Accounting Exam 3Chapter 10 NotesFinancial Accounting – the area of accounting that focuses on recordingtransactions and events so that general-purpose financial statements can beprepared (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 companyManagerial Accounting – the area of accounting that focuses onrecording and reporting information for use by a company’s management indecision making - Is not restricted by GAAP rules (statement may include additionalinfo)- Doesn’t have to report data in periodic intervals, so data isreported 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 ofmachinery and labor- Reports sales from selling its products- Cost of products is reported as cost of goods soldo Unlike merchandising business that reports it as cost ofmerchandise soldGross Profit = Sales – Cost of goods soldNet Income = Gross profit – Operating expenses- Materials and finished products are on the BS as inventory undercurrent assets- Managers rely on managerial accountants to provide useful costinformation to support decision makingCost – a payment of cash or its equivalent or the commitment to pay cash inthe future for the purpose of generating revenues  A cost provides a benefit that is used immediately or deferred to afuture period of time1o If benefit is used immediately = cost is an expense (Ex: Salaryexpense)o If benefit is deferred = cost is an asset (PPE)The cost of a manufactured product includes:1. Direct Material Costs2. Direct Labor Costs3. Factory Overhead CostsDirect Materials Cost – the cost of materials that are an essential part ofthe finished product, and a significant portion of the total cost of theproductDirect Labor Cost – Wages of factory workers who are directly involved inconverting materials into a finished product and a significant portion of thetotal cost of the productFactory Overhead Cost – All the costs of operating the factory except fordirect materials and direct labor All factory overhead costs are indirect costs of the product Prime Costs – Consist of direct materials and direct labor costsConversion 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 orperiod 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 goodssold 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 systemsProcess 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 jobsRaw Materials Inventory – The costs of materials that have not yetentered into the manufacturing processWork in Process Inventory – The direct materials, direct labor and factoryoverhead costs that have entered into the manufacturing process but areassociated with products that have not been finished 3Flow of Manufacturing CostsRaw Materials InventoryWork in Process InventoryFinished Goods InventoryCost of Goods SoldFinished Goods Inventory – The cost of finished products on hand thathave not been sold Cost of Goods Sold – The cost of manufactured product sold ----- In a job order cost accounting system, perpetual inventory records aremaintained 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 accountSubsidiary ledger – A ledger (a book of financial accounts) containingindividual accounts with a common characteristics Controlling account – The account in the general ledger that summarizesthe balances of the accounts in the subsidiary ledgerMaterials – Job Order Cost Systems- Materials account is a controlling account- A separate account for each type of material is maintained in asubsidiary materials ledgero Materials ledger – the subsidiary ledger containing theindividual accounts for each type of material- Increases to the account are based on ‘receiving reports’ supportedby 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 transmissionused by the receiving personnel to indicate that materialshave been received and inspected  Quantity received and condition of materials areentered on this When the supplier’s invoice is received it is comparedto the RR, if it all matches up then the purchase isrecorded- When a materials requisition is received, the storeroom releasematerials