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. :
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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) §
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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
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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
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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
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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
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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
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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)
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