Manufacturing Company paid production workers wages of $100,000. It incurred
materials costs of $120,000 and manufacturing overhead costsU $160,000. Selling and adminof
istrative salaries were $80,000. Lawson started and completed 1,000 units of product and sold
800 of these units. The company sets sales prices at $220 above the average per unit production cost. Based on this information alone, determine the amoun...
See more...
and Corporate Governance
LEARNING OBJECTIVES W
I
L
S
O
N
, After you have mastered the material in this chapter, you will be able to: Q
1 Distinguish between managerial and financial accounting.
2 Identify the cost components of a product made byU manufacturing company: the cost of materials, labor,
a
A
S
3 Explain the effects on financial statements of product costs versus general, selling, and administrative costs.
H
4 Distinguish product costs from upstream and downstream costs.
E
5 Explain how product costing differs in service, merchandising, and manufacturing companies.
and overhead. 6 Show how just-in-time inventory can increase profitability.
1
7 Identify the key components of corporate governance.
9
8 Identify emerging trends in accounting (Appendix A). 9
7
CHAPTER OPENING
B
Andy Grove, Senior Advisor to Executive Management U Intel Corporation, is credited with the motto “Only the
of paranoid survive.” Mr. Grove describes a wide variety of concerns that make him paranoid. Specifically, he declares:
I worry about products getting screwed up, and I worry about products getting introduced prematurely. I
worry about factories not performing well, and I worry about having too many factories. I worry about hiring
the right people, and I worry about morale slacking off. And, of course, I worry about competitors. I worry
about other people figuring out how to do what we do better or cheaper, and displacing us with our customers.
Do Intel’s historically-based financial statements contain the information Mr. Grove needs? No. Financial accounting
is not designed to satisfy all the information needs of business managers. Its scope is limited to the needs of external
users such as investors and creditors. The field of accounting designed to meet the needs of internal users is called
managerial accounting. 2 edm10890_ch01_002-053.indd Page 3 6/18/10 6:42 PM user-f497 /Users/user-f497/Desktop/MHBR165 The Curious Accountant
In the first course of accounting, you learned how
retailers, such as Sears, account for the cost of equipment that lasts more than one year. Recall that the
equipment was recorded as an asset when purchased, W
I
life. The depreciation charge reduced the company’s
L
assets and increased its expenses. This approach was
S
justified under the matching principle, which seeks to
O
recognize costs as expenses in the same period that
N
the cost (resource) is used to generate revenue.
,
and then it was depreciated over its expected useful Is depreciation always shown as an expense on the income statement? The answer may surprise you. Q
U
the bicycles that it sells to Sears. In order to produce the
A
bicycles, Schwinn had to purchase a robotic machine S
that it expects can be used to produce 50,000 bicycles. H
Do you think Schwinn should account for depreciation on its manufacturing equipment the same way Sears
E
Consider the following scenario. Schwinn manufactures accounts for depreciation on its registers at the checkout counters? If not, how should Schwinn account for its
depreciation? Remember the matching principle when thinking of your answer. (Answer on page 12.)
1 9
9
7
B
U 3 edm10890_ch01_002-053.indd Page 4 6/18/10 3:35 PM user-f497 4 /Users/user-f497/Desktop/MHBR165 Chapter 1 DIFFERENCES BETWEEN MANAGERIAL
AND FINANCIAL ACCOUNTING Users and Types of Information
Financial accounting provides information used primarily by investors, creditors, and
others outside a business. In contrast, managerial accounting focuses on information
used by executives, managers, and employees who work inside the business. These two
user groups need different types of information.
Internal users need information to plan, direct, and control business operations. The
nature of information needed is related to an employee’s job level. Lower level employees use nonfinancial information such as work schedules, store hours, and customer
W
service policies. Moving up the organizational ladder, financial information becomes
increasingly important. Middle managers use a blend of financial and nonfinancial
I
information, while senior executives concentrate on financial data. To a lesser degree,
L
senior executives also use general economic data and nonfinancial operating information.
For example, an executive may consider the growth rate of the economy before deciding
S
to expand the company’s workforce.
O
External users (investors and creditors) have greater needs for general economic
information than do internal users. For example, an investor debating whether to purN
chase stock versus bond securities might be more interested in government tax policy
,
than financial statement data. Exhibit 1.1 summarizes the information needs of different user groups. Q
Level of Aggregation U
External users generally desire global information that reflects the performance of a comA
pany as a whole. For example, an investor is not so much interested in the performance of
S
a particular Sears store as she is in the performance of Sears Roebuck Company versus
that of JC Penney Company. In contrast, internal users focus on detailed information
H
about specific subunits of the company. To meet the needs of the different user groups,
E
financial accounting data are more aggregated than managerial accounting data.
1
9
EXHIBIT 1.1
9
Relationship Between Type of User and Type of Information
7
Economic data
Financial data
B
U
Investors and creditors Nonfinancial data Outsiders Distinguish between managerial
and financial accounting. While the information needs of internal and external users overlap, the needs of
managers generally differ from those of investors or creditors. Some distinguishing
characteristics are discussed in the following section. Senior executives
Insiders LO 1 Middle managers Operating employees edm10890_ch01_002-053.indd Page 5 6/18/10 3:35 PM user-f497 /Users/user-f497/Desktop/MHBR165 Management Accounting and Corporate Governance Regulation
Financial accounting is designed to generate information for the general
public. In an effort to protect the public interest, Congress established the
Securities and Exchange Commission (SEC) and gave it authority to
regulate public financial reporting practices. The SEC has delegated much
of its authority for developing accounting rules to the private sector
Financial Accounting Standards Board (FASB), thereby allowing the
accounting profession considerable influence over financial accounting
reports. The FASB supports a broad base of pronouncements and practices known as generally accepted accounting principles (GAAP). GAAP
severely restricts the accounting procedures and practices permitted in
published financial statements.
Beyond financial statement data, much of the information generated by management accounting systems is proprietary information not available to the public. Since
this information is not distributed to the public, it need not be regulated to protect
the public interest. Management accounting is restricted only by the value-added
W
principle. Management accountants are free to engage in any information gathering
I
and reporting activity so long as the activity adds value in excess of its cost. For
example, management accountants are free to provide forecasted information to
L
internal users. In contrast, financial accounting as prescribed by GAAP does not
S
permit forecasting. O
Information Characteristics
N
While financial accounting is characterized by its objectivity, reliability, consistency,
, and historical nature, managerial accounting is more concerned with relevance and
timeliness. Managerial accounting uses more estimates and fewer facts than financial
accounting. Financial accounting reports what happened yesterday; managerial
Q
accounting reports what is expected to happen tomorrow. U
Time Horizon and Reporting Frequency A
S
Financial accounting information is reported periodically, normally at the end of a
year. Management cannot wait until the end of the year to discover problems. PlanH
ning, controlling, and directing require immediate attention. Managerial accounting
E
information is delivered on a continuous basis.
Exhibit 1.2 summarizes significant differences between financial and managerial
accounting. 1
9
PRODUCT COSTING IN MANUFACTURING
9
COMPANIES
7
A major focus for managerial accountants is determining product cost.1 Managers need
B
to know the cost of their products for a variety of reasons. For example, cost-plus
2
is
pricing is a common business practice. Product costing U also used to control business
operations. It is useful in answering questions such as: Are costs higher or lower than
expected? Who is responsible for the variances between expected and actual costs?
What actions can be taken to control the variances? Components of Product Cost
A company normally incurs three types of costs when making products. Specifically,
the company must pay for (1) the materials used to make the products, (2) the labor
1 This text uses the term product in a generic sense to mean both goods and services.
Other pricing strategies will be introduced in subsequent chapters. 2 LO 2
Identify the cost components of a
product made by a manufacturing
company: the cost of materials,
labor, and overhead. 5 edm10890_ch01_002-053.indd Page 6 6/18/10 3:35 PM user-f497 6 /Users/user-f497/Desktop/MHBR165 Chapter 1 EXHIBIT 1.2
Comparative Features of Managerial versus Financial Accounting Information
Features Managerial Accounting Financial Accounting Users Insiders including executives,
managers, and operators Information type Economic and physical data
as well as financial data
Local information on subunits
of the organization
No regulation, limited only by
the value-added principle
Estimates that promote
W
relevance and enable
Itimeliness Outsiders including investors,
creditors, government
agencies, analysts, and
reporters
Financial data Level of aggregation
Regulation
Information characteristics Time horizon
Reporting frequency L Past, present, and future
S
Continuous reporting Global information on the
company as a whole
Regulation by SEC, FASB, and
other determiners of GAAP
Factual information that is
characterized by objectivity,
reliability, consistency, and
accuracy
Past only, historically based
Delayed with emphasis on
annual reports O
N
,
expended by the employees who transform the materials into products, and (3) the
overhead (other resources such as utilities and equipment consumed in the process of
making the products). If the company stores its products, the costs of the materials,
Q
labor, and overhead used in making the products are maintained in an inventory
account until the products are U
sold. For a detailed explanation of how product costs
flow through the financial statements, refer to the following example of Tabor ManA
ufacturing Company. S
H
Tabor Manufacturing Company
E
Tabor Manufacturing Company makes wooden tables. The company spent $1,000 cash to build four tables: $390 for materials, $470 for a carpenter’s labor, and $140 for
tools used in making the tables. How much is Tabor’s expense? The answer is zero. The
1
$1,000 cash has been converted into products (four tables). The cash payments for
materials, labor, and tools (overhead) were asset exchange transactions. One asset (cash)
9
decreased while another asset (tables) increased. Tabor will not recognize any expense
9
until the tables are sold; in the meantime, the cost of the tables is held in an asset
account called Finished Goods Inventory. Exhibit 1.3 illustrates how cash is transformed
7
into inventory. Average Cost per Unit B
U How much did each table made by Tabor cost? The actual cost of each of the four
tables likely differs. The carpenter probably spent a little more time on some of the tables
than others. Material and tool usage probably varied from table to table. Determining
the exact cost of each table is virtually impossible. Minute details such as a second of
labor time cannot be effectively measured. Even if Tabor could determine the exact cost
of each table, the information would be of little use. Minor differences in the cost per
table would make no difference in pricing or other decisions management needs to
make. Accountants therefore normally calculate cost per unit as an average. In the case
of Tabor Manufacturing, the average cost per table is $250 ($1,000 4 4 units). Unless
otherwise stated, assume cost per unit means average cost per unit. edm10890_ch01_002-053.indd Page 7 6/18/10 3:35 PM user-f497 /Users/user-f497/Desktop/MHBR165 Management Accounting and Corporate Governance EXHIBIT 1.3
Transforming the Asset Cash Into the Asset Finished Goods Inventory
Financial assets Manufacturing process Physical assets $390 materials Converted
$1,000 of
cash Converted $470 labor $140 overhead CHECK YOURSELF 1.1 W
I
L
S
O
N
, $1,000 of
finished goods All boxes of General Mills’ Total Raisin Bran cereal are priced at exactly the same amount in
your local grocery store. Does this mean that the actual cost of making each box of cereal was
Q
exactly the same? U
No, making each box would not cost exactly the same amount. For example, some
boxes contain slightly more or less cereal than other boxes. Accordingly, some boxes cost
A
slightly more or less to make than others do. General Mills uses average cost rather than
S
actual cost to develop its pricing strategy. Answer H
E
Costs Can Be Assets or Expenses 1
It might seem odd that wages paid to production workers are recorded as inventory
instead of being expensed. Remember, however, that expenses are assets used in the
9
process of earning revenue. The cash paid to production workers is not used to produce
9
revenue. Instead, the cash is used to produce inventory. Revenue will be earned when
the inventory is used (sold). So long as the inventory remains on hand, all product costs
7
(materials, labor, and overhead) remain in an inventory account.
B
When a table is sold, the average cost of the table is transferred from the Inventory
account to the Cost of Goods Sold (expense) account.U some tables remain unsold
If
at the end of the accounting period, part of the product costs is reported as an asset
(inventory) on the balance sheet while the other part is reported as an expense (cost of
goods sold) on the income statement.
Costs that are not classified as product costs are normally expensed in the period
in which they are incurred. These costs include general operating costs, selling and
administrative costs, interest costs, and the cost of income taxes.
To illustrate, return to the Tabor Manufacturing example. Recall that Tabor made
four tables at an average cost per unit of $250. Assume Tabor pays an employee who
sells three of the tables a $200 sales commission. The sales commission is expensed
immediately. The total product cost for the three tables (3 tables 3 $250 each 5 $750)
is expensed on the income statement as cost of goods sold. The portion of the total 7 edm10890_ch01_002-053.indd Page 8 6/18/10 3:35 PM user-f497 8 /Users/user-f497/Desktop/MHBR165 Chapter 1 EXHIBIT 1.4
Cost Classification for Tabor Manufacturing Company
Cost category Balance sheet
$1,000
Cost of finished
goods $1,000
Product cost
• Materials
• Labor
• Overhead (tools) Income statement
$750
(Products sold)
Cost of goods sold $250
(Products not sold)
Ending inventory W
I
$200
$200
General, selling,
Selling and
L
and administrative
administrative
expense
costs
S
O
N
product cost remaining in inventory is $250 (1 table 3 $250). Exhibit 1.4 shows the
,
relationship between the costs incurred and the expenses recognized for Tabor Manufacturing Company. Q Effect of Product CostsU Financial Statements
on LO 3
Explain the effects on financial
statements of product costs versus
general, selling, and administrative
costs. We illustrate accounting for product costs in manufacturing companies with Patillo
A
Manufacturing Company, a producer of ceramic pottery. Patillo, started on January 1,
S
2013, experienced the following accounting events during its first year of operations. 3
Assume that all transactions except 6, 8, and 10 are cash transactions.
H
1. Acquired $15,000 cash by issuing common stock.
E
2. Paid $2,000 for materials that were used to make products. All products started
were completed during the period.
1
3. Paid $1,200 for salaries of selling and administrative employees.
9
4. Paid $3,000 for wages of production workers.
5. Paid $2,800 for furniture used in selling and administrative offices.
9
6. Recognized depreciation on the office furniture purchased in Event 5. The furniture
7
was acquired on January 1, had a $400 estimated salvage value, and a four-year useB
ful life. The annual depreciation charge is $600 [($2,800 2 $400) 4 4].
U
7. Paid $4,500 for manufacturing equipment.
8. Recognized depreciation on the equipment purchased in Event 7. The equipment
was acquired on January 1, had a $1,500 estimated salvage value, and a three-year
useful life. The annual depreciation charge is $1,000 [($4,500 2 $1,500) 4 3].
9. Sold inventory to customers for $7,500 cash.
10. The inventory sold in Event 9 cost $4,000 to make.
3 This illustration assumes that all inventory started during the period was completed during the period. Patillo
therefore uses only one inventory account, Finished Goods Inventory. Many manufacturing companies normally
have three categories of inventory on hand at the end of an accounting period: Raw Materials Inventory, Work in
Process Inventory (inventory of partially completed units), and Finished Goods Inventory. Chapter 11 discusses
these inventories in greater detail. edm10890_ch01_002-053.indd Page 9 7/9/10 3:39 PM user-f497 /Volumes/105/PHS00142/work/indd Management Accounting and Corporate Governance 9 EXHIBIT 1.5
Effect of Product versus Selling and Administrative Costs on Financial Statements
Assets
Event
No. Cash 1 15,000 2 (2,000) 3 (1,200) 4
5 Equity 6 Inventory 1
1
1 1 Manuf.
Equip.* Com.
Stk.
15,000 1 Ret.
Earn. Rev. 2 Exp. 5 Net Inc. 3,000 (2,800) Office
Furn.* 2,000 (3,000) 1 5
5 1 5 (1,200) 2 1,200 5 (1,200) 5 (600) 2 600 5 (600) 5 7,500 2,800
(600) W
7
(4,500) 1
4,500
I
8
1,000
1
(1,000)
9
7,500
7,500
7,500
L 5
10
(4,000)
(4,000)
S 5
Totals
9,000
1
2,000
1 2,200
1
3,500
O 5 15,000 1 1,700 7,500
*Negative amounts in these columns represent accumulated depreciation. N
,
The effects of these transactions on the balance sheet and income statement are
shown in Exhibit 1.5. Study each row in this exhibit, paying particular attention to
how similar costs such as salaries for selling and administrative personnel and wages
Q
for production workers have radically different effects on the financial statements.
U
The example illustrates the three elements of product costs, materials (Event 2), labor
(Event 4), and overhead (Event 8). These events are discussed in more detail below.
A
Materials Costs (Event 2)
S
Materials used to make products are usually called raw H
materials. The cost of raw materials is first recorded in an asset account (Inventory). The cost is then transferred
from the Inventory account to the Cost of Goods SoldE
account at the time the goods
are sold. Remember that materials cost is only one component of total manufacturing
costs. When inventory is sold, the combined cost of materials, labor, and overhead
1
is expensed as cost of goods sold. The costs of materials that can be easily and
conveniently traced to products are called direct raw materials costs.
9 9
Labor Costs (Event 4)
The salaries paid to selling and administrative employees (Event 3) and the wages paid
7
to production workers (Event 4) are accounted for differently. Salaries paid to selling
B
and administrative employees are expensed immediately, but the cost of production
wages is added to inventory. Production wages are expensed as part of cost of goods sold
U
at the time the inventory is sold. Labor costs that can be easily and conveniently traced
to products are called direct labor costs. The cost flow of wages for production employees
versus salaries for selling and administrative personnel is shown in Exhibit 1.6.
Overhead Costs (Event 8)
Although depreciation cost totaled $1,600 ($600 on office furniture and $1,000 on manufacturing equipment), only the $600 of depreciation on the office furniture is expensed
directly on the income statement. The depreciation on the manufacturing equipment is
split between the income statement (cost of goods sold) and the balance sheet (inventory). The depreciation cost flow for the manufacturing equipment versus the office
furniture is shown in Exhibit 1.7. 2 4,000 5 (4,000) 2 5,800 5 1,700 edm10890_ch01_002-053.indd Page 10 6/18/10 3:35 PM user-f497 10 /Users/user-f497/Desktop/MHBR165 Chapter 1 EXHIBIT 1.6
Flow of Labor Costs
Labor costs Balance sheet
Inventory Production
wages Selling and
administrative
salaries EXHIBIT 1.7
Flow of Depreciation Costs
Overhead cost
Depreciation on
manufacturing
equipment Depreciation on
office furniture Income statement
Cost of goods sold Salaries expense W
I
L
S
O
N
,
Q
U
A
S
H
E Balance sheet
Inventory Income statement
Cost of goods sold Depreciation
expense 1
9
9
Total Product Cost. A summary of Patillo Manufacturing’s total product cost is
shown in Exhibit 1.8.
7
Financial Statements
B
The income statement and balance sheet for Patillo Manufacturing are displayed in
U
Exhibit 1.9. Product Costs. The $4,000 cost of goods sold reported on the income statement includes a portion of the materials, labor, and overhead costs incurred by Patillo during
the year. Similarly, the $2,000 of finished goods inventory on the balance sheet includes
materials, labor, and overhead costs. These product costs will be recognized as expense
in the next accounting period when the goods are sold. Initially classifying a cost as a
product cost delays, but does not eliminate, its recognition as an expense. All product
costs are ultimately recognized as expense (cost of goods sold).
Selling, General, and Administrative Costs. Selling, general, and administrative costs
(SG&A) are normally expensed in the period in which they are incurred. Because of this
recognition pattern, nonproduct expenses are sometimes called period costs. In Patillo’s edm10890_ch01_002-053.indd Page 11 7/9/10 4:41 PM user-f497 /Volumes/105/PHS00142/work/indd Management Accounting and Corporate Governance EXHIBIT 1.9 EXHIBIT 1.8 PATILLO MANUFACTURING COMPANY Schedule of Inventory Costs
Materials
Labor
Manufacturing overhead*
Total product costs
Less: Cost of goods sold
Ending inventory balance 11 $2,000
3,000
1,000
6,000
(4,000)
$2,000 *Depreciation [($4,500 2 $1,500) 4 3] case, the salaries expense for selling and administrative employees and the depreciation
on office furniture are period costs reported
directly on the income statement. Overhead Costs: A Closer Look Financial Statements
Income Statement for 2013
Sales revenue
Cost of goods sold
Gross margin
SG&A expenses
Salaries expense
Depreciation expense—office furniture
Net income $ 7,500
(4,000)
3,500
(1,200)
(600)
$ 1,700 Balance Sheet as of December 31, 2013
Cash W
Finished goods inventory
I
Office furniture
L
Accumulated depreciation
Book value
S
Manufacturing equipment
O
Accumulated depreciation
Book value
N
Total assets
,
Stockholders’ equity
Common stock
Retained earnings
Q
Total stockholders’ equity Costs such as depreciation on manufacturing
equipment cannot be easily traced to products. Suppose that Patillo Manufacturing
makes both tables and chairs. What part of
the depreciation is caused by manufacturing
tables versus manufacturing chairs? Similarly, suppose a production supervisor oversees employees who work on both tables and
chairs. How much of the supervisor’s salary
U
relates to tables and how much to chairs?
Likewise, the cost of glue used in the producA
tion department would be difficult to trace to tables versus chairs. You could count the
S
drops of glue used on each product, but the information would not be useful enough to
H
merit the time and money spent collecting the data.
Costs that cannot be traced to products and services in a cost-effective manner are
E
called indirect costs. The indirect costs incurred to make products are called manufacturing overhead. Some of the items commonly included in manufacturing overhead are
indirect materials, indirect labor, factory utilities, rent of manufacturing facilities, and
1
depreciation on manufacturing assets. 9
9
7
CHECK YOURSELF 1.2
B
Lawson Manufacturing Company paid production workers wages of $100,000. It incurred
materials costs of $120,000 and manufacturing overhead costsU $160,000. Selling and adminof
istrative salaries were $80,000. Lawson started and completed 1,000 units of product and sold
800 of these units. The company sets sales prices at $220 above the average per unit production cost. Based on this information alone, determine the amoun...
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