Chapter 1-1. Chapter 1-2 CHAPTER 1 MANAGERIAL ACCOUNTING MANAGERIAL ACCOUNTING Managerial...

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Chapter 1-1

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Chapter Explain the distinguishing features of managerial accounting Identify the 3 broad functions of management Define the 3 classes of manufacturing costs Distinguish between product and period costs Explain the differences between a merchandising and a manufacturing income statement. Study Objectives

Transcript of Chapter 1-1. Chapter 1-2 CHAPTER 1 MANAGERIAL ACCOUNTING MANAGERIAL ACCOUNTING Managerial...

Page 1: Chapter 1-1. Chapter 1-2 CHAPTER 1 MANAGERIAL ACCOUNTING MANAGERIAL ACCOUNTING Managerial Accounting, Fourth Edition.

Chapter 1-1

Page 2: Chapter 1-1. Chapter 1-2 CHAPTER 1 MANAGERIAL ACCOUNTING MANAGERIAL ACCOUNTING Managerial Accounting, Fourth Edition.

Chapter 1-2

CHAPTER CHAPTER 11

MANAGERIAL MANAGERIAL ACCOUNTINGACCOUNTING

Managerial Accounting, Fourth Edition

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Chapter 1-3

1. Explain the distinguishing features of managerial accounting.

2. Identify the 3 broad functions of management.3. Define the 3 classes of manufacturing costs.4. Distinguish between product and period costs.5. Explain the differences between a

merchandising and a manufacturing income statement.

Study ObjectivesStudy Objectives

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Chapter 1-4

Study ObjectivesStudy Objectives

6. Indicate how cost of goods manufactured is determined.

7. Explain the difference between a merchandising and a manufacturing balance sheet.

8. Identify trends in managerial accounting.

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Chapter 1-5

Managerial Accounting BasicsCompare managerial and financial accounting,Management functions, Organizational structure, and Business ethics

Managerial Cost ConceptsManufacturing costsProduct vs. period costs

Manufacturing Costs in Financial StatementsIncome Statement and Balance SheetCost concepts – A review

Managerial Accounting TodayService industry trendsManagerial accounting practices

Preview of ChapterPreview of Chapter

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Chapter 1-6

Managerial AccountingManagerial Accounting

Managerial Managerial AccountingAccounting

BasicsBasics

Managerial Managerial Cost Cost

ConceptsConcepts

Managerial Managerial Accounting Accounting

TodayToday

Comparing Comparing managerial and managerial and financial financial accountingaccountingManagement Management functionsfunctionsOrganizational Organizational structurestructureBusiness ethics Business ethics

Manufacturing Manufacturing costscostsProduct vs. Product vs. period costsperiod costs

Service- Service- industry industry trendstrendsManagerial Managerial accounting accounting practicespractices

Manufacturing Manufacturing Costs in Costs in Financial Financial

StatementsStatements

Income Income statementstatementBalance sheetBalance sheetCost concepts – Cost concepts – A review A review

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Chapter 1-7

Managerial Accounting BasicsManagerial Accounting Basics

A field of accounting that provides economic A field of accounting that provides economic and financial information for managers and and financial information for managers and

other internal users.other internal users.

Also calledAlso called Management AccountingManagement Accounting

Definition of Managerial Accounting

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Chapter 1-8

Managerial Accounting BasicsManagerial Accounting Basics

Managerial Accounting Activities

Explaining manufacturing and nonmanufacturing costs and how they are reported in the financial statements. (Chapter 1)

Computing the cost of providing a service or manufacturing a product. (Chapters 2, 3, and 4)

Determining the behavior of costs and expenses as activity levels change and analyzing cost-volume-profit relationships within a company. (Chapters 5 and 6)

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Chapter 1-9

Managerial Accounting BasicsManagerial Accounting Basics

Managerial Activities: Continued

Accumulating and presenting data for management decision making. (Chapter 7)

Determining prices for external and internal transactions. (Chapter 8)

Assisting management in profit planning and formalizing these plans in the form of budgets. (Chapter 9)

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Chapter 1-10

Managerial Accounting BasicsManagerial Accounting Basics

Managerial Activities: Continued

Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard costs. (Chapters 10 and 11)

Accumulating and presenting data for capital expenditure decisions. (Chapter 12)

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Chapter 1-11

Managerial Accounting BasicsManagerial Accounting Basics

Applies to all types of business -Service, Merchandising, and Manufacturing

Applies to all forms of business organizations –Proprietorships, Partnerships, and Corporations

Applies to not-for-profit as well as profit-oriented companies

Distinguishing Features

LO 1 Explain the distinguishing features of managerial accounting.LO 1 Explain the distinguishing features of managerial accounting.

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Chapter 1-12

Managerial Accounting BasicsManagerial Accounting Basics

Changed role in collecting and reporting costs to management as a result of increasingly automated business environmentNow more responsible for strategic cost management – assisting in evaluating how well resources are employed by the company.

Teams with people from production, marketing, engineering, etc.

Aid in making critical strategic decisions

Distinguishing Features: Continued

LO 1 Explain the distinguishing features of managerial accounting.LO 1 Explain the distinguishing features of managerial accounting.

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Chapter 1-13

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting

Both managerial and financial accounting deal with economic events of a business –

Thus, interests overlapBoth require that economic events be quantified and communicated tointerested parties –

Determining unit cost is part of managerial accounting,Reporting cost of goods manufactured is a part of financial accounting

Similarities

LO 1 Explain the distinguishing features of managerial accounting.LO 1 Explain the distinguishing features of managerial accounting.

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Chapter 1-14

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccountingDifferences

LO 1 Explain the distinguishing features of managerial accountingLO 1 Explain the distinguishing features of managerial accounting ..

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Managerial accounting:Managerial accounting:

a.a. Is governed by generally accepted accounting principles.

b. Places emphasis on special-purpose information. c. Pertains to the entity as a whole and is highly Pertains to the entity as a whole and is highly

aggregatedaggregated. d. Is limited to cost data.

Review QuestionReview Question

Managerial Accounting BasicsManagerial Accounting Basics

LO 1 Explain the distinguishing features of managerial LO 1 Explain the distinguishing features of managerial accounting.accounting.

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Chapter 1-16

Managerial Accounting BasicsManagerial Accounting Basics

Management’s activities and responsibilities Management’s activities and responsibilities can be classified into the following three can be classified into the following three

broad functions:broad functions:

PlanningPlanning DirectingDirecting

ControllingControlling

Management Functions

LO 2 Identify the 3 broad functions of management.LO 2 Identify the 3 broad functions of management.

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Chapter 1-17

Management FunctionsManagement Functions

Look ahead and establish objectives such as – Maximize short-term profit and

market shareCommit to environmental protection

and social programs

Key Objective: Add value to the businessValue measured by trading price of stock and by

potential selling price of the company

Planning

LO 2 Identify the 3 broad functions of management.LO 2 Identify the 3 broad functions of management.

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Chapter 1-18

Management FunctionsManagement Functions

Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including executives, managers, and supervisors

Produce smooth-running operation

Directing

LO 2 Identify the 3 broad functions of management.LO 2 Identify the 3 broad functions of management.

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Chapter 1-19

Management FunctionsManagement Functions

Process of keeping activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or formal system of evaluations

Decision making is not a separate management function, but the outcome of the exercise of good judgment in planning, directing, and

controlling.

Controlling

LO 2 Identify the 3 broad functions of management.LO 2 Identify the 3 broad functions of management.

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Chapter 1-20

Within a company, organization charts show:The interrelationships of activities and

The delegation of authority and responsibility

Organizational StructureOrganizational Structure

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Chapter 1-21

Business EthicsAll employees are expected to act ethically An increasing number of organizations have codes of business ethicsDespite organizational efforts:

Business scandals have caused massive investment losses and employee

layoffs.Corporate fraud has increased 13% in

last 5 years.Employee fraud – 60% of all fraudIntentional misstatement of financial

reports Aka financial reporting fraud is most

costly

Good Ethics – Good BusinessGood Ethics – Good Business

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Chapter 1-22

Creating Proper IncentivesCompanies like Motorola, IBM, and Nike expend substantial resources to monitor and evaluate the actions of employees & managers.Monitoring can have the negative result of producing incentives for unethical actions.

Employees may feel that they must succeed no matter what.

Ineffective and unrealistic controls may also result in declining product quality.

Good Ethics – Good BusinessGood Ethics – Good Business

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Sarbanes-Oxley Act of 2002Clarifies management’s responsibilitiesCertifications by CEO and CFO -

fairness of financial statements andadequacy of internal control

Selection criteria for Board of Directors and Audit CommitteeSubstantially increased penalties for misconductIMA Statement of Ethical Professional Practices

Good Ethics – Good BusinessGood Ethics – Good Business

Code of Ethical Standards

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Chapter 1-24

The management of an organization performs The management of an organization performs several broad functions. They are:several broad functions. They are:

a.a. Planning, directing, and sellingPlanning, directing, and selling.b. Directing, manufacturing, and controlling. c. Planning, manufacturing, and controlling.d. Planning, directing, and controlling.

Review QuestionReview Question

Management FunctionsManagement Functions

LO 2 Identify the 3 broad functions of management.LO 2 Identify the 3 broad functions of management.

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Chapter 1-25

Manufacturing CostsManufacturing consists of activities and processes to convert raw materials into finished goods.In contrast, a merchandising firm sells goods in the form in which they were purchased. Manufacturing costs are typically classified as:

Managerial Cost ConceptsManagerial Cost Concepts

LO 3 – Define the three classes of manufacturing costs.LO 3 – Define the three classes of manufacturing costs.

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Manufacturing CostsManufacturing Costs

Materials

LO 3 Define the three classes of manufacturing LO 3 Define the three classes of manufacturing costs.costs.

Raw MaterialsBasic materials and parts used

in manufacturing process

Direct Materials Raw materials that can be

physically and directly associated with the finished product during the manufacturing process

Materials

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Chapter 1-27

Manufacturing CostsManufacturing Costs

Materials

LO 3 Define the three classes of manufacturing LO 3 Define the three classes of manufacturing costs.costs.

Indirect MaterialsRaw materials that cannot be easily associated with the finished productNot physically part of the finished product or they are an insignificant part of finished product in terms of costConsidered part of manufacturing overhead

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Manufacturing CostsManufacturing CostsLabor

LO 3 Define the three classes of manufacturing LO 3 Define the three classes of manufacturing costs.costs.

Direct LaborWork of factory employees

that can be physically and directly associated with converting raw materials into finished goods

Indirect Labor Work of factory employees that has no

physical association with the finished product or for which it is impractical to trace costs to the goods produced

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Chapter 1-29

Manufacturing CostsManufacturing Costs

LO 3 Define the three classes of manufacturing LO 3 Define the three classes of manufacturing costs.costs.

Manufacturing Overhead

Costs that are indirectly associated with manufacturing the finished productIncludes all manufacturing costs except direct materials and direct laborAllocation of overhead to products can present problemsAlso called factory overhead, indirect manufacturing costs, or burden

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Chapter 1-30

Which of the following is Which of the following is notnot an element an element of manufacturing overhead?:of manufacturing overhead?:

a.a. Sales manager’s salary.Sales manager’s salary.b. Plant manager’s salary. c. Factory repairman’s wages.d. Product inspector’s salary.

Review QuestionReview Question

Manufacturing CostsManufacturing Costs

LO 3 Define the three classes of manufacturing LO 3 Define the three classes of manufacturing costs.costs.

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Product Versus Period CostsProduct Versus Period Costs

LO 4 Distinguish between product and period costs.LO 4 Distinguish between product and period costs.

Product CostsComponents: direct material cost, direct labor cost, and manufacturing overhead

Costs that are a necessary and integral part of producing the productRecorded as inventory when incurred, thus may be called inventoriable costsNot an expense until the finished goods inventory is sold then cost of goods sold

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Chapter 1-32

Product Versus Period CostsProduct Versus Period Costs

LO 4 Distinguish between product and period costs.LO 4 Distinguish between product and period costs.

Period CostsMatched with revenue of a specific time period and charged to expense as incurred

Non-manufacturing costsDeducted from revenues in period incurred to determine net incomeIncludes all selling and administrative expenses

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Product Versus Period CostsProduct Versus Period Costs

LO 4 Distinguish between product costs and LO 4 Distinguish between product costs and period costsperiod costs..

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Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

LO 5 Explain the difference between a LO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statement.statement.

Income Statement

The income statement for a manufacturer is similar to that of a merchandiser except

for the cost of goods sold section.

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Chapter 1-35

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Cost of Goods Sold ComponentsMerchandiser versus Manufacturer

LO 5 Explain the difference between a LO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statement.statement.

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Chapter 1-36

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Cost of Goods Sold Section of the Income Statement

LO 5 Explain the difference between a LO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statementstatement..

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Chapter 1-37

For the year, Red Company has cost of goods For the year, Red Company has cost of goods manufactured of $600,000, beginning finished manufactured of $600,000, beginning finished goods inventory of $200,000, and ending goods inventory of $200,000, and ending finished goods inventory of $250,000. finished goods inventory of $250,000. The cost of goods sold isThe cost of goods sold is

a.a. $450,000.$450,000.b. $500,000. c. $550,000.d. $600,000.

Review QuestionReview Question

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

LO 5 Explain the difference between a LO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statement.statement.

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Chapter 1-38

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Determining the Cost of Goods Manufactured

LO 6 Indicate how cost of goods manufactured is determinedLO 6 Indicate how cost of goods manufactured is determined ..

Work in Process – partially completed units of product

Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period

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Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

LO 6 Indicate how cost of goods manufactured is determinedLO 6 Indicate how cost of goods manufactured is determined ..

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Chapter 1-40

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Balance Sheet - Inventories

LO 7 Explain the difference between a merchandising and a LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.manufacturing balance sheet.

Merchandising Company

One category of inventory:Merchandise Inventory

Manufacturing CompanyMay have three inventories:

Raw Materials Work in Process Finished Goods

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Chapter 1-41

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Balance Sheet - Inventories

LO 7 Explain the difference between a merchandising and a LO 7 Explain the difference between a merchandising and a manufacturing balance sheetmanufacturing balance sheet

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Chapter 1-42

A cost of goods manufactured schedule shows A cost of goods manufactured schedule shows beginning and ending inventories for:beginning and ending inventories for: a.a. Raw materials and work in process only Raw materials and work in process only b. Work in process onlyc. Raw materials onlyd. Raw materials, work in process, and finished goods

Review QuestionReview Question

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

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Chapter 1-43

Managerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management accounting.LO 8 Identify trends in management accounting.

Service Industry Trends

U.S. economy, in general, has shifted toward an emphasis on providing services rather than goodsOver 50% of U.S. workers are now employed by service companiesTrend is expected to continue in the futureMost of the techniques learned for manufacturing firms are applicable to service companies

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Managerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management accounting.LO 8 Identify trends in management accounting.

Managerial Accounting Practices

Value ChainRefers to all activities associated with providing a product or service

For a manufacturing firm these include the following:

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Chapter 1-45

Managerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management accounting.LO 8 Identify trends in management accounting.

Managerial Accounting Practices

Technological Change

Enterprise Resource Planning (ERP) – software programs designed to manage all major business processesComputer-Integrated Manufacturing (CIM) – manufacturing products with increased automation

Just-In-Time (JIT) Inventory MethodsInventory system in which goods are manufactured or purchased just in time for use

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Managerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management accounting.LO 8 Identify trends in management accounting.

Managerial Accounting Practices

QualityIncreased emphasis on product quality because goods are produced only as neededTotal Quality Management (TQM)

- a philosophy of zero defects –

Activity-Based-Costing (ABC)Allocates overhead based on use of activitiesResults in more accurate product costing and scrutiny of all activities in the value chain

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Chapter 1-47

Managerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management accounting.LO 8 Identify trends in management accounting.

Managerial Accounting Practices

Theory of ConstraintsConstraints (“bottlenecks” ) limit the

company’s potential profitabilityA specific approach to identify and manage

these constraints in order to achieve company goals

Balanced ScorecardEvaluates operations in an integrated fashionUses both financial and non-financial

measuresLinks performance measures to overall

company objectives

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Chapter 1-48

Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner?

a. Just-in-time inventory.b. Total-quality management.c. Balanced scorecard.d. Activity-based costing.

Review QuestionReview Question

Managerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management LO 8 Identify trends in management accounting.accounting.

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All About YouAll About YouOutsourcing and Jobs

To reduce costs and remain competitive many companies are turning to outsourcing

“Outsourcing means hiring an outside supplier to provide elements of a product rather than producing them internally”While outsourcing can be to another provider within the U.S., many professional services as well as manufacturing jobs have become candidates for outsourcing to foreign providersBy 2015, it has been predicted that 3.3 million service jobs will have been outsourced offshore.

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All About YouAll About YouOutsourcing and Jobs – What do you

think?Do you think outsourcing really reduces costs?

If costs are reduced, do you think that it justifies the loss of jobs to U.S. workers?

What would you say to your employees whose jobs have been outsourced?

Do you think that outsourced professional services performed in a foreign country or parts manufactured offshore will have the same quality and standards as those performed/manufactured in the U.S.?

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Chapter 1-51

Indicate whether each of the following Indicate whether each of the following costs of an automobile manufacturer would costs of an automobile manufacturer would be classified as direct materials, direct be classified as direct materials, direct labor, or manufacturing overhead.labor, or manufacturing overhead.

Chapter Review - Brief Exercise 1-5Chapter Review - Brief Exercise 1-5

______ a. Windshield______ b. Engine______ c. Wages of assembly line worker______ d. Depreciation of factory machinery______ e. Factory machinery lubricants______ f. Tires______ g. Steering wheel______ h. Salary of painting supervisor

DMDMDLMOMODMDMMO

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Chapter 1-52

Identify whether each of the following costs Identify whether each of the following costs should be classified as product costs or should be classified as product costs or period costs.period costs.

Chapter Review - Brief Exercise 1-6Chapter Review - Brief Exercise 1-6

____________ a. Manufacturing overhead____________ b. Selling expenses____________ c. Administrative expenses____________ d. Advertising expense____________ e. Direct labor____________ f. Direct material

ProductPeriodPeriodPeriod

ProductProduct

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Chapter 1-53

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