INTRODUCTION TO MANAGERIAL ACCOUNTING DISCUSSION QUESTIONS 1. Financial accounting and managerial accounting are different in several ways. Financial accounting information is reported in statements that are useful to persons or groups outside of a company. These statements objectively report the results of operations for fixed periods of time and the financial condition of the business under generally accepted accounting principles. Managerial accounting information uses both subjective and objective information to meet the specific needs of management. This non-GAAP information can be reported periodically or as needed by management and can be reported for the entire entity or for segments of the organization. This information includes (i) historical data, which provide objective measures of past operations, and (ii) estimated data, which provide subjective estimates about future decisions. 2. a. Vertical units are structured as separate businesses within a company and normally develop and sell products directly to customers. Horizontal units are not responsible for developing and selling products, but provide services to other horizontal and vertical units within the company. b. The accounting and legal departments are horizontal units within a company. c. A consumer products division would be considered a vertical unit within a company. 3. Direct materials cost 4. Prime costs are the combination of direct materials and direct labor costs, while conversion costs are the combination of direct labor costs and factory overhead costs. 5. Product costs are composed of three elements of manufacturing costs: direct materials cost, direct labor cost, and factory overhead cost. These costs are treated as assets until the product is sold. Period costs consist of selling and administrative expenses that are used in generating revenue during the current period. They are recognized as expenses on the current period’s income statement. 6. The three inventory accounts for a manufacturing business are as follows: a. Finished goods inventory consists of completed (or finished) products that have not been sold. b. Work in process inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed. c. Materials inventory consists of the costs of the direct and indirect materials that have not entered the manufacturing process. 7. Materials, work-in-process, and finished goods 8. The cost of finished goods and the cost of work in process includes the following: a. Direct materials—the costs of materials that enter directly into the finished product. b. Direct labor—the wages of factory workers who convert materials into a finished product. c. Factory overhead—the costs, other than direct materials and direct labor, that are incurred in the manufacturing process. 9. The manufacturing costs incurred during a period include direct materials used in production plus the direct labor and factory overhead costs incurred during the period. The cost of goods manufactured for a period is computed by adjusting the manufacturing costs incurred during the period for the effects of beginning and ending work in process. Beginning work in process inventory is added and ending work in process is subtracted from the manufacturing costs incurred during a period to arrive at the cost of goods manufactured for the period. 10. A retail business purchases merchandise (products) in a finished state for resale to customers. The cost of product sold is called cost of goods sold. A manufacturer makes the product it sells using direct materials, direct labor, and factory overhead, which make up the cost of goods manufactured included in the “Cost of goods sold” section of the income statement.