Unit 1 Study Guide: Cost Measurement and Estimation

1a: Compare and contrast financial accounting and managerial accounting in terms of audience, reporting, time frame, and use of information.

Companies use financial and managerial accounting methods to generate reports that serve the needs of their different audiences, which can be internal or external to the organization.

    • Differentiate between financial and managerial accounting.
    • Which accounting method focuses on external users of the reports?
    • Identify the accounting method that follows the rules of U.S. GAAP.
    • Which accounting method reports both historical information and future projections?

Review these definitions in section Characteristics of Managerial Accounting from Managerial Accounting. Note that Table 1.1 Comparison of Financial and Managerial Accounting provides a quick comparison of managerial and financial accounting.

1b: Describe the planning and control functions performed by managers.

Managers are required to constantly predict financial outcomes for their companies. After the accounting period is over, they should evaluate whether they successfully predicted what actually occurred, from a monetary perspective. For example, managers often create, present, and revise their budget, their financial predictor of anticipated revenues and expenses, throughout the planning, implementation, and reporting process.

    • Explain why a budget is a useful tool for the planning and control functions of accounting.
    • Differentiate among a budgeted income statement, a capital budget, and budgeted cash flow.

Review these definitions and statements about strategic plans for publicly-traded companies in Planning and Control Functions Performed by Managers of Managerial Accounting.

Notice how Southwest Airlines lists four future initiatives in its accounting report in the chart, Business in Action 1.1.

1c: Describe the functions of key finance and accounting personnel.

An effective organization delegates roles within its accounting, finance, and tax divisions.

    • Define the roles of the chief financial officer, controller, treasurer, and internal auditor.
    • Whom do managerial, financial, and tax accountants typically report to?
    • Explain the role of the board of directors in a public company.

Review these definitions in Key Finance and Accounting Personnel from Managerial Accounting.

Figure 1.1 A Typical Organization Chart presents an organizational chart which illustrates the flow of reporting within an organization.

Figure 1.1 A Typical Organization Chart

Image of a typical organizational chart.

1d: Use standards of ethical conduct to resolve ethical conflicts facing accountants.

Many professional and governmental organizations, and individual companies, provide their employees with guidance regarding ethical behavior and decision making. The Institute of Management Accountants (IMA) is a professional organization that provides guidance that its members can use when they face ethical dilemmas. Consider how you will respond to potential ethical conflicts in your career.

    • Discuss the four ethical standards members of the Institute of Management Accountants (IMA) must follow.

Figure 1.2 IMA Statement of Ethical Professional Practice.

Image of the IMA Statement of Ethical Professional Practice

1e: Describe how accounting systems can help organizations.

Companies rely on computerized accounting applications to record, sort, analyze, and report financial information for internal and external users.

    • List two important factors companies must consider when choosing an appropriate accounting software.

Companies require accurate and up-to-date information across the entire organization to make timely decisions. Companies have a lot to consider when they choose computer software and applications to manage their accounting processes, whether they are creating a basic spreadsheet or implementing a robust enterprise resource planning system.

    • Explain how an enterprise resource planning system allows companies to make more accurate and timely decisions.
    • List the pros and cons of using an enterprise resource planning system.

Review these considerations in Computerized Accounting Systems from Managerial Accounting.

 1f: Define the terms used for costing purposes.

The financial statements of manufacturing companies report two broadly-defined types of costs: manufacturing or non-manufacturing. Manufacturing costs, also called “product costs,” include direct materials, direct labor, and overhead costs.

    • Differentiate direct and indirect material.
    • Differentiate direct and indirect labor.
    • Identify examples of overhead costs.

Non-manufacturing costs are also called period costs.

    • Name two components of period costs accountants should report in an income statement.

Accountants at manufacturing companies expense manufacturing and non-manufacturing costs at specific times.

    • When should accountants expense manufacturing costs?
    • When should accountants expense non-manufacturing costs?
    • Classify the costs for a manufacturing company.

Review these definitions in Cost Terminology from Managerial Accounting. Note that Table 1.2 Manufacturing Costs at Custom Furniture Company and Table 1.3 Manufacturing Versus Non-manufacturing Costs present examples of these types of costs.

1g: Identify how costs flow through the three inventory accounts and cost of goods sold account.

Accountants report manufacturing costs in three types of inventory accounts on a balance sheet, depending on the level of completeness of the materials (raw materials, work in progress, and finished goods.

    • Differentiate raw materials, work-in-process, and finished goods in an inventory account.

Accountants must use appropriate classification and reporting methods in manufacturing. For example, they include the total cost of goods sold in the company’s income statement: after the finished goods have been sold, and their associated costs have been transferred from the income statement to the balance sheet.

    • Describe the flow of costs: from the purchase of raw materials, ending with a report of the cost of goods sold.

Review these classification and reporting methods in How Product Costs Flow through Accounts from Managerial Accounting.

1h: Describe how to prepare an income statement for a manufacturing company.

The cost flow equation helps accountants calculate the costs of manufactured goods as these items move through the company’s production process.

    • Define the cost flow equation.

The cost flow equation helps companies prepare schedules for the raw materials placed in production, the cost of goods manufactured, and the cost of goods sold.

    • Explain the costs included in the schedules for raw materials placed in production, the cost of goods manufactured, and the cost of goods sold.

Income statements for merchandising and manufacturing companies are somewhat different.

    • Describe and compare the terminology used for income statements of merchandising and manufacturing companies.

Review these three primary income statements schedules in Income Statements for Manufacturing Companies from Managerial Accounting.

Figure 1.7 Income Statement Schedules for Custom Furniture Company presents the flow of costs in a manufacturing company.

Figure 1.7 Income Statement Schedules for Custom Furniture Company

Image of the Schedule of Raw Materials Places in Production from Custom Furniture Company

 Unit 1 Vocabulary

      • Budget
      • Capital budget
      • Cash flow
      • Chief financial officer (CFO)
      • Controller
      • Control function
      • Cost flow equation
      • Cost of goods manufactured
      • Cost of goods sold
      • Direct labor
      • Direct materials
      • Enterprise resource planning system
      • Ethical conduct
      • Expense
      • Finance or financial accountant
      • Finished goods inventory
      • Income statement
      • Indirect labor
      • Indirect materials
      • Institute of Management Accountants (IMA)
      • Internal auditor
      • Managerial accountant
      • Manufacturing costs
      • Manufacturing overhead
      • Merchandising
      • Non-manufacturing costs
      • Overhead costs
      • Period costs
      • Planning function
      • Product costs
      • Publicly-traded company
      • Revenue
      • Raw materials inventory
      • Tax accountant
      • Strategic plan
      • Treasurer
      • U.S. GAAP
      • Work-in-process inventory
Last modified: Wednesday, July 17, 2019, 5:44 PM