The Entry To Record The Acquisition Of Raw Materials ✓ Solved

The Entry To Record The Acquisition Of Raw Materials On Account Is

The assignment involves understanding the correct journal entry to record the acquisition of raw materials purchased on account, as well as questions related to budgeting, cost systems, and retained earnings calculations. The core task is to identify the proper accounting entry for acquiring raw materials on credit, interpret the sequence of steps in developing a master budget, analyze vertical analyses for sales revenue, compute activity-based overhead rates, distinguish differences between job order and process cost systems, and perform retained earnings calculations based on given financial data.

Specifically, the primary focus is on the journal entry used to record raw materials bought on credit, which involves debiting the Raw Materials Inventory account and crediting the Accounts Payable account. Additional questions explore the proper sequence in creating budgets, the basis for vertical analysis, and the formula for overhead rates. Moreover, comparisons between different cost accounting systems and the calculation of retained earnings based on various financial transactions are key components of this assignment.

Sample Paper For Above instruction

Introduction

Accounting for raw materials and budgeting processes are foundational elements in managerial and financial accounting. Proper journal entries ensure accurate financial reporting, while understanding budget development and cost systems enables better managerial decision-making. Additionally, accurate retained earnings calculations are essential for assessing a company’s financial health over time. This paper explores these topics, emphasizing journal entries for raw materials, master budget development, vertical analysis bases, activity-based costing, cost system distinctions, and retained earnings computations.

Journal Entry for Acquisition of Raw Materials on Account

The acquisition of raw materials on account is a common transaction within manufacturing and inventory management. When raw materials are purchased on credit, the company records an increase in raw materials inventory and a liability in accounts payable. The correct journal entry is to debit the Raw Materials Inventory account and credit the Accounts Payable account, reflecting that the company now owns the raw materials but owes payment to the supplier. The entry is represented as follows:

Debit: Raw Materials Inventory

Credit: Accounts Payable

This entry aligns with accrual accounting principles, which recognize expenses and liabilities when incurred, regardless of payment timing. The other options, involving manufacturing overhead or work in process inventory, pertain to different stages of the manufacturing and costing processes and are not applicable at the purchase stage of raw materials.

Developing a Master Budget

The master budget is a comprehensive financial plan that consolidates various individual budgets, such as sales, production, and cash budgets. The last step in developing a master budget is preparing the budgeted income statement. This step provides a summary of projected revenues, expenses, and net income, culminating the budgeting process by translating all other budgets into projected profitability.

Other steps include preparing the budgeted balance sheet, which shows projected assets, liabilities, and equity; developing the cost of goods manufactured budget, which details production costs; and preparing the cash budget, which forecasts cash inflows and outflows.

Vertical Analysis of Sales Revenue

Vertical analysis involves expressing financial statement items as percentages of a base figure to facilitate comparison across periods or companies. In an income statement, the base for sales revenue is net sales because it provides a consistent basis for analyzing the proportion of other expenses and income relative to total sales. Therefore, when performing vertical analysis, the sales revenue figure used as the base is net sales, providing insight into how costs and other items relate to overall sales.

Calculating Activity-Based Overhead Rate

Activity-based costing (ABC) assigns overhead costs more accurately by identifying cost drivers and allocating costs based on actual resource consumption. The activity-based overhead rate is computed by dividing estimated overhead by estimated use of the relevant cost drivers. This method ensures better matching of overhead costs to the activities that generate them, resulting in more precise product costing.

Differences Between Job Order and Process Cost Systems

A key difference between job order and process cost systems lies in the flow of costs, the point where costs are totaled, unit cost computations, and the documents used. Most notably, the flow of costs varies: job order costing assigns costs to specific jobs, while process costing accumulates costs by process or department. The point at which costs are totaled also differs: in job costing, costs are tracked per job, whereas, in process costing, they are accumulated over a production process. The documents used, such as job cost sheets versus process cost reports, also distinguish the systems.

Retained Earnings Calculations

Retained earnings represent cumulative net income minus dividends paid over time. To compute the ending retained earnings, starting with the beginning balance, adding net income, and subtracting dividends is necessary. For Baxter Inc., the calculation considers the initial retained earnings, revenues, expenses, dividends, and the resulting net income or loss during the period. Similarly, Henson Company’s ending retained earnings are derived by applying the same method, reflecting the company's profitability and dividend policy during the year.

Conclusion

Understanding the correct journal entries for inventory transactions, the sequence of budgeting steps, the basis for vertical analysis, the computation of activity-based rates, differences in cost systems, and the calculation of retained earnings are integral to effective financial management and reporting. Mastery of these concepts not only ensures compliance with accounting standards but also enhances managerial decision-making capabilities, supporting the long-term success of organizations in competitive markets.

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