Review Questions - Chapter 16 Introduction to Managerial Accountin...

© 2016 Pearson Education, Inc. 16-1 Chapter 16 Introduction to Managerial Accounting

Review Questions

• 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.

• 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.

• 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 re- strictions, (5) scope of information, and (6) behavioral.

• How does managerial accounting assist managers with their responsibilities to the company’s stake-

holders?

Management accountability is the manager’s responsibility to the various stakeholders of the com- pany. 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, re- paying creditors, providing a safe work environment, and providing products that are safe and de- fect-free.

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

The four IMA standards of ethical practice and a description of each follow.

• Competence.

 Maintain an appropriate level of professional expertise. Perform professional duties in accordance with relevant laws, regulations, and technical standards. Provide decision support information and recommendations that are accurate, clear, concise, and timely.Horngrens Financial and Managerial Accounting The Managerial Chapters 5th Edition Miller-Nobles Solutions Manual Visit TestBankDeal.com to get complete for all chapters

© 2016 Pearson Education, Inc. 16-2  Recognize and communicate professional limitations or other constraints that preclude re- sponsible judgment or successful performance of an activity.II. Confidentiality. Keep information confidential except when disclosure is authorized or legally required. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance. Refrain from using confidential information for unethical or illegal advantage.III. Integrity. Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Abstain from engaging in or supporting any activity that might discredit the profession.IV. Credibility. Communicate information fairly and objectively. Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

• 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 physi- cians, and online auction services.

• 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. Ex- amples of merchandising companies include toy stores, grocery stores, and clothing stores.

• What are product costs?

Product costs are all costs of a product that GAAP requires companies to treat as an asset for exter- nal 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.

© 2016 Pearson Education, Inc. 16-3

• 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 peri- od in which the product is sold. Period costs are all costs not considered product costs. On the in- come 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.

• How do manufacturing companies differ from merchandising companies?

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

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

The three inventory accounts used by manufacturing companies are Raw Materials Inventory, Work- in-Process Inventory, and Finished Goods Inventory.

Raw Materials Inventory includes materials used to manufacture a product. Work-in-Process Inven- tory 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.

• How does a manufacturing company calculate cost of goods sold? How is this different from a mer-

chandising company?

For a manufacturing company, the activity in the Finished Goods Inventory account provides the in- formation for determining Cost of Goods Sold. A manufacturing company calculates 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 Inven- tory and Work-in-Process Inventory in order to compute Cost of Goods Manufactured used in the previous equation.

For a merchandising company, the activity in the Merchandise Inventory account provides the in- formation for determining Cost of Goods Sold. A merchandising company calculates Cost of Goods Sold as Beginning Merchandise Inventory + Purchases and Freight In – Ending Merchandise Inven- tory.

• 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 any- thing for which managers want a separate measurement of cost). An indirect cost is a cost that can- not be easily or cost-effectively traced to a cost object.

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• 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 manufac- turing 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 employ- ees who convert materials into finished products. Manufacturing overhead includes all manufactur- ing costs except direct materials and direct labor, such as indirect materials, indirect labor, factory depreciation, factory rent, and factory property taxes.

• 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, man- ufacturing plant managers’ salaries, and depreciation on manufacturing buildings and equipment.

• What are prime costs? Conversion costs?

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

• How is cost of goods manufactured calculated?

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

• How does a manufacturing company calculate unit product cost?

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

• 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 provid- ed.

• 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.