Question

Mastery Problem: Introduction to Managerial Accounting

Able Baker Charlie Company

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 makingManagerial Accounting

Generally Accepted Accounting Principles (GAAP) must be usedFinancial Accounting

Prepared statements usually pertain to the company as a whole rather than individual departments or productsFinancial Accounting

Information provided will often be subjective, such as estimated future resultsManagerial Accounting

Often prepared on an as-needed basis rather than at fixed intervalsManagerial Accounting

Feedback

Review the differences between managerial and financial accounting, and how each type of accounting is used in the organization and for management processes.

Cost Classification

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.)

CostProduct
CostPeriod
CostDirect
MaterialsDirect
LaborFactory
OverheadSelling
ExpenseAdministrative
ExpenseDirect
CostIndirect
CostPrime
CostConversion
Cost

Eggs used to make cheesecakesYes No Yes No No No No Yes No Yes No

Baker’s wagesYes No No Yes No No No Yes No Yes Yes

Delivery driver wagesNo Yes No No No Yes No No No No No

Depreciation of office computersNo Yes No No No No Yes No No No No

Power to run the cheesecake ovensYes No No No Yes No No No Yes No Yes

President’s salaryNo Yes No No No No Yes No No No No

Sales commissionsNo Yes No No No Yes No No No No No

Factory supervisor salaryYes No No No Yes No No No Yes No Yes

Feedback

Review the definitions of each type of cost. Note that each cost may be in more than one category.

Financial Statements

Charles 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 manufactured6,400

  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 expenses5,250

    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 purchases6,400

  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 expenses5,250

    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

Inventory6,000

Supplies2,100

Land17,000

Total assets$55,900

Liabilities

Accounts payable$17,800

Stockholders’ Equity

Common stock$19,000

Retained earnings19,100

Total stockholders’ equity38,100

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 process1,500

  Finished goods2,000

  Total inventory6,000

Supplies2,100

Land17,000

Total assets$55,900

Liabilities

Accounts payable$17,800

Stockholders’ Equity

Common stock$19,000

Retained earnings19,100

Total stockholders’ equity38,100

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

Feedback

Think about which accounts would be needed in a manufacturing environment.

Costs and Balances

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$3,300

Materials inventory on Feb. 2850% of materials inventory on Jan. 31

Direct materials purchased$11,700

Direct materials used3 times the direct labor incurred

Total manufacturing costs incurred in period$28,700

Total manufacturing costs incurred in period70% of Cost of Goods Manufactured

Total manufacturing costs incurred in period$7,000 less than Cost of Goods Sold

Account Balances

AccountJan. 31Feb. 28Costs Incurred

Materials Inventory$$Direct Materials Used$

Work in Process Inventory21,000Direct Labor Incurred

Finished Goods Inventory16,500Factory Overhead Incurred

Cost of Goods Sold

Answer 1

Answer-1:

1. Primarily used for internal decision making – This feature is associated more with managerial accounting, since its primary function is to provide data to management of a Company for internal decision-making.
2. Generally Accepted Accounting Principles (GAAP) must be used – This characteristic is more relevant to financial accounting, since financial statements for the outside world must be prepared strictly in adherence with generally accepted accounting principles (GAAP) for the purpose of authenticity and comparability of financial statements.
3. Prepared statements usually pertain to the company as a whole rather than individual departments or products – This is a feature of financial accounting since financial accounting is concerned with reporting performance of Company as a whole and not individual departments or products.
4. Information provided will often be subjective, such as estimated future results – This is more relevant to managerial accounting since managerial accounting involves projections, estimates relating to various products and processes to aid in managerial decision-making. Financial accounting, on the other hand, is just recording the financial transactions as it is, in the financial statements, therefore, is fully objective.
5. Often prepared on an as-needed basis rather than at fixed intervals – This is a characteristic of managerial accounting since financial accounts are prepared at fixed intervals, usually one year, while managerial accounts may be prepared as needed, semi-annually, quarterly, monthly and even fortnightly reporting to monitor performance regularly, so that actuals can be aligned to budgets well in time.

Answer-2:

Answer-3:

Income statement A is more suitable for a manufacturing business since income statement A is for a production-based company as it records inventory of finished goods, and the case in question being a cheesecake-producing company.

Income statement B is for a trading company which purchases products from outside and sells same (as “Net purchases” can be seen from the income statement).

Similarly, Balance sheet D is more suitable for a manufacturing business since it reflects inventory into three categories: raw materials, work-in-process and finishes goods. The cheesecake-producing factory is more likely to have two or all of these.

On the contrary, Balance sheet C is more relevant to a Company which just purchases from outside and does not have raw materials or work-in-progress inventories.

Answer-4:

(i) We have been provided that Feb. 28 material inventory is 50% of materials inventory on Jan. 31.

So, if Jan. 31 materials inventory is x, Feb. 28 materials inventory = 50% of x = 0.5 x

Decrease = x-0.5 x = 0.5x, which is given as $ 3,300

So, x = $ 3,300 / 0.5 = $ 6,600

So, materials Jan. 31 inventory (beginning inventory) = $6,600

Materials Feb. 28 inventory(ending inventory) = $ 3,300

Material purchased during Feb = $ 11,700

So, materials used in Feb. = Beginning inventory + Purchases – Ending inventory

= $ 6,600 + $ 11,700 - $ 3,300 = $ 15,000

(ii) Now, direct materials used = 3 times direct labour incurred

So, direct labour incurred = $ 15,000 / 3 = $ 5,000

(iii) Now, factory overhead = Total manufacturing costs – Direct materials used – direct labour used

= $ 28,700 - $ 15,000 - $ 5,000 = $ 8,700

(iv) Total manufacturing cost incurred in the period = $ 28,700, which is

70% of Cost of Goods manufactured (COGM), So, COGM = $ 28,700 * 100/70 = $ 41,000

And, $ 7,000 less than Cost of Goods Sold (COGS), so COGS = $ 28,700 + $ 7,000 = $ 35,700

COGM = Direct materials used + Direct labour used + manufacturing overhead + Beginning work in process inventory – ending work in process inventory

$ 41,000 = $ 15,000 + $ 5,000 + $ 8,700 + $ 21,000 – ending Work in progress inventory

Ending work in progress inventory = ($ 15,000 + $ 5,000 + $ 8,700 + $ 21,000) - $ 41,000

                                                  = $ 8,700

Further, COGS = Beginning finished goods inventory + COGM – Ending finished goods inventory

$ 35,700 = Beginning finished goods inventory + $ 41,000 - $ 16,500

So, beginning finished goods inventory = $ 11,200