Content
| Managerial Accounting [Chapter 1]
Manufacturing, Merchandising and Service Companies Managerial accounting is just as important in a service company as it is in a manufacturing company or a merchandising company [see the functions above]. However, there is a significant difference in the cost determination between the different types of companies. A manufacturing company uses labor and other inputs to transforms raw materials into finished product and then sells the product, like a merchandising company. A service company, on the other hand, does not produce/sell products, instead it provides service. The major difference between the three types of companies can be found in the cost of goods sold [services provided] calculation. |
All three types of companies need to determine the costs of product or services to
- Properly price goods or services [planning]
- To determine profitability [evaluation]
A final, very important function of managerial accounting is to develop plans and policies to ensure internal control and that company objectives are accomplished [control].
Standard Costing System
Examples:
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Examples:
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Example of Direct Cost, Indirect Cost and Overhead Allocation XYZ manufactures two products: [A] and [B]. Direct Costs | Indirect Cost Examples:
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A Materials Labor Total direct costs | 2 pounds @ $ 3 3 hours @ $15/hour $ 51 | B Material Labor Total direct costs | 3 pounds @ $1.75 5 hours @ $12/ hour $65.25 | |
Indirect Costs for A and B | Overhead allocation | |||
A: Indirect Material: $ 5 Indi. Labor: 1.5hours @ $9 | B: Indirect Material: $ 2 Indirect labor: 1hour @ $10 | Overhead is allocated to products according to some system Examples: | ||
Overhead is allocated using direct labor hours: 10,000 units of A and 4,000 units of B are produced with the same equipment. Total depreciation for the equipment for the period: $12,000 Other overhead costs total $18,000. |
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Total hours [A] 30,000 Overhead allocation/unit: 30,000/50,000*3 = $1.80/unit | Total hours [A]: 20,000 Overhead allocation/unit: 30,000/50,000*5 = $3/unit | |||
Total costs per unit [A] | Total costs per unit [B] | |||
Direct costs Indirect costs Overhead Total/unit | $ 51 $18.50 $1.80 $71.30 | Direct costs Indirect costs Overhead Total/unit: | $65.25 $12 $3 $80.25 |
Inventory Accounts for Manufacturing Companies
Manufacturing companies use multiple inventory accounts. At a minimum the following:
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Raw Materials Inventory: Used to track and report raw materials. As production occurs, raw material balances are transferred to work in process account using the standard quantity per unit produced -----> | Work in Process: During production all appropriate costs are recorded in this account using the standard rate per unit [materials, labor, indirect materials and labor, overhead] |
Finished Goods As units are completed, the standard cost per unit is recorded in this account. At the end of the reporting period | |
Variances: Note that all unit costs are recorded/transferred at the standard rate [cost] per unit. In reality, actually quantity and rates [costs] will likely differ from the standard [planned] The reasons are due to | |
Quantity Variances E.g., it took 3 hours and 15 minutes per unit [@ 15 per hour] to produce one unit, compared to the budgeted 3 hours per unit | Price Variances E.g., the product did use [as planned] 2 pounds of raw materials, however, the price per pound has increased to $3.10 [from $3] per pound. |
What happens to variances? | |
A. They are closed to work in process [finished goods] for financial reporting purposes | B. They are carefully analyzed to assist in the planning and evaluation/control purposes. |
Income Statement Comparison Merchandising versus Manufacturing Company
The income statement of a manufacturing company is identical to that of a merchandising company. The difference between the two types of companies lies in the
Determination of cost of goods sold
Merchandising Company | Manufacturing Company |
Beginning Inventory Purchases [net] [Ending Inventory] Cost of Goods Sold | A. Beginning work in Process Beginning Raw materials Raw materials purchases [Ending raw materials inventory] Raw materials used Direct labor Overhead Total manufacturing costs [ending work in process] Cost of Goods Manufactured B. Finished goods inventory [beginning] Plus cost of goods manufactured [Finished goods inventory - ending] Cost of Goods Sold |
Balance Sheet Statement Comparison Merchandising versus Manufacturing Company