MANAGERIAL ACCOUNTING

FINAL ASSIGNMENT FALL I 2020

Q1. Differentiate between financial accounting and managerial accounting?

Q2. What are the three major elements of product costs in a manufacturing company?

Q3. Define the following:

a) Conversion cost
b) Direct cost
c) Direct labor
d) Direct material
e) Fixed cost
f) Incremental cost
g) Indirect cost
h) Differential cost
i) Indirect labor
j) Indirect material
k) Inventoriable costs
l) Opportunity cost
m) Period costs
n) Prime cost
o) Product costs
p) Sunk cost
q) Variable cost

Q4. Describe how the income statement of a manufacturing company differs from the
income statement of a merchandising company.

Q5. XYZ company manufactures and sells a product for $20 per Kg. The data for the year
2016 is given below:
• Sales in kgs: 80,000 kgs
• Finished goods inventory at the beginning of the period: 15,000 kgs
• Finished goods inventory at the closing of the period: 19,000 kgs
• Manufacturing costs:
• Variable cost: $10 per Kg
• Fixed manufacturing overhead cost: $360,000 per year
• Marketing and administrative expenses:
• Variable expenses: $4per Kg of sale
• Fixed expenses: $400,000 per year

Required:
• Income statement using absorption and variable costing methods.
• Explanation of the cause of difference in net operating income under two concepts.
Q6. ABC company manufactures and sells a product for $20 per Kg. The data for the year
2018 is given below:
• Sales in kgs: 90,000 kgs
• Finished goods inventory at the beginning of the period: 13,000 kgs
• Finished goods inventory at the closing of the period: 15,000 kgs
• Manufacturing costs:
• Variable cost: $6 per Kg
• Fixed manufacturing overhead cost: $300,000 per year
• Marketing and administrative expenses:
• Variable expenses: $2 per Kg of sale
• Fixed expenses: $200,000 per year
• Required:
• Income statement using absorption and variable costing methods.
• Explanation of the cause of difference in net operating income under two concepts.

Q7. ALI company manufactures and sells a product for $20 per Kg. The data for the year
2016 is given below:
• Sales in kgs: 100,000 kgs
• Finished goods inventory at the beginning of the period: 10,000 kgs
• Finished goods inventory at the closing of the period: 13,000 kgs
• Manufacturing costs:
• Variable cost: $15 per Kg
• Fixed manufacturing overhead cost: $100,000 per year
• Marketing and administrative expenses:
• Variable expenses: $5 per Kg of sale
• Fixed expenses: $500,000 per year
• Required:
• Income statement using absorption and variable costing methods.
• Explanation of the cause of difference in net operating income under two concepts.

Q8. Assume that as an investor, you are planning to enter the construction industry as a
panel formwork supplier. The potential number of forthcoming projects, you forecasted that
within two years, your fixed cost for producing formworks is Rs. 300,000. The variable unit
cost for making one panel is Rs.  15.  The sale price for each panel will be Rs. 25. If you
charge Rs. 25 for each panel, how many panels you need to sell in total, in order to start
making money?

Q10. Sibon plc manufactures soft toys for the European market. The costs incurred by the
firm are as follows:
 $
Materials (per toy) 5
Wages (per toy) 4
Packaging (per toy) 3
Rent of premises 5,000
Machinery hire 3,000
Marketing and administration 1,000

The soft toys sell for an average price of $16. Current capacity of Sibon plc is 3000 toys per
year.

Required
Calculate the following:
Contribution per toy sold
Break-even in units of output
Break-even level of sales revenue

SOLUTIONS
Ans 1.

Difference between Financial Accounting and Managerial Accounting

Financial Accounting Managerial Accounting

a) Financial accounting data is primarily used a) Managerial accounting is primarily concerned
externally by Investors, govt. authorities and with internal usage, e.g. business managers and
creditors etc. employees

b) Financial accounting is based on historical b) Managerial accounting is current and future

events. based.

c) Financial accounting is objective, auditable, c) Managerial accounting is more subjective and

reliable, consistent and precise. judgmental, valid, relevant and accurate.

d) Financial accounting contains highly d) Managerial accounting contains disaggregated

aggregated information about the overall information to support local decisions.
organization.

e) Data of financial accounting must be accurate e) Data of managerial accouting is usually

and timely. It is compulsory under company approximate but relevant and flexible. It is not
law and Is an end in itself. mandatory and Is a mean to the end.

f) Financial accounting is primarily concerned f) In managerial accounting, segment reporting is

with reporting for the company as a whole. the primary emphasis.

g) In financial accounting, transactions are g) Managerial accounting is used to assist the

recorded to determine the profit/loss and management in decision-making and policy
financial position of a company. formulation.

h) Financial accounting is governed by GAAP. h) No set of rules are followed in managerial

accounting

i) Qualitative aspects are not recoded in financial i) Managerial accounting uses both qualitative
accounting. and quantitative aspects.

j) Reporting in financial accounting is generally j) Reporting is conducted as and when desired by

conducted at the end of the year. the management.

k) Only monetary transactions are recorded in k) Both monetary and non-monetary

financial accounting. transactions are recorded

Ans 2.
 Major Elements of Product Cost in Manufacturing Company
The three major elements of product costs in a manufacturing company are;
a) Direct materials
b) Direct labor, and
c) Manufacturing overhead

a) Direct Materials:
Direct material costs are basically the costs of raw materials or parts that are directly used in
producing/manufacturing a product. For example, if a company is a car manufacturer, then, the cost
of procuring metal or metal alloys that is used in manufacturing a car would be the direct material
cost.

b) Direct Labor:
Direct labor costs are the wages, benefits, and insurance that are paid to employees who are
directly involved in manufacturing and producing the goods – for example, workers on the assembly
line or those who use the machinery to make the products.

c) Manufacturing Overhead:
Manufacturing overhead costs include direct factory-related costs that are incurred when
producing a product, such as the cost of machinery and the cost to operate the machinery.

Ans 3.

Definitions:
a. Conversion Cost:
The term conversion cost refers to the cost that is incurred when raw materials are
converted into finished goods. In other words, conversion cost is equal to direct labor +
manufacturing overheads.

b. Direct Cost:
A direct cost is a price that can be directly connected to a specific cost object that could be
either a good or service. Examples of direct costs include direct labor, direct materials, and
manufacturing supplies.

c. Direct Labor:
Direct labor refers to the employees and temporary staff who work directly on a
manufacturer's products. Example includes a carpenter working on wood to make a chair.

d. Direct Material
Direct materials are those raw materials/supplies that are used during the manufacturing of
a product, and which are directly identified with that product. Direct materials are basically raw
materials that are made into finished products. In other words, these are the tangible pieces or
components of a finished product.
e. Fixed Cost:
A fixed cost is a cost that does not change with an increase or decrease in the amount of
goods or services produced or sold. Fixed costs are expenses that are incurred by a company,
regardless of any specific business activities. Examples include, Rent of an office or workplace.

f. Incremental Cost:
Incremental cost is the extra cost that a company incurs if it manufactures an additional
quantity of units. For example, consider a company that produces 100 units of its main product and
decides that it can fit 10 more units in its production schedule. The additional cost it will incur for
producing these 10 units is the incremental cost.

g. Indirect Cost:
An indirect cost is any cost not directly identified with a single, final cost objective, but
identified with two or more final cost objectives or an intermediate cost objective. It is not subject to
treatment as a direct cost. Indirect costs include costs which are frequently referred to as overhead
expenses (for example, rent and utilities).

h. Differential Cost:
Differential cost is the difference between the cost of two alternative decisions, or of a
change in output levels. The concept is used when there are multiple possible options to pursue,
and a choice must be made to select one option and drop the others.

i. Indirect Labor:
Indirect labor is the cost of any labor that supports the production process, but which is not
directly involved in the active conversion of materials into finished products. Examples of indirect
labor positions are: production supervisor, purchasing staff.

j. Indirect Material:
Indirect materials are resources used in a manufacture’s production process that can’t be
traced back to the products or batches of products they produce. In other words, indirect materials
are resources that are used to assemble direct materials into finished products. E.g. Nuts and Bolts
used in vehicle manufacturing company like Toyota.

k. Inventoriable Cost:
Inventoriable Cost is the total direct expense incurred by a manufacturing firm that includes
a) cost related to the purchase of inventory (raw material, WIP, Finished Goods) and b) cost that is
incurred to manufacture the goods till the point of sale.

l. Opportunity Cost
Opportunity cost is the value of something when a particular course of action is chosen.
Simply put, the opportunity cost is what you must forgo in order to get something. In other words,
opportunity cost refers to what you have to give up buying what you want in terms of other goods or
services.

m. Period Cost:
It is a cost relating to a time period rather than to the output of products and services. In
other words, costs that are not incurred in connection to the production, rather they are connected
and measured in context of time. These costs do not play any role in producing the asset or bringing
the asset to its present location and condition.

n. Prime Cost:
A prime cost refers to a firm’s expense that is directly related to the materials and labor used
in production. Prime costs are those costs that are directly incurred to create a product or a service
and are particularly useful in determining the contribution margin of a product or a service, as well as
for calculating the minimum price at which a product should be sold.

o. Product Cost:
The costs involved in creating a product are called Product Costs. These costs include
materials, labor, production supplies and factory overhead. The cost of the labor required to deliver
a service to a customer is also considered a product cost. Product costs related to services should
include things like compensation, payroll taxes and employee benefits.

p. Sunk Cost
It is a cost that has already been incurred and that cannot be recovered. Sunk costs are
treated as bygone and are not taken into consideration when deciding whether to continue an
investment project.

q. Variable Cost:
Variable costs are expenses that vary in proportion to the volume of goods or services that a
business produces. In other words, they are costs that vary depending on the volume of activity. The
costs increase as the volume of activities increases and decrease as the volume of activities
decreases.

Ans 4.

Difference between income statement of a manufacturing company

and income statement of a merchandising company

An income statement reflects the earnings of a business and shows all the expenses incurred in
generating that income. If a business is a manufacturing company, the categories of expenses shown
in the income statement would be different from that of a merchandising company.

Income Statement of a Manufacturing Company:

For manufacturing companies, cost of goods sold includes all costs related to manufacturing
the goods sold in the current period. These costs consist of materials, labor and overhead costs and
may be fixed or variable in cost behavior. Revenues listed are usually net revenues, which are all
sales less refunds and allowances for returns. Once revenues and cost of goods sold are determined,
the two figures can be subtracted to arrive at gross margin. To calculate net income, operating
expenses are subtracted from the gross margin.

Income statement of a Merchandising Company:

Merchandising income statement, on the other hand, involves computing the cost of goods
sold. However, unlike a manufacturer, a merchandiser does bear the complexity of production. The
cost of goods gold for a merchandiser consists primarily of the cost paid to a wholesaler for products
to sell. This amount is subtracted from revenues to arrive at gross margin. To calculate net income,
operating expenses are then subtracted from the gross margin.

Ans 5.

Part 1
Income Statements

(a) Absorption Costing Income Statement

XYZ Company
Income Statement (Absorption Method)
For the Year End December 31, 2016
_______________________________________________________________________________________________________

Sales (80,000 x $20) $1,600,000

Less: Cost of Goods Sold

Opening Inventory (15,000 x 14) 210,000
Add cost of good manufactured (84,000 x 14) 1,176,000

Cost of available for sale 1,386,000

Less: Closing Inventory (19,000 x 14) (266,000) (1,120,000)

Gross Profit $480,000

Less marketing and admin expenses:

Variable marketing and admin expenses (80,000 x $4) 320,000
Fixed marketing and admin expenses 400,000 (720,000)

Net Operating Income ($240,000)

Calculation:
Production for the year 2016:
Units manufactured during 2016 = Units sold + Units in closing inventory – Units in opening
inventory
= 80,000 kgs + 19,000 kgs – 15,000 kgs
= 84,000 kgs

Manufacturing expenses per unit:

Variable expenses + Fixed expenses
= $10 + ($360,000/84,000 kgs)
= $10 + $4 (rounded off from 4.285)
= $14

(b) Variable costing income statement:

Sales (80,000 x $20) 1,600,000

Less variable cost of goods sold:

Opening inventory (15000Kg × $10) 150,000
Add variable cost of goods manufactured (84,000 Kg × $10) 840,000

Variable cost of goods available for sale 990,000

Less Closing inventory (19,000Kg × 10) (190,000) (800,000)

Gross contribution margin $800,000

Less variable marketing and admin expenses (80,000Kg × $4) (320,000)

Contribution margin 480,000

Less period costs:

Fixed manufacturing overhead expense 360,000
Fixed marketing and admin expense 400,000 760,000

Net Operating Income (280,000)

Part 2
Explanation of the difference in net operating income:

The negative net operating income under absorption costing is ($40,000) less than the net operating
income under variable costing. When production is more than sales, the fixed manufacturing
overhead is deferred in inventory that causes a lower negative net operating income under
absorption costing than under variable costing. The reconciliation of net operating income is given
below:

Operating income under absorption costing (240,000)

Operating income under variable costing (280,000)

Difference in net operating income -40,000

Change in inventory (19,000Kg – 15,000Kg) 4,000Kg

Fixed cost deferred in inventory (4,000Kg × $4) 16,000

Ans 6.
Part 1
Income Statements

(a) Absorption Costing Income Statement

ABC Company
Income Statement (Absorption Method)
For the Year End December 31, 2016
_______________________________________________________________________________________________________

Sales (90,000 x $20) $1,800,000

Less: Cost of Goods Sold

Opening Inventory (13,000 x 9) 117,000
Add cost of good manufactured (92,000 x 9) 828,000

Cost of available for sale 945,000

Less: Closing Inventory (15,000 x 9) (135,000) (810,000)

Gross Profit $990,000

Less marketing and admin expenses:

Variable marketing and admin expenses (90,000 x $2) 180,000
Fixed marketing and admin expenses 200,000 (380,000)

Net Operating Income $750,000

Calculations:
Production for the year 2016:
Units manufactured during 2016 = Units sold + Units in closing inventory – Units in opening
inventory
= 90,000 kgs + 15,000 kgs – 13,000 kgs
= 92,000 kgs

Manufacturing expenses per unit:

Variable expenses + Fixed expenses
= $6 + ($300,000/92,000 kgs)
= $6 + $3 (rounded off from 3.260)
= $9

(b) Variable costing income statement:

Sales (90,000 x $20) 1,800,000

Less variable cost of goods sold:

Opening inventory (13,000Kg × $6) 78,000
Add variable cost of goods manufactured (92,000 Kg × $6) 552,000

Variable cost of goods available for sale 630,000

Less Closing inventory (15,000Kg × 6) (90,000) (540,000)

Gross contribution margin $1,260,000

Less variable marketing and admin expenses (90,000Kg × $2) (180,000)

Contribution margin 1,080,000

Less period costs:

Fixed manufacturing overhead expense 300,000
Fixed marketing and admin expense 200,000 (500,000)

Net Operating Income $580,000

Part 2
Explanation of the difference in net operating income:

The net operating income under absorption costing is $170,000 more than the net operating income
under variable costing. When production is more than sales, the fixed manufacturing overhead is
deferred in inventory that causes a higher net operating income under absorption costing than
under variable costing. The reconciliation of net operating income is given below:

Operating income under absorption costing $750,000

Operating income under variable costing $580,000

Difference in net operating income $170,000

Change in inventory (15,000Kg – 13,000Kg) 2,000Kg

Fixed cost deferred in inventory (2,000Kg × $3) $6,000

Ans 7.

Part 1
Income Statements

(a) Absorption Costing Income Statement

ALI Company
Income Statement (Absorption Method)
For the Year End December 31, 2016
 _______________________________________________________________________________________________________

Sales (100,000 x $20) $2,000,000

Less: Cost of Goods Sold

Opening Inventory (10,000 x 31) 310,000
Add cost of good manufactured (103,000 x 31) 3,193,000

Cost of available for sale 3,503,000

Less: Closing Inventory (13,000 x 31) (403,000) (3,100,000)

Gross Loss $1,100,000

Less marketing and admin expenses:

Variable marketing and admin expenses (100,000 x $5) 500,000
Fixed marketing and admin expenses 500,000 (1,000,000)

Net Operating Income $2,100,000

Calculations:
Production for the year 2016:
Units manufactured during 2016 = Units sold + Units in closing inventory – Units in opening
inventory
= 100,000 kgs + 13,000 kgs – 10,000 kgs
= 103,000 kgs

Manufacturing expenses per unit:

Variable expenses + Fixed expenses
= $15 + ($100,000/103,000 kgs)
= $15 + $16 (rounded off from 15.970)
= $31

(b) Variable costing income statement:

Sales (100,000 x $20) 2,000,000

Less variable cost of goods sold:

Opening inventory (10,000Kg × $15) 1,500,000
Add variable cost of goods manufactured (103,000 Kg × $15) 1,545,000

Variable cost of goods available for sale 3,045,000

Less Closing inventory (13,000Kg × 15) (195,000) (2,850,000)

Gross contribution margin $-850,000

Less variable marketing and admin expenses (100,000Kg × $5) (500,000)

Contribution margin -1,350,000

Less period costs:

Fixed manufacturing overhead expense 100,000
Fixed marketing and admin expense 500,000 (600,000)

Net Operating Income $1,950,000

Part 2
Explanation of the difference in net operating income:

The net operating income under absorption costing is $170,000 more than the net operating income
under variable costing. When production is more than sales, the fixed manufacturing overhead is
deferred in inventory that causes a higher net operating income under absorption costing than
under variable costing. The reconciliation of net operating income is given below:

Operating income under absorption costing $750,000

Operating income under variable costing $580,000

Difference in net operating income $170,000

Change in inventory (15,000Kg – 13,000Kg) 2,000Kg

Fixed cost deferred in inventory (2,000Kg × $3) $6,000

Ans 8.

Breakeven in units = TOTAL FIXED COST____

PRICE - VARIABLE COST

Breakeven in Units = 300,000

25 – 15

= 30,000 panels ANS

Ans 10.