Mastery Problem: Introduction to Managerial Accounting

Able Baker Charlie Company

Charles Maxwell is starting a cheesecake bakery, Able Baker Charlie Company, to produce and sell different flavored cheesecakes to restaurants and the general public. He has just begun his study of accounting, and is a bit confused about the many types of reports he has read about and how they will help him run his business. He asks you to help him clarify what the differences between managerial accounting and financial accounting are. Hes also wondering how to set up his inventory, how to classify the costs of his business, and how to fill in some missing information.

Managerial vs. Financial

Select whether the following characteristics are most often associated with managerial accounting or financial accounting.

Primarily used for internal decision makingManagerial Accounting

Generally Accepted Accounting Principles (GAAP) must be usedFinancial Accounting

Prepared statements usually pertain to the company as a whole rather than individual departments or productsFinancial Accounting

Information provided will often be subjective, such as estimated future resultsManagerial Accounting

Often prepared on an as-needed basis rather than at fixed intervalsManagerial Accounting

Feedback

Review the differences between managerial and financial accounting, and how each type of accounting is used in the organization and for management processes.

Cost Classification

Charles has provided some of the costs he expects to incur as follows. Decide on the classifications that could be applied to each of these costs using the table provided. The cost object in each case is the cheesecake.

(Select "Yes" or "No" from the below dropdowns.)

CostProduct CostPeriod CostDirect MaterialsDirect LaborFactory OverheadSelling ExpenseAdministrative ExpenseDirect CostIndirect CostPrime CostConversion Cost

Eggs used to make cheesecakesYes No Yes No No No No Yes No Yes No

Bakers wagesYes No No Yes No No No Yes No Yes Yes

Delivery driver wagesNo Yes No No No Yes No No No No No

Depreciation of office computersNo Yes No No No No Yes No No No No

Power to run the cheesecake ovensYes No No No Yes No No No Yes No Yes

Presidents salaryNo Yes No No No No Yes No No No No

Sales commissionsNo Yes No No No Yes No No No No No

Factory supervisor salaryYes No No No Yes No No No Yes No Yes

Feedback

Review the definitions of each type of cost. Note that each cost may be in more than one category.

Financial Statements

Charles found some sample income statements and balance sheets on the Internet, and asked which of them might be most appropriate for a manufacturing business like his. Review income statements A and B, and balance sheets C and D. Determine which income statement and balance sheet would be most appropriate for a manufacturing business like Able Baker Charlie Company.

Income Statement A

Sample Company A Income Statement For the Year Ended December 31, 20Y8

Sales$42,000

Finished goods inventory, January 1, 20Y8$5,250

Cost of goods manufactured6,400

Cost of finished goods available for sale$11,650

Finished goods inventory, December 31, 20Y8(400)

Cost of goods sold(11,250)

Gross profit$30,750

Operating expenses:

Selling expenses$6,400

Administrative expenses5,250

Total operating expenses(11,650)

Net income$19,100

Income Statement B

Sample Company B Income Statement For the Year Ended December 31, 20Y8

Sales$42,000

Beginning inventory$5,250

Net purchases6,400

Inventory available for sale$11,650

Ending inventory(400)

Cost of goods sold(11,250)

Gross profit$30,750

Operating expenses:

Selling expenses$6,400

Administrative expenses5,250

Total operating expenses(11,650)

Net income$19,100

Balance Sheet C

Sample Company C Balance Sheet December 31, 20Y8

Assets

Cash$20,800

Accounts receivable (net)10,000

Inventory6,000

Supplies2,100

Land17,000

Total assets$55,900

Liabilities

Accounts payable$17,800

Stockholders Equity

Common stock$19,000

Retained earnings19,100

Total stockholders equity38,100

Total liabilities and stockholders equity$55,900

Balance Sheet D

Sample Company D Balance Sheet December 31, 20Y8

Assets

Cash$20,800

Accounts receivable (net)10,000

Inventory:

Direct materials$2,500

Work in process1,500

Finished goods2,000

Total inventory6,000

Supplies2,100

Land17,000

Total assets$55,900

Liabilities

Accounts payable$17,800

Stockholders Equity

Common stock$19,000

Retained earnings19,100

Total stockholders equity38,100

Total liabilities and stockholders equity$55,900

Which income statement is most appropriate for a manufacturing business?

Income statement A

Which balance sheet is most appropriate for a manufacturing business?

Balance sheet D

Feedback

Think about which accounts would be needed in a manufacturing environment.

Costs and Balances

At the end of February, after the second month of operations of Able Baker Charlie Company, Charles shows you the data hes collected, but he was unable to figure out some of the amounts. Review the following data and fill in the missing amounts on the chart for Able Baker Charlie Company. Note: It may be helpful to use T accounts to map the flow of the amounts through the manufacturing accounts and solve for the missing dollar values. It may also be helpful to review the steps for determining the cost of materials used, total manufacturing cost incurred, and cost of goods manufactured.

Data for February

Decrease in materials inventory$3,300

Materials inventory on Feb. 2850% of materials inventory on Jan. 31

Direct materials purchased$11,700

Direct materials used3 times the direct labor incurred

Total manufacturing costs incurred in period$28,700

Total manufacturing costs incurred in period70% of Cost of Goods Manufactured

Total manufacturing costs incurred in period$7,000 less than Cost of Goods Sold

Account Balances

AccountJan. 31Feb. 28Costs Incurred

Materials Inventory$$Direct Materials Used$

Work in Process Inventory21,000Direct Labor Incurred

Finished Goods Inventory16,500Factory Overhead Incurred

Cost of Goods Sold