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Chapter 16

1. Briefly distinguish between management and financial accounting information in terms of


a) The intended users of the information and
b) The purpose of the information
Management accounting is the design and use of accounting information systems inside the firm to
achieve the firm’s objectives. The purpose is to provide managers with information useful for planning,
evaluating and rewarding performance, and sharing with other outside parties.
Financial accounting provides information about the financial resources, obligations, and activities of an
economic entity that is intended for use primarily by external decision makers – investors, creditors and
regulators.

2. Describe the three principles guiding the design of management accounting systems.
a) Assign decision making responsibility - management accounting systems help to decide who
has the decision making authority over company assets.
b) Support the decision making process- accounting information produced or created from the
management accounting system supports planning and decision making.
c) Evaluate decision outcome - management accounting reports provide a means of monitoring,
evaluating, and rewarding performance.

3. Is management accounting information developed in conformity with general accepted


accounting principles or some other set of prescribed standards? Explain.
Management accounting uses rules that are set within each organization to produce
information that is needed by management. Since the reports are used only by employees of
the company, GAAP is not required.

4. A manufacturing firm has three inventory control accounts. Name each of the accounts, and
describe briefly what the balance in each at the end of any accounting period represents.
Materials inventory- raw materials on hand and available for use in the manufacturing process.
The balance represents the cost of direct materials on hand and ready for use.
Direct Labor – wages and other payroll cost of employees whose efforts are directly traceable to
the products they manufacture. The direct labor account will have a credit balance representing
the amount owed to employees for work already performed
Manufacturing overhead- a catchall classification, which includes all manufacturing costs other
than the costs of direct materials and direct labor. Examples – utilities, supervisor salaries,
equipment repair. The balance at year end should be zero because all the overhead costs should
be assigned to units of product manufactured.
5. Is the cost of disposing of hazardous waste materials resulting from factory operations a product
cost or a period cost? Explain.
Hazardous waste is a product cost because it’s a cost incurred to manufacture inventory.
6. An important focus of management accounting is decision-making authority. Everyone within
an organization has some decision making authority. How do employees and managers know
what decision- making authority they have regarding firm assets?
Employees within a corporation know their decision-making responsibilities because they are
outlined in a variety of ways, such as in job descriptions, verbal instructions from their
supervisors, and management accounting system documents and reports. Managers are
responsible for decisions about equipment in the plant, employees at the plant, the physical
plant layout and sources of raw material and accounting reports. Managers are responsible for
achieving organizational goals.

7. What amounts are debited to the materials inventory account? What amounts are credited to
this account? What type of balance (debit or credit) is this account likely to have at year end?
Explain.
Debited to material inventory – Purchase of Direct material
Credited – Direct material used
The balance at the year-end is likely a debit which represents the cost of direct materials on
hand and ready for use.
8. Briefly explain what accounting benchmark studies are and why they are important for an
organizations management accounting system.
Benchmark studies are designed to show an organization how its cost and processes compare to
other in the industry. Organizations also share information with customers and suppliers in
order for shipments from suppliers to arrive at the exact time they are needed.
9. What amounts are debited to the direct labor account during the year? What amounts are
credited to this account? What type of balance (debit or credit) is this account likely to have at
year end? Explain.
Direct labor payroll – Debit
Direct labor cost - credit
The balance at year end would be a credit. Direct labor accounts are recorded throughout the
payroll period, but the debits are not recorded until year end of the payroll period. If the
balance sheet date falls between payroll dates and before adjusting entries are made, the direct
labor account will have a credit balance representing the amount owed to employees for work
already performed.
10. Exhibit 16-6 includes six ledger accounts. Which of these six accounts often have balances at
year end that appear in the company’s formal financial statement? Briefly explain how these
balances will be classified in the financial statements.
Material Inventory
Work in process inventory
Finished Goods Inventory
Classified as an asset included in inventories.
11. Argo Mfg co. uses approximately $1200 in janitorial supplies to clean the work area and factory
equipment each month. Should this $1200 be included in the cost of direct materials used?
Explain.
Janitorial supplies to clean the work area and factory equipment should not be included in the
cost of direct materials used. Direct materials are the raw materials and components parts used
in production whose costs are directly traceable to the products manufactured.

12. What amounts are debited to the work in process inventory account during the year? What
amounts are credited to this account? What does the year-end balance in this account
represent?
Debited – Direct materials used, Direct labor, Overhead cost applied
Credit – Cost of finished goods manufactured
The balance represents only the manufacturing costs associated with units still inprocess.

13. What amounts are debited to the finished goods inventory account during the year? What
amounts are credited to this account? What type of balance (debit or credit) is this account
likely to have at year-end?
Debited – Cost of finished goods
Credited – Cost of goods sold
The balance is likely to be a debit.

14. Briefly describe the computation of the cost of finished goods manufactured as it appears in a
schedule of the cost of finished goods manufactured.
This list the manufacturing cost including the three types; direct material, direct labor and
overhead. It also includes the in process inventory at the beginning of the year. To calculate the
cost of finished goods manufactured, you add work in process inventory beginning of year, total
manufacturing cost and deduct work in process inventory end of the year.
15. A schedule of the cost of finished goods manufactured is a helpful tool in determining the per
unit cost of manufactured products. Explain several ways in which information about per unit
manufacturing costs is used by (a) management accounts and (b) financial accounts.
Management use per unit cost by comparing successive periods, they can determine if labor or
overhead is rising or falling.
Financial accountants use per unit cost in recording the transfer of completed goods from work
in process to finished goods, and from finished goods to cost of goods sold.

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