Content - double entry journal
- Manufacturing; Merchandising;
Service Company
- Cost Accounting Terminology
- Example
Inventory accounts for Manufacturing Company
- Variances Example
- Income Statement
- Balance Sheet
| Managerial Accounting (Chapter 1) - Used internally - no official rules - consists of whatever reports management finds useful
- Objective: Provide management with decision relevant information to assist in
- Planning
- Evaluation
- Control
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.
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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
- Product cost - costs that can be associated with manufacturing a product either directly or indirectly
Examples: - Raw material; labor
- Manufacturing equipment depreciation
- Supervisor's salary
| - Period cost - costs that cannot be associated with specific products and are expensed in the period in which they are incurred
Examples: - Corporate advertising
- Depreciation of corporate headquarter
- Selling expenses
- Insurance
| Direct (prime) Cost - costs that are directly related and identifiable with producing a specific product. Usually raw materials and labor.
| - Indirect Costs - (Overhead) - costs of materials or labor thatare necessary forproductionbutcannot easily be measured for each product item.
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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: - Incidental materials (nails, screws, adhesives, etc.)
- Incidental labor (equipment maintenance, supervisor)
- Utilities
- Joint costs (i.e., two products use the same indirect materials)
- Depreciation on equipment used in the manufacturing process
| 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.
| - Labor hours
- Machine hours
- Some other method designed to accomplish certain managerial objectives (i.e., as a motivational or control tool)
| 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)
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| 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
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| Inventory Accounts for Manufacturing Companies
Manufacturing companies use multiple inventory accounts. At a minimum the following: - Raw Materials Inventory
- Work in Process
- Finished Goods
| 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)
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| 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
What is the major difference between service and merchandising companies in terms of accounting?
Key Takeaways. A merchandising company engages in the purchase and resale of tangible goods. Service companies primarily sell services rather than tangible goods. Income statements for each type of firm vary in several ways, such as the types of gains and losses experienced, cost of goods sold, and net revenue.
What is the difference between service company merchandising company and manufacturing company?
Manufacturing, Merchandising and Service 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.
What is a difference between merchandising companies and service enterprises quizlet?
What is a difference between merchandising companies and service enterprises? Merchandising companies generally have a longer operating cycle than service enterprises. Inventory account is increased.
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