Accounting Principles II – Managerial and Cost Accounting Concepts - Quick Guides

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Study GuideAccounting PrinciplesII–Managerial and CostAccounting Concepts1. Managerial Accounting vs. Financial AccountingAccounting information is useful forboth people inside the business and people outside it.However, these groups needdifferent kinds of information, which is why accounting is divided intofinancial accountingandmanagerial accounting.Why Do We Need Two Types of Accounting?Financial statementsgive an overall picture of how a company is doing. These statements are usedby:•Investors•Creditors•Analysts•Government agencies•Company managementFor example:•Thebalance sheetshows thetotal value of inventory.•Theincome statementshows thetotal cost of goods sold.However, these reportsdo not show details about individual products, such as how much it coststo produce one specific item. This information isnot shared with the public.What Does Management Need?People who manage the business needmuch more detailed information. They use accounting datato:

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Study Guide•Decide what to produce•Control costs•Plan for the future•Evaluate performanceThis detailed information comes frommanagerial accounting.Key Differences Between Managerial and Financial AccountingThe table shows how managerial accounting and financial accounting differ in several important ways:•Users○Managerial accounting is used byinternal managers.○Financial accounting is used byexternal userssuch as investors and creditors.•Rules and Guidelines

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Study Guide○Managerial accounting isflexibleand can be adapted to management’s needs.○Financial accounting must followGAAP, which is strict and standardized.•Purpose○Managerial accounting helps withdecision-making and control.○Financial accounting providesgeneral informationfor investment and creditdecisions.•Frequency of Reports○Managerial reports are preparedwhenever needed.○Financial reports are usually preparedquarterly and annually.•Independent Review○Managerial accountingdoes not requirean independent audit.○Financial accounting often requires anauditor’s opinion.•Type of Information○Managerial accounting providesdetailed, project-specific information, often usingestimates.○Financial accounting providesgeneral-purpose informationwith very fewestimates.2.Manufacturing Financial StatementsManufacturing companies prepare financial statements that areslightly more complexthan those ofservice or merchandising companies. This is because manufacturersproduce goods, not just buy orsell them. As a result, they usedifferent inventory accountsand havespecial types of assetsontheir balance sheets.1.Inventory Accounts in a Manufacturing CompanyUnlike service or merchandising businesses, manufacturing companies usethree separateinventory accounts. Each account represents a different stage in the production process.

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Study Guide1.Raw Materials InventoryThis includes all materials and parts that have been purchased buthave not yet been usedinproduction.2.Work-in-Process (WIP) InventoryThis includes products that arecurrently being manufactured but are not yet finished.It contains:○Raw materials already used○Direct labor costs○Other manufacturing costs incurred so far3.Finished Goods InventoryThis includescompleted productsthat are ready to be sold to customers.At any given time, a manufacturing company’s total inventory is made up ofraw materials, work-in-process, and finished goods.2.Reporting Inventory on Financial StatementsThe value of each inventory type isdisclosed in the financial statements. Companies may:•Show each inventory typeseparately on the balance sheet, or•Provide the details in thefootnotesto the financial statementsBoth methods are acceptable as long as the information is clearly reported.3.Long-Term Assets of a Manufacturing CompanyIn thelong-term asset sectionof a manufacturer’s balance sheet, you will usually find:•Factory buildings•Manufacturing equipment•Small tools and machineryMany manufacturers also ownpatentsrelated to their products or production processes.

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Study GuideThecapitalized cost of patentsis reported under theintangible assetssection of the balancesheet.4.Income Statement and Cost of Goods SoldTheincome statementof a manufacturing company lookssimilar to that of a merchandisingcompany, with one important difference.When calculatingcost of goods sold, a manufacturer usesonly the Finished Goods Inventoryaccount.Raw materials and work-in-process inventories arenot directly includedin this calculation.5.Comparison of Cost of Goods Sold: Manufacturer vs. MerchandiserThe table demonstrates how cost of goodssold is calculated differently:•Manufacturers

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Study Guide○Start with beginningfinished goods inventory○Addcost of goods manufactured○Subtract ending finished goods inventory•Merchandisers○Start with beginningmerchandise inventory○Addcost of goods purchased○Subtract ending merchandise inventoryThis highlights thatmanufacturers focus on production, whilemerchandisers focus onpurchasing and resale.3.Costing TerminologyWhen looking at an income statement, expenses are classified intotwo main types:product costsandperiod costs. Understanding the difference between these two is very important in accounting,especially for manufacturing businesses.1.Product CostsProduct costsare costs that areassigned to inventory. These costs are not immediately expensed.Instead, they stay in inventory until the product is sold. Once the product is sold, these costs becomepart ofcost of goods sold.In amanufacturing company, product costs are also calledmanufacturing costs.Examples of manufacturing product costs include:•Raw materials used•Direct labor•Factory supervisor’s salary•Factory utilitiesEvenservice companiescan have product costs. For example, the cost of performing an audit orpreparing a legal document may be accumulated as inventory until the service is completed.

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