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Accounting Chapter 18

Accounting info. is often divided into two types:
Financial and Managerial
Financial Accounting (definition):
information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements.
Financial Accounting:
What are the financial statements used?
Income statement, retained earnings statement, balance sheet, statement of cash flows.
Financial Accounting:
The financial statements are prepared according to:
Generally Accepted Accounting Principles (GAAP)
Financial Accounting:
The financial statements are used by…
External Users and Company Management
Financial Accounting:
The financial statements are used by external users such as the following:
shareholders, creditors, government agencies, and the general public
Financial Accounting:
Nature of information of the financial statements:
objective
Financial Accounting:
Timeliness of Reporting for financial statements:
prepared at fixed intervals
Financial Accounting:
Focus of Reporting for financial statements:
Company as a whole
Managerial Accounting (definition):
information is designed to meet the specific needs of a company’s management.
Managerial Accounting:
Reports DO NOT always have to be…(3 things):
1) prepared according to GAAP
2) prepared at fixed intervals (monthly, quarterly, yearly)
3) prepared for the business as a whole (most are prepared for products, projects, sales territories, or other segments of the company).
Managerial Accounting:
Nature of Information of management reports are:
objective and subjective
Managerial Accounting:
Guidelines for Preparation for management reports are:
prepared according to management needs
Managerial Accounting:
Timeliness of Reporting for management reports are:
prepared at fixed intervals and on an as-needed basis
Managerial Accounting:
Focus of Reporting for management reports are:
company as a whole or segment
The operating structure of a company can be shown in an:
organization chart
The departments in a company can be viewed as having either of the following:
Line Responsibilities
Staff Responsibilities
Line Department (definition):
is directly involved in providing goods or services to the customers of the company.
Staff Department (definition):
provides services, assistance, and advice to the departments with line or other staff responsibilities.
(Has no direct authority over a line department.)
Controller (definition):
the chief management accountant.
The Controller’s staff consists of a variety of other accountants who are responsible for specialized accounting functions such as the following:
1) systems and procedures
2) general accounting
3) budgets and budget analysis
4) special reports and analysis
5) taxes
6) cost accounting
Management Process (5 basic phases):
1) planning
2) directing
3) controlling
4) improving
5) Decision making
Management Process

Planning (definition):

Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action.
Management Process

Planning can be classified into two categories:

Strategic Planning
Operational Planning
Management Process

Strategic Planning (definition):

developing long-term actions to achieve the company’s objectives. These long-term actions are called “strategies”, which often involve periods of 5 to 10 years.
Management Process

Operational Planning (definition):

develops short-term actions for managing the day-to-day operations of the company.
Management Process

Directing (definition):

the process by which managers run day-to-day operations.
Management Process

Controlling (definition):

Monitoring operating results and comparing actual results with expected results. This “feedback” allows management to isolate areas for further investigation and possible remedial action. This philosophy of controlling by comparing actual and expected results is called “management by exception”.
Management Process

Improving (definition):

feedback is also used by managers to support continuous process improvement.
Management Process: Improving

Continuous Process Improvement (definition):

the philosophy of continually improving employees, business processes, and products. The objective of continuous improvement is to eliminate the source of problems in a process.
Management Process

Decision Making (definition):

inherent in each of the preceding management processes.
The operations of a business can be classified as (3 things):
service, merchandising, or manufacturing
Cost (definition):
a payment of cash or the commitment to pay cash in the future for the purpose of generating revenues.
Cost Object (definition):
costs are often classified by their relationship to a segment of operations.
A Cost Object may be a:
product, sales territory, department, or an activity, such as research and development.
Costs identified with cost objects are either:
direct costs or indirect costs.
Direct Costs (definition):
are identified with and can be traced to a cost object.
Indirect Costs (definition):
cannot be identified with or traced to a cost object.
The cost of a manufactured product includes the cost of:
materials used in making the product and the cost of converting the materials into a finished product.
The cost of the cost object includes the following:
1) direct materials cost
2) direct labor cost
3) factory overhead cost
Direct Materials Cost (definition):
The cost of any material that is an integral part of the finished product.
Direct Materials Cost

To be classified as a direct materials cost, the cost bust be BOTH of the following:

1) an integral part of the finished product
2) a significant portion of the total cost of the product
Direct Labor Cost (definition):
the cost of employee wages that is an integral part of the finished product.
Direct Labor Cost

Like a direct materials cost, a direct labor cost must meet BOTH of the following criteria:

1) an integral part of the finished product
2) a significant portion of the total cost of the product
Factory Overhead Cost (definition):
costs other than direct materials and direct labor that are incurred in the manufacturing process are combined and classified as this. (factory overhead is sometimes called “manufacturing overhead” or “factory Burden”.)
All factory overhead costs are indirect costs of the product. Some factory overhead costs include the following:
1) heating and lighting the factory
2) repairing and maintaining factory equipment
3) property taxes on factory buildings and land
4) insurance on factory buildings
5) depreciation on factory plant and equipment
Factory overhead cost also includes:
materials and labor costs that do not enter directly into the finished product.
Direct materials, direct labor, and factory overhead costs may be grouped together for analysis and reporting. What are the 2 common groupings?
prime costs
conversion costs
Prime Costs (definition):
consist of direct materials and direct labor costs
Conversion Costs (definition):
consist of direct labor and factory overhead costs
For financial reporting purposes, costs are classified as:
Product costs
period costs
For financial reporting purposes, costs are classified as product costs or period costs. What is the definition of Product Costs?
consist of manufacturing costs: direct materials, direct labor, and factory overhead.
For financial reporting purposes, costs are classified as product costs or period costs. What is the definition of Period Costs?
consist of selling and administrative expenses. Selling expenses are incurred in marketing the product and delivering the product to customers. Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions.
A manufacturing business reports three types of inventory on its balance sheet:
Materials Inventory
Work in Process Inventory
Finished goods inventory
Balance Sheet for a Manufacturing Business

Materials Inventory (definition):

Sometimes called raw materials inventory. This inventory consists of the costs of the direct and indirect materials that have not entered the manufacturing process.
Balance Sheet for a Manufacturing Business

Work in Process Inventory (definition):

This inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process).
Balance Sheet for a Manufacturing Business

Finished Goods Inventory (definition):

This inventory consists of completed (or finished) products that have not been sold.
Income Statement for a Manufacturing Business

Cost of goods manufactured (definition):

the total cost of making products that are available for sale during the period.
Income Statement for a manufacturing Business

Cost of finished goods available for sale (definition):

is determined by adding the beginning finished goods inventory to the cost of goods manufactured during the period.
Income Statement for a Manufacturing Business

Cost of Goods Sold (definition):

determined by subtracting the ending finished goods inventory from the cost of finished goods available for sale.
Income Statement for a Manufacturing Business

What is required to determine the cost of goods sold and thus to prepare the income statement?

Cost of goods manufactured
Income Statement for a Manufacturing Business

Statement of Cost of Goods Manufactured (definition):

The cost of goods manufactured is often determined by preparing a statement of cost of goods manufactured.
The statement of cost of goods manufactured is prepared using the following 3 steps:
1) determine the “cost of materials used”
2) determine the “total manufacturing costs incurred”
3) determine the “cost of goods manufactured”

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