Question

Q: 1SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS

1. What are the major differences between managerial and financial accounting?
2. Identify the three elements of cost incurred in manufacturing a product and indicate the distinguishing characteristics of each.
3. Why might a company claim that the total cost of employing a person is $15.30 per hour when the employee’s wage rate is $10.50 per hour? How should this difference be classified and why?

1. Why are certain costs referred to as period costs? What are the major types of period costs incurred by a manufacturer?
2. Explain why the income statement of a manufacturing company differs from the income statement of a merchandising company.
3. What is the general content of a statement of cost of goods manufactured? What is its relationship to the income statement?
4. Real world question Assume Domino’s Pizza is considering offering a new product—a 6-inch (15.24 cm) pizza. Why would it matter if Domino’s Pizza knows how much it costs to produce and deliver this 6-inch (15.24 cm) pizza?
5. Real world question Why is it becoming more important that the managers of hospitals understand their product costs?

Answer 1

Managerial accounting is internal based and used by managers for decision making in day to day operations. Financial accounting is external based and used by external users of financial statements for informed decisions. For example: shareholders, suppliers, bankers, etc

3 costs incurred

Direct material- Cost of material used in producing a product. It is variable cost

Direct labor- Cost of labor directly deployed for example: assembly workers, packing line workers. It is variable cost

Manufacturing overheads – expenses which facility the production of goods and services Eg: Factory rent, Factory depreciation, indirect material, and indirect labor. It consists both variable and fixed cost

Difference is the payroll tax and associated benefit of employing labor like additional benefits, fringe benefits, etc it is classified with respective cost. For example additional cost incurred on assembly workers will be charged to direct labor cost

Period costs are the costs which are charged to the period in which it is incurred. They are not part of the product which is manufactured since it is not incurred in factories. Major types of period cost incurred by a manufacturer are selling expenses and administrative expenses

Income statement of manufacturing consists 3 types of inventories Raw materials, Work in process and finished goods. Income statement of mechanising company consists of finished goods only since is purchased and sold.

The contents of Cost of goods manufactured. Current cost incurred – Direct material, direct labor, Manufacturing overheads, Work in process is adjusted for opening and closing balance. Cost of goods manufactured is considered for cost of goods sold by adjusting opening and closing balance of finished goods. Cost of goods sold is considered in income statement for arriving at gross profit.

Domino’s pizza would like know its cost for following reasons

· Product costing – arrive at cost of manufacture

· Product pricing – Fixing the selling price

· Cost control and cost reduction- to improve profitablity

Hospitals are service type firms and they also should know their cost since it helps them

· Service costing – helps in understanding cost of each service

· Service pricing – helps in pricing the service based on cost

· Profitablity – Helps in understanding profitability of service rendered

· Helps in improving cost competitiveness