Ch 10

Front 1

What are some differences between financial and managerial accounting?

Back 1

1. Financial accounting deals with regulated, historical, financial information that pertains to the whole company and is designed primarily to meet the information needs of outsiders. Managerial accounting is concerned with unregulated financial, economic as well as physical data, which pertains more to the sub-units of the organization, that is current and future oriented, and that is designed primarily to meet the information needs of insiders.

Front 2

What does the value-added principle mean as it applies to managerial accounting infomration? Give an example of vaule-added information that may be included in managerial accounting reports but is not shown in publicly reported financial statements.

Back 2

2. The value-added principle means that management accountants are free to engage in any information gathering and reporting activity so long as the activity adds value in excess of its cost. Estimates of future product costs are permissible in managerial accounting reports for budgeting and product costing but would not be allowed by financial regulations in financial accounting.

Front 3

How does product costign used in financial accounting differe from product costing used in managerial accounting?

Back 3

3. Both financial and managerial accountants need cost information about the company’s products and services. In managerial accounting, cost information is useful in product pricing decisions and is an essential part of cost control (comparing actual product cost to budgeted product cost to assess needed improvement) and performance evaluation (assess managers’ success in controlling and eliminating unnecessary costs). In financial accounting, cost information about the product is needed to determine ending inventory on the balance sheet and cost of goods sold on the income statement. Product costing in financial accounting can impact the decisions of not only managers but also outsiders such as investors, creditors, and taxing authorities. Product costing information in managerial accounting can affect the product’s price as well as management’s decisions as to whether cost correction changes are needed.

Front 4

What does the statement "costs can be assets or expenses" mean?

Back 4

4. A cost that has the future economic potential to increase assets is recorded as an asset (e.g. product cost of products purchased). A cost that is used in the process of earning revenue is recorded as an expense (e.g. administrative salaries, and product cost associated with products sold).

Front 5

Why are the salaries of production workers accumulated in an inventory account instead of being directly expensed on the income statement?

Back 5

5. The cash paid to production workers is not used to produce revenue but to produce inventory. The revenue is earned when the inventory is sold at which time the cost of salaries associated with those products sold should be expensed.

Front 6

How do product costs affect the financial statements? How does the classicfation of product cost( as an asset vs> an expense) affect net income?

Back 6

6. Product costs associated with goods that have not been sold are recorded in the account called inventory. Inventory cost is shown on the balance sheet as an asset. The amount of total assets and net income will be higher if a product cost is classified as an asset. Product cost associated with goods that have been sold should be recorded in the account called cost of goods sold. Cost of goods sold is an expense shown on the income statement. The amount of total assets and net income will be lower if a product cost is classified as an expense as opposed to being classified as an asset.

Front 7

What is an indirect cost? Provide examples of product costs that would be classified as indirect.

Back 7

7. An indirect product cost is a cost that cannot be easily or economically traced to a specific product. Product costs that would be considered indirect include costs such as production supplies, salaries of production supervisors, and depreciation, rent, and utilities on factory facilities.

Front 8

How does a product cost differ from a general, selling, and administrative cost? Give examples of each.

Back 8

8. Product costs are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and are generally expensed in the period in which the associated economic sacrifices are made. A product cost would be the cost of direct materials used in the production of a product. A period cost would be rent on administrative facilities.

Front 9

Why is cost classification important to managers?

Back 9

The effects of cost classification on the financial statements can have important implications for managers with respect to the following:

(1) Availability of financing - Investors and creditors use financial statement data to predict businesses’ future earnings. Favorable financial statements provide evidence of favorable future performance whereas unfavorable financial statements are an indication of possible poor future financial performance. A company with favorable financial performance is more likely to generate sufficient cash flows to make interest payments, to repay the principal balance of its liabilities, and to pay dividends. Hence, investors and creditors believe they have a greater probability of receiving interest payments, the return of principal, and return on investment when companies show favorable financial statements. Since expenses reduce profit and financial performance, classifying a cost as an expense will inhibit the company’s ability to obtain financing. Classifying a cost as an asset, which will increase profit, total assets, and equity, enhances businesses’ ability to obtain financing.

(2) Management motivation - Executive compensation may be affected by financial statement data. Many managers’ bonuses are based on a percentage of net income. If costs are classified as expenses, net income will be reduced which in turn affects managerial income. Managers may even be tempted to misclassify costs in order to manipulate financial statement data to their advantage.

(3) Income tax considerations - With respect to taxes, managers prefer to classify costs as expenses rather than assets. Classifying a cost as an expense reduces net income and in turn reduces income taxes, which are determined by taking a designated percentage of taxable income.

Front 10

What is cost allocation? Give an example of a cost that needs to be allocated.

Back 10

10. Cost allocation is the process of dividing a total cost into parts and assigning the parts to relevant cost objects. A production manager is usually in charge of the manufacturing operation of multiple products. The manager’s salary needs to be allocated among the products for the computation of product costs.

Front 11

What are some of the common ethical conflicts that accountants encounter?

Back 11

Some of the more common ethical conflicts encountered by accountants include the following:
(1) Pressure to perform duties for which they are not competently trained.
(2) Pressure to disclose confidential information.
(3) Pressure to engage in falsification, embezzlement, and bribery.
(4) Pressure to issue misleading or incomplete reports.

Front 12

What costs should be considered in determining the sales price of a produtct?

Back 12

12. A pricing decision must include all costs associated with the product. The manufacturing product cost as well as all upstream costs (costs that occur before the manufacturing process begins, e.g., research and development costs) and downstream costs (costs that are incurred after the manufacturing process, e.g., sales commissions) must be covered by the product’s revenues in order for the company to be profitable.

Front 13

What is a just-in-time inventory system? Name some inventory costs that can be eliminated or reduced by its use.

Back 13

13. JIT inventory system is a reengineering principle where inventory is made available for customer consumption at the time of customer demand. A JIT inventory system is designed to eliminate the storage of large amounts of inventory. By eliminating the storage of inventory, costs related to inventory such as financing, warehouse space, security and maintenance, theft, damage and obsolescence can be reduced or eliminated.

Front 14

What are the two dimensions of a total quality management program? Why is TQM being used in business practice?

Back 14

14. The two dimensions of the TQM program are: (1) management should follow a continuous, systematic problem solving philosophy that engages all employees to eliminate waste and errors and to simplify the design and delivery of products and services to customers, and (2) organizations need a strong commitment to customer satisfaction. TQM is being used in business to maintain profitability in an increasingly competitive global market. In this environment profit margins are tight and therefore inefficiencies can more easily erode business profits. To eliminate waste, errors, and customer dissatisfaction, information must be timely and relevant in order to prevent or discover and correct mistakes immediately.

Front 15

What does the term reegineering mean? Name some reengineering practices.

Back 15

15. Reengineering is the term used to explain companies’ responses to world-wide companies by changing production and delivery systems so as to eliminate waste, reduce errors, and minimize costs. Some of the best practices used by world-class competitors include activity-based management, value-added activities, and just-in-time inventory acquisition.

Front 16

How has the Institute of Managerment Accountants responded to the need for high standards of ethical conduct in the accounting profession?

Back 16

16. In recognition of its responsibility to uphold high ethical standards of conduct, the Institute of Management Accountants issued a Statement of Ethical Professional Practice for Management Accountants. The statement sets forth professional ethical standards covering the areas of competence, confidentiality, integrity, and credibility that management accountants are required to abide by in order to maintain their professional and personal integrity.

Front 17

What does the term activity-based management mean?

Back 17

17. Activity-based management assesses the value chain of an organization’s business operations to create new or refine existing value-added activities and to eliminate or reduce nonvalue-added activities.

Front 18

What is a value chain?

Back 18

18. A value chain is the sequence of activities through which an organization provides products to its customers.

Front 19

What do the terms value-added activity and nonvalue-added activity mean? Provide an example of each

Back 19

A value-added activity is any unit of work that contributes to a product’s ability to satisfy customer needs. Value-added activities include the following:
(1) Input activities - research and development, product design, and hiring and training.
(2) Processing activities - assembly, inspection, and storing.
(3) Output activities - marketing, distribution, and customer relations.
(4) Administrative activities - accounting and legal services, personnel management, and public relations.


Nonvalue-added activities are tasks undertaken that do not contribute to a product’s ability to satisfy customer needs. Examples would include the following:
(1) Maintaining excess quantities of inventories.
(2) Transporting materials and products.
(3) Machine set-ups.