Read Problem 10, 21, And Discuss Differentiation

Read Problem 10 21 And Discuss The Differentiation Between Product Ver

Read Problem 10-21 and discuss the differentiation between product versus general, selling, and administrative costs by setting up financial statements from the transactions in the problem. The following transactions pertain to 2012, the first year operations of Hall Company. All inventory was started and completed during 2012. Assume that all transactions are cash transactions:

• Acquired $4,000 cash by issuing common stock.
• Paid $720 for materials used to produce inventory.
• Paid $1,800 to production workers.
• Paid $540 rental fee for production equipment.
• Paid $180 to administrative employees.
• Paid $144 rental fee for administrative office equipment.
• Produced 300 units of inventory of which 200 units were sold at a price of $12 each.

Required: Prepare an income statement, balance sheet, and statement of cash flows based on these transactions. Complete exercises including 10-1, 10-3, 10-6, 11-1, 11-6, and 11-15 from Chapters 10 & 11. These answers will be posted for self-assessment. The assignment is graded for completion. Ensure accuracy and understanding of concepts.

Paper For Above instruction

In managerial accounting, understanding the differentiation between product, period, and various costs is crucial for accurate financial analysis and decision-making. The problem of Hall Company provides a practical illustration of how costs are classified and presented within financial statements, particularly emphasizing the distinctions between product costs and selling, general, and administrative (G&A) costs.

Firstly, product costs include all costs directly related to the manufacturing of goods. For Hall Company, these comprise the materials used ($720), wages paid to production workers ($1,800), and the rental fee for production equipment ($540). These costs are capitalized as inventory until the products are sold, at which point they transfer to the cost of goods sold (COGS) on the income statement. The total product costs for the period, therefore, are the sum of direct materials, direct labor, and manufacturing overhead—here, the equipment rental.

Conversely, selling, general, and administrative costs are associated with selling the products and managing the business. Administrative employees’ wages ($180) and rental fees for administrative office equipment ($144) fall under G&A costs. These are not directly traceable to specific products and are expensed in the period incurred, affecting the net income but not the inventory valuation.

Setting up the financial statements involves aggregating these costs accordingly. The income statement begins with sales revenue from the sale of 200 units at $12 each, totaling $2,400. The cost of goods sold includes the product costs associated with these units—namely, the costs of materials, labor, and manufacturing overhead proportional to the goods sold. The gross profit is then calculated by subtracting COGS from sales. Selling and administrative expenses—$180 + $144—are deducted from gross profit to arrive at operating income.

The balance sheet reflects the end-of-period inventory, which includes unsold units (100 units). The inventory valuation comprises the proportionate product costs of those units remaining. The cash flow statement records operating activities, including cash paid for materials, wages, and rent, as well as cash inflow from stock issuance.

Understanding these classifications helps managers control costs, managers distinguish between fixed and variable expenses, and external stakeholders evaluate the company's profitability and efficiency.

Additionally, analyzing how these costs behave—whether fixed, variable, or mixed—enables better forecasting and strategic planning. For example, wages for production workers are typically variable, increasing with production volume, while rent for production equipment might be fixed. Recognizing these behaviors assists in establishing budgets, analyzing profit margins, and making operational decisions.

In academic and practical contexts, accurately classifying and accounting for costs ensures transparent, consistent financial reporting, which is foundational for effective managerial decision-making and adherence to accounting standards.

References

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