Acct. CH 2

Building Blocks
of Managerial
Accounting
Chapter 2
Objective 1
Distinguish among service,
merchandising, and
manufacturing companies
Copyright 2015 Pearson Education, Inc.
Three types of companies

Service
Merchandisers
Manufacturers
Service Companies
Provide a service only
No inventory
Examples:
__________
__________
__________
__________
Merchandisers
Resell products purchased from
suppliers
One inventory account
Examples
Wal-Mart
Best Buy
Amazon
Retailers vs. Wholesalers

Manufacturers
Use labor and other inputs to convert
raw materials into finished products
Examples
Three inventory accounts
Manufacturers
Three inventory accounts
Raw materials: includes all raw materials used in manufacturing or
building a product. No labor is included in raw materials.
Work in process: includes all goods that are partway through the
manufacturing process but not yet complete (raw materials plus some
labor and manufacturing overhead).
Finished goods: includes completed goods that have not yet been
sold. Although most manufacturers sell their finished goods inventory to
merchandisers, some manufacturers sell their products directly to
consumers. (Finished goods inventory includes all costs associated with
the product.)
Objective 2
Describe the value chain
and its elements
Value Chain
Activities that add value to products
and services and cost money.
Box #:
6
9
E2-18A
10
E2-18A
Cost incurred
Newspaper advertisements
Payment to consultant for advice on location
of new store
Purchases of merchandise
Freight-in
Salespeoples salaries
Depreciation expense on delivery trucks
Research on whether store should sell
satellite radio service
Customer Complaint Department
Rearranging store layout (before you open
your store for business)
Category of the
value chain
Marketing
R&D
Purchases
Purchases
Marketing
Distribution
R&D
Customer Service
Design
11
Objective 3
Distinguish between direct
and indirect costs
12
Cost Object
Anything for which managers want a
separate measurement of cost
Direct cost
Cost that can be traced directly to a cost
object
Indirect cost
Cost that CANNOT be traced directly to a
cost object
Copyright
2015
Pearson
Education, Inc.
Allocated to
the
cost
object
13
S2-4
14
S2-4
Cost incurred
Depreciation of the building
Cost of costume jewelry on the mannequins in
the Juniors Department
Cost of bags used to package customer
purchases at the main registers for the store
The Medina Kohls store managers salary
Cost of the security staff at the Medina store
Manager of Juniors Department
Juniors Department sales clerks
Cost of Juniors clothing
Cost of hangers used to display the clothing in
the store
Direct or indirect
Indirect
Direct
Indirect
Indirect
Indirect
Direct
Direct
Direct
Indirect
15
S2-4 (cont.)
Cost incurred
Electricity for the building
Cost of radio advertising for the store
Juniors clothing buyers salaries (these
buyers buy for all of the Juniors Departments
of Kohls stores)
Direct or indirect
Indirect
Indirect
Indirect
16
Objective 4
Identify the inventoriable product
costs and period costs of
merchandising and manufacturing
firms
17
Two definitions of product

cost
Total costs: used internally only (we
will see this in later chapters)
Inventoriable product costs: used
for external reporting
Recall the third block on the value
chain
18
Value Chain
Inventoriable Product Costs
In
Pr ven
od to
uc ria
t C bl
os e
ts
Box #:
6
19
Per
io
d
C
o
s
t
s
(
O
p
e
r
a
ti
n
g
Value Chain Period Costs
Box #:
6
20
Treatment of Costs
Inventoriable product costs:
Costs stay on the balance sheet as
inventory until sold
When sold, expensed on the income
statement (Cost of goods sold)
Period costs:
Expense immediately on the income
statement (SGA, Operating expenses)
21

and
Period Costs
22
What is Included in
for a Merchandiser?
FORMULA:
+
+
+
+
Purchase price from suppliers

Cost to get ready for sale
Freight-in
Import duties or tariffs
23
What is Included in
for a Manufacturer?
1. Direct materials
Direct Costs
2. Direct labor
3. Manufacturing overhead
> Costs
Indirect
FORMULA
24
3. Manufacturing Overhead
Indirect costs related to
manufacturing that are not direct
materials or direct labor
Indirect materials
Indirect labor
Other indirect manufacturing costs
25
Ask Yourself
Does the cost relate to producing the
product?
If yes, then it is probably:
an inventoriable product cost
Classified as either DM, DL, or MOH
If no, then it is probably:

a period cost
26
S2-8
COST
1. Cost of milk purchased from local dairy
farmers
2. Depreciation on Marketing Departments
computers
3. Property tax on dairy processing plant
4. Gasoline used to operate refrigerated
trucks delivering finished dairy products to
grocery stores
5. Company presidents annual bonus
If an
Period Cost
Inventoriable
or
Product Cost:
Inventoriable
Is it DM, DL,
Product Cost?
or MOH?
Product
DM
Period
Product
MOH
Period
Period
6. Depreciation on refrigerated trucks used to

collect raw milk from local dairy famers
Product
7. Plastic gallon containers in which milk is
packaged
Product
8. Research and development on improving
milk pasteurization process
Period
MOH
DM
27
Prime and Conversion Costs
28
Direct and Indirect Labor Costs

Include
Salaries and wages
Fringe benefits
Payroll taxes
29
Objective 5
Prepare the financial statements for:
1. Service companies,
2. Merchandising companies, and
3. Manufacturing companies
30
1. Income StatementService
Company
Simplest income statement
All costs are period costs
Service revenues
Operating expenses
Operating income
31
2. Income StatementMerchandiser
+ Sales
Cost of goods sold
(inventoriable product
costs when sold)
= Gross profit
Operating expenses
(5 blocks on the value
chain)
= Operating income
FORMULA
Cost of Goods Sold Calculation

Merchandiser
+ Beginning inventory
+ Purchases
+ Import duties or tariffs
+ Freight-in
= Cost of goods available for sale
Ending inventory
=Cost of goods sold
33
S2-10
34
S2-10
Cost of Goods Sold Computation
Beginning inventory
Plus: Purchases
+45,000
Import duties
+700
Freight-in
+3,300
= Cost of goods available
for sale
Less: Ending inventory
Cost of goods sold
Copyright 2015 Pearson

Education, Inc.
+3600
=49,000
+52,000
-5500
=47100
35
Now turn to S2-11
Sales revenue: 39,225,000

Less: COGS 20,655,000
=Gross Profit: 18,570,000
Less: Operating Expenses: 6,850,000
=Operating Income: 11,720,000
36
2. Income StatementMerchandiser
+ Sales
Cost of goods sold
(inventoriable product
costs when sold)
= Gross profit
Operating expenses
(5 blocks on the value
chain)
= Operating income
37

Merchandiser
+ Beginning inventory
+ Purchases
+ Import duties or tariffs
+ Freight-in
Ending inventory
=Cost of goods sold
38
S2-11
Simply Hair
Schedule of Cost of Goods Sold
Beginning inventory
Plus: Purchases
= Cost of goods available for sale =

Less: Ending inventory
= Cost of goods sold
39
S2-11
Simply Hair
Income Statement
+ Sales revenue
Less: Cost of goods sold
= Gross profit
Less: Operating expenses
= Operating income
40
3. Income Statement
Manufacturer
+
=
=
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating income
41
Cost of Goods Sold Manufacturer

Three formulas:
1. Cost of goods sold (CGS)
2. Cost of goods manufactured (CGM)
3. Direct Materials Used (DM Used)
The flow:
DM Used
(RM Inventory)
Inventory)
CGM
(WIP Inventory)
CGS
(FG
42
Direct Materials Used Calculation

Manufacturer
+ Beginning raw materials
inventory
+ Purchases of raw materials
+ Freight in
= Materials available for use
- Ending raw materials inventory
= Direct materials used
43
S2-12
44
S2-12
Thomas Bikes
Calculation of Direct Materials Used
Beginning raw materials
inventory
Plus: Purchases
Import duties
Freight-in
Less: Ending raw materials
inventory
Direct materials used
Copyright 2015 Pearson
Education, Inc.
+
+
=
=
45
Cost of Goods Manufactured

Calculation Manufacturer
+ Beginning work in process
inventory
+ Direct materials used (from
formula)
+ Direct labor
+ Manufacturing overhead
= Total manufacturing costs to
account for
- Ending work in process
inventory
46

Manufacturer
+ Beginning finished goods
inventory
+ Cost of goods manufactured (from
formula)

- Ending finished goods inventory
= Cost of goods sold
47

Three formulas:
1. Cost of goods sold (CGS)
2. Cost of goods manufactured (CGM)
3. Direct Materials Used (DM Used)
The flow:
DM Used
(RM Inventory)
CGM
(WIP Inventory)
CGS
(FG Inventory)
Actual inventory movement

48
E2-25A
49
E2-25A
1.
Calculate Direct Materials Used
2.
Calculate Costs of Goods

Manufactured
3.
Calculate Cost of Goods Sold
50
E2-25A, Direct Materials

Used
Blue Sea Company
Direct Materials Used
inventory
Plus: Purchases of direct
materials
inventory
+
+
=
=
51
E2-25A, Cost of Goods Manufactured

Blue Sea Company
Schedule of Cost of Goods Manufactured
Beginning work in process inventory

Plus: Manufacturing costs incurred:
Direct materials used (from
formula)
Direct labor
Manufacturing overhead*
Total manufacturing costs to account
for
Less: Ending work in process
inventory
Cost of goods manufactured
+
+
+
+
=
=
* Manufacturing overhead:
52
E2-25A, Cost of Goods Sold

Blue Sea Company
Beginning finished goods inventory
Plus: Cost of goods manufactured (from
formula)
Less: Ending finished goods inventory
Cost of Goods Sold
53
Income Statement Manufacturer

+
=
=
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating income
54
E2-26A
55
E2-26A
Blue Sea Company
Income Statement
Sales revenue
= Gross profit
Less: Operating
expenses:
= Operating income
+
=
56
E2-37B
57
E2-37B
1.
Calculate Direct Materials Used
2.
Calculate Costs of Goods

Manufactured
3.
Calculate Cost of Goods Sold
58
E2-37B, Direct Materials

Used
Striker Company
Direct Materials Used
inventory
Plus: Purchases of direct
materials
inventory
+
+
=
=
59
E2-37B, Cost of Goods Manufactured

Striker Company
Schedule of Cost of Goods Manufactured
Beginning work in process inventory

Plus: Manufacturing costs incurred:
Direct materials used (from
formula)
Direct labor
Manufacturing overhead*
Total manufacturing costs to account
for
Less: Ending work in process
inventory
Cost of goods manufactured
+
+
+
+
=
=
* Manufacturing overhead:
60
E2-37B, Cost of Goods Sold

Striker Company
Beginning finished goods inventory
Plus: Cost of goods manufactured (from
formula)
Less: Ending finished goods inventory
Cost of Goods Sold
61
E2-38B
62
Income Statement Manufacturer

+
=
=
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating income
63
E2-38B
Striker Company
Income Statement
Sales revenue
= Gross profit
Less: Operating
expenses
+
=
+
+
= Operating income
64
Product and Period Costs

Type of
Inventoriable
Product Costs
Period
Costs
65
Manufacturing Companies
Inventory Accounts
Raw Materials Inventory
+ Beginning
inventory
+ Purchases and
freight
= Ending
inventory
Materials used
in work in
process
66
Inventory Accounts
Work in Process Inventory
+ Beginning
inventory
+ Materials used from
raw materials
+ Direct Labor
+ Manufacturing
overhead
= Ending
inventory
Cost of goods
manufactured and sent
to finished goods
67
Inventory Accounts
Finished Goods Inventory
+ Beginning
inventory
+ Cost of goods
Cost of goods
sold
manufactured
= Ending
inventory
68

The flow:
DM Used
CGS
(RM Inventory)
(FG Inventory)
CGM
(WIP Inventory)
69
Balance Sheet Differences

Type of Company
Inventory Accounts
Service Company
None
Merchandiser
Merchandise inventory
Raw materials, work in process,
Manufacturer
and finished goods inventory
70
Study Plan
Concepts:
Quick Check (QC) Multiple Choice Questions in
Text
Learning Objective 2.3:
Try-it, page 54 & SP
Learning Objective 2.4:

Try-it, page 65 & SP,
Summary Problem 1, Page 62 & SP, S2-9
71
End of Chapter 2
72
All rights reserved. No part of this publication may be

reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United
States of America.
73

Acct. CH 2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Acct. CH 2

Uploaded by

Copyright:

Available Formats

Building Blocks

Copyright 2015 Pearson Education, Inc.

Three types of companies

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Retailers vs. Wholesalers

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Two definitions of product

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Value Chain Period Costs

Copyright 2015 Pearson Education, Inc.

Inventoriable Product Costs

Copyright 2015 Pearson Education, Inc.

Purchase price from suppliers

Copyright 2015 Pearson Education, Inc.

If no, then it is probably:

6. Depreciation on refrigerated trucks used to

Prime and Conversion Costs

Copyright 2015 Pearson Education, Inc.

Direct and Indirect Labor Costs

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

costs when sold)

(5 blocks on the value

Copyright 2015 Pearson Education, Inc.

Cost of Goods Sold Calculation

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson

Now turn to S2-11

Sales revenue: 39,225,000

costs when sold)

(5 blocks on the value

Copyright 2015 Pearson Education, Inc.

Cost of Goods Sold Calculation

= Cost of goods available for sale =

= Cost of goods sold

Copyright 2015 Pearson Education, Inc.

Cost of Goods Sold Manufacturer

Direct Materials Used Calculation

Copyright 2015 Pearson Education, Inc.

Cost of Goods Manufactured

Cost of Goods Sold Calculation

= Cost of goods available for sale

Cost of Goods Sold Manufacturer

Actual inventory movement

Copyright 2015 Pearson Education, Inc.

Calculate Direct Materials Used

Calculate Costs of Goods

Calculate Cost of Goods Sold

E2-25A, Direct Materials

E2-25A, Cost of Goods Manufactured

Beginning work in process inventory

Copyright 2015 Pearson Education, Inc.

E2-25A, Cost of Goods Sold