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ACC403 Case 1
Jeremy Vess
Trident University International
ACC403 Principles of Accounting
9 January 2022
BUS401 Case 1
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ACC403 Case 1
Part I
1. What are the major differences between managerial and financial accounting? The
major differences between the two is that managerial accounting uses estimates of the
future for decision-making and budgeting versus financial accounting uses part or
historical data. Additionally, financial accounting is focused on reporting to external
parties (i.e., creditors, owners, analysts). Managerial accounting information is based on
internal specifications, which financial accounting may not be privy to (Walther, 2019).
2. Explain how a contribution margin (variable costing, behavioral income statement)
differs from an income statement prepared in accordance with US GAAP. The
contribution margin gives much more insight than the Income Statement. The income
statement, also known as a profit and loss statement, is mostly used for identifying if a
profit was made and is for the entire firm (Edspira, 2014). A contribution margin
provides more detail on costs and resources needed for any given product and helps
analyze information needed to identify how specific products are doing. A contribution
margin is a company’s revenues minus its variable expenses, which shows how their
revenue is contributing to their fixed costs and net income (Borowski, 2021).
3. Why are certain costs referred to as product costs? What are the major types of
product costs incurred by a manufacturer? Certain costs are considered product costs
when the costs are considered “inventoriable”, which means that the costs go toward the
product costs and are considered costs of goods. There are three major cost components
which are Direct materials, Direct labor, and manufacturing overhead. Direct materials
are the materials that go into a final product. Direct labor consists of gross wages paid to
those individuals who directly and physically worked on the goods being purchased.
Manufacturing overhead are all of the costs except for direct labor/materials (Walther,
2019).
4. Define the following terms.
o Overhead for the production departments. This is all the indirect costs
necessary to operate a factory. This can include indirect labor such as cost
associated with cleaning personnel and maintenance.
o Overhead for non-production departments. This is all of the direct
costs/expenses for example salaries, distribution, selling, marketing. They are
considered non-production since they are outside of the production function.
5. Explain the distinction of variable costs, fixed costs, and mixed costs. These costs are
categorized based on how they change in response to production output and sales.
According to (Rogers, 2019), variable costs are directly associated to sales and
production. As output increases and decreases the cost fluctuates. On the other hand, no
matter how many units you produce or sell, fixed costs remain the same. When
discussing mixed costs, the fixed portion remains the same while the variable costs
change along with production and sales.
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6. Explain the difference between direct and indirect costs. According to the background
material (Andromedia Productions, 2012), direct costs is the cost directly associated to
the actual product. Indirect costs are the costs that are not directly associated to one
project but are general business expenses that keep it operating. For example, direct costs
are the expenses such as direct labor, manufacturing supplies, and direct materials
(Blakely-Gray, 2021). Whereas indirect costs are expenses such as utilities, rent, and
other general office expenses.
7. Distinguish between controllable and uncontrollable costs. Controllable costs are any
costs that department, manager, or executive can control. For example, a restraint manger
can control the cost of food used in their restaurant (Controllable), but they cannot
control the cost of national advertising by that restaurant chain (Uncontrollable) (Rutgers
Accounting Web, 2015).
8. Define sunk costs and opportunity costs. Sunk costs are defined as not being relevant
for the decision-making process and these costs cannot be recovered later according to
the background reading. These costs are those that have already been incurred and cannot
be recovered. On the other hand, opportunity costs are what you give up by choosing one
alternative over another (Lynch, 2014).
Part II
The following information was retrieved from ("Stitch Fix Announces First Quarter
Fiscal Year 2022 Financial Results | Stitch Fix", n.d.). According to the First Quarter 2022
report, Stitch Fix helps adults and kids get dressed by combining the human touch of expert
stylist with advanced data to choose the right outfit for each individual. The company is focused
on the ecommerce world of shopping and strives to have an experience based on convenience
and guided discovery for a simply and enjoyable experience.
Looking at the Income statement in the last quarterly report, it shows great information
needed for accounting. It shows the net revenue and costs of goods sold giving you their gross
profit. Additionally, it then shows the expenses which gives you the operating income. All of this
information is extremely important as you can use it to create your data charts. However, what
this doesn’t give you is information such as bottlenecks and restraints. This is the additional
information needed for managerial accounting so that they can see what is hindering their
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sales/profits and improve that restraint until it is no longer the eliminating issue. Additionally,
the quarterly report is good for financial accounting since it shows the entire business. However,
this is where this information differs from that needed for managerial accounting purposes. As
we learned in the background material, managerial accounting focuses on more detailed reports
for example when looking at Stitch Fix, they would need to see profits/losses from the product
line, products, geographical region, and customers ("Financial Accounting vs. Managerial
Accounting", n.d.).
As a manager making business decisions within the company as discussed above, I would
need access to more detailed reports to show me more accurate information. One example would
be a detailed report showcasing direct and indirect costs. According to the quarterly report, it
shows the selling, general, and administrative expenses. Additionally, these costs exceeded the
gross profit putting the company at a loss. A more detailed report showing direct and indirect
costs could aid in locating the bottleneck and decreasing these costs which will allow for an
increase in profits. Lastly, as a manager, I would want to know the breakdown of the costs. As
stated in Part I, the cost of goods is classified as Direct materials, Direct labor, and
manufacturing overhead. This information would give a manager more details to identify
shortfalls.
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References
Andromedia Productions. (2012). Direct & Indirect Costs [Video]. Retrieved 2 January 2022,
from https://youtu.be/NTEwMcXZ-0o.
Blakely-Gray, R. (2021). Direct vs. Indirect Costs | Breakdown, Examples, & Why it Matters.
Patriot Software. Retrieved 2 January 2022, from
https://www.patriotsoftware.com/blog/accounting/direct-vs-indirect-costs-difference/.
Borowski, C. (2021). Traditional Income Statement vs. Contribution Margin: What's the
Difference?. The Blueprint. Retrieved 29 December 2021, from
https://www.fool.com/the-blueprint/traditional-income-statement/.
Edspira. (2014). Introduction to Managerial Accounting [Video]. Retrieved 29 December 2021,
from https://www.youtube.com/watch?v=KCyg8-zM9bA.
Financial Accounting vs. Managerial Accounting. FreshBooks. Retrieved 2 January 2022, from
https://www.freshbooks.com/hub/accounting/financial-accounting-vs-managerialaccounting.
Lynch, C. (2014). Differential Analysis - Concepts [Video]. Retrieved 2 January 2022, from
https://youtu.be/ZtATVI1Oeyo.
Rogers, K. (2019). Examples of Mixed Costs in Accounting. Small Business - Chron.com.
Retrieved 2 January 2022, from https://smallbusiness.chron.com/examples-mixed-costsaccounting-80566.html.
Rutgers Accounting Web. (2015). Controllable and Uncontrollable costs [Video]. Retrieved 2
January 2022, from https://youtu.be/HKJjov8i3RU.
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Stitch Fix Announces First Quarter Fiscal Year 2022 Financial Results | Stitch Fix. Stitch Fix.
Retrieved 2 January 2022, from https://investors.stitchfix.com/news-releases/newsrelease-details/stitch-fix-announces-first-quarter-fiscal-year-2022-financial.
Walther, L. (2019). principles of accounting.com. Introduction to Managerial Accounting, Ch.
17. Retrieved from https://www.principlesofaccounting.com/chapter-17/
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