ACC-1A Lecture Notes - Lecture 18: Indirect Costs, Income Statement

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11 Sep 2020

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Organisations can be categorised into three types: Manufacturing: convert raw materials into physical product. Inventory: raw materials, work in process, finished goods. Merchandising: sell goods already made by manufacturer completed goods. All of which incur selling, general & administrative costs. Cost is the value sacrificed for goods/services that are expected to bring a current or future benefit to business. As costs are used up in the production, they expire and become expenses (otherwise it is an asset). Sunk cost are costs that have been paid/incurred and are irretrievable and cannot be changed. Controllable costs are costs that are heavily influenced/controlled by a manager. Cost object is any item or activity to which costs are assigned. Direct costs: costs that can be traced to a cost object, in a convenient and cost-effective way. Indirect costs: costs that are common to several cost objects, i. e. not directly traceable to.

Related Questions

You are the owner of a successful fanny-pack company. your fanny-packs are selling

well. So well that you are considering adding a premium fanny-pack to your line-up of goods. Your

marketing department estimates that you will be able to sell $5 million worth of the premium fanny-

packs annually. Unfortunately, the team informs you that the premium product will not attract new

fanny-pack customers. Rather, the sales of premium packs will cannibalize your existing sales in a 1-to-1

ratio. For every premium fanny-pack you sell for $50, you sell one fewer regular fanny-pack (which

retails for $20). Luckily, both styles of fanny-pack use the same raw materials in the same quantities, so

the costs of goods sold will remain unchanged, and your inventory requirements will be unaffected. You

plan on selling fanny-packs indefinitely, but don't expect sales to increases year-over-year. Your firm's

effective tax rate is 30%, and your cost of capital is 8.5%

(a) The premium nature of these fanny-packs derives from the intricate sewing techniques which

must be used. The only machines capable of such delicate work are produced only in Italy, and

cost an astounding $20 million. If purchased today, the machine will be working by tomorrow.

Moreover, these machines, while beautiful, are notoriously expensive to maintain. If you buy the

machine, you can expect your annual maintenance costs to increase by $250 thousand. Should

you buy the machine?

(b) Alternatively, you learn that a large purse manufacturer has a machine capable of sewing the

premium fanny-packs, and that manufacturer is willing to construct them for you. The purse

company offers the following deal: You supply them with the necessary inventory of raw goods,

and you pay them $30 for each premium fanny-pack made. The pure manufacturer is responsible

for all maintenance costs associated with their machines. Furthermore, the purse company is

willing to let you pay the $30 three months after the date of the sale. Should you take the deal?

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	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
Account	Jan.31	Feb.28	Costs Incurred
Materials Inventory			DirectMaterials Used
Work inProcess Inventory	$27,000		DirectLabor Incurred
FinishedGoods Inventory		$16,000	FactoryOverhead Incurred
			Cost ofGoods Sold

grayprairie-dog947

PRODUCTS R'US, INC. - CHINA PROJECT Brian Smith has been the champion of the Pacific Rim market within Products R'Us for the past few years. The emerging buying power in this sector has led to an increasing amount of business for Products R'Us. Smith was finding himself at a growing competitive disadvantage due to comparative processing and freight costs. Smith had argued forcefully that without a Pacific Rim manufacturing facility, he would soon be unable to compete in this important market. Six months ago, a five million dollar facility to be situated in China focusing on basic products had been given the green light - provided he could justify the investment. Smith had been negotiating with the Chinese government and gathering both market and manufacturing data since that decision. He was now ready to compile it for a final report. First, from the company's construction group, process engineers and his own faceto-face negotiations, to get the plant built and running relatively smoothly, he drew up the following:

1) The Chinese government would waive all taxes for the first 5 years and donate the land use for the first 10 years.

2) Costs to build the facility, $2,000,000.

3) Machinery and equipment costs, $3,000,000.

4) Training and other start-up costs, $350,000

After shake-down, from his discussions with marketing, manufacturing and accounting people, he estimated the following on an annual basis:

5) Sales, $15,000,000 with approximately 20% outstanding in receivables at the end of the year.

6) Raw material purchases, $8,000,000, of which $1,500,000 will be unpaid at year end.

7) Variable cost of goods manufactured, (raw materials) 50% of sales.

8) Fixed cost of goods manufactured excluding depreciation charges for plant and equipment, $2,500,000 (all of which will be paid by year end).

9) Variable distribution costs, 15% (all of which will be paid by year end).

10) Administration costs, $400,000 (all of which will be paid by year end).

11) Since this will be a JIT facility, no inventory of finished goods is expected (Amazing! Right?).

12) Development budget is set at $1,000,000 to adapt the product mix to local demands.

13) Tax accountant has noted that the building can be depreciated over 10 years, and the equipment over three.

14) Tax accountant has also noted that due to the uncertainty of future benefit, accounting rules state that the training and other start-up costs should be written off.

15) Historically, bad debts in this area of the globe are approximately 2% of sales. Please note that these are summary transactions. Over the year there would be voluminous transactions taking place in a different chronological order. Of interest for this exercise is how the accountant would go about collating this data into financial statements, and how well the financial statements reflect what is happening in the business.

Assignment build a balance sheet, income statement, and statement of cash flows from the above information.

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ACC-1A Lecture Notes - Lecture 18: Indirect Costs, Income Statement

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