mee er eee DT UC Washburn Guitars aul Stanley, quitast for the legeniary rock band KISS, has 3, How many employees should the company have working on F entertained rrllions of fans playing his guitar. His guitar each stage of the manufacturing process? was built by quailty @ Identify the foilowing costs as a prime cost (PI, conversion cost (C), Leather used to make a baseball glove 'b. Coolants for machines that sew baseball gloves & Wages of assembly line employees d._ Ink used to print a player's autograph one baseball glove Follow My Exaniple 1-3- > Se Ht both () for a baseball glove manufacturer. aogee nen Product Costs and Period Costs Fur financial reporting pur ipposes, costs are ciassi- sfied as product costs or period costs 1: Product costs consist of manufacturing cost: di tory overhead. 2, Period costs consist of selling and administrative ex are incurred in marketing the product and delivering Administrative expenses are incurred in managing the compa related to the manufacturing or selling functions. rect materials, direct labor, and fac- ‘penses. Selling expenses Product to customers. iny and are not directly Examples of product costs and period costs for Legend Guitars are presented in Exhibit 7. : ‘Scanned with CamScannervi act costs and Period Costs—Legend Guitars Examples of Prod! Product {Manufacturing) Costs To facilitate control, selling and administrative expenses may be repoited by level of responsibility. For example, selling expenses may be reported by products, salespersons, departments, divisions, or territories. Likewise, administrative expenses may be reported by areas such as human resources, computer services, legal, accounting, uf finance. . ‘The impact on the fnancial statements of product and period costs is summarized Note? cenit in Exhibit 8. As product costs are incurred, they arc rec-wrded and reported on the Produsteons ita balance sheet as inventory. When the itwventory is sold, the cost of the manufactured {aber andfaciary Product sold is reported as cost of goods sold on the income statement. Period costs overhead cos are reported as expenses on the income statement in the period in which they are incurred and, thus, never appear on the balance sheet: Coss eh Purpose of a Revenves cc Product Costs, Product Cons Period Cons Pevod Cons amt 7 | Financial Stateme"! Inventory | (Balance Sheet) - i | i Eo satis ae | | pine Statement) Administrative Efpensos £ | ; ss eet (income Statement) § ‘Scanned with CamScanner42. Chapter 1 Nianagerial Accounting Concepts and Principles , Pisce) y > @ Identity the following costs a8 a product costo a peti cos fora baseball glove manufactrer, a. Leather used to make a baseball glove b._ Cost of endorsement from a profesional baseball olaer Office supplies used at the company headquarter: 4. Inkeused to prat a player's autograph or the baseball glove = Follow My Example.1-4 >>. : one Product cost . 3 : bi. Petiod cost . Petiod cnit : 4. Product cost i Practice Exercises: PE 1-4A, PE 1-48 vewiteand —- Financial Statements for a austate the ' 5 fotovingsetenens ors Manufacturing Business manufacturing busines: 1. balance shest ‘The retained earnings and cash flow statements for a manufacturing business are simi- 2, statement of cost of lar to those illustrated in earlier chapters for service and merchandising businesses. goods mancfactured —Frowever, the balance sheet and income statement for a manufacturing business are — more complex. This is because a manufacturer inakes the products that it sells and, thus, must record and report product costs. The reporting of product costs primarily affects the balance sheet and the income statement. Balance Sheet for a Manufacturing Business ‘A manufacturing business reports three types of inventory on its balance sheet as follows: 1. Materials inventory (someti:es called raw materials inventory). This inventory con- sists of the costs of the direct and indirect materials that have not entered the manu- facturing process Examples for Legend Guitars: Wood, guitar strings, glue, sandpaper 2. Work in process inventory. This inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process). Example for Legend Guitars: Unfinished (pat 3, Finished goods inventory. This inventory consists of ucts that have not been, sold Example for Legend Guit ly assembled) guitars (oF finished) LIPA CITY COLLEGE: LRC - COLLEGE O14 404 ‘Scanned with CamScanner rs: Unsold guitarsChapter 1 Manzgerlal Accounting Concepts and Principles 3 Exhibit 9 illustrates the reporting of inventory on the balance sheet for a mer- : chandising and a manufacturing business. Musicland Stores, Inc., a retailer of mu- : sical instruments, reports only Merchandise Inventory. In contrast, Legend Guitars, a manufacturer of guitars, reports Fintshed Goods, Work in Process, and Materials inventories. In both balance sheets, inventory is reported in the Current Assets section, SET R Pre rer Deed ~ pear ier Balence Sheet Presentation of inventory tn Manufacturing and Merchandising ‘Companies ban. % ‘Accounts recelvabie SUPpIIGScosssceseesk “Total current assets: cae Boece iene e er Current assets: Cash. e ‘Accounts receivable (et). Inventor Z Finished goods... Work in process. Materials supplies Total curent asets, cenpegeteoing 204 Income Statement for a Manufacturing Business ‘The ificome statements for merchandising and manufacturing businesses differ primar- ily in the reporting of the cost of merchandise (goods) availabie jor sale and sold during the period. These differences are shown below. |A merchandising business purchases merchandise ready for resale to customers. ‘The total cost of the merchandise available for sale during the period is determined by adding the beginning merchandise inventory to the net purchases. The cost of merchandise sold is determined by subtracting the ending merchandise inventory from the cost of merchandise available for sale. 4 ‘Scanned with CamScanner“4 Chapter Managerial Accounting Concepts and Principles A manufacturer niakes the products it sells, using direct materials, direct labor, and factory overhead. The total cost of making products: that are available for sate during the period is called the cost of goods manufactured. The cost of finished ‘goods available for sale is determined by adding the beginning finished goods inven- tory to tke cost of goods manufactured during the period. The cost of goods sold is determined by subtracting the «1 finished goods available for sale. Cost of goods manufactured is nding finisied goods ixventory from the cost of required to determine the cost of goods sold and, thus to prepare the incomé statement. The.cnst of goods manufactured is often d~ termined by prepasing a statement summarizes the cost of goods mani of cost of goods manufactured." This statement wufactured during the period, as shown below. Statement of Cost of Goods Manufactured Beginning workin process inventory... Ditectamateria:: Beginning materials inventory. Pure ost of materials avaiable for use. ‘ess ending materials inventory... Cost of direct material u Direct labor Factory overhea Total manufacturing costs incurred “otal manufacturing costs. Less ending workin process inventory . ‘Coét of goocis manuiactured To illustrate, the following data Inventories: Materials Work in process Finished goods. Total inventories. Selling expenses. ‘Administrative expenses ome $0 ‘ ox es te sone "o a om oe Box x . Sax for Legend Guitars are used: Jan.1,2014 _Dec.51,2014 $5000 § 35000 24000 2300 Has ‘$100,000 a ‘a0 #4000 saeco $366000 20000 13000 The statement of cost of goods manufactured is prepared using the following three steps: Step 1. Determine the cast of materials u-vd. Step 2. Determine the total manufactziring costs incurred, ‘ ‘Step 3. Determine the cost of goods manufactured. 1 Chapters 203 describe and musta the use of). ore and races cos systems. A wl be discussed hese stems donot ‘Scanned with CamScanner+ capt eet fhe income statement flow tet yy manufactur costs reghibie 10 summarizes HOW TH sine ‘and balance sheet of & mant — INCOME BALANCE JUFACTURING SHEET STATEMENT (MANUFAC COSTS , ‘ocesgage ening 201. ing the cost of materials used, sfactured are shown below. 1s, the sieps for determi Using tne snd Guita peor abpenetipe and cost of gods manu total manufacturing costs incurred, Step 1.-The cos of materials used in prostin is determine = follows: Matra ventory, January 12014 $ 65000 ‘add materials purchased 100.000 {ost of materials available for use 165000 - Less materia: inventory, December 33, 2014 35000 Costef cre materials used Fano ‘The January 1, 2014 (beginning), materials inventory of $65,000 is added to the cost of ‘materials purchased of $100,000 to yicld the $165,000 total cost of materials that are avail- able for use during 2014. Deducting the December 31, 2014 (ending), materials inventory ‘of $35,000 yields the $130,000 cost of direct materials used in production. Step 2. The fotal manufacturing costs incurred is determined as follows: Direct materials used in production (Step 1) 130000 <— Diect labor 110000 Factory overhead 44900 Total marufacturing costs incurred ‘Szea000 - ‘The total manufacturing costs incurred in 2014 of $284,000 are determined by adding the ‘direct materials used in production (Step), the direct labor cost, and the factory overhead costs, : a ‘Step 3. The cost of gcods manufactured is determined as follows: Workin process inventory sanuary 1,2014 ‘Total manufacturing costs incurred ee s >auonn he bietraclosintisae = $314,000 eee mts eno, cb pred Cost of goods manufactured os ‘$z9q063 ‘Scanned with CamScanner co46 Chapter 1 Managerial Accounting Concepts and Pin ‘The income statement aind statement-of cost of goods manufactured for Leyend Guitars are shown in’ ibit 11. Sia le tc Manufacturing ic ee nee SSR a ee Ly statement with hack 2 Statement of Costotgoads sold Cost uf Goods Finished goo vent Jaaty 1, 2014. Manufactured Cost of goods manufsctuted s, ssv ct Cost of firished goo’ avaliable forsale ‘Less finished goods Invencory December 31,2014 ‘Cost of goods sold... Gross proft.-.-.-100 ‘Operating expenses Selig expenses ‘aministrative expenses “otal operating expenses. Netinzome jycessenes sneer z ee sooed Pe etre aa peat ree oD ‘Wrkin process inventor, Dive maverias S Materials Inventory lanuary 12014. Purchases ssar--sncssneszecenstése Cost of materials avaliable for use ess materials inventory, December 31,2014 ‘Cost of deck mattis used Direct labor. sve Factory overhead: Inlet labo? onto sustaseeeat Depreciation an factory equipment... Fertory supplies and uly 2st Total factory wvetieatc scene: ‘ota ianufactuing tosis Incurred. “ola! manufacturing cst . [ede work in process inventory December 31,201 Cost of goods manufactured. $130,000 110,000 ecangee ening 20 rss wing informatica for January {Gauntlet Company hes the fol ost of direct materials used in preduction $25,000 Direct labor 35,000, Factory ovethead 20,000, Workin process inventory, January 1 30,000, Workin process Inventory, January 31 25,000 Finished goods inventory, January 1 15,000 Finished goods inventory, January 31 12.000 or January, determine (a) the cost of goods manufactured and() the cost of goods oe ‘Scanned with CamScanner7 Root . Chapter 1 Managerls! Accounting Concepits and Principles RX > a ‘Work In process inventory, Jariva $ 0000 Cost of direct materials used in production, $ 25,000 Direct iabor....... 35,000 Factory overliead . dane 20,000 Tota! manufacturing costs Incurred during Januaty. 80.000 ‘Total manufacturing costs + $110,000 Less wark in process Inventory, 25000 Cost of goods manufattured.... 585000 b Finished goods Inventory, January 1... «. - $ 15,000 Cost of goods manufactured... 85,000 Cost af finished goods available for sale. $100,000 Less finished goods Inventory, January 31. 42,000 Cost of goods sold. 388,000 Practice Fyercises: PE 1-5A, PE 1-5B Uses of Managerial Accounting Desa tne a uses of manage accounting As mentioned caslier, managerial accounting provides information and reports for Meneses managers to use in operating a business. Some exampies of how managerial acrount- ing could be used by Legend Guitars include the following: 1. The cost of manufacturing each guitar could be used to determine its selling price. 2. Comparing the costs of guitars over time can be used to monitor and control the cost _ ‘of direct materials, direct labor, end factory overhedd. 3. Performance reports could be used to identify any large amounts of scrap or employee 5 downtime. For example, large amounts of unusable wood (scrap) after the cutting process should be investigated to determine the underlying cause. Such scrap may be caused by saws that have not been properly maintained. 4, A report could analyze the potential efficlencies and dollar savings of purchasing a new computerized saw to speed up the production process. 5. A report could analyze how many guitars need to be sold to cover operating costs land expenses, Such information could be used to set munthly selling targets and ‘bonuses for sales personnel. [As the priof examples illustrate, managerial accounting information can be vsed for a variety of purposes. In the remaining chapters of this text, we examine these and other areas of managerial accounting, aaa oem “OVERHEAD COSTS. -” 1t0FV ovethiead costs are a much lager partion ofthe cost i ‘of goods sold for defense contractors than itis in other industries. For example, a US. General Accourting Ofce study of sucdefense contractors found that overhead costs were almost onethird af the price of the fal put This s over three times greater than the factory overhead ‘costs fora laptop computer, which ate typically about Of the price of the final product. . +» Defense contractors such as Gerieral Oynamics, Boeing, and Lockheed Martin sell products such a> airplanes, ~ ships, and military equipment to the US. Department of Defense. Building large products such as these requires a significant investment in facilities and tools, all of which ‘re classified as factory overhead costs, As a result, fac- ‘Scanned with CamScanneeKey Points Mi reponts to aid my tiom ti accounting reports are dl Aongterm strates ise agement in planning, directing, controlling, counting, isa staf function that supports the management process DY, PO and decision making. ‘his ned to meet the spectic needs of management and aid management in plansing and conning the day-to-day operations, iaming Outcomes fee tents Sanaih the differences be accountit etween financial accounting, + Desr’he the rule of the management sceountant in the + Desmbe the vole of managerial accounting in the smuanagement process iP mial accounting, which provides information to users outside of the organization. Manag: al | i Pn UE ae Sper ern pnt he iri oe wack Key Points Manufacturing coupanies use nizchinery and labos to convert materials into a finished preabict- A dvect cost can be directly traced to a finished product, while an indirect cost cannot. The Pek of at finished product is made up of three components: (1) clrect maretials, (2) direct labor, and 1G) factory overtead. ‘Those three manufacturing costs can be extegorized into prime costs (direct materials and direct labor) vr ont enion conts (diet labor and factory overhead). Product costs consist of the elements of manufacturing, Cou —alincet materials, direct labor, and factory overhead—while period costs cozsist of selling and | | | | i comes ‘Gample Practice » Leasing Outcomes tang ia } + Describe a cost object. Fs cats cot ae int cane fr aco ones + Describe dest materials cos ea | peta, tee | + Destine direst aber es ee te + Deseie fconyovetzad cos rez | er2a,126 © peste pre cons ad conssion costs eid | eee cae «tec produc CO88 a pti cos. mia |edit fine 18 . ‘Scanned with CamScannerKey Points The financial statements of manufacturing companies dif nies, Manufacturing company balance sheets report three types of in rd goo" tke tot of goods nanufactured, which provides the dletals of dhe * Describe work in process inventory. + Describe finished gaoxls inventory. * Deseribe the differences between merchandising and manufacturing company balance sheets. (see Conte auntie ae =(2) statement of cost of goods manufactured, and (3Tincome statement. eS ‘The income statement uf manufacturing companies teports the cost Of yoods sold, which tiring cost ofthe gocdls eld. The income statement i¢ supported by the tment ef cag cost uf goods manul ‘Example ee Caariha Osteomes 2) 2) 5 ae ae | Baa ae from those of merchandisin, ising compa. my materials, Work in prose tured during © Perica | | | | | | * vreparc a statement of cost of goods marufuctured, FELS PELSA, 1-5B + Peepare an income statement for a manufacturing EELS PELSA, 15E | compan I 4 Key Points Managers need information to guide.their decis variety of iaformation and reports that help managers run the operati ng, Managerial acvou ing prides a Learning Outcome * * Describe examples of how managerial accounting aids rvanagess in decision making, jons of their business fxemple Practice ] Beri Frecies continuous process irect materials cost (8) improvement (5) directing (6) controller (4) tory burden (9) controlling (5) tory overhead cost (9) conversion costs (10) feedback (5) cost (7) cost object (7) cost of finished goods available (14) cost of gocds manufactured (°4) cost of goods sold (14) cost of merchandise sold (13) decision making (5) direct costs (7) direct labor cost (9) al accounting (3) wed goods inventory (12) fi indirect costs (7) line department (4) vent by exception (5) yement process (4) rial accounting (3) manufacturing overhead (9) materials inventory (12) merchandise available for sale (13) objectives (goals) 6) ‘operational planning (5) period casts (10) planning (5) prime costs (10) product costs (10) staff department () statement of cost of goods ‘manufactured (14) strategic planning (5) strategies (5) work in process inventory (12) ‘Scanned with CamScanner