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 making
Generally Accepted Accounting Principles (GAAP) must be used
Prepared statements usually pertain to the company as a whole rather than individual departments or products
Information provided will often be subjective, such as estimated future results
Often prepared on an as-needed basis rather than at fixed intervals

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.)

Cost	Product Cost	Period Cost	Direct Materials	Direct Labor	Factory Overhead	Selling Expense	Administrative Expense	Direct Cost	Indirect Cost	Prime Cost	Conversion Cost
Eggs used to make cheesecakes
Bakers wages
Delivery driver wages
Depreciation of office computers
Power to run the cheesecake ovens
Presidents salary
Sales commissions
Factory supervisor salary

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 manufactured	6,400
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 expenses	5,250
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 purchases	6,400
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 expenses	5,250
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
Inventory		6,000
Supplies		2,100
Land		17,000
Total assets		$55,900
Liabilities
Accounts payable		$17,800
Stockholders Equity
Common stock	$19,000
Retained earnings	19,100
Total stockholders equity		38,100
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 process	1,500
Finished goods	2,000
Total inventory		6,000
Supplies		2,100
Land		17,000
Total assets		$55,900
Liabilities
Accounts payable		$17,800
Stockholders Equity
Common stock	$19,000
Retained earnings	19,100
Total stockholders equity		38,100
Total liabilities and stockholders equity		$55,900

Which income statement is most appropriate for a manufacturing business?

Which balance sheet is most appropriate for a manufacturing business?

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	$3,000
Materials inventory on Feb. 28	50% of materials inventory on Jan. 31
Direct materials purchased	$12,000
Direct materials used	3 times the direct labor incurred
Total manufacturing costs incurred in period	$29,400
Total manufacturing costs incurred in period	70% of Cost of Goods Manufactured
Total manufacturing costs incurred in period	$8,000 less than Cost of Goods Sold

	Account Balances
Account	Jan. 31	Feb. 28	Costs Incurred
Materials Inventory	$	$	Direct Materials Used	$
Work in Process Inventory	27,000		Direct Labor Incurred
Finished Goods Inventory		17,000	Factory Overhead Incurred
			Cost of Goods Sold