Accounting Exam 3 Chapter 10 Notes Financial Accounting the area of accounting that focuses on recording transactions and events so that general purpose financial statements can be prepared What chapters 1 9 focused on Transactions and events recorded and reported using GAAP Focus of report Company as a whole or segments within the company Managerial Accounting the area of accounting that focuses on recording and reporting information for use by a company s management in decision making Is not restricted by GAAP rules statement may include additional info Doesn t have to report data in periodic intervals so data is reported whenever needed by management Focus of report Varies by type of decision Manufacturing Business Produces the products it sells Converts materials into finished products through the use of machinery and labor Reports sales from selling its products Cost of products is reported as cost of goods sold o Unlike merchandising business that reports it as cost of merchandise sold Gross Profit Sales Cost of goods sold Net Income Gross profit Operating expenses Materials and finished products are on the BS as inventory under current assets Managers rely on managerial accountants to provide useful cost information to support decision making Cost a payment of cash or its equivalent or the commitment to pay cash in the future for the purpose of generating revenues A cost provides a benefit that is used immediately or deferred to a future period of time 1 o If benefit is used immediately cost is an expense Ex Salary expense o If benefit is deferred cost is an asset PPE The cost of a manufactured product includes 1 Direct Material Costs 2 Direct Labor Costs 3 Factory Overhead Costs Direct Materials Cost the cost of materials that are an essential part of the finished product and a significant portion of the total cost of the product Direct Labor Cost Wages of factory workers who are directly involved in converting materials into a finished product and a significant portion of the total cost of the product Factory Overhead Cost All the costs of operating the factory except for direct materials and direct labor All factory overhead costs are indirect costs of the product Prime Costs Consist of direct materials and direct labor costs Conversion Costs Consist of direct labor and factory overhead costs costs of converting the materials into a finished product For financial reporting purposes costs are classified as product costs or period costs Product Manufacturing Costs consists of manufacturing costs direct materials direct labor and factory overhead Reported on balance sheet as inventory when the inventory is sold the cost of the manufactured product sold is reported as cost of goods sold on the income statement Period Nonmanufacturing Costs consist of selling and administrative expenses reported as expenses on the income statement and don t appear on the balance sheet 2 Selling Expenses are incurred in marketing the product and delivering the product to customers Administrative Expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions Cost accounting systems A system used to accumulate manufacturing costs for decision making and financial reporting purposes Measure record and report product costs Used by managers to help set product prices control operations and develop financial statements Two main types of cost accounting systems 1 Process cost systems 2 Job order cost systems Process Costing A type of cost accounting system in which costs are accumulated by department or process within a factory We are making identical products Job Order Cost a type of cost accounting system that provides for a separate record of the cost of each particular quantity of product that passes through the factory made for custom orders customer tells manufacturer what they want then the manufacturer makes it to the customer s order specification this is called a job JOC records and summarizes manufacturing costs by jobs Flow of Manufacturing Costs Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Raw Materials Inventory The costs of materials that have not yet entered into the manufacturing process Work in Process Inventory The direct materials direct labor and factory overhead costs that have entered into the manufacturing process but are associated with products that have not been finished 3 Finished Goods Inventory The cost of finished products on hand that have not been sold Cost of Goods Sold The cost of manufactured product sold In a job order cost accounting system perpetual inventory records are maintained for materials work in process and finished goods inventories Perpetual inventory records inventory system where each purchase and sale of merchandise is recorded in an inventory account Subsidiary ledger A ledger a book of financial accounts containing individual accounts with a common characteristics Controlling account The account in the general ledger that summarizes the balances of the accounts in the subsidiary ledger Materials Job Order Cost Systems Materials account is a controlling account A separate account for each type of material is maintained in a subsidiary materials ledger o Materials ledger the subsidiary ledger containing the individual accounts for each type of material Increases to the account are based on receiving reports supported by the supplier s invoice Decreases to the accounts are based on materials requisitions A receiving report is prepared when materials have been ordered received and inspected o Receiving report the form or electronic transmission used by the receiving personnel to indicate that materials have been received and inspected Quantity received and condition of materials are entered on this When the supplier s invoice is received it is compared to the RR if it all matches up then the purchase is recorded When a materials requisition is received the storeroom release materials for use in manufacturing 4 o Materials requisition The form or electronic transmission used by a manufacturing department to authorize the issuance of materials from the storeroom The MR for each job serve as the basis for recording materials used Direct Materials quantities and amounts from the MR are recorded on job cost sheets o Job cost sheets An account in the work in process subsidiary ledger in which the costs charged to a particular job order are recorded