In: Accounting
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 making | |
Generally Accepted Accounting Principles (GAAP) must be used | |
Prepared statements usually pertain to the company as a whole rather than individual departments or products | |
Information provided will often be subjective, such as estimated future results | |
Often prepared on an as-needed basis rather than at fixed intervals |
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.)
Cost | Product Cost |
Period Cost |
Direct Materials |
Direct Labor |
Factory Overhead |
Selling Expense |
Administrative Expense |
Direct Cost |
Indirect Cost |
Prime Cost |
Conversion 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 |
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 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?
Which balance sheet is most appropriate for a manufacturing business?
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 | $3,000 |
Materials inventory on Feb. 28 | 50% of materials inventory on Jan. 31 |
Direct materials purchased | $12,300 |
Direct materials used | 3 times the direct labor incurred |
Total manufacturing costs incurred in period | $29,400 |
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 | 17,000 | Factory Overhead Incurred | ||
Cost of Goods Sold |
SOLUTION
Financial accounting refers to the process of preparation of financial statements from the accounting records of a business during a defined accounting period, for the purpose of reporting the overall performance (profitability) of a business to various stakeholders, mainly external stakeholders like shareholders, creditors, statutory bodies. The object is to report the performance of the Company to its stakeholders.
Managerial accounting, on the other hand, is more inward-looking in terms of providing detailed data such as profitability of various product lines, processes, estimates, budgets to the management of the Company. The purpose is to enable better decision-making by the management and to chart future course of action for the Company.
Managerial vs Financial:
Cost classification:
In order to understand how each of the items given below are classified into various costs, a brief on what is the meaning of each cost classification is provided as under:
Thus, the classification of various costs is presented in table below:
Cost |
Product |
Period |
Direct |
Direct |
Factory |
Selling |
Administrative |
Direct |
Indirect |
Cost |
Cost |
Materials |
Labor |
Overhead |
Expense |
Expense |
Cost |
Cost |
|
Eggs used to make cheesecakes |
Yes |
No |
Yes |
No |
No |
No |
No |
Yes |
No |
Baker’s wages |
Yes |
No |
No |
Yes |
No |
No |
No |
Yes |
No |
Delivery driver wages |
No |
Yes |
No |
No |
No |
Yes |
No |
No |
Yes |
Depreciation of office computers |
No |
Yes |
No |
No |
No |
No |
Yes |
No |
Yes |
Power to run the cheesecake ovens |
Yes |
No |
No |
No |
Yes |
No |
No |
Yes |
No |
President’s salary |
No |
Yes |
No |
No |
No |
No |
Yes |
No |
Yes |
Sales commissions |
No |
Yes |
No |
No |
No |
Yes |
No |
Yes |
No |
Factory supervisor salary |
Yes |
No |
No |
No |
Yes |
No |
No |
No |
Yes |
Financial statements:
Income statement A is more suitable in the given case 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).
Based on same principle as above, balance sheet D is more suitable 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 D is more relevant to a Company which just purchases from outside and does not have raw materials or work-in-progress inventories.
Cost and balances:
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 $ 3,000
So, x = $ 3,000 / 0.5 = $ 6,000
So, materials Jan. 31 inventory (beginning inventory) = $,6000
Materials Feb. 28 inventory(ending inventory) = $ 3,000
Material purchased during Feb = $ 12,000
So, materials used in Feb. = Beginning inventory + Purchases – Ending inventory
= $ 6,000 + $ 12,000 - $ 3,000 = $ 15,000
Now, direct materials used = 3 times direct labour incurred
So, direct labour incurred = $ 15,000 / 3 = $ 5,000
Now, factory overhead = Total manufacturing costs – Direct materials used – direct labour used
= $ 29,400 - $ 15,000 - $ 5,000 = $ 9,400
Total manufacturing cost incurred in the period = $ 29,400, which is
70% of Cost of Goods manufactured (COGM), So, COGM = $ 29,400 * 100/70 = $ 42,000
And, $ 8,000 less than Cost of Goods Sold (COGS), so COGS = $ 29,400 + $ 8,000 = $ 37,400
COGM = Direct materials used + Direct labour used + manufacturing overhead + Beginning work in process inventory – ending work in process inventory
$ 42,000 = $ 15,000 + $ 5,000 + $ 9,400 + $ 27,000 – ending Work in progress inventory
Ending work in progress inventory = ($ 15,000 + $ 5,000 + $ 9,400 + $ 27,000) - $ 42,000
= $ 14,400
Further, COGS = Beginning finished goods inventory + COGM – Ending finished goods inventory
$ 37,400 = Beginning finished goods inventory + $ 42,000 - $ 17,000
So, beginning finished goods inventory = $ 12,400