In: Accounting
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 |
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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 |
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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 |
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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 |
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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 |
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.
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