What are Indirect Materials?

Indirect materials are generally small items of material such as rivets, nails, and oil . They can be considered be an integral part of a finished product produced by the manufacturing company but their costs are difficult to trace and may be insignificant in the overall costs incurred to produce a product. Indirect materials are ordinarily classified as manufacturing overhead and can be applied to the product costs.

Links related to indirect materials and managerial accounting:

Calculate Manufacturing Overhead
Job Order Costing
Manufacturing Company Accounting

Perpetual Inventory System

When a merchandising company uses a Perpetual Inventory system, the inventory account balances are updated after each sale made by the company. This type of inventory system is much more complex and often employs the use of computer technology such as scanning cash registers, bar coded merchandise to update the inventory records after each sale.

The perpetual inventory system is more expensive and complex but it gives managers several main advantages:

1. A higher degree of control over inventory in the company's possession
2. Helps purchasing agents to order replacement merchandise in a more timely fashion
3. Detects and deters employee theft
   
4. Identifies other problems related to inventory quickly
   

Additional Accounting Tutorials and Accounting Examples:

What are Direct Materials?
What are Indirect Materials?
FIFO Method and Weighted Average Inventory Method
Perpetual Inventory System
Basic Equation for Inventory Accounts
Inventory Cost Flow Assumptions
Accounting Inventory Shrinkage Example Problem
Merchandising Accounting Journal Entry

Balance Sheet Assets Questions

Barnes Company had the following account balances at the end of their first year of operation on their balance sheet:

Revenues $ 43,000
Expenses 28,000
Dividends 2,000
Common stock 85,000
Total liabilities 54,000


What is the amount of their total assets?

$152,000

What Costs for Depreciation?

A manufacturing company incurred the following costs related to the purchase of an equipment on January 1, 2009:


Invoice cost, terms 1/10 n 30, fob shipping point $55,000

(Payment is made within discount period)

Shipping costs 1,000
Installation costs 1,500
First year utility costs 2,000

What cost should Bears use as a basis for depreciation?



Answer $57,000

Additional Links to Accounting Problems and Examples:

Accumulated Depreciation Balance Sheet
How to Calculate Net Income
Accounting Financial Statements
Credit Sales and Purchases Accounting Problems

What is a Transfer Price?

An accounting transfer price is the accounting cost used for the transfer of goods or services between segments or subsidiaries of the same organization or family of companies.

Some examples include two departments or divisions selling to each other. Transfer prices are needed for performance evaluation purposes and accounting records. The selling unit gets credit for the transfer price and the buying unit/department must deduct the transfer price as an expense of doing business.

Transfer prices in international can be regulated and manipulated to save money with international subsidiaries.

What is an Operating Segment?

An operating segment of business is any division or activity of an organization which it is necessary that a manager seeks cost, revenue, or profit data in individual accounting records

Examples of operating segments include departments, operations, sales territories, divisions, product lines, and sales departments

Activity Based Costing Method Differences

How is activity based costing different from traditional costing methods?

Activity-based costing differs from traditional costing systems in three main different ways:

1. In activity-based costing (ABC), non-manufacturing and manufacturing costs may be assigned to products produced by a firm.
   
2. Some manufacturing costs may be excluded from product costs using activity-based costing (ABC) that are included with traditional costing methods.
   
3. An activity-based costing (ABC) system will usually include a number of activity cost pools determined by the company, each of these cost pools has a unique measure of activity. These measures of activity can differ from the allocation bases that are normally used in traditional costing systems.
4. The activity rates are different from typical predetermined overhead rates because they should be based on activity at actual capacity rather than depending on a more inaccurate budgeted levels of activity.

Pledging Receivables as Loan Collateral

If a business decides to pledge its receivables as collateral for a loan and the loan remains outstanding at the end of the accounting period, the company is required to disclose this information in the notes accompanying its current financial statements.

It is required of the business because the company has pledged assets to cover a specific liability, therefore if the business dishonors its obligations to pay the loan, the creditor has legal rights to the amount of receivables identified in the assets pledged as collateral to cover the loan.

This type of financing must be disclosed to satisfy the full-disclosure principle which informs shareholders.

Variable Cost Examples

Here are some examples of variable costs and their cost drivers in different types of industry. It is important to note what the cost driver is and how it affects the expense.

Industry	Cost	Cost Driver
Manufacturing	Direct Materials	Number of units produced
Law Firm	Payroll	Number of hours
Airline	Fuel	Number of miles flow
Hotel	Housekeeping costs	Number of rooms occupied
Tire Factory	Rubber	Number of rubber used
Country Club	Food cost	Number of members

Straight-Line Depreciation Expense Example

Depreciation is the process of computing expense from allocating the cost of plant and equipment over their expected useful. Use the following example to calculate depreciation expense.

Straight-Line Depreciation Expense Method:

Straight-Line depreciation Expense = (Asset Cost- Salvage Value)/ Useful Life

Additional Links:

Accumulated Depreciation Balance Sheet
Depreciation of an Asset and Book Value

Four Types of Adjusting Entries

There are four main types of adjusting entries to be used in an accounting system.

Four types of adjusting entries:

1. converting liabilities to revenue
2. converting assets to expenses
3. accruing unpaid expenses
4. accruing uncollected revenues

Adjusting Journal Entry Note Receivable

If a company receives a 90-day, 6 percent note receivable from a client for the sale of a $10,000 computer. The sale occurred in the middle of September. If IBN’s accounting period ends on September 31, and they fail to make the appropriate adjusting entry related to the note receivable, then

A. Assets will be overstated and equity will be overstated.
B. Assets will be understated and equity will be unaffected.
C. Assets will be overstated and liabilities will be understated.
D. Assets will be understated and equity will be understated.

Answer D

Accounting Cycle

The series of accounting procedures in a specified period is known as the accounting cycle.

The following is a list of the steps to follow in the accounting cycle.

1. Start Accounting Cycle
2. Analyze Accounting Transactions
3. Post Accounting Transactions
4. Prepare unadjusted trial balance
5. Adjust
6. Prepare adjusted trial balance
7. Prepare financial statements
8. Close
9. Prepare post-closing trial balance
10. Repeat Accounting Cycle

The accounting cycle is the method accountants use to keep track of the financial situation of a company. The financial reports will be correct and accurate if the accounts have been analyzed correctly, events have been posted correctly and the accounting equation remains balanced.

Overall, the most important result of completing the accounting cycle is the production of financial statements.

Additional Accounting Examples and Explanations:

Information on the Accounting Cycle
What is a Trial Balance?
Common Trial Balance Errors

Ratio Analysis Financial Control

Using Ratio Analysis for Financial Control

• Liquidity ratios show financial managers how readily the firm’s assets can be converted to cash to pay liabilities.
  
• Debt ratios show the firm’s ability to pay long-term financial obligations such as bonds.
• Return ratios demonstrate how much return the firm is generating relative to the value of its book assets.
• Coverage ratios estimate the ability of the firm to pay the interest expenses on money it has borrowed from creditors
  
• Operating ratios demonstrate how efficient the operation of the firm is
  

Additional Accounting Examples and Explanations:

Calculate Invested Capital
Ratio Analysis and Financial Control

Calculate Gross Margin Financial Ratio

Expanded ROA Equation

Calculate Fixed Ass Turnover Ratio