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3 A Managerial Accounting Project Table of Contents NATURE OF THE GATSBY MANAGERIAL ACCOUNTING PROJECT....1 PREPARATION...1 INTRODUCTION OBJECTIVES BENEFITS OF STUDYING SOURCE DOCUMENTS... 2 USE OF TECHNOLOGY... 3 MATERIALS AND DOCUMENTS... 3 SUGGESTIONS FOR EFFICIENCY... 4 GATSBY S ACCOUNTING SYSTEM AND POLICIES BUSINESS OVERVIEW PERSONNEL STRUCTURE AND RESPONSIBILITIES MANUFACTURING PROCESS ACCOUNTING PROCESSES AND SOURCE DOCUMENTS....7 COSTS AND SELLING PRICES INVENTORY PROCEDURES PAYROLL...11 OVERHEAD EQUIPMENT AND BUILDING CUSTOMERS AND VENDORS JOURNALS, LEDGERS, AND JOB COST SHEETS CALENDAR MONTH AND YEAR-END PROCEDURES SYSTEMS FLOWCHARTS ASSIGNMENTS 1 THROUGH 6 (with Excel Option Instructions) BOOKS GENERAL JOURNAL GENERAL LEDGER T-ACCOUNTS NOTES i
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5 Nature of the Gatsby Managerial Accounting Project NATURE OF THE GATSBY MANAGERIAL ACCOUNTING PROJECT This project is an integrative case that provides hands-on exposure to a simplified job costing system for GATSBY MANUFACTURING INC., a designer jean manufacturing company. These active-learning assignments demonstrate the flow of managerial accounting information and reinforce your understanding of managerial accounting concepts. You are provided with source documents for a small number of transactions for the company that occur during the period December 1 through December 31, You will assume the role of the management accountant and complete various documents, record transactions in job cost records, and reconcile the inventory and overhead control accounts before preparing an updated balance sheet and income statement at year-end. In one of the six assignments, you will record transactions in the General Journal and post them in the corresponding general ledger and subsidiary and control accounts. In other assignments, you will build on this information to address what if managerial questions about variable costing, alternative overhead drivers, and budgeting for operations and capital expenditures. Your instructor may assign any or all of these assignments. PREPARATION The following will familiarize you with the overall project, simplifying your effort and insuring a better solution. 1. Read the Introduction and Accounting System and Policies sections carefully so you are familiar with Gatsby s products, processes, and accounting information system. Go to each of the websites noted in the footnotes to better understand the industry context in which this company operates. 2. Look over the Source Documents and scan the Transactions List provided in the Documents Folder for the month of December Read over the Core Concept Reviews, which are inserted within the assignments as a quick review of concepts that are more fully developed in a principles of management accounting textbook. 4. Preview the requirements, questions, and problems for each assignment. 5. Review your instructor s directions about which Assignments are done manually and/or in Microsoft Excel. IN ORDER TO SUCCESSFULLY ACCESS THE ECEL SPREADSHEETS AND ONLINE HOMEWORK REQUIRED FOR THIS PROJECT, YOU WILL NEED TO CAREFULLY READ AND APPLY THE STEPS DESCRIBED BELOW AND DETAILED IN THE E-MATERIALS PROVIDED ON THE ARMOND DALTON RESOURCES WEBSITE. u Go to and click on E-Materials. u u Use the E-materials drop-down menu and select Gatsby Manufacturing. Follow the instructions in the E-materials to register on the Armond Dalton Resources website and download the Gatsby Manufacturing Excel spreadsheets. 1
6 INTRODUCTION Introduction OBJECTIVES If you carefully complete the job costing system procedures for GATSBY MANUFACTURING INC., you will become more knowledgeable about several aspects of managerial accounting and how documents and transactions flow through an accounting and manufacturing system. This knowledge will aid you in the study of managerial accounting, cost accounting, and financial accounting. The project supplements the work in your managerial accounting course. Completing the requirements for GATSBY MANUFACTURING INC. assignments will reinforce the concepts you are studying in class. You will play the role of the managerial accountant providing data to decision makers. Learning Objectives: Upon completion of these assignments, you will be able to: 1. Reconcile manufacturing-related inventory accounts with job cost sheets, and trace transactions through source documents to job cost sheets. 2. Record cost accounting information into the General Journal and General Ledger. 3. Prepare financial statements for a manufacturing company at the end of a year. 4. Contrast different costing approaches related to overhead and overhead drivers for multi-product companies. 5. Prepare a master budget for a manufacturing company with two divisions and analyze variances. 6. Evaluate a capital budgeting decision made by managers. BENEFITS OF STUDYING SOURCE DOCUMENTS Completing this hands-on project will help you: visualize sources of information about transactions in which a manufacturing company is engaged, understand how all the parts of a cost accounting information system fit together, and create a job cost system to effectively and efficiently analyze performance. Learning by doing assignments, in which students physically trace source documents through the accounting system, provide an opportunity to see the risk of errors at each step along the way. This awareness will help students to understand why managerial accountants build internal controls into the accounting system, minimizing these risks. Reducing errors results in more reliable information, leading managers to make better data-driven business decisions. 2
7 Gatsby s Accounting System and Policies Gatsby pays its vendors each month. Given those assumptions, there is no need for subsidiary ledgers for accounts receivable or accounts payable. CALENDAR GATSBY MANUFACTURING INC. has a calendar year-end. Information for the first 11 months of the year is captured on the adjusted trial balance as of November 30, Transactions are provided for the month of December On December 31, 2019, adjusting journal entries are recorded for the month of December and for any under- or over-allocated manufacturing overhead at year-end. A master budget is prepared for the upcoming calendar year The table below illustrates three time periods that relate to assignments in this project. January through November 2019 December 2019 January through December 2020 MONTH AND YEAR-END PROCEDURES At the end of each month, overhead is accrued for various manufacturing-related expenses, other than indirect labor, in the amount of $15,000. Depreciation expense on the equipment and building is recorded based on the information provided earlier in the Equipment and Building section. Financial statements are prepared as of the end of each month, but the temporary operating accounts are not closed out until the end of the calendar year. There will be an adjusted trial balance at the end of each month that reports all revenues and costs and expenses for the year up to that date. At the end of the year, GATSBY MANUFACTURING INC. closes out its temporary accounts to retained earnings in order to start the next accounting period with a zero balance in the revenue and expense accounts. Year-end procedures include determining over- or underapplied manufacturing overhead and adjusting the Cost of Goods Sold for the entire difference. SYSTEMS FLOWCHARTS This graphic shows where product costs and period expenses occur within the building s floor plan. The building is about 10,000 square feet. The administrative offices and lobby represent 25% of the square footage. The other 75% relates to the production facility (or factory floor). Shipping Dock Design Area Cutting Area Sewing Area Factory Floor Finishing Area Storeroom Lobby Administrative offices Suppliers 13
8 Assignment 1 CORE CONCEPT REVIEW Job-Order Costing Determining which costs to assign to a cost object is crucial for any business, whether a service organization, a manufacturer, or a retailer. A cost object can be a product line, a process, a customer, or any other object of interest to managers. Information related to manufacturing products is collected by using one of two costing systems: process or job-order. If a product is manufactured in large batches and all the output is identical (e.g., barrels of oil, gallons of milk, bushels of wheat), then process costing, which aggregates costs by stages in the manufacturing process, is most likely used. If a product is unique in character and distinguishable for each job, then job-order costing is most effective. Examples of a job-order costing environment are custom homes, medical services, textbooks, movie production, and custom clothing. A jeans company like Levi Strauss would likely use job-order costing in which one job could be all ladies size 8 boot cut jeans. The company may produce thousands of these, but this job is different than ladies size 10 straight leg jeans, or men s size 34 stone-washed jeans. Costs are then matched to the revenues generated from the client to determine if a profit or loss results. Alternatively, jobs can be tied to customers. CORE CONCEPT REVIEW Product and Period Costs Costs are categorized into product costs and period costs. The three components of a product s cost are 1) raw materials that are requisitioned from the warehouse by the factory manager (and from then on are called direct materials as they can be directly traced to jobs), 2) direct labor, which is the cost of employees working directly with the production process, and 3) manufacturing overhead, which are those indirect costs that are critical to manufacturing the product but not easily traced to it, such as factory equipment costs, factory supervisor salaries, factory building occupancy costs, and indirect supplies. If some of these product costs have been added to a job but the job is not yet completed, they comprise work-in-process inventory at the end of the period. Jobs that are completed are moved from work-in-process inventory to finished goods inventory. Raw materials, work-inprocess, and finished goods are all inventory control accounts in the General Ledger. Job cost sheets serve as a subsidiary ledger to support the control accounts of work-in-process, finished goods inventory, and cost of goods sold. Accountants reconcile control accounts at the end of an accounting period to be certain that the subsidiary accounts and control accounts match. Product costs are deferred on the balance sheet as inventory until sold, at which point these costs are reflected on the income statement as cost of goods sold and matched with sales. Period costs are selling and general and administrative (G&A) expenses that are charged off to the period in which they are incurred. Examples of period costs include depreciation, interest, and bad debt expense. 18
9 Assignment 3 CORE CONCEPT REVIEW Financial Statements Generally accepted accounting principles (GAAP) require businesses to prepare an income statement that reports on the results of operations for a period of time, a balance sheet reporting on the balances in all permanent accounts as of a point in time, and a statement of cash flows for that period. The accrual basis of accounting is GAAP. Managers are often most interested in the monthly or annual income statement, which is a performance report showing the results of operations for that day, month, quarter, or year. GAAP requires that this statement be prepared using the absorption costing method showing product costs distinguished from period expenses. The income statement is presented with operating expenses distinguished from nonoperating expenses (e.g., interest, taxes, and gains/ losses on the sale of capital assets). A column could be added to the right of the income statement numbers to show what percentage each element is of Sales (which is considered 100%). For example, gross profit as a percentage of sales is a useful ratio. A balance sheet presents the balances in the permanent accounts (i.e., assets, liabilities, and equity) as of the end of the accounting period. Assets and liabilities are often displayed as current or noncurrent depending on whether they are expected to be collected or paid in cash within the next 12 months. The retained earnings account in the equity section of the balance sheet includes the profit or loss from that accounting period; therefore, the income statement has to be completed before the balance sheet. A simplified format for the balance sheet and income statement is presented below. Good form includes right justifying all numbers, using a single underline for subtotals and a double underline under any grand totals, and a dollar sign at the top of a column of numbers and at each grand total. Balance Sheet as of 12/31/2019 Assets: Cash Inventory Equipment Total Assets Liabilities: Accounts payable Notes payable Total liabilities Owners Equity: Common stock Retained earnings Total equity Total Liabilities & Equity $ $ Income Statement for the year ended 12/31/2019 Revenues $ Less: Cost of goods sold Gross Margin Less: Operating expenses Net operating income (NOI) +/- Nonoperating items Net Income $ $ 35
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11 Assignment 3 ASSIGNMENT 3 QUESTIONS Enter answers on the Armond Dalton Resources website ( Q-3-1. What is the total dollar amount of debits in the adjusted trial balance as of December 31, 2019 (which should agree with the total dollar amount of credits)? Q-3-2. What is the net income for the calendar year 2019? Q-3-3. What is gross profit as a percent of sales? Q-3-4. What are operating expenses as a percent of sales? Q-3-5. Which jobs are included in Cost of Goods Sold for the year? (Check all that apply.) #220 #221 #222 #223 #225 Q-3-6. Which jobs are included in ending Work-in-Process Inventory? (Check all that apply.) #220 #222 #223 #224 #225 Q-3-7. What are the total current assets as of December 31, 2019? Q-3-8. What is the amount of retained earnings as of December 31, 2019, after all closing journal entries are made? Assignment 3 Questions 37
12 Q-5-6. Assignment 5 Gatsby pays its accounts payable within 30 days, and all of its customers pay in full for their orders when received. All of the following statements are true given this cash flow pattern except: 1. Gatsby will not find it difficult to complete a cash budget. 2. Estimating the monthly pattern of collections on accounts receivable is critical. 3. Gatsby has sufficient cash on hand to make payroll payments to employees. 4. Gatsby s purchasing agent will not likely be persuaded by special financing arrangements offered by raw material suppliers. 5. Gatsby s customers would like to be rewarded for timely payment of sales invoices. Q-5-7. If Gatsby had an unusual turnover of sewing employees without adequate time to train replacement staff, then at the end of the year the company is likely to have a(n): 1. Unfavorable direct labor efficiency variance. 2. Favorable variable overhead rate variance. 3. Unfavorable direct materials quantity variance. 4. Unfavorable fixed overhead volume variance. 5. Favorable direct labor rate variance. Q-5-8. Gatsby is evaluating whether it may have a skilled labor constraint; that is, not enough skilled labor to handle all of the production for two product lines. All of the following are considerations of the product mix to be produced except: 1. Which products offer the highest contribution margin per unit of the constraint? 2. Does a skilled labor constraint affect the amount of units of each product line that can be sold to the same degree? 3. Which product has the most sunk investment costs? 4. Would emphasizing one product over another affect fixed costs? 5. Will the product mix ratio remain the same? Q-5-9. If Gatsby wants to ensure that it can start each month with sufficient denim on hand to make its products, then it should: (Check all that apply.) Set a management policy for the desired amount of ending raw materials inventory. Purchase more raw materials than needed for the actual production for the year. Consider any beginning raw materials inventory at the first of the year. Require that its suppliers relocate to be close to its production facility. 58 Assignment 5 Questions
13 Assignment 6 ASSIGNMENT 6 Evaluate a capital budgeting decision Learning Objectives: At the end of this assignment you will be able to determine if management should accept a proposal to make a long-term investment in new equipment that will allow expansion to another product line. ADDITIONAL INFORMATION The robotic machine that is required to produce children s denim chairs that are later personalized with their name is expected to cost $1,100,000 and have a seven-year life. Core Concept Reviews In year four it will be necessary to overhaul * Time Value of Money the electronics that go into the robotic arms * Capital Budgeting Techniques at a cost of $95,000. After the overhaul is completed, the machine is expected to run another three years. GATSBY MANUFACTURING INC. is considering this investment but would like a return of 6% annually. It is expected that the equipment could be sold at the end of its seven-year life for $30,000, the estimated value of its recycled component parts. Annual cash inflows for the new product are expected to be $240,000. Annual depreciation on the new equipment is calculated using the straight-line method. REQUIREMENTS 1. Review the additional information provided for Assignments 4, 5, and 6 on page Complete this table of the cash inflows and cash outflows related to this investment opportunity. In the When column indicate either today, years 1 through for an annuity of years, or a specific number representing the year in which that cash inflow or outflow will occur. Cash Flow Amount When YR1 YR2 YR3 YR4 YR5 YR6 YR7 Initial investment Annual cash inflows Overhaul cost Salvage value 63
14 GENERAL JOURNAL Date Acct # Account Name Posted to G/L 4 Job Debit Credit 72 Books General Journal
15 GENERAL LEDGER Designed WAGES by PAYABLE Regina Rexrode Copyright - Armond Dalton Date Reference Debit Credit Debit Balance 11/30/19 Balance Forward 268, PAYROLL TAES PAYABLE Date Reference Debit Credit Credit Balance 11/30/19 Balance Forward 40, NOTE PAYABLE FIRST BANK Date Reference Debit Credit Debit Balance 11/30/19 Balance Forward 470,500 Books General Ledger 81