Part 1
Overhead cost – refers to operation costs which are not directly attributable to a specific product, service or activity (Hilton, 2016).
Cost of goods sold – these are direct cost relating to production of products sold including the material’s cost and cost of direct labor and even overhead which are used in creation of good or provision of service (Hilton, 2016).
Selling expenses are costs incurred mostly during selling process and include both the direct and indirect costs. The direct selling expenses arise upon selling a product while indirect costs during and after manufacturing process (Hilton, 2016).
Indirect expenses includes expenses incurred by an organization but which are not directly related to a particular function and examples are salaries and general services cost s(Hilton, 2016).
Reports on Financial accounting are normally prepared to be used by external stakeholders like creditors and creditors while reports on managerial accounting are prepared to be used by managers in a firm. Managerial accounting is focused towards the future for the purpose of planning but financial accounting basically offers a summary of financial transaction in the future. Financial accounting has to be verifiable and uphold objectivity hence does not allow for flexibility. Managerial accounting allows for flexible information systems so that it provides the kind of data needed by a specific individual even if it is not verifiable and objective as long as it is relevant to the problem to be solved (Hilton, 2016).
The basic elements of cost used in manufacturing include the direct labor, direct material and factory overhead. Direct materials include all the materials which are an essential part of finished goods and other direct costs that can be attributed to the acquisition of materials. Direct labor refers to all the costs of human resources involved in the manufacturing process such as wages, benefits and payroll taxes. The factory overheads refer to any other cost need in the manufacturing process that cannot be categorized in direct labor or material elements. The three basic elements are important aspects whose control enables a firm to gain competitive advantage and hence, remain profitable (Hilton, 2016).
The difference between employment total cost and the wage rate of an employment can be attributed to indirect employment costs which cannot be directly attributed to the manufacturing process. The $ 4.8 difference is an indirect labor cost related to any labor that offers support for the entire production process but cannot be directly attributed to the conversion of various materials into final products. Hence, this cost cannot be related directly to a given product or even in the provision of services and for this reason they cannot be conveniently traced in the process (Hilton, 2016). This kind of cost should be charged to the overhead costs.
Some costs are referred to as period costs because they are more closely related to passage time than they can be associated with a given transaction or production activity. Such costs are also charged to a given expense in that period that they were incurred. The periods costs can be inform of administrative costs including costs that have been incurred by the department of human resource, research and development of a product and the cost incurred while maintaining some machines for manufacturing. The research and administrative costs involve the creation of a new product or even in the improvement of an already existing product (Hilton, 2016).
Income statement from a manufacturing company differs from one from a merchandizing company with the basis of such differences being mostly being inventory existence. This involves how the cost of sales is shown in income statements for the firms. For the manufacturing company the differences arise from the fact that cost of sales is broken down into various categories. The first category includes expenses on raw materials and covers any materials, parts of components that are needed to make a product for the manufacturing company. The inventory process for the manufacturing company must also considered the goods-in-progress , available finished goods , the manufacturing labor cost and factory overhead in determination of cost of goods related expenses. For the merchandising company, the process involves subtracting cost of goods from earnings and accounting for the freight charges (Hilton, 2016). The expenses for the companies so much differences that their expense statements are called by different names.
A contribution margin income statement is prepared purpose for assisting management in making decision and hence its format is management oriented in terms of presenting expenses and revenues. This means that it does not follow the various standards set out by GAAP or rather does not fulfill any requirements for any external parties but serves the interests of internal parties. The contribution margin statement of income shows the cost behavior to managers and hence cannot for the requirements set under GAAP (Hilton, 2016).
The major differentiating factor between direct and indirect cost is that traceability of direct cost can be done to particular cost objects, cost object in this case referring to something that makes up the cost. Examples include a project, customer, service or product. Such costs are normally categorized as indirect or direct if they are associated with production activities but not administrative activities. Hence, a direct cost refers to cost which can be traced to a specific product in a manner that is considered economically feasible. Indirect cost on the other hand refers to a cost which is difficult to associate with a given product or service. When they are put together, direct costs are referred as prime costs while indirect costs are referred to as overheads (Hilton, 2016).
The main difference between controllable and uncontrollable costs is that a business has power to change the controllable costs while it cannot change the uncontrollable costs on the basis of a business decision. In addition, a company can only change controllable cost over the short term, but can change the uncontrollable cost over the long term. The various variable costs or incremental costs including fixed costs that have been stepped up are controllable costs while a fixed cost is usually an uncontrollable cost. For controllable costs they can mostly be changed by managers with power to make decisions while it is difficult to change uncontrollable costs in case of low decision making authority (Hilton, 2016).
Sunk costs refer to costs that have been incurred in the past and no decision can change them. Economically it is irrational to try to consider or even change sunk costs in decision making. Opportunity costs refers to any profit that a firm foregoes when one alternative is selected over another and they can be considered in decision making even though it may be hard to identify them (Hilton, 2016).
Part II
Home Depot is a retail firm offering various products for including products for home improvement, garden and lawns and building materials. The firm operates different stores which offer full services and other warehouse-type stores where the aforesaid products are sold. Other services provided by the company include installation services through contracting independent contractors. The retail stores also provide professional customers such as remodel and repair contractors and other support and special services.
The presentation of the financial information in the income statement of Home Depot’s 2016 annual report follows the various accounting standards established by GAAP. The income statement follows the required format so that it offers a summary of various transactions including revenue and expenses which have occurred during the financial period of one year. It follows the minimum disclosures where components are presented in a way that external users can use it easily. It only discloses the summary of various components of income statement and avoids representation of all the revenues and expenses in detail. It therefore, provides general information to serve the needs of users. This is unlike the financial statements for managerial accounting where not accounting standards are followed in presenting the various components of revenues, expenses and costs. Unlike the income statement, the information in managerial account would address a particular issue using detailed components.
For the purpose of making important business decision, I would require more detailed information on the performance of the company including the financial ratios and trends in financial performance. The financial ratios would be necessary for the purpose of controlling costs and determining the revenue growth and profitability. In addition, other sources of income apart from sales revenue would also be important.
References
Hilton, R. W. (2016). Managerial accounting. New York
Home Depot, Inc.( 2017). 2016 annual report.
