CHAPTER 1
Review questions:
1. Define managerial accounting.
2. What are the components of cost inventory for a manufacturing firm?
3. What is the cost flow of a manufacturing firm?
4. What are fixed costs? What are variable costs? How do they differ?
5. Prepare a contribution margin income statement.
6. What are the inventory accounts for a manufacturing firm?
a. Answer: raw materials, work in progress, finished goods
Financial accounting
- Produces financial statements for external users
- Follows GAAP or IFRS rules
- Summary of historical information; transactions from prior period
Managerial accounting
- Statements for internal users
- Used to run company
- No defined rules
- Uses historical information to create forecasts
- Does not have to be expressed in financial terms
- Number, percentage, etc depending on what is most useful
- Manufacturing firm has most complexity
Importance of determining cost of a product
Companies compete in one of two ways:
1. Product differentiation
a. Able to differentiate its products from competitors products in a meaningful way
for customers
i. Product typically marked up
2. Price-based competition
a. Tries to sell its product for a lower price
i. Product typically marked down
The cost of inventory
Business classifications:
- Merchandising firms
- Wholesale and retail
- Manufacturing firms
- Manufacturer buys inventory, company processes it, company sells product
different from original inventory
- Cost of inventory (inventory on balance sheet)
, - 1) raw materials
- Aka direct materials
- 2) direct labor
- Labor cost for all employees directly involved in making product
- Does NOT include maintenance employee, forklift driver, or
anyone working in factor but not directly on product (product level
cost)
- 3) manufacturing overhead
- All other expenses
- Utilities, rent, salaries of maintenance employees, etc
- Factory related
- Do not include administrative expenses
- Product costs–inventoriable expenses; factory expenses
- Period costs–non-inventoriable expenses; not related to factory operations
- 3 inventory accounts:
- 1) raw material inventory
- 2) work in progress inventory
- Collects cost of all direct materials, direct labor, and portion of
manufacturing overhead used during production process
- 3) finished goods inventory
- Total cost that the product accumulated
- When sold:
- 1) revenue increased on income statement + either cash or
accounts receivable on balance sheet
- 2) inventory account reduced by cost of product sold
- 3) COGS increased on income statement
- Service firms
- Do not carry inventory
- Sell knowledge and abilities of employees
- Inventory purchased → inventory asset account increased → accounts payable
or cash decreased
- Sale recorded on income statement at sales price; cash or accounts
receivable increased on balance sheet
- Inventory reduced on balance sheet at COGS, COGS increased
Fixed costs vs variable costs
Fixed costs–total stays same regardless of volume produced
- Ex: rent, property taxes, salary of CEO, depreciation
Variable costs–change depending on level of production
- Ex: direct materials, sales commission, cost of transportation of finished goods to
warehouse
*only move within relevant range
Mixed costs–contain both fixed and variable costs
Review questions:
1. Define managerial accounting.
2. What are the components of cost inventory for a manufacturing firm?
3. What is the cost flow of a manufacturing firm?
4. What are fixed costs? What are variable costs? How do they differ?
5. Prepare a contribution margin income statement.
6. What are the inventory accounts for a manufacturing firm?
a. Answer: raw materials, work in progress, finished goods
Financial accounting
- Produces financial statements for external users
- Follows GAAP or IFRS rules
- Summary of historical information; transactions from prior period
Managerial accounting
- Statements for internal users
- Used to run company
- No defined rules
- Uses historical information to create forecasts
- Does not have to be expressed in financial terms
- Number, percentage, etc depending on what is most useful
- Manufacturing firm has most complexity
Importance of determining cost of a product
Companies compete in one of two ways:
1. Product differentiation
a. Able to differentiate its products from competitors products in a meaningful way
for customers
i. Product typically marked up
2. Price-based competition
a. Tries to sell its product for a lower price
i. Product typically marked down
The cost of inventory
Business classifications:
- Merchandising firms
- Wholesale and retail
- Manufacturing firms
- Manufacturer buys inventory, company processes it, company sells product
different from original inventory
- Cost of inventory (inventory on balance sheet)
, - 1) raw materials
- Aka direct materials
- 2) direct labor
- Labor cost for all employees directly involved in making product
- Does NOT include maintenance employee, forklift driver, or
anyone working in factor but not directly on product (product level
cost)
- 3) manufacturing overhead
- All other expenses
- Utilities, rent, salaries of maintenance employees, etc
- Factory related
- Do not include administrative expenses
- Product costs–inventoriable expenses; factory expenses
- Period costs–non-inventoriable expenses; not related to factory operations
- 3 inventory accounts:
- 1) raw material inventory
- 2) work in progress inventory
- Collects cost of all direct materials, direct labor, and portion of
manufacturing overhead used during production process
- 3) finished goods inventory
- Total cost that the product accumulated
- When sold:
- 1) revenue increased on income statement + either cash or
accounts receivable on balance sheet
- 2) inventory account reduced by cost of product sold
- 3) COGS increased on income statement
- Service firms
- Do not carry inventory
- Sell knowledge and abilities of employees
- Inventory purchased → inventory asset account increased → accounts payable
or cash decreased
- Sale recorded on income statement at sales price; cash or accounts
receivable increased on balance sheet
- Inventory reduced on balance sheet at COGS, COGS increased
Fixed costs vs variable costs
Fixed costs–total stays same regardless of volume produced
- Ex: rent, property taxes, salary of CEO, depreciation
Variable costs–change depending on level of production
- Ex: direct materials, sales commission, cost of transportation of finished goods to
warehouse
*only move within relevant range
Mixed costs–contain both fixed and variable costs
