Solution Manual For Managerial Accounting: Creating Value in a Dynamic Business Environment, 10th Edition
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Appendix I - The Sarbanes-Oxley Act, Internal Controls, and Management Accounting
App I-1
Solutions Manual
to accompany
MANAGERIAL
ACCOUNTING
Tenth Edition (Global Edition)
Ronald W. Hilton
Cornell University
David E. Platt
University of Texas at Austin
App I-1
Solutions Manual
to accompany
MANAGERIAL
ACCOUNTING
Tenth Edition (Global Edition)
Ronald W. Hilton
Cornell University
David E. Platt
University of Texas at Austin
Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-1
CHAPTER 1
THE CHANGING ROLE OF MANAGERIAL
ACCOUNTING IN A DYNAMIC BUSINESS ENVIRONMENT
Learning Objectives
1. Define managerial accounting and describe its role in the management
process.
2. Explain four fundamental management processes that help organizations
attain their goals.
3. List and describe five objectives of managerial accounting activity.
4. Explain the major differences between managerial and financial accounting.
5. Describe the accounting and finance structure in an organization.
6. Describe the roles of an organization's chief financial officer (CFO) or
controller, treasurer, and internal auditor.
7. Understand and explain the value chain concept.
8. Explain how investments in capacity affect managerial decisions making.
9. Discuss the professional organizations and certifications in the field of
managerial accounting.
10. Describe the ethical responsibilities and ethical standards that apply to
managerial accounting.
1-1
CHAPTER 1
THE CHANGING ROLE OF MANAGERIAL
ACCOUNTING IN A DYNAMIC BUSINESS ENVIRONMENT
Learning Objectives
1. Define managerial accounting and describe its role in the management
process.
2. Explain four fundamental management processes that help organizations
attain their goals.
3. List and describe five objectives of managerial accounting activity.
4. Explain the major differences between managerial and financial accounting.
5. Describe the accounting and finance structure in an organization.
6. Describe the roles of an organization's chief financial officer (CFO) or
controller, treasurer, and internal auditor.
7. Understand and explain the value chain concept.
8. Explain how investments in capacity affect managerial decisions making.
9. Discuss the professional organizations and certifications in the field of
managerial accounting.
10. Describe the ethical responsibilities and ethical standards that apply to
managerial accounting.
Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-1
CHAPTER 1
THE CHANGING ROLE OF MANAGERIAL
ACCOUNTING IN A DYNAMIC BUSINESS ENVIRONMENT
Learning Objectives
1. Define managerial accounting and describe its role in the management
process.
2. Explain four fundamental management processes that help organizations
attain their goals.
3. List and describe five objectives of managerial accounting activity.
4. Explain the major differences between managerial and financial accounting.
5. Describe the accounting and finance structure in an organization.
6. Describe the roles of an organization's chief financial officer (CFO) or
controller, treasurer, and internal auditor.
7. Understand and explain the value chain concept.
8. Explain how investments in capacity affect managerial decisions making.
9. Discuss the professional organizations and certifications in the field of
managerial accounting.
10. Describe the ethical responsibilities and ethical standards that apply to
managerial accounting.
1-1
CHAPTER 1
THE CHANGING ROLE OF MANAGERIAL
ACCOUNTING IN A DYNAMIC BUSINESS ENVIRONMENT
Learning Objectives
1. Define managerial accounting and describe its role in the management
process.
2. Explain four fundamental management processes that help organizations
attain their goals.
3. List and describe five objectives of managerial accounting activity.
4. Explain the major differences between managerial and financial accounting.
5. Describe the accounting and finance structure in an organization.
6. Describe the roles of an organization's chief financial officer (CFO) or
controller, treasurer, and internal auditor.
7. Understand and explain the value chain concept.
8. Explain how investments in capacity affect managerial decisions making.
9. Discuss the professional organizations and certifications in the field of
managerial accounting.
10. Describe the ethical responsibilities and ethical standards that apply to
managerial accounting.
Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-2
Chapter Overview
I. Managing Resources, Activities, and People
A. What is managerial accounting?
B. Management activities
1. Decision making
2. Planning
3. Directing operational activities
4. Controlling
II. How Managerial Accounting Adds Value to the Organization
A. Objectives of managerial accounting activity
1. Provides information for decision making and planning
2. Assists in directing and controlling
3. Motivates managers and employees
4. Measures performance
5. Assesses an organization's competitive position
B. Balanced Scorecard
C. Managerial Versus Financial Accounting
1. Focus of reports
2. External vs. internal users of information
3. Degree of regulation
4. Information focus
D. Managerial Accounting in Different Types of Organizations
III. Where Do We Find Managerial Accountants in an Organization?
A. Organization Chart
1. Line and staff positions
2. Chief financial officer (CFO) or controller
3. Treasurer
4. Internal auditor
B. Cross-functional deployment
C. Physical location
IV. The Operational Context of Managerial Accounting
A. Managerial Accounting and the Value Chain
B. Capacity and Capacity Costs
C. Cost management systems
V. Managerial Accounting as a Career
A. Professional Organizations
B. Professional Certification
VI. Managerial Accounting and the Ethical Climate of Business
1-2
Chapter Overview
I. Managing Resources, Activities, and People
A. What is managerial accounting?
B. Management activities
1. Decision making
2. Planning
3. Directing operational activities
4. Controlling
II. How Managerial Accounting Adds Value to the Organization
A. Objectives of managerial accounting activity
1. Provides information for decision making and planning
2. Assists in directing and controlling
3. Motivates managers and employees
4. Measures performance
5. Assesses an organization's competitive position
B. Balanced Scorecard
C. Managerial Versus Financial Accounting
1. Focus of reports
2. External vs. internal users of information
3. Degree of regulation
4. Information focus
D. Managerial Accounting in Different Types of Organizations
III. Where Do We Find Managerial Accountants in an Organization?
A. Organization Chart
1. Line and staff positions
2. Chief financial officer (CFO) or controller
3. Treasurer
4. Internal auditor
B. Cross-functional deployment
C. Physical location
IV. The Operational Context of Managerial Accounting
A. Managerial Accounting and the Value Chain
B. Capacity and Capacity Costs
C. Cost management systems
V. Managerial Accounting as a Career
A. Professional Organizations
B. Professional Certification
VI. Managerial Accounting and the Ethical Climate of Business
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Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-3
Key Lecture Concepts
I. Managing Resources, Activities, and People
• Types of organizations include manufacturers, retailers, service
providers, agribusinesses, and nonprofit firms. These organizations
have goals—for example: growth, profit, quality, leadership, etc.
• Organizations have information needs in the financial, production,
personnel, environmental, and legal areas. Managerial accounting
provides some of this information. Managerial accounting is the
process of identifying, measuring, analyzing, interpreting, and
communicating information in pursuit of an organization's goals.
• The role of managerial accountants has expanded in recent years.
Managerial accountants are specialists in using the tools of managerial
accounting to help the organization and its managers run the operation
smoothly. Formerly in staff positions, managerial accountants now
serve as internal business consultants, trusted advisors, and "business
partners."
• Management functions performed within an organization can often be
summarized as decision making, planning, the directing of operational
activities, and controlling.
➢ Decision making—the process of choosing among available
alternatives
➢ Planning—developing a detailed financial and operational
description of anticipated operations
➢ Directing operational activities—running the organization on a
day-to-day basis
➢ Controlling—ensuring that the organization operates in the
intended manner to achieve its goals
1-3
Key Lecture Concepts
I. Managing Resources, Activities, and People
• Types of organizations include manufacturers, retailers, service
providers, agribusinesses, and nonprofit firms. These organizations
have goals—for example: growth, profit, quality, leadership, etc.
• Organizations have information needs in the financial, production,
personnel, environmental, and legal areas. Managerial accounting
provides some of this information. Managerial accounting is the
process of identifying, measuring, analyzing, interpreting, and
communicating information in pursuit of an organization's goals.
• The role of managerial accountants has expanded in recent years.
Managerial accountants are specialists in using the tools of managerial
accounting to help the organization and its managers run the operation
smoothly. Formerly in staff positions, managerial accountants now
serve as internal business consultants, trusted advisors, and "business
partners."
• Management functions performed within an organization can often be
summarized as decision making, planning, the directing of operational
activities, and controlling.
➢ Decision making—the process of choosing among available
alternatives
➢ Planning—developing a detailed financial and operational
description of anticipated operations
➢ Directing operational activities—running the organization on a
day-to-day basis
➢ Controlling—ensuring that the organization operates in the
intended manner to achieve its goals
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Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-4
II. How Managerial Accounting Adds Value to the Organization
• Provides managers with information (e.g., product costs, budgets, cash
flows). The information includes financial and nonfinancial data to
help managers with strategic planning and decision making.
• Assists in directing and controlling (analyzing and comparing actual
performance to budgeted plans; attention-directing to highlight
successful or problem areas).
• Motivates managers to achieve the organization's goals by
communicating the plans, providing a measurement of how well the
plan was achieved, and prompting an explanation of deviations from
plans.
• Measures performance not only for the entire organization, as in
financial accounting, but also for many subunits (divisions,
departments, managers).
• Assesses the organization's competitive position in the rapidly
changing business environment. Looks at how well the firm is doing
internally, in the eyes of its customers, from the standpoint of
innovation and continuous improvement, and financially.
➢ The preceding factors are integrated in a model of performance
evaluation known as the balanced scorecard.
• Managerial Versus Financial Accounting
➢ Financial accounting is intended for external users (investors,
creditors, etc.); is heavily regulated by the FASB, SEC; is mandatory
for publicly-traded companies; is historic in nature.
➢ Managerial accounting is intended for internal users
(managers); is not heavily regulated; is not mandatory but rather is
adopted based on costs/benefits; is future-oriented.
1-4
II. How Managerial Accounting Adds Value to the Organization
• Provides managers with information (e.g., product costs, budgets, cash
flows). The information includes financial and nonfinancial data to
help managers with strategic planning and decision making.
• Assists in directing and controlling (analyzing and comparing actual
performance to budgeted plans; attention-directing to highlight
successful or problem areas).
• Motivates managers to achieve the organization's goals by
communicating the plans, providing a measurement of how well the
plan was achieved, and prompting an explanation of deviations from
plans.
• Measures performance not only for the entire organization, as in
financial accounting, but also for many subunits (divisions,
departments, managers).
• Assesses the organization's competitive position in the rapidly
changing business environment. Looks at how well the firm is doing
internally, in the eyes of its customers, from the standpoint of
innovation and continuous improvement, and financially.
➢ The preceding factors are integrated in a model of performance
evaluation known as the balanced scorecard.
• Managerial Versus Financial Accounting
➢ Financial accounting is intended for external users (investors,
creditors, etc.); is heavily regulated by the FASB, SEC; is mandatory
for publicly-traded companies; is historic in nature.
➢ Managerial accounting is intended for internal users
(managers); is not heavily regulated; is not mandatory but rather is
adopted based on costs/benefits; is future-oriented.
Loading page 6...
Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-5
III. Where Do We Find Managerial Accountants in an Organization?
• Line personnel are directly involved in carrying out the mission of the
organization (e.g., assembly workers in a factory, doctors in a hospital,
teachers in a school).
• Staff personnel (accountants, lawyers, personnel directors, and other
administrative positions) provide support for the organization's
mission.
➢ An accountant in a CPA firm would be in a line position,
because the organization's mission is providing accounting
services. In contrast, an accountant at a university would be in a
staff position.
• The chief financial officer (CFO) or controller is the chief accountant
responsible for the supervision of the accounting department,
preparation of reports, and the interpretation of information to line
managers.
• The treasurer is responsible for raising capital, safeguarding assets,
managing investments, insurance coverage, and the credit policy of an
organization.
• The internal auditor reviews accounting procedures, reports, and
performance on behalf of top management.
• More and more, managerial accountants work throughout an entire
enterprise and are deployed in cross-functional management teams,
working with top executives and personnel from a variety of functional
areas (e.g., marketing, production, engineering, and operations).
1-5
III. Where Do We Find Managerial Accountants in an Organization?
• Line personnel are directly involved in carrying out the mission of the
organization (e.g., assembly workers in a factory, doctors in a hospital,
teachers in a school).
• Staff personnel (accountants, lawyers, personnel directors, and other
administrative positions) provide support for the organization's
mission.
➢ An accountant in a CPA firm would be in a line position,
because the organization's mission is providing accounting
services. In contrast, an accountant at a university would be in a
staff position.
• The chief financial officer (CFO) or controller is the chief accountant
responsible for the supervision of the accounting department,
preparation of reports, and the interpretation of information to line
managers.
• The treasurer is responsible for raising capital, safeguarding assets,
managing investments, insurance coverage, and the credit policy of an
organization.
• The internal auditor reviews accounting procedures, reports, and
performance on behalf of top management.
• More and more, managerial accountants work throughout an entire
enterprise and are deployed in cross-functional management teams,
working with top executives and personnel from a variety of functional
areas (e.g., marketing, production, engineering, and operations).
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Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-6
IV. The Operational Context of Managerial Accounting
• More attention is being paid to the value chain—the set of linked,
value-creating activities, from conducting product research, to
manufacturing, to providing customer service.
➢ A number of activities occur prior to the production of a good or
service (i.e., upstream activities) and several occur after (so-
called downstream activities).
• To achieve an organization's goals, managers must understand the
entire value chain as well as the related cost-causing factors (cost
drivers).
• Managing the cost relationships within a value chain to the firm's
advantage is called strategic cost management.
• A key objective of managerial accounting information is the
management of an organization’s capacity and the costs of providing
that capacity.
Capacity is the upper limit on the amount of goods or services that an
organization can produce in a specified period of time. There are
various concepts of an organization’s capacity. Theoretical capacity
refers to the upper limit on production of goods or services if
everything works perfectly. Practical capacity allows for normal
occurrences such as machine downtime and employee fatigue or
illness.
• The growing use of cost management systems—planning and control
systems that measure the cost of resources and eliminate non-value-
added costs (costs that can be eliminated with no deterioration of
product quality, performance, or perceived value).
➢ These systems also help determine the efficiency and
effectiveness of the enterprise, and identify new opportunities
for the organization.
➢ Activity-based costing (ABC) is a system for determining the
cost of producing goods or services.
➢ Activity-based management (ABM) is the process of using an
ABC system to improve the operations of an organization.
V. Managerial Accounting as a Career
• The Institute of Management Accountants (IMA) administers the
1-6
IV. The Operational Context of Managerial Accounting
• More attention is being paid to the value chain—the set of linked,
value-creating activities, from conducting product research, to
manufacturing, to providing customer service.
➢ A number of activities occur prior to the production of a good or
service (i.e., upstream activities) and several occur after (so-
called downstream activities).
• To achieve an organization's goals, managers must understand the
entire value chain as well as the related cost-causing factors (cost
drivers).
• Managing the cost relationships within a value chain to the firm's
advantage is called strategic cost management.
• A key objective of managerial accounting information is the
management of an organization’s capacity and the costs of providing
that capacity.
Capacity is the upper limit on the amount of goods or services that an
organization can produce in a specified period of time. There are
various concepts of an organization’s capacity. Theoretical capacity
refers to the upper limit on production of goods or services if
everything works perfectly. Practical capacity allows for normal
occurrences such as machine downtime and employee fatigue or
illness.
• The growing use of cost management systems—planning and control
systems that measure the cost of resources and eliminate non-value-
added costs (costs that can be eliminated with no deterioration of
product quality, performance, or perceived value).
➢ These systems also help determine the efficiency and
effectiveness of the enterprise, and identify new opportunities
for the organization.
➢ Activity-based costing (ABC) is a system for determining the
cost of producing goods or services.
➢ Activity-based management (ABM) is the process of using an
ABC system to improve the operations of an organization.
V. Managerial Accounting as a Career
• The Institute of Management Accountants (IMA) administers the
Loading page 8...
Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-7
Certified Management Accountant (CMA) program. Students
interested in internal accounting rather than employment in a public
accounting firm may wish to pursue this designation.
VI. Managerial Accounting and the Ethical Climate of Business
• Recent corporate scandals have involved mismanagement, alleged
ethical lapses, and criminal behavior. Causes of these scandals were
attributable to:
➢ Greedy corporate executives, managers who made over-
reaching business deals and a lack of oversight by boards of
directors and audit committees.
➢ Shoddy work by external auditors, a lack of sufficient probing
by Wall Street analysts and the financial press, and overly
aggressive accounting.
• Various reforms have begun to surface that remedy deficiencies in
corporate governance and accounting. For example, the Sarbanes-
Oxley Act both:
➢ Created the Public Company Accounting Oversight Board
(PCAOB) to establish auditing standards and provide for an
audit quality review process, and
➢ Limits the types of non-audit work that public accounting firms
can perform for their audit clients.
• Professional ethics require high standards of conduct from
management accountants in the areas of competence, confidentiality,
integrity, and credibility.
Teaching Tip: If you plan to highlight ethics throughout the course, you may
want to spend extra time in class discussing the Focus on Ethics box at the end
of this chapter. The box summarizes the standards of conduct just noted by
the use of various detailed examples.
1-7
Certified Management Accountant (CMA) program. Students
interested in internal accounting rather than employment in a public
accounting firm may wish to pursue this designation.
VI. Managerial Accounting and the Ethical Climate of Business
• Recent corporate scandals have involved mismanagement, alleged
ethical lapses, and criminal behavior. Causes of these scandals were
attributable to:
➢ Greedy corporate executives, managers who made over-
reaching business deals and a lack of oversight by boards of
directors and audit committees.
➢ Shoddy work by external auditors, a lack of sufficient probing
by Wall Street analysts and the financial press, and overly
aggressive accounting.
• Various reforms have begun to surface that remedy deficiencies in
corporate governance and accounting. For example, the Sarbanes-
Oxley Act both:
➢ Created the Public Company Accounting Oversight Board
(PCAOB) to establish auditing standards and provide for an
audit quality review process, and
➢ Limits the types of non-audit work that public accounting firms
can perform for their audit clients.
• Professional ethics require high standards of conduct from
management accountants in the areas of competence, confidentiality,
integrity, and credibility.
Teaching Tip: If you plan to highlight ethics throughout the course, you may
want to spend extra time in class discussing the Focus on Ethics box at the end
of this chapter. The box summarizes the standards of conduct just noted by
the use of various detailed examples.
Loading page 9...
Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-8
Teaching Overview
The main objective of the first two class meetings is to help students understand the
overall context in which managerial accounting satisfies the information needs of an
enterprise. I urge students to think not only about the discipline in its current form
but also how it should evolve to meet the changing needs of organizations.
Therefore, the first two classes include not only the usual discussion of the syllabus
but also the role of the management accountant in an organization, the differences
between financial accounting and managerial accounting, managerial accounting as
a tool for managers, and emerging trends in the field. It is especially important to
stress the cost-benefit theme, as cost-benefit analysis will surface throughout the
course and text.
Students have very insightful thoughts on the emerging trends in business today.
Therefore, I try to generate some discussion of their ideas early on. (I also want to
communicate the need for student participation—not always an easy task if the
group is large.) After some discussion, I like to conclude the second class by having
the students suggest some accounting information needs that they feel managers
have in the current business environment. Their suggestions usually include: how
much does my product or service cost? How much inventory should I have on
hand? At what point does my business breakeven? How do I put together a
budget? How do I project cash flows? As class ends, I tell students that these are
the very issues we will be working on during the semester and that one of our first
tasks will be to answer the basic question, "How can we calculate the cost to produce
a product or service?" In summary, by the end of the second class, students should
have a basic understanding of managerial accounting's purpose and appreciate the
need to study the discipline.
1-8
Teaching Overview
The main objective of the first two class meetings is to help students understand the
overall context in which managerial accounting satisfies the information needs of an
enterprise. I urge students to think not only about the discipline in its current form
but also how it should evolve to meet the changing needs of organizations.
Therefore, the first two classes include not only the usual discussion of the syllabus
but also the role of the management accountant in an organization, the differences
between financial accounting and managerial accounting, managerial accounting as
a tool for managers, and emerging trends in the field. It is especially important to
stress the cost-benefit theme, as cost-benefit analysis will surface throughout the
course and text.
Students have very insightful thoughts on the emerging trends in business today.
Therefore, I try to generate some discussion of their ideas early on. (I also want to
communicate the need for student participation—not always an easy task if the
group is large.) After some discussion, I like to conclude the second class by having
the students suggest some accounting information needs that they feel managers
have in the current business environment. Their suggestions usually include: how
much does my product or service cost? How much inventory should I have on
hand? At what point does my business breakeven? How do I put together a
budget? How do I project cash flows? As class ends, I tell students that these are
the very issues we will be working on during the semester and that one of our first
tasks will be to answer the basic question, "How can we calculate the cost to produce
a product or service?" In summary, by the end of the second class, students should
have a basic understanding of managerial accounting's purpose and appreciate the
need to study the discipline.
Loading page 10...
Chapter 01 - The Changing Role of Managerial Accounting in a Dynamic Business Environment
1-9
Links to the Text
Homework Grid
Item No.
Learning
Objectives
Completion
Time (min.)
Special
Features*
Exercises:
1-25 3, 4 25
1-26 2, 3 20
1-27 1, 3, 5 30 C
Problems:
1-28 4, 6 30 W, E
1-29 4, 5, 6, 8 25 G
1-30 6, 7, 9, 10 45 W, E
1-31 3, 8 25
Cases:
1-9
Links to the Text
Homework Grid
Item No.
Learning
Objectives
Completion
Time (min.)
Special
Features*
Exercises:
1-25 3, 4 25
1-26 2, 3 20
1-27 1, 3, 5 30 C
Problems:
1-28 4, 6 30 W, E
1-29 4, 5, 6, 8 25 G
1-30 6, 7, 9, 10 45 W, E
1-31 3, 8 25
Cases:
Loading page 11...
Chapter 02 - Basic Cost Management Concepts
2-1
CHAPTER 2
BASIC COST MANAGEMENT CONCEPTS
Learning Objectives
1. Explain what is meant by the word cost.
2. Distinguish among product costs, period costs, and expenses.
3. Describe the role of costs in published financial statements.
4. List five types of manufacturing operations and describe mass customization.
5. Give examples of three types of manufacturing costs.
6. Prepare a schedule of cost of goods manufactured, a schedule of cost of goods
sold, and an income statement for a manufacturer.
7. Understand the importance of identifying an organization's cost drivers.
8. Describe the behavior of variable and fixed costs, in total and on a per-unit
basis.
9. Distinguish among direct, indirect, controllable, and uncontrollable costs.
10. Define and give examples of an opportunity cost, an out-of-pocket cost, a
sunk cost, a differential cost, a marginal cost, and an average cost.
2-1
CHAPTER 2
BASIC COST MANAGEMENT CONCEPTS
Learning Objectives
1. Explain what is meant by the word cost.
2. Distinguish among product costs, period costs, and expenses.
3. Describe the role of costs in published financial statements.
4. List five types of manufacturing operations and describe mass customization.
5. Give examples of three types of manufacturing costs.
6. Prepare a schedule of cost of goods manufactured, a schedule of cost of goods
sold, and an income statement for a manufacturer.
7. Understand the importance of identifying an organization's cost drivers.
8. Describe the behavior of variable and fixed costs, in total and on a per-unit
basis.
9. Distinguish among direct, indirect, controllable, and uncontrollable costs.
10. Define and give examples of an opportunity cost, an out-of-pocket cost, a
sunk cost, a differential cost, a marginal cost, and an average cost.
Loading page 12...
Chapter 02 - Basic Cost Management Concepts
2-2
Chapter Overview
I. What Do We Mean by a Cost?
A. Product costs, period costs, and expenses
II. Costs on Financial Statements
A. Income statement
1. Selling and administrative costs
2. Costs of manufactured inventory
B. Balance sheet
1. Raw-materials inventory
2. Work-in-process inventory
3. Finished-goods inventory
III. Manufacturing Operations and Manufacturing Costs
A. Job shop, batch, assembly line, continuous flow
B. Assembly manufacturing
C. Manufacturing costs
1. Direct material
2. Direct labor
3. Manufacturing overhead
4. Indirect material
5. Indirect labor
6. Other manufacturing costs
7. Conversion cost, prime cost
IV. Manufacturing Cost Flows
A. Cost of goods manufactured
B. Production costs in service industry firms and nonprofit organizations
V. Basic Cost Management Concepts: Different Costs for Different Purposes
A. The cost driver team
1. Variable and fixed costs
B. The cost management and control team
1. Direct and indirect costs
2. Controllable and uncontrollable costs
C. The outsourcing action team
1. Opportunity costs
2. Out-of-pocket costs
3. Sunk costs
4. Differential
2-2
Chapter Overview
I. What Do We Mean by a Cost?
A. Product costs, period costs, and expenses
II. Costs on Financial Statements
A. Income statement
1. Selling and administrative costs
2. Costs of manufactured inventory
B. Balance sheet
1. Raw-materials inventory
2. Work-in-process inventory
3. Finished-goods inventory
III. Manufacturing Operations and Manufacturing Costs
A. Job shop, batch, assembly line, continuous flow
B. Assembly manufacturing
C. Manufacturing costs
1. Direct material
2. Direct labor
3. Manufacturing overhead
4. Indirect material
5. Indirect labor
6. Other manufacturing costs
7. Conversion cost, prime cost
IV. Manufacturing Cost Flows
A. Cost of goods manufactured
B. Production costs in service industry firms and nonprofit organizations
V. Basic Cost Management Concepts: Different Costs for Different Purposes
A. The cost driver team
1. Variable and fixed costs
B. The cost management and control team
1. Direct and indirect costs
2. Controllable and uncontrollable costs
C. The outsourcing action team
1. Opportunity costs
2. Out-of-pocket costs
3. Sunk costs
4. Differential
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Chapter 02 - Basic Cost Management Concepts
2-3
B. Variable and fixed costs
C. Controllable and uncontrollable costs
D. Opportunity, out-of-pocket, and sunk costs
E. Differential, marginal, and average costs
2-3
B. Variable and fixed costs
C. Controllable and uncontrollable costs
D. Opportunity, out-of-pocket, and sunk costs
E. Differential, marginal, and average costs
Loading page 14...
Chapter 02 - Basic Cost Management Concepts
2-4
Key Lecture Concepts
I. What Do We Mean by a Cost?
• A cost is the sacrifice made to achieve a particular purpose.
• There are different costs for different purposes, with costs that are
appropriate for one use being totally inappropriate for others (e.g., a
cost that is used to determine inventory valuation may be irrelevant in
deciding whether or not to manufacture that same product).
• An expense is defined as the cost incurred when an asset is used up or
sold for the purpose of generating revenue. The terms "product cost"
and "period cost" are used to describe the timing with which expenses
are recognized.
➢ Product costs are the costs of goods manufactured or the cost of
goods purchased for resale. These costs are inventoried until
the goods are sold.
➢ Period costs are all other non-product costs in an organization
(e.g., selling and administrative). Such costs are not inventoried
but are expensed as time passes.
II. Costs on Financial Statements
• Product costs are shown as cost of goods sold on the income statement
when goods are sold. Income statements of service enterprises lack a
cost-of-goods-sold section and instead reveal a firm's operating
expenses.
• Product costs, housed on the balance sheet until sale, are found in three
inventory accounts:
➢ Raw materials—materials that await production
➢ Work in process—partially completed production
➢ Finished goods—completed production that awaits sale
2-4
Key Lecture Concepts
I. What Do We Mean by a Cost?
• A cost is the sacrifice made to achieve a particular purpose.
• There are different costs for different purposes, with costs that are
appropriate for one use being totally inappropriate for others (e.g., a
cost that is used to determine inventory valuation may be irrelevant in
deciding whether or not to manufacture that same product).
• An expense is defined as the cost incurred when an asset is used up or
sold for the purpose of generating revenue. The terms "product cost"
and "period cost" are used to describe the timing with which expenses
are recognized.
➢ Product costs are the costs of goods manufactured or the cost of
goods purchased for resale. These costs are inventoried until
the goods are sold.
➢ Period costs are all other non-product costs in an organization
(e.g., selling and administrative). Such costs are not inventoried
but are expensed as time passes.
II. Costs on Financial Statements
• Product costs are shown as cost of goods sold on the income statement
when goods are sold. Income statements of service enterprises lack a
cost-of-goods-sold section and instead reveal a firm's operating
expenses.
• Product costs, housed on the balance sheet until sale, are found in three
inventory accounts:
➢ Raw materials—materials that await production
➢ Work in process—partially completed production
➢ Finished goods—completed production that awaits sale
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Chapter 02 - Basic Cost Management Concepts
2-5
III. Manufacturing Operations and Manufacturing Costs
• There are various types of production processes; for example:
➢ Job shop—low production volume, little standardization; one-of-
a-kind products
➢ Batch—multiple products; low volume
➢ Assembly line—a few major products; higher volume
➢ Continuous flow—high volume; highly standardized commodity
products
• Direct materials—materials easily traced to a finished product (e.g.,
the seat on a bicycle)
• Direct labor—the wages of anyone who works directly on the product
(e.g., the assembly-line wages of the bicycle manufacturer)
• Manufacturing overhead—all other manufacturing costs such as:
➢ Indirect materials—materials and supplies other than those
classified as direct materials,
➢ Indirect labor—personnel who do not work directly on the
product (e.g., manufacturing supervisors), and
➢ Other manufacturing costs not easily traceable to a finished
good (insurance, property taxes, depreciation, utilities, and
service/support department costs). Overtime premiums and
the cost of idle time are also accounted for as overhead.
➢ Idle time
2-5
III. Manufacturing Operations and Manufacturing Costs
• There are various types of production processes; for example:
➢ Job shop—low production volume, little standardization; one-of-
a-kind products
➢ Batch—multiple products; low volume
➢ Assembly line—a few major products; higher volume
➢ Continuous flow—high volume; highly standardized commodity
products
• Direct materials—materials easily traced to a finished product (e.g.,
the seat on a bicycle)
• Direct labor—the wages of anyone who works directly on the product
(e.g., the assembly-line wages of the bicycle manufacturer)
• Manufacturing overhead—all other manufacturing costs such as:
➢ Indirect materials—materials and supplies other than those
classified as direct materials,
➢ Indirect labor—personnel who do not work directly on the
product (e.g., manufacturing supervisors), and
➢ Other manufacturing costs not easily traceable to a finished
good (insurance, property taxes, depreciation, utilities, and
service/support department costs). Overtime premiums and
the cost of idle time are also accounted for as overhead.
➢ Idle time
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Chapter 02 - Basic Cost Management Concepts
2-6
IV. Manufacturing Cost Flows
• Manufacturing costs (direct materials, direct labor, and manufacturing
overhead) are "put in process" and attached to work-in-process
inventory. The goods are completed (finished goods), and the costs are
then passed along to cost of goods sold upon sale.
• Cost of goods manufactured: Direct materials used + direct labor +
manufacturing overhead + beginning work-in-process inventory -
ending work-in-process inventory
➢ This amount is transferred from work-in-process inventory to
finished-goods inventory when goods are completed.
• Product costs and cost of goods sold for a manufacturer:
Beginning Cost of Goods Ending
Inventory, + Manufactured - Inventory, = Cost of
Finished Goods to Completion Finished Goods Goods Sold
S
upported by A schedule of
Current Income
the prior year's production costs balance sheet statement
balance sheet
• Production-cost concepts are applicable to service businesses and
nonprofit organizations. For example, the direct-materials concept can
be applied to the food consumed in a restaurant or the jet fuel used by
an airline. Similarly, direct labor would be equivalent to the cooks in a
restaurant and the flight crews of an airline.
2-6
IV. Manufacturing Cost Flows
• Manufacturing costs (direct materials, direct labor, and manufacturing
overhead) are "put in process" and attached to work-in-process
inventory. The goods are completed (finished goods), and the costs are
then passed along to cost of goods sold upon sale.
• Cost of goods manufactured: Direct materials used + direct labor +
manufacturing overhead + beginning work-in-process inventory -
ending work-in-process inventory
➢ This amount is transferred from work-in-process inventory to
finished-goods inventory when goods are completed.
• Product costs and cost of goods sold for a manufacturer:
Beginning Cost of Goods Ending
Inventory, + Manufactured - Inventory, = Cost of
Finished Goods to Completion Finished Goods Goods Sold
S
upported by A schedule of
Current Income
the prior year's production costs balance sheet statement
balance sheet
• Production-cost concepts are applicable to service businesses and
nonprofit organizations. For example, the direct-materials concept can
be applied to the food consumed in a restaurant or the jet fuel used by
an airline. Similarly, direct labor would be equivalent to the cooks in a
restaurant and the flight crews of an airline.
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Chapter 02 - Basic Cost Management Concepts
2-7
V. Basic Cost Management Concepts: Different Costs for Different Purposes
• A cost driver is any event or activity that causes costs to be incurred.
Cost driver examples include labor hours in manual assembly work
and machine hours in automated production settings.
➢ The higher the degree of correlation between a cost-pool
increase and the increase in its cost driver, the better the cost
management information.
• Variable and fixed costs
➢ Variable costs move in direct proportion to a change in activity.
For example, in the manufacture of bicycles, the total cost of
bicycle seats goes up in proportion to the number of bicycles
produced. However, the cost per unit (i.e., per seat) remains
constant.
➢ Fixed costs remain constant in total as the level of activity
changes. For instance, straight-line depreciation of a bicycle
plant remains the same whether 100 bicycles or 1,000 bicycles
are produced. However, the depreciation cost per unit
fluctuates because this constant total is spread over a smaller or
greater volume.
• Direct and indirect costs
➢ An entity (e.g., a specific product, service, or department) to
which a cost is assigned is commonly known as a cost object.
➢ A direct cost is one that can be easily traced to a cost object.
▪ If a college department has been defined as the cost
object, professors' salaries and administrative assistants'
salaries are direct costs of the department (just as
assembly workers' wages are direct costs of a
manufacturing department).
➢ An
2-7
V. Basic Cost Management Concepts: Different Costs for Different Purposes
• A cost driver is any event or activity that causes costs to be incurred.
Cost driver examples include labor hours in manual assembly work
and machine hours in automated production settings.
➢ The higher the degree of correlation between a cost-pool
increase and the increase in its cost driver, the better the cost
management information.
• Variable and fixed costs
➢ Variable costs move in direct proportion to a change in activity.
For example, in the manufacture of bicycles, the total cost of
bicycle seats goes up in proportion to the number of bicycles
produced. However, the cost per unit (i.e., per seat) remains
constant.
➢ Fixed costs remain constant in total as the level of activity
changes. For instance, straight-line depreciation of a bicycle
plant remains the same whether 100 bicycles or 1,000 bicycles
are produced. However, the depreciation cost per unit
fluctuates because this constant total is spread over a smaller or
greater volume.
• Direct and indirect costs
➢ An entity (e.g., a specific product, service, or department) to
which a cost is assigned is commonly known as a cost object.
➢ A direct cost is one that can be easily traced to a cost object.
▪ If a college department has been defined as the cost
object, professors' salaries and administrative assistants'
salaries are direct costs of the department (just as
assembly workers' wages are direct costs of a
manufacturing department).
➢ An
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Chapter 02 - Basic Cost Management Concepts
2-8
that caused them so that managers can isolate responsibility for
spending and objectively evaluate operations.
Teaching Tip: When discussing indirect costs, you may want to cite a
hospital's medical and surgical supplies as an example. Such items do
not appear to be a primary target for trimming; however, these
indirect costs often account for a sizable portion of a hospital's
operating costs. Understanding indirect costs has become more
valuable in a managed-care environment because it helps hospitals
negotiate fixed-fee contracts.
• Controllable and uncontrollable costs
➢ Controllable costs—costs over which a manager has influence
(e.g., direct materials)
➢ Uncontrollable costs—costs over which a manager has no
influence (e.g., the salary of a firm's CEO from the production
manager's viewpoint)
• Opportunity cost—the benefit forgone by choosing an alternative
course of action (e.g., the wages forgone when a student decides to
attend college full-time rather than be employed)
• Out-of-pocket cost—a cost that requires a cash outlay
• Sunk cost—a cost incurred in the past that cannot be changed by
future action (e.g., the cost of existing inventory or equipment)
➢ Such costs are not relevant for decision making.
• Differential cost—the net difference in cost between two alternative
courses of action
➢ Incremental cost—the increase in cost from one alternative to
another
2-8
that caused them so that managers can isolate responsibility for
spending and objectively evaluate operations.
Teaching Tip: When discussing indirect costs, you may want to cite a
hospital's medical and surgical supplies as an example. Such items do
not appear to be a primary target for trimming; however, these
indirect costs often account for a sizable portion of a hospital's
operating costs. Understanding indirect costs has become more
valuable in a managed-care environment because it helps hospitals
negotiate fixed-fee contracts.
• Controllable and uncontrollable costs
➢ Controllable costs—costs over which a manager has influence
(e.g., direct materials)
➢ Uncontrollable costs—costs over which a manager has no
influence (e.g., the salary of a firm's CEO from the production
manager's viewpoint)
• Opportunity cost—the benefit forgone by choosing an alternative
course of action (e.g., the wages forgone when a student decides to
attend college full-time rather than be employed)
• Out-of-pocket cost—a cost that requires a cash outlay
• Sunk cost—a cost incurred in the past that cannot be changed by
future action (e.g., the cost of existing inventory or equipment)
➢ Such costs are not relevant for decision making.
• Differential cost—the net difference in cost between two alternative
courses of action
➢ Incremental cost—the increase in cost from one alternative to
another
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Chapter 02 - Basic Cost Management Concepts
2-9
VI. Costs in the Service Industry
• The preceding costs are relevant in service providers as well as for
manufacturing entities.
2-9
VI. Costs in the Service Industry
• The preceding costs are relevant in service providers as well as for
manufacturing entities.
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Chapter 02 - Basic Cost Management Concepts
2-10
Teaching Overview
The main purpose of Chapter 2 is to expand the way in which costs are defined and
viewed. After completing a course in financial accounting, students are very much
geared into thinking about functional costs (depreciation, utilities, and commissions)
for an entire organization. While this is useful information to an outside creditor or
investor, it is insufficient with respect to helping internal managers do their jobs
effectively. Managers must also consider cost behavior, controllability, costs
incurred by smaller segments, and so on. An initial reminder of these facts generally
opens a discussion of additional ways of viewing financial information. It is
worthwhile to spend a few extra minutes in the area of cost behavior since it is so
fundamental to later topics.
Before discussing manufacturing costs, I ask for a show of hands from students who
have actually visited a manufacturing plant. The typical, small number of hands
serves as a reminder that many students have little idea of what a factory "looks like"
and does. Pictures and videos are helpful in providing a context for the concepts
being discussed—even a field trip to a local manufacturer is a good idea. This is also
an excellent time to point out that even if a student does not plan to work in
production management, he or she may well work in accounting, finance, or
marketing for a company that makes a product. Therefore, being conversant in the
language and concepts of cost accounting will be useful. Accounting techniques in
manufacturing are frequently transferable to the service sector, and this fact should
be emphasized in class.
In summary, Chapter 2 discusses the many ways that costs can be categorized.
Chapter 3 then follows with a discussion of a system to track product costs and
answers the age-old question, “How much does this cost?” I recommend using
Problem 2-50 (cost terminology and cost behavior) and Exercise 2-28 (financial
schedules and statements) as lecture demonstration problems.
2-10
Teaching Overview
The main purpose of Chapter 2 is to expand the way in which costs are defined and
viewed. After completing a course in financial accounting, students are very much
geared into thinking about functional costs (depreciation, utilities, and commissions)
for an entire organization. While this is useful information to an outside creditor or
investor, it is insufficient with respect to helping internal managers do their jobs
effectively. Managers must also consider cost behavior, controllability, costs
incurred by smaller segments, and so on. An initial reminder of these facts generally
opens a discussion of additional ways of viewing financial information. It is
worthwhile to spend a few extra minutes in the area of cost behavior since it is so
fundamental to later topics.
Before discussing manufacturing costs, I ask for a show of hands from students who
have actually visited a manufacturing plant. The typical, small number of hands
serves as a reminder that many students have little idea of what a factory "looks like"
and does. Pictures and videos are helpful in providing a context for the concepts
being discussed—even a field trip to a local manufacturer is a good idea. This is also
an excellent time to point out that even if a student does not plan to work in
production management, he or she may well work in accounting, finance, or
marketing for a company that makes a product. Therefore, being conversant in the
language and concepts of cost accounting will be useful. Accounting techniques in
manufacturing are frequently transferable to the service sector, and this fact should
be emphasized in class.
In summary, Chapter 2 discusses the many ways that costs can be categorized.
Chapter 3 then follows with a discussion of a system to track product costs and
answers the age-old question, “How much does this cost?” I recommend using
Problem 2-50 (cost terminology and cost behavior) and Exercise 2-28 (financial
schedules and statements) as lecture demonstration problems.
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Chapter 02 - Basic Cost Management Concepts
2-12
Cases:
2-59 7, 8, 10 30 W, G
2-60 10 50 W, E
* W = Written response E = Ethical issue G = Group work
I = International C = Internet use S = Spreadsheet
2-12
Cases:
2-59 7, 8, 10 30 W, G
2-60 10 50 W, E
* W = Written response E = Ethical issue G = Group work
I = International C = Internet use S = Spreadsheet
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment
3-1
CHAPTER 3
PRODUCT COSTING AND COST ACCUMULATION IN A
BATCH PRODUCTION ENVIRONMENT
Learning Objectives
1. Discuss the role of product and service costing in manufacturing and
nonmanufacturing firms.
2. Diagram and explain the flow of costs through the manufacturing accounts
used in product costing.
3. Distinguish between job-order costing and process costing.
4. Compute a predetermined overhead rate, and explain its use in job-order
costing for job-shop and batch-production environments.
5. Prepare journal entries to record the costs of direct material, direct labor, and
manufacturing overhead in a job-order costing system.
6. Prepare a schedule of cost of goods manufactured, a schedule of cost of goods
sold, and an income statement for a manufacturer.
7. Describe the two-stage allocation process used to assign manufacturing
overhead costs to production jobs.
8. Describe the process of project costing used in service industry firms and
nonprofit organizations.
3-1
CHAPTER 3
PRODUCT COSTING AND COST ACCUMULATION IN A
BATCH PRODUCTION ENVIRONMENT
Learning Objectives
1. Discuss the role of product and service costing in manufacturing and
nonmanufacturing firms.
2. Diagram and explain the flow of costs through the manufacturing accounts
used in product costing.
3. Distinguish between job-order costing and process costing.
4. Compute a predetermined overhead rate, and explain its use in job-order
costing for job-shop and batch-production environments.
5. Prepare journal entries to record the costs of direct material, direct labor, and
manufacturing overhead in a job-order costing system.
6. Prepare a schedule of cost of goods manufactured, a schedule of cost of goods
sold, and an income statement for a manufacturer.
7. Describe the two-stage allocation process used to assign manufacturing
overhead costs to production jobs.
8. Describe the process of project costing used in service industry firms and
nonprofit organizations.
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment
3-3
VI. Further Aspects of Overhead Application
A. Actual and normal costing
B. Choosing the cost driver for overhead application
C. Departmental overhead rates
VII. Two-stage cost allocation
VIII. Project Costing: Job-Order Costing in Nonmanufacturing Organizations
IX. Changing Technology in Manufacturing Operations
A. EDI and XML
B. Use of bar codes and RFID system
3-3
VI. Further Aspects of Overhead Application
A. Actual and normal costing
B. Choosing the cost driver for overhead application
C. Departmental overhead rates
VII. Two-stage cost allocation
VIII. Project Costing: Job-Order Costing in Nonmanufacturing Organizations
IX. Changing Technology in Manufacturing Operations
A. EDI and XML
B. Use of bar codes and RFID system
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment
3-4
Key Lecture Concepts
I. Product and Service Costing
• A product-costing costing system accumulates the total cost of making
products and facilitates the calculation of a per-unit cost. Applications
exist in:
➢ Financial accounting: Valuation of ending inventory on the
balance sheet and determination of cost of goods sold for the
income statement
➢ Managerial accounting: Planning, cost control, and decision
making
➢
3-4
Key Lecture Concepts
I. Product and Service Costing
• A product-costing costing system accumulates the total cost of making
products and facilitates the calculation of a per-unit cost. Applications
exist in:
➢ Financial accounting: Valuation of ending inventory on the
balance sheet and determination of cost of goods sold for the
income statement
➢ Managerial accounting: Planning, cost control, and decision
making
➢
Loading page 27...
Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment
3-5
III. Types of Product-Costing Systems
• A product-costing system must be adapted to match the environment
in which it operates.
• A job-order costing system is used in an industry where products are
made individually, or in relatively small batches, and one product or
batch is readily distinguishable from the other.
➢ Candidates for job-costing systems would be custom
homebuilding, custom printing, custom furniture construction,
legal cases, medical cases, audits, and research projects.
• A process-costing system is employed in an environment at the other
end of the continuum: the mass production of like units. Users might
include manufacturers of chemicals, gasoline, and microchips. This
topic is discussed fully in Chapter 4.
3-5
III. Types of Product-Costing Systems
• A product-costing system must be adapted to match the environment
in which it operates.
• A job-order costing system is used in an industry where products are
made individually, or in relatively small batches, and one product or
batch is readily distinguishable from the other.
➢ Candidates for job-costing systems would be custom
homebuilding, custom printing, custom furniture construction,
legal cases, medical cases, audits, and research projects.
• A process-costing system is employed in an environment at the other
end of the continuum: the mass production of like units. Users might
include manufacturers of chemicals, gasoline, and microchips. This
topic is discussed fully in Chapter 4.
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment
3-6
IV. Accumulating Costs in a Job-Order Costing System
• A job-cost record is used to accumulate the actual direct materials,
actual direct labor, and applied manufacturing overhead costs for each
job. The recording of costs on this record and in the general ledger is
triggered by various source documents.
• Material requisition forms authorize the transfer of direct materials
from the warehouse to production. In many firms, the requisitions are
based on a bill of materials that lists all of the materials (e.g., parts)
needed.
• Supply chain—the flow of all goods, services, and information into
and out of the organization. The supply chain often has ramifications
for materials, as manufacturers work with vendors to achieve
improved delivery schedules and reductions in material cost.
• Time
3-6
IV. Accumulating Costs in a Job-Order Costing System
• A job-cost record is used to accumulate the actual direct materials,
actual direct labor, and applied manufacturing overhead costs for each
job. The recording of costs on this record and in the general ledger is
triggered by various source documents.
• Material requisition forms authorize the transfer of direct materials
from the warehouse to production. In many firms, the requisitions are
based on a bill of materials that lists all of the materials (e.g., parts)
needed.
• Supply chain—the flow of all goods, services, and information into
and out of the organization. The supply chain often has ramifications
for materials, as manufacturers work with vendors to achieve
improved delivery schedules and reductions in material cost.
• Time
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment
3-7
credited to Manufacturing Overhead.
➢ The year-end difference between actual and applied amounts is
known as over- or underapplied overhead. This figure is
adjusted in the process of closing the Manufacturing Overhead
account to zero by either:
▪ Charging or crediting the amount to cost of goods sold.
This approach is acceptable if the over- or
underapplication is small or if most of the products made
during the period have been sold.
▪ Prorating the amount among work in process, finished
goods, and cost of goods sold.
Teaching Tip: Emphasize that under- and overapplied overhead is the difference
between actual and applied overhead, not actual and budgeted overhead. The
budgeted figure is used solely in the determination of the predetermined rate.
3-7
credited to Manufacturing Overhead.
➢ The year-end difference between actual and applied amounts is
known as over- or underapplied overhead. This figure is
adjusted in the process of closing the Manufacturing Overhead
account to zero by either:
▪ Charging or crediting the amount to cost of goods sold.
This approach is acceptable if the over- or
underapplication is small or if most of the products made
during the period have been sold.
▪ Prorating the amount among work in process, finished
goods, and cost of goods sold.
Teaching Tip: Emphasize that under- and overapplied overhead is the difference
between actual and applied overhead, not actual and budgeted overhead. The
budgeted figure is used solely in the determination of the predetermined rate.
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment
3-8
V. Illustration of Job-Order Costing
• As noted earlier, the Work-in-Process Inventory account contains
charges for direct materials used, direct labor, and applied
manufacturing overhead.
• Period costs are expensed and not charged to Manufacturing
Overhead.
• A sale requires two journal entries: one to record the sales revenue and
another to transfer the goods' cost from Finished-Goods Inventory to
Cost of Goods Sold.
Teaching Tip: Although the text illustration appears relatively complicated, it is
simply presenting the details that accompany the flow of goods (and costs) from
work in process, to finished goods, to cost of goods sold.
• The
3-8
V. Illustration of Job-Order Costing
• As noted earlier, the Work-in-Process Inventory account contains
charges for direct materials used, direct labor, and applied
manufacturing overhead.
• Period costs are expensed and not charged to Manufacturing
Overhead.
• A sale requires two journal entries: one to record the sales revenue and
another to transfer the goods' cost from Finished-Goods Inventory to
Cost of Goods Sold.
Teaching Tip: Although the text illustration appears relatively complicated, it is
simply presenting the details that accompany the flow of goods (and costs) from
work in process, to finished goods, to cost of goods sold.
• The
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Subject
Accounting