Managerial Accounting quiz 1

The Flow of Total Manufacturing Costs Through Inventory Accts:

Materials inventory:Debit Beginning Balance Ending Balance, Purchases Credit:direct and indirect materials

Wages Payable: Credit Direct and Indirect Labor

Work in process Inventory:Debit Beginning Balance,Direct materials,Direct Labor,Applied Overhead,ending balance Credit:Cost of goods manufactured

Finished Goods inventory: Debit beginning balance, Cost of goods manufactured Ending Balance, Credit Cost of goods sold

Manufacturing Overhead:Debit Indirect materials:Indirect labor depreciation utilities,Insurance,Taxes,etc credit applied overhead

Product Cost flows:Direct materials,work in process inventory, finished goods inventory,cost of goods sold

Materials Inventory
 Cost of materials purchased but not yet used

 Work in Process Inventory
 Cost of units started but not yet completed.

 Finished Goods Inventory
 Cost of units completed but not yet sold.

Cost management/Value chain
getting raw materials → research and development → product design_> production → marketing → distribution → customer service

Managerial information

Costs

1. Cost Types

• Product Costs: Costs directly tied to production (e.g., direct materials, direct labor, manufacturing overhead). These are capitalized as inventory until the product is sold.

• Period Costs: Costs not related to production (e.g., selling & administrative expenses). These are expensed in the period incurred.

2. Product vs. Period Costs

• Product Costs: Incurred inside the factory (e.g., raw materials, factory labor, factory utilities).

• Period Costs: Incurred outside the factory (e.g., office rent, marketing expenses, executive salaries).

3. Variable vs. Fixed Costs (Plus Mixed Costs)

• Variable Costs: Change in direct proportion to production levels (e.g., raw materials, direct labor).

• Fixed Costs: Do not change regardless of production levels (e.g., rent, insurance).

• Mixed Costs: Contain both fixed and variable components (e.g., utility bills).

4. Cost Flow and Inventory Accounts (T-Accounts)

Raw Materials Inventory

• Debits (Increases): Raw material purchases.

• Credits (Decreases): Raw materials used in production (moved to Work in Process).

Work in Process (WIP) Inventory

• Debits (Increases):

  • Direct materials used (from Raw Materials Inventory).

  • Direct labor incurred.

  • Applied manufacturing overhead.

• Credits (Decreases): When products are completed (moved to Finished Goods Inventory).

Finished Goods Inventory

• Debits (Increases): Completed goods transferred from WIP.

• Credits (Decreases): When products are sold (moved to Cost of Goods Sold).

Cost of Goods Sold (COGS)

• Debits (Increases): When finished goods are sold.

• Credits (Decreases): If products are returned or written off.

5. Direct vs. Indirect Costs

• Direct Costs: Directly traceable to a specific product (e.g., direct materials, direct labor).

• Indirect Costs: Cannot be traced directly to a product (e.g., factory utilities, supervisor salaries).

6. Types of Production Processes

• Job Order Costing: Used for unique/custom products (e.g., custom furniture, construction projects).

• Process Costing: Used for mass production (e.g., beverages, cereals).

• Hybrid Costing: A mix of job order and process costing (e.g., clothing manufacturing).

7. Cost Behavior

• Variable Costs: Increase with production.

• Fixed Costs: Remain constant.

• Mixed Costs: Have both variable and fixed components.

8. Data Collection Problems

• Issues: Misclassification, inaccurate tracking, missing data.

• Impact: Can lead to incorrect cost calculations, poor decision-making.

9. Inventories (Reported as Current Assets on Balance Sheet)

• Raw Materials Inventory: Unused materials.

• Work in Process (WIP) Inventory: Partially completed products.

• Finished Goods Inventory: Completed products ready for sale.

10. Direct Materials & Direct Labor

• Direct Materials: Raw materials that can be directly traced to a product (e.g., wood for furniture).

• Direct Labor: Wages paid to workers directly involved in production (e.g., machine operators).

11. Manufacturing Overhead

• Definition: Indirect costs related to production (e.g., utilities, depreciation, factory supervisor salaries).

• Allocation: Applied to WIP inventory based on a predetermined overhead rate.

12. Cost of Goods Sold (COGS) Calculation

COGS = Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory

13. Schedule of Cost of Goods Manufactured

• Direct Materials Used

• Direct Labor

• Applied Manufacturing Overhead

• Changes in Work in Process Inventory

14. Objective of Managerial Accounting

• Purpose: Helps internal managers make strategic decisions.

• Focus: Future-oriented, detailed, not bound by GAAP.

Questions & Answers

1. What is the difference between product costs and period costs?

• Product Costs: Related to manufacturing (recorded as inventory).

• Period Costs: Related to selling/admin expenses (expensed immediately).

2. If production increases within a given range, what happens to fixed costs per unit?

• Fixed costs per unit decrease because total fixed costs are spread over more units.

3. Which of the following would be considered a direct cost for a unit of production?

• Direct materials (e.g., wood for furniture).

4. What is included in the schedule of cost of goods manufactured?

• Direct materials used, direct labor, applied overhead, changes in WIP inventory.

5. What is the correct order of the flow of product costs through the inventory system?

1. Raw Materials Inventory → 2. Work in Process Inventory → 3. Finished Goods Inventory → 4. Cost of Goods Sold

6. Which of the following is NOT an example of manufacturing overhead?

• Direct labor (since it’s a direct cost, not overhead).

7. How is cost of goods sold calculated?

COGS = Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory

8. What are the three types of inventory reported on the balance sheet?

1. Raw Materials Inventory

2. Work in Process (WIP) Inventory

3. Finished Goods Inventory

9. What is the objective of managerial accounting?

• To provide internal managers with relevant data for planning and decision-making.

10. What is the difference between direct and indirect materials?

• Direct Materials: Traceable to a product (e.g., wood for a table).

• Indirect Materials: Used in production but not directly traceable (e.g., glue, nails).

11. What are the key characteristics of managerial accounting?

• Focuses on internal users, future-oriented, not GAAP regulated, detailed reporting.

12. What is cost behavior, and how do variable, fixed, and mixed costs differ?

• Variable Costs: Change with production.

• Fixed Costs: Stay constant.

• Mixed Costs: Have both components.

13. What are the types of production processes, and how do they differ?

• Job Order Costing: Custom products.

• Process Costing: Mass production.

• Hybrid: Combination of both.

14. What are data collection problems, and how do they impact cost accounting?

• Errors in data tracking → Inaccurate costs → Poor decision-making.

15. What is the difference between direct labor and manufacturing overhead?

• Direct Labor: Workers directly making the product.

• Manufacturing Overhead: Indirect costs related to production (e.g., factory utilities).