Chapter 18 definitions

How does a service company calculate unit cost per service?

A service company calculates unit cost per service as Total Costs / Total number of services provided.

Give five examples of manufacturing overhead.

Examples of manufacturing overhead include costs of indirect materials, indirect labor, repair and maintenance in factory, factory utilities, factory rent, factory insurance, factory property taxes, manufacturing plant managers' salaries, and depreciation on manufacturing buildings and equipment.

How does managerial accounting assist managers with their responsibilities to the company's stakeholders?

Management accountability is the manager's responsibility to the various stakeholders of the company. Stakeholders have an interest of some sort in the company, and include customers, creditors, suppliers, employees, and investors. Managerial accounting provides information to help managers make wise decisions, effectively manage the resources of the company, evaluate operations, plan, and control. These things are requisite to meeting responsibilities to the company's stakeholders. For example: Making timely payments to suppliers, providing a return on investors' investment, repaying creditors, providing a safe work environment, and providing products that are safe and defect-free.

List the three inventory accounts used by manufacturing companies, and describe each.

Raw Materials Inventory includes materials used to manufacture a product. Work-in-Process Inventory includes goods that have been started in the manufacturing process but are not yet complete. Finished Goods Inventory includes completed goods that have not yet been sold.

Describe a service company, and give an example.

Service companies sell time, skills, and knowledge. They seek to provide services that are high quality with reasonable prices and timely delivery. Examples of service companies include phone service companies, banks, cleaning service companies, accounting firms, law firms, medical physicians, and online auction services.

What is the primary purpose of managerial accounting?

The primary purpose of managerial accounting is to provide information to help managers plan and control operations.

How does a manufacturing company calculate unit product cost?

A manufacturing company calculates unit product cost as Cost of Goods Manufactured / Total number of units produced.

How is cost of goods manufactured calculated?

Cost of Goods Manufactured is calculated as Beginning Work-in-Process Inventory + Direct Materials Used + Direct Labor + Manufacturing Overhead - Ending Work-in-Process Inventory.

Explain the difference between a direct cost and an indirect cost.

A direct cost is a cost that can be easily and cost-effectively traced to a cost object (which is anything for which managers want a separate measurement of cost). An indirect cost is a cost that cannot be easily or cost-effectively traced to a cost object.

How does a merchandising company calculate unit cost per item?

A merchandising company calculates unit cost per item as Total Cost of Goods Sold / Total number of items sold.

List six differences between financial accounting and managerial accounting.

Financial accounting and managerial accounting differ on the following 6 dimensions: (1) primary users, (2) purpose of information, (3) focus and time dimension of the information, (4) rules and restrictions, (5) scope of information, and (6) behavioral.

Describe a merchandising company, and give an example.

Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory of products, and managers are accountable for the purchasing, storage, and sale of the products. Examples of merchandising companies include toy stores, grocery stores, and clothing stores.

How do manufacturing companies differ from merchandising companies?

Merchandising companies resell products they previously bought from suppliers, whereas manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into new finished products. In contrast to merchandising companies, manufacturing companies have a broad range of production activities that require tracking costs on three kinds of inventory.

How do period costs differ from product costs?

Period costs are operating costs that are expensed in the same accounting period in which they are incurred, whereas product costs are recorded as an asset and not expensed until the accounting period in which the product is sold. Period costs are all costs not considered product costs. On the income statement, Cost of Goods Sold (a product cost) is subtracted from Sales Revenue to compute gross profit. Period costs are subtracted from gross profit to determine operating income.

Explain the difference between planning and controlling.

Planning means choosing goals and deciding how to achieve them, whereas, controlling means implementing the plans and evaluating operations by comparing actual results to the budget.

What are prime costs? Conversion costs?

Prime costs are direct materials plus direct labor. Conversion costs are direct labor plus manufacturing overhead. Note that direct labor is classified as both a prime cost and a conversion cost.

What are product costs?

Product costs are all costs of a product that GAAP requires companies to treat as an asset for external financial reporting. These costs are recorded as an asset and not expensed until the product is sold. Product costs include direct materials, direct labor, and manufacturing overhead.

What are the three product costs for a manufacturing company? Describe each.

The three product costs for a manufacturing company are direct materials, direct labor, and manufacturing overhead. Direct materials are materials that become a physical part of a finished product and whose costs are easily traceable to the finished product. Direct labor is the labor cost of the employees who convert materials into finished products. Manufacturing overhead includes all manufacturing costs except direct materials and direct labor, such as indirect materials, indirect labor, factory depreciation, factory rent, and factory property taxes.

List the four IMA standards of ethical practice, and briefly describe each.

competence, confidentiality, integrity, credibility

How does a manufacturing company calculate cost of goods sold? How is this different from a merchandising company?

manufacturing- Cost of Goods Sold as Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Good Inventory. In addition, a manufacturing company must track costs from Raw Materials Inventory and Work-in-Process Inventory in order to compute Cost of Goods Manufactured used in the previous equation. merchandising- Cost of Goods Sold as Beginning Merchandise Inventory + Purchases and Freight In - Ending Merchandise Inventory.