ACC 406 Lecture Notes - Lecture 1: Income Statement, Variable Cost, Management Accounting
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I'll rate posting for sec times just do last parts likecost and balance sheet ( account balance and cost incurred ) that'sit ready question carefully then answer all last partthanks
Charles Maxwell is starting a cheesecake bakery, Able BakerCharlie Company, to produce and sell different flavored cheesecakesto restaurants and the general public. He has just begun his studyof accounting, and is a bit confused about the many types ofreports he has read about and how they will help him run hisbusiness. He asks you to help him clarify what the differencesbetween managerial accounting and financial accounting are. Heâsalso wondering how to set up his inventory, how to classify thecosts of his business, and how to fill in some missinginformation.
Required: | |
1. | Choose whether thecharacteristics on the Managerial vs. Financial panel are mostoften associated with managerial accounting or financialaccounting. |
2. | Charles has provided some ofthe costs he expects to incur on the Cost Classification panel.Decide on the classifications that could be applied to each ofthese costs using the table provided. The cost object in each caseis the cheesecake. |
3. | Charles found some sampleincome statements and balance sheets on the Internet, and askedwhich of them might be most appropriate for a manufacturingbusiness like his. Review income statements A and B on the IncomeStatements panel, and balance sheets C and D on the Balance Sheetspanel. Determine which income statement and balance sheet would bemost appropriate for a manufacturing business like Able BakerCharlie. Then, on the Financial Statements panel, denote whichincome statement and balance sheet would be most appropriate for amanufacturing business. |
4. | At the end of February, afterthe second month of operations of Able Baker Charlie Company,Charles shows you the data heâs collected, but he was unable tofigure out some of the amounts. On the Costs and Balances panel,determine the missing amounts. Note: It may behelpful to use T accounts to map the flow of the amounts throughthe manufacturing accounts and solve for the missing dollarvalues. |
Managerial vs. Financial
Choose whether the following characteristics are most oftenassociated with managerial accounting or financial accounting.
Managerial Accounting | Financial Accounting | ||
---|---|---|---|
Primarily used for internal decision making | |||
Generally Accepted Accounting Principles (GAAP) must beused | |||
Prepared statements usually pertain to the company as a wholerather than individual departments or products | |||
Information provided will often be subjective, such asestimated future results | |||
Often prepared on an as-needed basis rather than at fixedintervals | |||
Use principles of the Sustainability Accounting Standards Board(SASB) to provide sustainability information to external financialstatement users | |||
Consideration of sustainability practices to contribute to thecompanyâs long-term success | |||
Using eco-efficiency measures to reduce expenses |
Cost Classification
Charles has provided some of the costs he expects to incur asfollows. Decide on the classifications that could be applied toeach of these costs using the table provided. The cost object ineach case is the cheesecake.
Cost | Product | Period | Direct | Direct | Factory | Selling | Administrative | Direct | Indirect | Prime | Conversion | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | Cost | Materials | Labor | Overhead | Expense | Expense | Cost | Cost | Cost | Cost | ||
Eggs used to make cheesecakes | ||||||||||||
Bakerâs wages | ||||||||||||
Delivery driver wages | ||||||||||||
Depreciation of office computers | ||||||||||||
Power to run the cheesecake ovens | ||||||||||||
Presidentâs salary | ||||||||||||
Sales commissions | ||||||||||||
Factory supervisor salary |
Financial Statements
Charles found some sample income statements and balance sheetson the Internet, and asked which of them might be most appropriatefor a manufacturing business like his. Review income statements Aand B on the Income Statements panel, and balance sheets C and D onthe Balance Sheets panel. Determine which income statement andbalance sheet would be most appropriate for a manufacturingbusiness like Able Baker Charlie Company.
Which income statement is most appropriate for a manufacturingbusiness?
Income statement A
Income statement B
Which balance sheet is most appropriate for a manufacturingbusiness?
Balance sheet C
Balance sheet D
Income Statements
Income Statement A (scroll down for Income StatementB):
Sample Company A |
Income Statement |
For the Year Ended December 31, 20Y8 |
1 | Sales | $42,000.00 | |
2 | Beginning finished goods inventory | $5,250.00 | |
3 | Plus cost of goods manufactured | 6,400.00 | |
4 | Cost of finished goods available for sale | $11,650.00 | |
5 | Less ending finished goods inventory | 400.00 | |
6 | Cost of goods sold | 11,250.00 | |
7 | Gross profit | $30,750.00 | |
8 | Operating expenses: | ||
9 | Selling expenses | $6,400.00 | |
10 | Administrative expenses | 5,250.00 | |
11 | Total operating expenses | 11,650.00 | |
12 | Net income | $19,100.00 |
Income Statement B:
Sample Company B |
Income Statement |
For the Year Ended December 31, 20Y8 |
1 | Sales | $42,000.00 | |
2 | Beginning merchandise inventory | $5,250.00 | |
3 | Plus net purchases | 6,400.00 | |
4 | Merchandise available for sale | $11,650.00 | |
5 | Less ending merchandise inventory | 400.00 | |
6 | Cost of merchandise sold | 11,250.00 | |
7 | Gross profit | $30,750.00 | |
8 | Operating expenses: | ||
9 | Selling expenses | $6,400.00 | |
10 | Administrative expenses | 5,250.00 | |
11 | Total operating expenses | 11,650.00 | |
12 | Net income | $19,100.00 |
Balance Sheets
Balance Sheet C (scroll down for Balance SheetD):
Sample Company C |
Balance Sheet |
December 31, 20Y8 |
1 | Assets | ||
2 | Cash | $20,800.00 | |
3 | Accounts receivable (net) | 10,000.00 | |
4 | Merchandise inventory | 6,000.00 | |
5 | Supplies | 2,100.00 | |
6 | Land | 17,000.00 | |
7 | Total assets | $55,900.00 | |
8 | Liabilities | ||
9 | Accounts payable | $17,800.00 | |
10 | Stockholdersâ Equity | ||
11 | Common stock | $19,000.00 | |
12 | Retained earnings | 19,100.00 | |
13 | Total stockholdersâ equity | 38,100.00 | |
14 | Total liabilities and stockholdersâ equity | $55,900.00 |
Balance Sheet D:
Sample Company D |
Balance Sheet |
December 31, 20Y8 |
1 | Assets | ||
2 | Cash | $20,800.00 | |
3 | Accounts receivable (net) | 10,000.00 | |
4 | Inventories: | ||
5 | Finished goods | $2,000.00 | |
6 | Work in process | 1,500.00 | |
7 | Materials | 2,500.00 | 6,000.00 |
8 | Supplies | 2,100.00 | |
9 | Land | 17,000.00 | |
10 | Total assets | $55,900.00 | |
11 | Liabilities | ||
12 | Accounts payable | $17,800.00 | |
13 | Stockholdersâ Equity | ||
14 | Common stock | $19,000.00 | |
15 | Retained earnings | 19,100.00 | |
16 | Total stockholdersâ equity | 38,100.00 | |
17 | Total liabilities and stockholdersâ equity | $55,900.00 |
Costs and Balances
At the end of February, after the second month of operationsof Able Baker Charlie Company, Charles shows you the data heâscollected, but he was unable to figure out some of the amounts.Review the following data and fill in the missing amounts on thechart for Able Baker Charlie Company. Note: It maybe helpful to use T accounts to map the flow of the amounts throughthe manufacturing accounts and solve for the missing dollar values.It may also be helpful to review the steps for determining the costof materials used, total manufacturing cost incurred, and cost ofgoods manufactured.
Data forFebruary | |
---|---|
Decrease in materialsinventory | $3,300 |
Materials inventory on Feb. 28 | 50% of materials inventory on Jan.31 |
Direct materials purchased | $12,600 |
Direct materials used | 3 times the direct laborincurred |
Total manufacturing costs incurredin period | $29,400 |
Total manufacturing costs incurredin period | 70% of Cost of GoodsManufactured |
Total manufacturing costs incurredin period | $7,000 less than Cost of GoodsSold |
Account | Account Balances | Costs Incurred | ||
---|---|---|---|---|
Jan.31 | Feb.28 | |||
Materials Inventory | DirectMaterials Used | |||
Work inProcess Inventory | $27,000 | DirectLabor Incurred | ||
FinishedGoods Inventory | $16,000 | FactoryOverhead Incurred | ||
Cost ofGoods Sold |
Cost-Based Pricing
Companies use various strategies to set price. Since cost is animportant determinant of supply and is known to the producer, manycompanies base price on cost. Still other companies use atarget-costing strategy, or strategies based on the initialconditions in the market.
A cost-based pricing approach starts with product cost and thendesired profit is added. Usually, there is some cost base and amarkup. The markup is a percentage applied to base cost; itincludes desired profit and any costs not included in the basecost. Companies that bid for jobs routinely base bid price oncost.
Example: Linder Company makes and sells vitaminsupplements. The following information from last year's accountingrecords showed:
Cost of Goods Sold | $254,000 |
Selling and administrativeexpense | 86,360 |
Operating income | 111,760 |
The markup percentage must include all costs that are not a partof cost of goods sold plus the desired profit. For Linder Company,the markup on COGS is found as follows:
Markup on COGS | = (Selling and administrativeexpenses + Operating income)/COGS |
= ($86,360 + $111,760)/$254,000 =0.78 or 78% |
Now, if Linder Company produces a new product with manufacturingcost of $2 per unit, the unit price at this markup is:
Price = $2 + (0.78 Ã $2) = $2.00 +$1.56 = $3.56 |
A Company does not have to use Cost of Goods Sold as the basisof the markup. For example, a job-order firm might decide to usethe markup on prime costs (direct materials and direct labor) tocost jobs. Suppose that Carl's Custom Cabinetry wants to price jobsbased on prime costs plus a markup on prime cost. Last year'sincome statement revealed the following information:
Prime costs | $134,000 |
Overhead | 73,700 |
Selling and administrativeexpense | 38,860 |
Operating income | 50,920 |
Markup on Prime Cost | = (Overhead + Selling andadministrative expenses + Operating income)/Prime cost |
= ($73,700 + $38,860 +$50,920)/$134,000 = 1.22 or 122% |
Carl is pricing a new job with estimated direct materials of$4,300 and direct labor of $1,800. The estimated price is:
Price = ($4,300 + $1,800) + (1.22 Ã$6,100) = $6,100 + $7,442 = $13,542 |
Neither Linder Company nor Carl's Custom Cabinets must use theprice figured according to the markup. This is just a firstapproximation. Carl, for example, may want to set a lower price inhopes of getting more business from this particular customer.Linder Company may want to charge a higher price based on marketconsiderations.
Target Costing
Another approach to pricing a product or service is targetcosting. The target cost is based on the price (target price) thatcustomers are willing to pay. The Marketing Department determineswhat characteristics and price for a product are most acceptable toconsumers. Then, it is the job of the company's engineers to designand develop the product such that cost and profit can be covered bythat price. Japanese firms have been doing this for years; Americancompanies are beginning to use target costing. So first the targetprice is set. Then the desired profit is deducted, and theremaining amount is the target cost.
Target cost = Target price -Desired profit |
Determining the target cost is relatively easy. Actuallydesigning and manufacturing a product that will achieve the targetcost and sell for the target price is more difficult. As a result,target costing is an iterative process as the firm works to refinethe proposed product to meet the cost and price targets.
Price Discrimination
Price discrimination refers to the charging of different pricesto different customers for essentially the same product. TheRobinson-Patman Act was passed in 1936 as a means of outlawingprice discrimination by manufacturers or suppliers; services andintangibles are not included under the act.
The Robinson-Patman Act does allow price discrimination undercertain specified conditions: (1) if the competitive situationdemands it and (2) if costs (including costs of manufacture, sale,or delivery) can justify the lower price. According to the secondcondition, a lower price offered to one customer must be justifiedby identifiable cost savings and the amount of the discount must beat least equaled by the amount of cost saved.
To compute a cost differential, the company creates classes ofcustomers based on the average costs of selling to those customers.Then all customers in each group are charged a cost-justifiableprice.
Example: Raul Company manufactures specializedelastic bandages used to reinforce athletes' wrists or ankles. Raulsells to a number of individual physical therapists and athletictrainers as well as to Medallion Gym, a national chain of physicalfitness facilities. The average manufacturing cost is $169 per case(a case contains 100 plastic-wrapped elastic bandages). RaulCompany sold 350,000 cases last year to the following two classesof customer.
Price | Quantity | |
---|---|---|
Medallion Gym | $235 | 175,000 |
Individual trainers and physicaltherapists | $241 | 175,000 |
Medallion Gym requires that the bandages be individuallypackaged in boxes with the Medallion name on the label. This boxand special labelling costs $0.34 per unit. Raul also pays allshipping costs, which amounted to $1,400,000 last year.
The individual trainers and physical therapists order in smalllots that require special picking and packing in the factory; thespecial handling adds $20 to the cost of each case sold. Salescommissions to the independent jobbers who sell Raul products tothe trainers and physical therapists average 10 percent of sales.Bad debts expense amounts to 1 percent of sales.
The cost per case for each customer category can be computed asfollows:
Medallion Gym: | |
---|---|
Manufacturing cost per case | $169.00 |
Box and special labelling ($0.34 Ã100) | 34.00 |
Shipping ($1,400,000/175,000cases) | 8.00 |
Total cost per case | $211.00 |
Individual Trainers and PhysicalTherapists: | |
---|---|
Manufacturing cost per case | $169.00 |
Special handling | 20.00 |
Sales commission ($241 x 0.10) | 24.10 |
Bad debts expense ($241 x0.01) | 2.41 |
Total cost per case | $215.51 |
Profit and profit percentages are as follows:
Medallion Gym | Trainers and Physical Therapists | |
---|---|---|
Price per case | $235.00 | $241.00 |
Less: cost per case | 211.00 | 215.51 |
Profit per case | $24.00 | $25.49 |
Profit percentage | 10.21% | 10.58% |
The company will need to see if the profit percentages range areclose to one another; if so, there would be a cost justificationfor the price differential. If not, the company may need toconsider potential price discrimination and change its price forthe customer group that it considers to be "out of line."
For each of the following situations, determine whether or notthere is price discrimination according to the Robinson-PatmanAct.
1. | Dr. Jeffrey Lowman, M.D., chargesless to patients who he feels cannot afford his usual fee.- Selectyour answer -YesNoItem 1 |
2. | Damian Company manufacturesspecialty jams and jellies. Damian is located in Amarillo, Texas,and sells only to stores in the Amarillo area. Sometimes Damianoffers a price break to store owners whose children attend the sameschools as Damian's children. - Select your answer -YesNoItem2 |
3. | A national manufacturer of hairproducts charges a significantly lower price to large chain storesthan to smaller stores. The price differential is not supported bycost differences. - Select your answer -YesNo |
Name the definitions given below:
______________ | 1. | Technique that examines changes inprofits in response to changes in sales volumes, costs, andprices. |
______________ | 2. | Percent by which the selling price (orrevenue) per unit exceeds the variable cost per unit, orcontribution margin as a percent of revenue. |
______________ | 3. | Diagram of the relationship betweentotal revenues and total costs; illustrates how an organizationâsprofits are expected to change under different volumes ofactivity. |
______________ | 4. | Index of the extent to which the costfunction is made up of fixed costs. |
______________ | 5. | Total revenue minus total variable costs. |
______________ | 6. | Proportion of different products or services that anorganization sells. |
______________ | 7. | Excess of an organizationâs expectedfuture sales (in either revenue or units) above the breakevenpoint. |
______________ | 8. | The level of activity where equal costor profit occurs across multiple alternatives. |
______________ | 9. | Selling price per unit minus variablecost per unit. |
______________ 10. | Level of operating activity at whichrevenues cover all fixed and variable costs and there is noprofit. | |
______________ 11. | Margin of safety as a percentage ofactual or estimated sales (units or revenues). | |
______________ 12. | A systematic tendency for people to beoverly optimistic about the outcomes of their plans andprojects. |