Question

In: Accounting

Charles Maxwell is starting a cheesecake bakery, Able Baker Charlie Company, to produce and sell different...

Charles Maxwell is starting a cheesecake bakery, Able Baker Charlie Company, to produce and sell different flavored cheesecakes to restaurants and the general public. He has just begun his study of accounting, and is a bit confused about the many types of reports he has read about and how they will help him run his business. He asks you to help him clarify what the differences between managerial accounting and financial accounting are. He’s also wondering how to set up his inventory, how to classify the costs of his business, and how to fill in some missing information.

Managerial vs. Financial

Select whether the following characteristics are most often associated with managerial accounting or financial accounting.

Primarily used for internal decision making Managerial Accounting
Generally Accepted Accounting Principles (GAAP) must be used Financial Accounting
Prepared statements usually pertain to the company as a whole rather than individual departments or products Financial Accounting
Information provided will often be subjective, such as estimated future results Managerial Accounting
Often prepared on an as-needed basis rather than at fixed intervals Managerial Accounting

Charles has provided some of the costs he expects to incur as follows. Decide on the classifications that could be applied to each of these costs using the table provided. The cost object in each case is the cheesecake.

(Select "Yes" or "No" from the below dropdowns.)

Cost Product Period Direct Direct Factory Selling Administrative Direct Indirect Prime Conversion
Cost Cost Materials Labor Overhead Expense Expense Cost Cost Cost Cost
Eggs used to make cheesecakes
Baker’s wages
Delivery driver wages
Depreciation of office computers
Power to run the cheesecake ovens
President’s salary
Sales commissions
Factory supervisor salary

harles found some sample income statements and balance sheets on the Internet, and asked which of them might be most appropriate for a manufacturing business like his. Review income statements A and B, and balance sheets C and D. Determine which income statement and balance sheet would be most appropriate for a manufacturing business like Able Baker Charlie Company.

Income Statement A

Sample Company A
Income Statement
For the Year Ended December 31, 20Y8
Sales $42,000
  Finished goods inventory, January 1, 20Y8 $5,250
  Cost of goods manufactured 6,400
  Cost of finished goods available for sale $11,650
  Finished goods inventory, December 31, 20Y8 (400)
  Cost of goods sold (11,250)
Gross profit $30,750
Operating expenses:
  Selling expenses $6,400
  Administrative expenses 5,250
    Total operating expenses (11,650)
Net income $19,100

Income Statement B

Sample Company B
Income Statement
For the Year Ended December 31, 20Y8
Sales $42,000
  Beginning inventory $5,250
  Net purchases 6,400
  Inventory available for sale $11,650
  Ending inventory (400)
  Cost of goods sold (11,250)
Gross profit $30,750
Operating expenses:
  Selling expenses $6,400
  Administrative expenses 5,250
    Total operating expenses (11,650)
Net income $19,100

Balance Sheet C

Sample Company C
Balance Sheet
December 31, 20Y8
Assets
Cash $20,800
Accounts receivable (net) 10,000
Inventory 6,000
Supplies 2,100
Land 17,000
Total assets $55,900
Liabilities
Accounts payable $17,800
Stockholders’ Equity
Common stock $19,000
Retained earnings 19,100
Total stockholders’ equity 38,100
Total liabilities and stockholders’ equity $55,900

Balance Sheet D

Sample Company D
Balance Sheet
December 31, 20Y8
Assets
Cash $20,800
Accounts receivable (net) 10,000
Inventory:
  Direct materials $2,500
  Work in process 1,500
  Finished goods 2,000
  Total inventory 6,000
Supplies 2,100
Land 17,000
Total assets $55,900
Liabilities
Accounts payable $17,800
Stockholders’ Equity
Common stock $19,000
Retained earnings 19,100
Total stockholders’ equity 38,100
Total liabilities and stockholders’ equity $55,900

Which income statement is most appropriate for a manufacturing business?

Income statement A

Which balance sheet is most appropriate for a manufacturing business?

Balance sheet D

At the end of February, after the second month of operations of Able Baker Charlie Company, Charles shows you the data he’s collected, but he was unable to figure out some of the amounts. Review the following data and fill in the missing amounts on the chart for Able Baker Charlie Company. Note: It may be helpful to use T accounts to map the flow of the amounts through the manufacturing accounts and solve for the missing dollar values. It may also be helpful to review the steps for determining the cost of materials used, total manufacturing cost incurred, and cost of goods manufactured.

Data for February
Decrease in materials inventory $3,600
Materials inventory on Feb. 28 50% of materials inventory on Jan. 31
Direct materials purchased $12,000
Direct materials used 3 times the direct labor incurred
Total manufacturing costs incurred in period $27,300
Total manufacturing costs incurred in period 70% of Cost of Goods Manufactured
Total manufacturing costs incurred in period $7,000 less than Cost of Goods Sold
Account Balances
Account Jan. 31 Feb. 28 Costs Incurred
Materials Inventory $ $ Direct Materials Used $
Work in Process Inventory 21,000 Direct Labor Incurred
Finished Goods Inventory 16,000 Factory Overhead Incurred
Cost of Goods Sold

Solutions

Expert Solution

Cost Product Period Direct Direct Factory Selling Administrative Direct Indirect Prime Conversion
Cost Cost Materials Labor Overhead Expense Expense Cost Cost Cost Cost
Eggs used to make cheesecakes Yes Yes Yes Yes
Baker’s wages Yes Yes Yes Yes Yes
Delivery driver wages Yes Yes Yes
Depreciation of office computers Yes Yes Yes
Power to run the cheesecake ovens Yes Yes Yes Yes
President’s salary Yes Yes Yes
Sales commissions Yes Yes Yes
Factory supervisor salary Yes Yes Yes Yes


Power to run cheesecake ovens can also be classified as indirect cost based on its cost formula

Last Question
Direct Material Used = $12000+3600 = $15600
Direct Labor incurred = $15600/3 = $5200
Factory Overhead incurred = $27300-15600-5200 = $6500
Cost of Goods Sold = $27300+7000 = $34300

Cost of Goods Manufactured = $27300 / 70% = $39000

Finished Goods, Jan 31 = $34300+16000-39000 = $11300

Work in Process, Feb 28 = $21000+27300-39000 = $9300

Material Inventory, Jan 31 = $3600 / 50% = $7200
Material Inventory, Feb 28 = $3600

Other questions are answered correctly.
If you have any query, kindly comment with your query and please mark thumbs up.


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