Shukrullah Assignment No 2

Managerial Accounting and Cost Concepts
Assignment No 2
Name: shukrullah
BBA III
Group G
2–1: Describe the three major activities of a manager?

Managers carry out three major activities in an organization: planning, directing and motivating, and
controlling. Planning involves establishing a basic strategy, selecting a course of action, and specifying
how the action will be implemented. Directing and motivating involves mobilizing people to carry out
plans and run routine operations. Controlling involves ensuring that the plan is actually carried out and
is appropriately modified as circumstances change.
2–2 What are the four steps in the planning and control cycle?
The planning and control cycle involves formulating plans, implementing plans, measuring performance,
and evaluating differences between planned and actual performance.
2–3 What are the major differences between financial and managerial accounting?
In contrast to financial accounting, managerial accounting: (1) focuses on the needs of managers rather
than outsiders; (2) emphasizes decisions affecting the future rather than the financial consequences of
past actions; (3) emphasizes relevance rather than objectivity and verifiability; (4) emphasizes timeliness
rather than precision; (5) emphasizes the segments of an organization rather than summary data
concerning the entire organization; (6) is not governed by GAAP; and (7) is not mandatory.
2–4 What are the three major elements of product costs in a manufacturing company?
The three major elements of product costs in a manufacturing company are direct materials, direct
labor, and manufacturing overhead.
2–5 Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect
labor, and (e) manufacturing overhead?
 Direct materials are an integral part of a finished product and their costs can be conveniently traced
to it.
 Indirect materials are generally small items of material such as glue and nails. They may be an
integral part of a finished product but their costs can be traced to the product only at great cost or
inconvenience.
 Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is
also called “touch labor.
 Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other
factory workers that cannot be conveniently traced to particular products. These labor costs are
incurred to support production, but the workers involved do not directly work on the product.
 Manufacturing overhead includes all manufacturing costs except direct materials and direct labor.
Consequently, manufacturing overhead includes indirect materials and indirect labor as well as
other manufacturing costs.
2–6 Explain the difference between a product cost and a period cost?
 A product cost is any cost involved in purchasing or manufacturing goods. In the case of
manufactured goods, these costs consist of direct materials, direct labor, and manufacturing
overhead.
 A period cost is a cost that is taken directly to the income statement as an expense in the period
in which it is incurred.
2–7 Describe how the income statement of a manufacturing company differs from the income
statement of a merchandising company?
2-7The income statement of a manufacturing company differs from the income statement of a
merchandising company in the cost of goods sold section. A merchandising company sells finished goods
that it has purchased from a supplier. These goods are listed as “purchases” in the cost of goods sold
section. Because a manufacturing company produces its goods rather than buying them from a supplier,
it lists “cost of goods manufactured” in place of “purchases.” Also, the manufacturing company
identifies its inventory in this section as Finished Goods inventory, rather than as Merchandise
Inventory.
2–8 Describe the schedule of cost of goods manufactured. How does it tie into the income statement?
The schedule of cost of goods manufactured lists the manufacturing costs that have been incurred
during the period. These costs are organized under the three categories of direct materials, direct labor,
and manufacturing overhead. The total costs incurred are adjusted for any change in the Work in
Process inventory to determine the cost of goods manufactured (i.e. finished) during the period. The
schedule of cost of goods manufactured ties into the income statement through the cost of goods sold
section. The cost of goods manufactured is added to the beginning Finished Goods inventory to
determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the
Purchases account in a merchandising firm.
2–9 Describe how the inventory accounts of a manufacturing company differ from the inventory
account of a merchandising company?
A manufacturing company usually has three inventory accounts: Raw Materials, Work in Process, and
Finished Goods. A merchandising company may have a single inventory account—Merchandise
Inventory.
2–10: Why are product costs sometimes called inventor able costs? Describe the flow of such
costs in a manufacturing company from the point of incurrence until they finally become
expenses on the income statement?
Product costs are assigned to units as they are processed and hence are included in inventories. The
flow is from direct materials, direct labor, and manufacturing overhead to Work in Process inventory. As
goods are completed, their cost is removed from Work in Process inventory and transferred to Finished
Goods inventory. As goods are sold, their cost is removed from Finished Goods inventory and
transferred to Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement.
2–11: Is it possible for costs such as salaries or depreciation to end up as assets on the balance
sheet? Explain.
Yes, costs such as salaries and depreciation can end up as part of assets on the balance sheet if they are
manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold.
Thus, if some units are still in inventory, such costs may be part of either Work in Process inventory or
Finished Goods inventory at the end of the period.
2–12 “The variable cost per unit varies with output, whereas the fixed cost per unit is constant.”
Do you agree? Explain.
No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity.
The variable cost per unit is constant. A fixed cost is fixed in total, but the average cost per unit changes
with the level of activity.
2–13 Define the following terms: differential cost, opportunity cost, and sunk cost?
 A differential cost is a cost that differs between alternatives in a decision.

 An opportunity cost is the potential benefit that is given up when one alternative is selected
over another.
 A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken
now or in the future.
2–14 Only variable costs can be differential costs. Do you agree? Explain.
No, differential costs can be either variable or fixed. For example, the alternatives might consist of
purchasing one machine rather than another to make a product. The difference between the fixed costs
of purchasing the two machines is a differential cost.

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Managerial Accounting and Cost Concepts

2–1: Describe the three major activities of a manager?

 A differential cost is a cost that differs between alternatives in a decision.

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