Question

1. 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	$2,700
   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	$28,000
   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	27,000		Direct Labor Incurred
   Finished Goods Inventory		16,000	Factory Overhead Incurred
   			Cost of Goods Sold

Answer 1

1. Primarily used for internal decision making – managerial accounting
2. (GAAP) must be used – financial accounting
3. Prepared statements usually pertain to the company as a whole – financial accounting
4. Information provided will often be subjective – managerial accounting
5. Often prepared on an as-needed basis rather than at fixed intervals – managerial accounting

1. 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

   Which income statement is more appropriate for a manufacturing business = Income Statement A [As a manufacturing company should have cost of good manufactured ] Which Balance Sheet is more appropriate for manufacturing company. = Balance Sheet D

	Account Balances
Account	Jan. 31	Feb. 28	Costs Incurred
Materials Inventory	$5400	$2700	Direct Materials Used	$15000
Work in Process Inventory	27,000	15000	Direct Labor Incurred	5000
Finished Goods Inventory	11000	17,000	Factory Overhead Incurred	8000
			Cost of Goods Sold	35000

Feb. 28 material inventory = 50% of materials inventory on Jan. 31.

Jan. 31 materials inventory = x,

Feb. 28 materials inventory = 50% of x = 0.5 x

Decrease = x-0.5 x = 0.5x, which is given as $ 2700

So, x = $ 2700 / 0.5 = $ 5400

Jan. 31 inventory (beginning inventory) = $5400

Feb. 28 inventory(ending inventory) = $2700

Material purchased during Feb = $ 12,300

So, materials used in Feb. = Beg inventory + Purchases – End inventory = $ 5400 + $ 12,300 - $ 2700 = $ 15,000

Now, direct materials used = 3 times direct labour incurred = $ 15,000 / 3 = $ 5,000

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

= $ 28000 - $ 15,000 - $ 5,000 = $8000

Total manufacturing cost incurred in the period = 70% of Cost of Goods manufactured (COGM),

So, COGM = $ 28000 * 100/70 = $ 40,000

Cost of Goods Sold (COGS), so COGS = $ 28000 + $ 7,000 = $ 35000

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

$ 40,000 = $ 15,000 + $ 5,000 + $ 8000 + $ 27,000 – ending Work in progress inventory

Ending work in progress inventory = ($ 15,000 + $ 5,000 + $ 8000 + $ 27,000) - $ 40,000 = $ 15000

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

$ 35000 = Beginning finished goods inventory + $ 40,000 - $ 16,000

beginning finished goods inventory = $ 11000