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2 Chapter Cost Terms, Concepts, and Classifications Solutions to Questions 2-1 The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead. 2-2 a. Direct materials are an integral part of a finished product and their costs can be conveniently traced to it. b. Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. Indirect materials are ordinarily classified as manufacturing overhead. c. Direct labor includes those labor costs that can be easily traced to particular products. Direct labor is also called touch labor. d. Indirect labor includes the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product. e. Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. 2-3 A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred. 2-4 The income statement of a manufacturing company differs from the income statement of a merchandising company in the cost of Solutions Manual, Chapter 2 goods sold section. The merchandising company sells finished goods that it has purchased from a supplier. These goods are listed as Purchases in the cost of goods sold section. Since the manufacturing company produces its goods rather than buying them from a supplier, it lists Cost of Goods Manufactured in place of Purchases. Also, the manufacturing company identifies its inventory in this section as Finished Goods Inventory, rather than as Merchandise Inventory. 2-5 The schedule of cost of goods manufactured lists the manufacturing costs that have been incurred during the period. These costs are organized under the three major categories of direct materials, direct labor, and manufacturing overhead. The total costs incurred are adjusted for any change in the Work in Process inventory to determine the cost of goods manufactured (i.e. finished) during the period. The schedule of cost of goods manufactured ties into the income statement through the Cost of Goods Sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the Purchases account in a merchandising firm. 2-6 A manufacturing company has three inventory accounts: Raw Materials, Work in Process, and Finished Goods. A merchandising company generally identifies its inventory account simply as Merchandise Inventory. 2-7 Since product costs accompany units of product into inventory, they are sometimes called inventoriable costs. The flow is from direct materials, direct labor, and manufacturing overhead to Work in Process. As goods are 15 The McGraw-Hill Companies, Inc., 2006. All rights reserved. completed, their cost is removed from Work in Process and transferred to Finished Goods. As goods are sold, their cost is removed from Finished Goods and transferred to Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement. 2-8 Yes, costs such as salaries and depreciation can end up as assets on the balance sheet if these are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, if some units are still in inventory, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of a period. 2-9 Cost behavior refers to how a cost will react or respond to changes in the level of activity. 2-10 No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit of product. A fixed cost is fixed in total, but will vary inversely on an average per-unit basis with changes in the level of activity. 2-11 When fixed costs are involved, the average cost of a unit of product will depend on the number of units being manufactured. As production increases, the average cost per unit will fall as the fixed cost is spread over more units. Conversely, as production declines, the average cost per unit will rise as the fixed cost is spread over fewer units. 2-12 Manufacturing overhead is an indirect cost since these costs cannot be easily and conveniently traced to particular units of products. 2-13 A differential cost is a cost that differs between alternatives in a decision. An opportunity cost is the potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken now or in the future. 2-14 No; differential costs can be either variable or fixed. For example, the alternatives might consist of purchasing one machine rather than another to make a product. The difference in the fixed costs of purchasing the two machines would be a differential cost. 16 2-15 Direct labor cost (34 hours $15 per hour) ........................... $510 Manufacturing overhead cost (6 hours $15 per hour) ............................. 90 Total wages earned......................................... $600 2-16 Direct labor cost (45 hours $14 per hour) ........................... $630 Manufacturing overhead cost (5 hours $7 per hour) ............................... 35 Total wages earned......................................... $665 2-17 Costs associated with the quality of conformance can be broken down into prevention costs, appraisal costs, internal failure costs, and external failure costs. Prevention costs are incurred in an effort to keep defects from occurring. Appraisal costs are incurred to detect defects before they can create further problems. Internal and external failure costs are incurred as a result of producing defective units. 2-18 Total quality costs are usually minimized by increasing prevention and appraisal costs in order to reduce internal and external failure costs. Total quality costs usually decrease as prevention and appraisal costs increase. 2-19 Shifting the focus to prevention and away from appraisal is usually the most effective way to reduce total quality costs. It is usually more effective to prevent defects than to attempt to fix them after they have occurred. 2-20 First, a quality cost report helps managers see the financial consequences of defects. Second, the report may help managers identify the most important areas for improvement. Third, the report helps managers see whether quality costs are appropriately distributed among prevention, appraisal, internal failure, and external failure costs. 2-21 Most accounting systems do not track and accumulate the costs of quality. It is particularly difficult to get a feel for the magnitude of quality costs since they are incurred in many departments throughout the organization. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Managerial Accounting, 11th Edition Exercise 2-1 (15 minutes) 1. The cost of a hard-drive installed in a computer: direct materials cost. 2. The cost of advertising in the Puget Sound Computer User newspaper: marketing and selling cost. 3. The wages of employees who assemble computers from components: direct labor cost. 4. Sales commissions paid to the company's salespeople: marketing and selling cost. 5. The wages of the assembly shop's supervisor: manufacturing overhead cost. 6. The wages of the company's accountant: administrative cost. 7. Depreciation on equipment used to test assembled computers before release to customers: manufacturing overhead cost. 8. Rent on the facility in the industrial park: a combination of manufacturing overhead, administrative, and marketing and selling cost. The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, administrative, and marketing operations. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 17 Exercise 2-2 (15 minutes) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Depreciation on salespersons' cars ........................... Rent on equipment used in the factory ..................... Lubricants used for maintenance of machines ........... Salaries of finished goods warehouse personnel ........ Soap and paper towels used by factory workers at the end of a shift ................................................. Factory supervisors' salaries .................................... Heat, water, and power consumed in the factory....... Materials used for boxing products for shipment overseas (units are not normally boxed) ................ Advertising costs.................................................... Workers' compensation insurance on factory employees .............................................................. Depreciation on chairs and tables in the factory lunchroom .............................................................. The wages of the receptionist in the administrative offices ................................................................ Lease cost of the corporate jet used by the company's executives .................................................... Rent on rooms at a Florida resort for holding the annual sales conference ....................................... Attractively designed box for packaging the company's product--breakfast cereal .............................. Product Period Cost Cost X X X X X X X X X X X X X X X The McGraw-Hill Companies, Inc., 2006. All rights reserved. 18 Managerial Accounting, 11th Edition Exercise 2-3 (15 minutes) CyberGames Income Statement Sales....................................................... Cost of goods sold: Beginning merchandise inventory ............ $ 240,000 Add: Purchases ..................................... 950,000 Goods available for sale .......................... 1,190,000 Deduct: Ending merchandise inventory .... 170,000 Gross margin ........................................... Less operating expenses: Selling expense ..................................... 210,000 Administrative expense .......................... 180,000 Net operating income ............................... $1,450,000 1,020,000 430,000 390,000 $ 40,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 19 Exercise 2-4 (15 minutes) Lompac Products Schedule of Cost of Goods Manufactured Direct materials: Beginning raw materials inventory ............. $ 60,000 Add: Purchases of raw materials................ 690,000 Raw materials available for use ................. 750,000 Deduct: Ending raw materials inventory ..... 45,000 Raw materials used in production .............. Direct labor ............................................... Manufacturing overhead ............................. Total manufacturing costs ........................... Add: Beginning work in process inventory ..... Deduct: Ending work in process inventory..... Cost of goods manufactured ........................ $ 705,000 135,000 370,000 1,210,000 120,000 1,330,000 130,000 $1,200,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 20 Managerial Accounting, 11th Edition Exercise 2-5 (15 minutes) A few of these costs may generate debate. For example, some may argue that the cost of advertising a Madonna rock concert is a variable cost since the number of people who come to the rock concert depends on the amount of advertising. However, one can argue that if the price is within reason, any Madonna rock concert in New York City will be sold out and the function of advertising is simply to let people know the event will be happening. Moreover, while advertising may affect the number of persons who ultimately buy tickets, the causation is in one direction. If more people buy tickets, the advertising costs don't go up. 1. X-ray film used in the radiology lab at Virginia Mason Hospital in Seattle .............................. 2. The costs of advertising a Madonna rock concert in New York City .................................... 3. Rental cost of a McDonald's restaurant building in Hong Kong .............................................. 4. The electrical costs of running a roller coaster at Magic Mountain ........................................ 5. Property taxes on your local cinema ................. 6. Commissions paid to salespersons at Nordstrom................................................... 7. Property insurance on a Coca-Cola bottling plant........................................................... 8. The costs of synthetic materials used to make Nike running shoes ...................................... 9. The costs of shipping Panasonic televisions to retail stores ................................................. 10. The cost of leasing an ultra-scan diagnostic machine at the American Hospital in Paris ....... Cost Behavior Variable Fixed X X X X X X X X X X The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 21 Exercise 2-6 (15 minutes) 1. 2. 3. 4. 5. 6. 7. 8. The wages of pediatric nurses Prescription drugs Heating the hospital The salary of the head of pediatrics The salary of the head of pediatrics Hospital chaplain's salary Lab tests by outside contractor Lab tests by outside contractor Cost The pediatric department A particular patient The pediatric department The pediatric department A particular pediatric patient A particular patient A particular patient A particular department Costing object Direct Cost X X Indirect Cost X X X X X X The McGraw-Hill Companies, Inc., 2006. All rights reserved. 22 Managerial Accounting, 11th Edition Exercise 2-7 (15 minutes) 1. Cost of the old X-ray machine ........ 2. The salary of the head of the Radiology Department ................ 3. The salary of the head of the Pediatrics Department ................ 4. Cost of the new color laser printer............................................ 5. Rent on the space occupied by Radiology .................................. 6. The cost of maintaining the old machine .................................... 7. Benefits from a new DNA analyzer ......................................... 8. Cost of electricity to run the Xray machines ............................. Item Differential Cost Opportunity Cost Sunk Cost X X X X X Note: The costs of the salaries of the head of the Radiology Department and Pediatrics Department and the rent on the space occupied by Radiology are neither differential costs, nor opportunity costs, nor sunk costs. These are costs that do not differ between the alternatives and are therefore irrelevant in the decision, but they are not sunk costs since they occur in the future. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 23 Exercise 2-8 (15 minutes) 1. No. It appears that the overtime spent completing the job was simply a matter of how the job happened to be scheduled. Under these circumstances, an overtime premium probably should not be charged to a customer whose job happens to fall at the end of the day's schedule. 2. Direct labor cost: 9 hours $14 per hour ............. $126 General overhead cost: 1 hour $7 per hour ....... 7 Total labor cost.................................................. $133 3. A charge for an overtime premium might be justified if the customer requested a rush order that caused the overtime. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 24 Managerial Accounting, 11th Edition Exercise 2-9 (15 minutes) 1. a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. Product testing .................... Product recalls .................... Rework labor and overhead .. Quality circles...................... Downtime caused by defects ................................ Cost of field servicing ........... Inspection of goods ............. Quality engineering .............. Warranty repairs.................. Statistical process control ..... Net cost of scrap ................. Depreciation of test equipment ............................... Returns and allowances arising from poor quality .... Disposal of defective products ................................. Technical support to suppliers .................................. Systems development .......... Warranty replacements ........ Field testing at customer site .................................. Product design .................... Internal External Prevention Appraisal Failure Failure Cost Cost Cost Cost X X X X X X X X X X X X X X X X X X X 2. Prevention costs and appraisal costs are incurred in an effort to keep poor quality of conformance from occurring. Internal and external failure costs are incurred because poor quality of conformance has occurred. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 25 Exercise 2-10 (30 minutes) 1. Mason Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning .................. $ 7,000 Add: Purchases of raw materials ...................... 118,000 Raw materials available for use ........................ 125,000 Deduct: Raw materials inventory, ending .......... 15,000 Raw materials used in production ..................... $110,000 Direct labor ...................................................... 70,000 Manufacturing overhead: Indirect labor ................................................. 30,000 Maintenance, factory equipment ...................... 6,000 Insurance, factory equipment .......................... 800 Rent, factory facilities...................................... 20,000 Supplies ........................................................ 4,200 Depreciation, factory equipment....................... 19,000 Total overhead costs ......................................... 80,000 Total manufacturing costs .................................. 260,000 Add: Work in process, beginning ........................ 10,000 270,000 Deduct: Work in process, ending ........................ 5,000 Cost of goods manufactured............................... $265,000 2. The cost of goods sold section of Mason Company's income statement: Finished goods inventory, beginning ............ Add: Cost of goods manufactured ................ Goods available for sale .............................. Deduct: Finished goods inventory, ending ..... Cost of goods sold ..................................... $ 20,000 265,000 285,000 35,000 $250,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 26 Managerial Accounting, 11th Edition Exercise 2-11 (15 minutes) Cost Item 1. Hamburger buns at a Wendy's outlet .......... 2. Advertising by a dental office ........................ 3. Apples processed and canned by Del Monte . 4. Shipping canned apples from a Del Monte plant to customers...................... 5. Insurance on a Bausch & Lomb factory producing contact lenses ....................... 6. Insurance on IBM's corporate headquarters .......................... 7. Salary of a supervisor overseeing production of printers at Hewlett-Packard ........ 8. Commissions paid to Encyclopedia Britannica salespersons ....... 9. Depreciation of factory lunchroom facilities at a General Electric plant ........................ 10. Steering wheels installed in BMWs ......... Cost Behavior Variable Fixed X X X Selling and Administrative Cost Product Cost X X X X X X X X X X X X X X X X X The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 27 Exercise 2-12 (30 minutes) 1. a. Batteries purchased ......................................................... Batteries drawn from inventory ......................................... Batteries remaining in inventory ........................................ Cost per battery .............................................................. Cost in Raw Materials Inventory at April 30 ........................ b. Batteries used in production (7,600 100) ......................... Motorcycles completed and transferred to Finished Goods (90% 7,500 = 6,750)................................................. Motorcycles still in Work in Process at April 30 .................... Cost per battery .............................................................. Cost in Work in Process Inventory at April 30 ..................... c. Motorcycles completed and transferred to Finished Goods (see above) .................................................................. Motorcycles sold during the month (70% 6,750 = 4,725) ......................................................................... Motorcycles still in Finished Goods at April 30 ..................... Cost per battery .............................................................. Cost in Finished Goods Inventory at April 30 ...................... d. Motorcycles sold during the month (above) ........................ Cost per battery .............................................................. Cost in Cost of Goods Sold at April 30 ................................ e. Batteries used in salespersons' motorcycles ........................ Cost per battery .............................................................. Cost in Selling Expense at April 30 ..................................... 2. Raw Materials Inventory--balance sheet Work in Process Inventory--balance sheet Finished Goods Inventory--balance sheet Cost of Goods Sold--income statement Selling Expense--income statement 8,000 7,600 400 $10 $4,000 7,500 6,750 750 $10 $7,500 6,750 4,725 2,025 $10 $20,250 4,725 $10 $47,250 100 $10 $ 1,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 28 Managerial Accounting, 11th Edition Exercise 2-13 (15 minutes) 1. Direct labor cost: 31 hours $14 per hour .................... Manufacturing overhead cost: 9 hours $14 per hour .... Total cost ................................................................... 2. Direct labor cost: 48 hours $14 per hour .................... Manufacturing overhead cost: 8 hours $7 per hour ..... Total cost ................................................................... $434 126 $560 $672 56 $728 3. A company could treat the cost of fringe benefits relating to direct labor workers as part of manufacturing overhead. This approach spreads the cost of such fringe benefits over all units of output. Alternatively, the company could treat the cost of fringe benefits relating to direct labor workers as additional direct labor cost. This latter approach charges the costs of fringe benefits to specific jobs rather than to all units of output. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 29 Problem 2-14 (30 minutes) Rental revenue forgone, $30,000 per year..................................... Direct materials cost, $80 per unit... Rental cost of warehouse, $500 per month.................................. Rental cost of equipment, $4,000 per month.................................. Direct labor cost, $60 per unit ........ Depreciation of the annex space, $8,000 per year .......................... Advertising cost, $50,000 per year .. Supervisor's salary, $1,500 per month ....................................... Electricity for machines, $1.20 per unit ........................................... Shipping cost, $9 per unit .............. Return earned on investments, $3,000 per year .......................... Name of the Cost Period Product Cost (selling Manufac- and OpporVariable Fixed Direct Direct turing admin.) tunity Sunk Cost Cost Materials Labor Overhead Cost Cost Cost X X X X X X X X X X X X X X X X X X X X X The McGraw-Hill Companies, Inc., 2006. All rights reserved. 30 Managerial Accounting, 11th Edition Problem 2-15 (30 minutes) Note to the Instructor: There may be some exceptions to the answers below. The purpose of this problem is to get the student to start thinking about cost behavior and cost purposes; therefore, try to avoid lengthy discussions about how a particular cost is classified. Cost Item 1. Property taxes, factory ................................ 2. Boxes used for packaging detergent produced by the company.............................. 3. Salespersons' commissions .......................... 4. Supervisor's salary, factory .......................... 5. Depreciation, executive autos ...................... 6. Wages of workers assembling computers ...... 7. Insurance, finished goods warehouses .......... 8. Lubricants for machines............................... 9. Advertising costs ........................................ 10. Microchips used in producing calculators ....... 11. Shipping costs on merchandise sold .............. 12. Magazine subscriptions, factory lunchroom .... 13. Thread in a garment factory......................... 14. Billing costs ................................................ 15. Executive life insurance ............................... Variable or Selling Fixed Cost F V V F F V F V F V V F V V F Administrative Cost Manufacturing (Product) Cost Direct Indirect X X X X X X X X X X X X X X* X The McGraw-Hill Companies, Inc., 2006. All rights reserved. 31 Managerial Accounting, 11th Edition Problem 2-15 (continued) Cost Item 16. 17. 18. 19. Ink used in textbook production ................... Fringe benefits, assembly-line workers .......... Yarn used in sweater production .................. Wages of receptionist, executive offices ........ Variable or Selling Fixed Cost V V V F Administrative Cost Manufacturing (Product) Cost Direct Indirect X X** X X * Could be administrative cost. ** Could be indirect cost. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 32 Managerial Accounting, 11th Edition Problem 2-16 (30 minutes) Cost Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Electricity used in operating machines......................... Rent on a factory building.......................................... Cloth used in drapery production ................................ Production superintendent's salary ............................. Wages of laborers assembling a product ..................... Depreciation of air purification equipment used in furniture production ................................................... Janitorial salaries ...................................................... Peaches used in canning fruit ..................................... Lubricants needed for machines ................................. Sugar used in soft drink production ............................ Property taxes on the factory ..................................... Wages of workers painting a product .......................... Depreciation on cafeteria equipment........................... Insurance on a building used in producing helicopters .. Cost of rotor blades used in producing helicopters ....... Cost Behavior Variable Fixed X X X X X X X X X X X X X X X To Units of Product Direct Indirect X X X X X X X X X X X X X X X The McGraw-Hill Companies, Inc., 2006. All rights reserved. 33 Managerial Accounting, 11th Edition Problem 2-17 (30 minutes) 1. Total wages for the week: Regular time: 40 hours $20 per hour .................... Overtime: 6 hours $30 per hour ........................... Total wages ............................................................. Allocation of total wages: Direct labor: 46 hours $20 per hour ...................... Manufacturing overhead: 6 hours $10 per hour ...... Total wages ............................................................. 2. Total wages for the week: Regular time: 40 hours $20 per hour .................... Overtime: 8 hours $30 per hour ........................... Total wages ............................................................. Allocation of total wages: Direct labor: 45 hours $20 per hour ...................... Manufacturing overhead: Idle time: 3 hours $20 per hour ......................... Overtime premium: 8 hours $10 per hour ........... Total wages ............................................................. 3. Total wages and fringe benefits for the week: Regular time: 40 hours $20 per hour .................... Overtime: 10 hours $30 per hour.......................... Fringe benefits: 50 hours $6 per hour ................... Total wages and fringe benefits ............................. Allocation of wages and fringe benefits: Direct labor: 48 hours $20 per hour ...................... Manufacturing overhead: Idle time: 2 hours $20 per hour ......................... Overtime premium: 10 hours $10 per hour ......... Fringe benefits: 50 hours $6 per hour ................. Total wages and fringe benefits .................................. $800 180 $980 $920 60 $980 $ 800 240 $1,040 $ 900 $60 80 140 $1,040 $ 800 300 300 $1,400 $ 960 $ 40 100 300 440 $1,400 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 34 Managerial Accounting, 11th Edition Problem 2-17 (continued) 4. Allocation of wages and fringe benefits: Direct labor: Wage cost: 48 hours $20 per hour ..................... Fringe benefits: 48 hours $6 per hour ................. Manufacturing overhead: Idle time: 2 hours $20 per hour ......................... Overtime premium: 10 hours $10 per hour ......... Fringe benefits: 2 hours $6 per hour................... Total wages and fringe benefits ............................... $960 288 $1,248 40 100 12 152 $1,400 The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 35 Problem 2-18 (60 minutes) 1. Florex Company Quality Cost Report Prevention costs: Quality engineering........... Systems development ....... Statistical process control .. Total prevention costs ......... Appraisal costs Inspection ....................... Product testing ................. Supplies used in testing..... Depreciation of testing equipment..................... Total appraisal costs ............ Internal failure costs: Net cost of scrap .............. Rework labor ................... Disposal of defective products ....................... Total internal failure costs .... External failure costs: Cost of field servicing ........ Warranty repairs .............. Product recalls ................. Total external failure costs ... Total quality cost ................ This Year Percent of Amount Sales $ 570 750 180 1,500 900 1,200 60 240 2,400 1,125 1,500 975 3,600 900 1,050 750 2,700 $10,200 0.76 1.00 0.24 2.00 1.20 1.60 0.08 0.32 3.20 1.50 2.00 1.30 4.80 1.20 1.40 1.00 3.60 13.60 Last Year Percent of Amount Sales $ 420 480 0 900 750 810 30 210 1,800 630 1,050 720 2,400 1,200 3,600 2,100 6,900 $12,000 0.56 0.64 0.00 1.20 1.00 1.08 0.04 0.28 2.40 0.84 1.40 0.96 3.20 1.60 4.80 2.80 9.20 16.00 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 36 Managerial Accounting, 11th Edition Problem 2-18 (continued) 2. $14,000 Quality Costs (in thousands) $12,000 $10,000 External Failure $8,000 $6,000 $4,000 $2,000 $0 Last Year This Year Internal Failure Appraisal Prevention Quality Costs as a Percentage of Sales 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Last Year This Year External Failure Internal Failure Appraisal Prevention The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 37 Problem 2-18 (continued) 3. The overall impact of the company's increased emphasis on quality over the past year has been positive in that total quality costs have decreased from 16% of sales to 13.6% of sales. Despite this improvement, the company still has a poor distribution of quality costs. The bulk of the quality costs in both years is traceable to internal and external failure, rather than to prevention and appraisal. Although the distribution of these costs is poor, the trend this year is toward more prevention and appraisal as the company has given more emphasis on quality. Probably due to the increased spending on prevention and appraisal activities during the past year, internal failure costs have increased by one half, going from $2.4 million to $3.6 million. The reason internal failure costs have gone up is that, through increased appraisal activity, defects are being caught and corrected before products are shipped to customers. Thus, the company is incurring more cost for scrap, rework, and so forth, but it is saving huge amounts in field servicing, warranty repairs, and product recalls. External failure costs have fallen sharply, decreasing from $6.9 million last year to just $2.7 million this year. If the company continues its emphasis on prevention and appraisal--and particularly on prevention--its total quality costs should continue to decrease in future years. Although internal failure costs are increasing for the moment, these costs should decrease in time as better quality is designed into products. Appraisal costs should also decrease as the need for inspection, testing, and so forth decreases as a result of better engineering and tighter process control. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 38 Managerial Accounting, 11th Edition Problem 2-19 (30 minutes) 1. Staci's current salary, $3,800 per month ........................................ Building rent, $500 per month ......... Clay and glaze, $2 per pot .............. Wages of production workers, $8 per pot ....................................... Advertising, $600 per month ........... Sales commission, $4 per pot .......... Rent of production equipment, $300 per month .......................... Legal and filing fees, $500 .............. Rent of sales office, $250 per month ........................................ Phone for taking orders, $40 per month ........................................ Interest lost on savings account, $1,200 per year .......................... Name of the Cost Period Product Cost (selling VariDirect Mfg. and able Fixed Mate- Direct Over- admin) Cost Cost rials Labor head Cost X X X X Opportunity Cost X Sunk Cost X X X X X X X X X X X X X X X X X X 2. The $500 cost of incorporating the business is not a differential cost. Even though the cost was incurred to start the business, it is a sunk cost. Whether Staci produces pottery or stays in her present job, she will have incurred this cost. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 39 Managerial Accounting, 11th Edition Problem 2-20 (15 minutes) 1. The controller is correct in his viewpoint that the salary cost should be classified as a selling (marketing) cost. The duties described in the problem have nothing to do with manufacturing a product, but rather deal with moving finished units from the factory to distribution warehouses. Selling costs include all costs necessary to secure customer orders and to get the finished product into the hands of customers. Coordination of shipments of finished units from the factory to distribution warehouses falls in this category. 2. No, the president is not correct. The reported net operating income for the year will differ depending on how the salary cost is classified. If the salary cost is classified as a selling expense all of it will appear on the income statement as a period cost. However, if the salary cost is classified as a manufacturing (product) cost, then it will be added to Work In Process Inventory along with other manufacturing costs for the period. To the extent that goods are still in process at the end of the period, part of the salary cost will remain with these goods in the Work Process in Inventory account. Only that portion of the salary cost that has been assigned to finished units will leave the Work In Process Inventory account and be transferred into the Finished Goods Inventory account. In like manner, to the extent that goods are unsold at the end of the period, part of the salary cost will remain with these goods in the Finished Goods Inventory account. Only the portion of the salary that has been assigned to finished units that are sold during the period will appear on the income statement as an expense (part of Cost of Goods Sold) for the period. The remainder of the salary costs will be on the balance sheet as part of inventories. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 40 Managerial Accounting, 11th Edition Problem 2-21 (15 minutes) Direct or Indirect Cost of Particular Seniors Served by the Meals-OnWheels Program Direct Indirect X X* X X X Item a. b. c. d. Description Direct or Indirect Cost of the MealsOn-Wheels Program Direct Indirect Variable or Fixed with Respect to the Number of Seniors Served by the Meals-On-Wheels Program Variable Fixed X e. f. g. h. i. The cost of leasing the meals-on-wheels van......... X The cost of incidental supplies such as salt, pepper, napkins, and so on .................................... X The cost of gasoline consumed by the meals-onwheels van ....................................................... X The rent on the facility that houses Madison Seniors Care Center, including the meals-onwheels program ............................................... X The salary of the part-time manager of the meals-on-wheels program ................................. X Depreciation on the kitchen equipment used in the meals-on-wheels program ........................... X The hourly wages of the caregiver who drives the van and delivers the meals .......................... X The costs of complying with health safety regulations in the kitchen ........................................ X The costs of mailing letters soliciting donations to the meals-on-wheels program ....................... X *These costs could be direct costs of serving particular seniors. X* X X X X X X X X X X X The McGraw-Hill Companies, Inc., 2006. All rights reserved. 41 Managerial Accounting, 11th Edition Problem 2-22 (45 minutes) 1. An analysis of the company's quality cost report is presented below: Prevention costs: Machine maintenance ... $ 120 Training suppliers ......... 10 Quality circles............... 20 Total prevention costs ..... 150 Appraisal costs: Incoming inspection ...... Final testing ................. Total appraisal costs ........ Internal failure costs: Rework........................ Scrap .......................... Total internal failure costs ........................... External failure costs: Warranty repairs........... Customer returns ......... Total external failure costs ........................... 40 90 130 130 70 200 30 80 110 This Year Amount Percent* 2.5 0.2 0.4 3.1 0.8 1.9 2.7 2.7 1.5 4.2 0.6 1.7 2.3 20.3 1.7 3.4 25.4 6.8 15.3 22.0 22.0 11.9 33.9 5.1 13.6 18.6 Last Year Amount Percent* $70 0 0 70 20 80 100 50 40 90 90 320 410 $4,200 1.7 0.0 0.0 1.7 0.5 1.9 2.4 1.2 1.0 2.1 2.1 7.6 9.8 10.4 0.0 0.0 10.4 3.0 11.9 14.9 7.5 6.0 13.4 13.4 47.8 61.2 Total quality cost ............ $ 590 12.3 100.0 Total production cost ....... $4,800 $670 16.0 100.0 * Percentage figures may not add down due to rounding. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 42 Managerial Accounting, 11th Edition Problem 2-22 (continued) From the above analysis it would appear that Mercury, Inc.'s program has been successful. o Total quality costs have declined from 16.0% to 12.3% as a percentage of total production cost. In dollar amount, total quality costs went from $670,000 last year to $590,000 this year. o External failure costs, those costs signaling customer dissatisfaction, have declined from 9.8% of total production costs to 2.3%. These declines in warranty repairs and customer returns should result in increased sales in the future. o Appraisal costs have increased from 2.4% to 2.7% of total production cost. o Internal failure costs have increased from 2.1% to 4.2% of production costs. This increase has probably resulted from the increase in appraisal activities. Defective units are now being spotted more frequently before they are shipped to customers. o Prevention costs have increased from 1.7% of total production cost to 3.1% and from 10.4% of total quality costs to 25.4%. The $80,000 increase is more than offset by decreases in other quality costs. 2. The initial effect of emphasizing prevention and appraisal was to reduce external failure costs and increase internal failure costs. The increase in appraisal activities resulted in catching more defective units before they were shipped to customers. As a consequence, rework and scrap costs increased. In the future, an increased emphasis on prevention should result in a decrease in internal failure costs. And as defect rates are reduced, resources devoted to appraisal can be reduced. 3. To measure the cost of not implementing the quality program, management could assume that sales and market share would continue to decline and then calculate the lost profit. Or, management might assume that the company will have to cut its prices to hang on to its market share. The impact on profits of lowering prices could be estimated. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 43 Problem 2-23 (30 minutes) 1. A cost that is classified as a period cost will be recognized on the income statement as an expense in the current period. A cost that is classified as a product cost will be recognized on the income statement as an expense (i.e., cost of goods sold) only when the associated units of product are sold. If some units are unsold at the end of the period, the costs of those unsold units are treated as assets. Therefore, by reclassifying period costs as product costs, the company is able to carry some costs forward in inventories that would have been treated as current expenses. 2. The discussion below is divided into two parts--Gallant's actions to postpone expenditures and the actions to reclassify period costs as product costs. The decision to postpone expenditures is highly questionable. It is one thing to postpone expenditures due to a cash bind; it is quite another to postpone expenditures in order to hit a profit target. Postponing these expenditures may have the effect of ultimately increasing future costs and reducing future profits. If orders to the company's suppliers are changed, it may disrupt the suppliers' operations. The additional costs may be passed on to Gallant's company and may create ill will and a feeling of mistrust. Postponing maintenance on equipment is particularly questionable. The result may be breakdowns, inefficient and/or unsafe operations, and a shortened life for the machinery. Interestingly, in a survey of 649 managers reported in Management Accounting, only 12% stated that it is unethical to defer expenses and thereby manipulate quarterly earnings. The proportion who felt it was unethical increased to 24% when it involved annual earnings. Another 41% said that deferring expenses is a questionable practice when it involved quarterly reports and 35% said this when annual reports were involved. Finally, 47% said that it is completely ethical to manipulate quarterly reports in this way and 41% gave the green light for annual reports. (See William J. Bruns, Jr. and Kenneth A. Merchant, The Dangerous Morality of Managing Earnings, Management Accounting, August 1990, pp. 2225) The McGraw-Hill Companies, Inc., 2006. All rights reserved. 44 Managerial Accounting, 11th Edition Problem 2-23 (continued) Gallant's decision to reclassify period costs is not ethical--assuming that there is no intention of disclosing in the financial reports this reclassification. Such a reclassification would be a violation of the principle of consistency in financial reporting and is a clear attempt to mislead readers of the financial reports. Although some may argue that the overall effect of Gallant's action will be a wash--that is, profits gained in this period will simply be taken from the next period--the trend of earnings will be affected. Hopefully, the auditors would discover any such attempt to manipulate annual earnings and would refuse to issue an unqualified opinion due to the lack of consistency. However, recent accounting scandals may lead to some skepticism about how forceful auditors have been in enforcing tight accounting standards. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 45 Problem 2-24 (60 minutes) 1. Meriwell Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ............. Add: Purchases of raw materials ................. Raw materials available for use ................... Deduct: Raw materials inventory, ending ..... Raw materials used in production ................ Direct labor ................................................. Manufacturing overhead: Depreciation, factory .................................. Utilities, factory ......................................... Maintenance, factory.................................. Supplies, factory ........................................ Insurance, factory ..................................... Indirect labor ............................................ Total overhead costs .................................... Total manufacturing costs ............................. Add: Work in process inventory, beginning ..... Deduct: Work in process inventory, ending ..... Cost of goods manufactured.......................... $ 9,000 125,000 134,000 6,000 $128,000 70,000 27,000 8,000 40,000 11,000 4,000 15,000 105,000 303,000 17,000 320,000 30,000 $290,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 46 Managerial Accounting, 11th Edition Problem 2-24 (continued) 2. Meriwell Company Income Statement Sales .......................................................... Cost of goods sold: Finished goods inventory, beginning ............ $ 20,000 Add: Cost of goods manufactured ............... 290,000 Goods available for sale ............................. 310,000 Deduct: Finished goods inventory, ending .... 40,000 Gross margin ............................................... Less operating expenses: Selling expenses ........................................ 80,000 Administrative expenses ............................. 110,000 Net operating income ................................... $500,000 270,000 230,000 190,000 $ 40,000 3. Direct materials: $128,000 10,000 units = $12.80 per unit. Factory Depreciation: $27,000 10,000 units = $2.70 per unit. 4. Direct materials: Unit cost: $12.80 (unchanged) Total cost: 15,000 units $12.80 per unit = $192,000. Factory Depreciation: Unit cost: $27,000 15,000 units = $1.80 per unit. Total cost: $27,000 (unchanged) 5. Unit cost for depreciation dropped from $2.70 to $1.80, because of the increase in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a unit basis as the activity level rises. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 47 Problem 2-25 (45 minutes) 1. Factory labor, direct ..................... $118,000 Advertising .................................. Factory supervision ...................... Property taxes, factory building ..... Sales commissions ....................... 80,000 Insurance, factory ........................ Depreciation, office equipment ...... Lease cost, factory equipment ....... Indirect materials, factory ............. 6,000 Depreciation, factory building ........ General office supplies .................. 3,000 General office salaries .................. Direct materials used .................... 94,000 Utilities, factory............................ 20,000 Total costs .................................. $321,000 Cost Item Cost Behavior Variable Fixed $50,000 40,000 3,500 2,500 4,000 12,000 10,000 60,000 $182,000 Selling or Administrative Cost $50,000 80,000 4,000 $118,000 Product Cost Direct Indirect $40,000 3,500 2,500 12,000 6,000 10,000 94,000 3,000 60,000 $197,000 $212,000 20,000 $94,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 48 Managerial Accounting, 11th Edition Problem 2-25 (continued) 2. Direct ................................................... $212,000 Indirect ................................................. 94,000 Total..................................................... $306,000 $306,000 2,000 sets = $153 per set 3. The average product cost per set would increase. This is because the fixed costs would be spread over fewer units, causing the average cost per unit to rise. 4. a. Yes, the president may expect a minimum price of $153, which is the average cost to manufacture one set. He might expect a price even higher than this to cover a portion of the administrative costs as well. The brother-in-law probably is thinking of cost as including only direct materials, or, at most, direct materials and direct labor. Direct materials alone would be only $47 per set, and direct materials and direct labor would be only $106. b. The term is opportunity cost. The full, regular price of a set might be appropriate here, since the company is operating at full capacity, and this is the amount that must be given up (benefit forgone) to sell a set to the brother-in-law. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 49 Problem 2-26 (60 minutes) 1. Swift Company Schedule of Cost of Goods Manufactured For the Month Ended August 31 Direct materials: Raw materials inventory, August 1 ................. $ 8,000 Add: Purchases of raw materials .................... 165,000 Raw materials available for use ...................... 173,000 Deduct: Raw materials inventory, August 31 ... 13,000 Raw materials used in production................... $160,000 Direct labor .................................................... 70,000 Manufacturing overhead: Indirect labor cost ........................................ 12,000 Utilities (60% $15,000) ............................. 9,000 Depreciation, factory equipment .................... 21,000 Insurance (75% $4,000) ........................... 3,000 Rent on facilities (80% $50,000) ................ 40,000 Total overhead costs ....................................... 85,000 Total manufacturing costs ................................ 315,000 Add: Work in process inventory, August 1 ......... 16,000 331,000 Deduct: Work in process inventory, August 31 ... 21,000 Cost of goods manufactured ............................ $310,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 50 Managerial Accounting, 11th Edition Problem 2-26 (continued) 2. Swift Company Income Statement For the Month Ended August 31 Sales ............................................................. $450,000 Less cost of goods sold: Finished goods inventory, August 1 ................ $ 40,000 Add: Cost of goods manufactured .................. 310,000 Goods available for sale ................................ 350,000 Deduct: Finished goods inventory, August 31 .. 60,000 290,000 Gross margin.................................................. 160,000 Less operating expenses: Utilities (40% $15,000) ............................. 6,000 Depreciation, sales equipment ....................... 18,000 Insurance (25% $4,000) ........................... 1,000 Rent on facilities (20% $50,000) ............... 10,000 Selling and administrative salaries .................. 32,000 Advertising .................................................. 75,000 142,000 Net operating income ...................................... $ 18,000 3. In preparing the income statement for August, Sam failed to distinguish between product costs and period costs, and he also failed to recognize the changes in inventories between the beginning and end of the month. Once these errors have been corrected, the financial condition of the company looks much better and selling the company may not be advisable. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 51 Problem 2-27 (60 minutes) 1. Superior Company Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, beginning .............. $ 40,000 Add: Purchases of raw materials .................. 290,000 Raw materials available for use .................... 330,000 Deduct: Raw materials inventory, ending ...... 10,000 Raw materials used in production ................. $320,000 Direct labor .................................................. 93,000 * Manufacturing overhead: Insurance, factory ...................................... 8,000 Utilities, factory .......................................... 45,000 Indirect labor ............................................. 60,000 Cleaning supplies, factory ............................ 7,000 Rent, factory building.................................. 120,000 Maintenance, factory .................................. 30,000 Total overhead costs ..................................... 270,000 Total manufacturing costs (given) ................... 683,000 Add: Work in process inventory, beginning ...... 42,000 * 725,000 Deduct: Work in process inventory, ending ...... 35,000 Cost of goods manufactured .......................... $690,000 The cost of goods sold section of the income statement follows: Finished goods inventory, beginning .............. Add: Cost of goods manufactured.................. Goods available for sale (given) ..................... Deduct: Finished goods inventory, ending ...... Cost of goods sold (given) ............................ $ 50,000 690,000 * 740,000 80,000 * $660,000 * These items must be computed by working backwards up through the statements. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 52 Managerial Accounting, 11th Edition Problem 2-27 (continued) 2. Direct materials: $320,000 40,000 units = $8 per unit. Rent, factory building: $120,000 40,000 units = $3 per unit. 3. Direct materials............ Rent, factory building ... $8.00 (Same) $2.40 * (Changed) Per Unit $400,000 ** (Changed) $120,000 (Same) Total * $120,000 50,000 units = $2.40 per unit. ** $8 per unit 50,000 units = $400,000. 4. The unit cost for rent dropped from $3.00 to $2.40, because of the increase in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a unit basis as the activity level rises. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 53 Problem 2-28 (60 minutes) 1. Visic Corporation Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ....................... Add: Purchases of raw materials ........................... Raw materials available for use ............................. Deduct: Raw materials inventory, ending ............... Raw materials used in production .......................... Direct labor ........................................................... Manufacturing overhead: Indirect labor ...................................................... Building rent (80% $40,000) ............................ Utilities, factory ................................................... Royalty on patent ($1.50 per unit 29,000 units) .. Maintenance, factory ........................................... Rent on equipment $7,000 + ($0.30 per unit 29,000 units) ........... Other factory overhead costs ................................ Total overhead costs .............................................. Total manufacturing costs ....................................... Add: Work in process inventory, beginning ............... Deduct: Work in process inventory, ending ............... Cost of goods manufactured ................................... $ 20,000 480,000 500,000 30,000 $470,000 90,000 85,000 32,000 108,000 43,500 9,000 15,700 6,800 300,000 860,000 50,000 910,000 40,000 $870,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 54 Managerial Accounting, 11th Edition Problem 2-28 (continued) 2. a. To compute the number of units in the finished goods inventory at the end of the year, we must first compute the number of units sold during the year. Total sales $1,300,000 = = 26,000 units sold Unit selling price $50 per unit sold Units Units Units Units Units in the finished goods inventory, beginning ..... produced during the year ............................. available for sale ......................................... sold during the year (above) ....................... in the finished goods inventory, ending ......... 0 29,000 29,000 26,000 3,000 b. The average production cost per unit during the year would be: Cost of goods manufactured $870,000 = = $30 per unit Number of units produced 29,000 units Thus, the cost of the units in the finished goods inventory at the end of the year would be: 3,000 units $30 per unit = $90,000. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 55 Problem 2-28 (continued) 3. Visic Corporation Income Statement Sales .......................................................... Less cost of goods sold: Finished goods inventory, beginning ............ Add: Cost of goods manufactured ............... Goods available for sale ............................. Finished goods inventory, ending ................ Gross margin............................................... Less operating expenses: Advertising ............................................... Entertainment and travel ............................ Building rent (20% $40,000) ................... Selling and administrative salaries ............... Other selling and administrative expense ..... Net operating income ................................... $1,300,000 $ 0 870,000 870,000 90,000 105,000 40,000 8,000 210,000 17,000 780,000 520,000 $ 380,000 140,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 56 Managerial Accounting, 11th Edition Problem 2-29 (45 minutes) Direct materials ................. $ 4,500 $ 6,000 $ 5,000 $ 3,000 Direct labor ...................... 9,000 * 3,000 7,000 4,000 Manufacturing overhead .... 5,000 4,000 8,000 * 9,000 Total manufacturing costs .. 18,500 13,000 * 20,000 16,000 * Beginning work in process inventory ....................... 2,500 2,000 * 3,000 4,500 * Ending work in process inventory ....................... (3,000) * (1,000) (4,000) (3,000) Cost of goods manufactured ............................. $18,000 $14,000 $19,000 * $17,500 Sales................................ $30,000 $21,000 $36,000 $40,000 Beginning finished goods inventory ....................... 1,000 2,500 3,500 * 2,000 Cost of goods manufactured ............................. 18,000 14,000 19,000 * 17,500 Goods available for sale ..... 19,000 * 16,500 * 22,500 * 19,500 Ending finished goods inventory .......................... (2,000) * (1,500) (4,000) (3,500) Cost of goods sold............. 17,000 15,000 * 18,500 16,000 Gross margin .................... 13,000 6,000 * 17,500 24,000 Operating expenses ........... (9,000) * (3,500) (12,500) * (15,000) Net operating income ........ $ 4,000 $ 2,500 * $ 5,000 $ 9,000 * Missing data in the problem. Case 1 Case 2 Case 3 Case 4 * * * * The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 57 Case 2-30 (60 minutes) The following cost items are needed before a schedule of cost of goods manufactured can be prepared: Materials used in production: Prime cost .................................................. $410,000 Less direct labor cost ................................... 180,000 Direct materials cost .................................... $230,000 Manufacturing overhead cost: Direct labor cost $180,000 = Percentage of conversion cost 30%* = $600,000 total conversion cost *100% 70% = 30%. Conversion cost .......................................... $600,000 Less direct labor cost .................................. 180,000 Manufacturing overhead cost ....................... $420,000 Cost of goods manufactured: Goods available for sale ............................... $810,000 Less finished goods inventory, beginning ....... 45,000 Cost of goods manufactured ......................... $765,000 The easiest way to proceed from this point is to place all known amounts in a partially completed schedule of cost of goods manufactured and a partially completed income statement. Then fill in the missing amounts by analysis of the available data. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 58 Managerial Accounting, 11th Edition Case 2-30 (continued) Direct materials: Raw materials inventory, beginning ........................ $ 18,000 Add: Purchases of raw materials ............................ 290,000 Raw materials available for use .............................. 308,000 Deduct: Raw materials inventory, ending ................ A Raw materials used in production (see above) ......... 230,000 Direct labor cost ..................................................... 180,000 Manufacturing overhead cost (see above) .................. 420,000 Total manufacturing costs ........................................ 830,000 Add: Work in process inventory, beginning ................ 65,000 895,000 Deduct: Work in process inventory, ending ................ B Cost of goods manufactured (see above) ................... $765,000 Therefore, A (Raw materials inventory, ending) would be $78,000; and B (Work in process inventory, ending) would be $130,000. Sales .............................................................. $1,200,000 Less cost of goods sold: Finished goods inventory, beginning ................ $ 45,000 Add: Cost of goods manufactured (see above) . 765,000 Goods available for sale ................................. 810,000 Deduct: Finished goods inventory, ending ........ C 720,000 Gross margin ................................................... $ 480,000 *$1,200,000 (100% 40%) = $720,000. Therefore, C (Finished goods inventory, ending) would be $90,000. The procedure outlined above is just one way in which the solution to the case can be approached. Some may wish to start at the bottom of the income statement (with gross margin) and work upwards from that point. Also, the solution can be obtained by use of T-accounts. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 59 Case 2-31 (60 minutes) 1. No distinction has been made between period expenses and product costs on the income statement filed by the company's accountant. Product costs (e.g., direct materials, direct labor, and manufacturing overhead) should be assigned to inventory accounts and flow through to the income statement as cost of goods sold only when finished products are sold. Since there were ending inventories, some of the product costs should appear on the balance sheet as assets rather than on the income statement as expenses. 2. Solar Technology, Inc. Schedule of Cost of Goods Manufactured For the Quarter Ended March 31 Direct materials: Raw materials inventory, beginning ............... $ 0 Add: Purchases of raw materials ................... 360,000 Raw materials available for use ..................... 360,000 Deduct: Raw materials inventory, ending ....... 10,000 Raw materials used in production .................. $350,000 Direct labor ................................................... 70,000 Manufacturing overhead: Maintenance, production .............................. 43,000 Indirect labor .............................................. 120,000 Cleaning supplies, production ....................... 7,000 Rental cost, facilities (80% $75,000) .......... 60,000 Insurance, production .................................. 8,000 Utilities (90% $80,000) ............................ 72,000 Depreciation, production equipment .............. 100,000 Total overhead costs ...................................... 410,000 Total manufacturing costs ............................... 830,000 Add: Work in process inventory, beginning ....... 0 830,000 Deduct: Work in process inventory, ending ....... 50,000 Cost of goods manufactured ........................... $780,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. 60 Managerial Accounting, 11th Edition Case 2-31 (continued) 3. Before an income statement can be prepared, the cost of the 8,000 batteries in the ending finished goods inventory must be determined. Altogether, the company produced 40,000 batteries during the quarter; thus, the production cost per battery would be: Cost of goods manufactured $780,000 = =$19.50 per unit Batteries produced during the quarter 40,000 units Since 8,000 batteries (40,000 32,000 = 8,000) were in the finished goods inventory at the end of the quarter, the total cost of this inventory would be: 8,000 units $19.50 per unit = $156,000. With this figure and other data from the case, the company's income statement for the quarter can be prepared as follows: Solar Technology, Inc. Income Statement For the Quarter Ended March 31 Sales (32,000 batteries) ............................. $960,000 Less cost of goods sold: Finished goods inventory, beginning ......... $ 0 Add: Cost of goods manufactured ............ 780,000 Goods available for sale ........................... 780,000 Deduct: Finished goods inventory, ending . 156,000 624,000 Gross margin ............................................ 336,000 Less operating expenses: Selling and administrative salaries............. 110,000 Advertising ............................................. 90,000 Rental cost, facilities (20% $75,000) ..... 15,000 Depreciation, office equipment ................. 27,000 Utilities (10% $80,000) ........................ 8,000 Travel, salespersons................................ 40,000 290,000 Net operating income ................................ $ 46,000 The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 61 Case 2-31 (continued) 4. No, the insurance company probably does not owe Solar Technology $226,000. The key question is how cost was defined in the insurance contract. It is most likely that the insurance contract limits reimbursement for losses to those costs that would normally be considered product costs--in other words, direct materials, direct labor, and manufacturing overhead. The $226,000 figure is overstated since it includes elements of selling and administrative expenses as well as all of the product costs. The $226,000 figure also does not recognize that some costs incurred during the period are in the ending Raw Materials and Work in Process inventory accounts, as explained in part (1) above. The insurance company's liability is probably just $156,000, which is the amount of cost associated with the ending Finished Goods inventory as shown in part (3) above. The McGraw-Hill Companies, Inc., 2006. All rights reserved. 62 Managerial Accounting, 11th Edition Group Exercise 2-32 1. This statement reflects Ford's focus on reducing costs. Producing cars in different colors adds to costs and reduces output in a variety of ways. First, changing colors on the production line involves considerable setups, during which time nothing can be painted. The old color must be purged from paint lines before the new color can be applied. And different colors mean larger paint inventories and--perhaps most importantly--larger inventories of finished autos. By producing the Model T in only one color, Ford was able to keep costs low and to keep throughput up-- thus keeping its costs low. However, the market was eventually willing to pay for more colors and Ford was slow to adapt to this change. 2. As stated in the problem, further efficiencies could be achieved by implementing standardized work procedures, specializing work, and using machines to enhance the productivity of individual workers. 3. There are indeed limits to lowering costs--they can't go below zero. One might think that the lowest limit is the cost of raw materials used in production. However, even this cost can be pushed down over time as more efficient means of producing raw materials are developed. 4. The most obvious application of mass production concepts to university education has been the increase in the number of students in classes-- with large lecture classes now being the norm in many introductory courses. Hospitals have applied the concepts of mass production by developing standardized procedures and by specializing in certain areas such as cardiac care or cancer treatment. Airlines have applied mass production concepts by increasing the size of the jets they fly and by reducing the time required to service a jet between flights. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 63 Group Exercise 2-33 1. A fixed cost is normally defined as a cost that remains constant, in total, regardless of changes in the level of activity. A variable cost is normally defined as a cost that varies, in total, in direct proportion to changes in the level of activity. 2. The relevant measure of activity for a steel company is probably the volume of steel produced. Fixed costs for a steel company include factory rent and depreciation, property taxes, many administrative costs, salaries, and periodic depreciation of equipment. Variable costs include the cost of raw materials, some energy costs, some labor costs, and some supply costs. 3. A number of different measures of activity could be used at a hospital. Some hospitals use a measure called patient-days, which counts a patient in the hospital for one day as a patient-day. Fixed costs at a hospital include the rental and depreciation of buildings, administrative salaries, utilities, insurance, and the costs of equipment. Variable costs include the costs of drugs and supplies and some labor costs. Universities often use credit-hours or the total number of students enrolled as the measure of activity. Fixed costs for a university include the costs of buildings, salaries, utilities, grounds maintenance, and so on. Variable costs are minimal. A measure of activity at an auto manufacturer might be the number of cars produced. Fixed costs for an auto manufacturer include the costs of buildings and equipment, insurance, salaries, and utilities. Variable costs include raw materials and perhaps some labor. 4. As the volume of steel produced increases, total fixed costs remain the same; the fixed cost per unit decreases; total variable costs increase; the variable cost per unit remains the same; total cost increases (due to the increase in total variable cost); and the average unit cost decreases (because of the decline in the fixed cost per unit). The McGraw-Hill Companies, Inc., 2006. All rights reserved. 64 Managerial Accounting, 11th Edition Group Exercise 2-33 (continued) 5. The following graph depicts how total costs behave as a function of how many tons of steel are produced. Total cost $ Total variable cost Total fixed cost Tons 6. The following graph depicts how average costs per unit behave as a function of how many tons of steel are produced. $ Average total cost per unit Variable cost per unit Average fixed cost per unit Tons 7. Once capacity has been set, total fixed costs and variable costs per unit remain the same while the average fixed cost per unit drops and the total variable cost increases as demand (output) increases. The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 2 65

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1.31.08
Path: UT Dallas >> HIST >> 1302 Spring, 2008
2.7.08
Path: UT Dallas >> HIST >> 1302 Spring, 2008
1.17.08
Path: UT Dallas >> HIST >> 1302 Spring, 2008
1.22.08
Path: UT Dallas >> HIST >> 1302 Spring, 2008
ch6
Path: UT Dallas >> ECO >> 2301 Spring, 2008
ch7
Path: UT Dallas >> ECO >> 2301 Spring, 2008
ch1
Path: UT Dallas >> ECO >> 2301 Spring, 2008
ch2
Path: UT Dallas >> ECO >> 2301 Spring, 2008
ch4
Path: UT Dallas >> ECO >> 2301 Spring, 2008
ch3
Path: UT Dallas >> ECO >> 2301 Spring, 2008
business law 1
Path: UT Dallas >> BA >> 2301 Spring, 2008
business law 3
Path: UT Dallas >> BA >> 2301 Spring, 2008
Business law 2
Path: UT Dallas >> BA >> 2301 Spring, 2008
ch5
Path: UT Dallas >> ECO >> 2301 Spring, 2008
Unit 1 Exam Review
Path: UT Dallas >> BIOL >> 1300 Spring, 2008
BS unit 4 review pt1
Path: UT Dallas >> BIOL >> 1300 Spring, 2008
BS unit 4 review pt2
Path: UT Dallas >> BIOL >> 1300 Spring, 2008
Unit 1 Exam Review
Path: UT Dallas >> BIOL >> 1300 Spring, 2008
Exam review 1
Path: UT Dallas >> HIST >> 1302 Spring, 2008
unit 2 exam review
Path: UT Dallas >> BIOL >> 1300 Spring, 2008
Chapter 3
Path: Colorado >> EMUS >> 1832 Spring, 2008
Aristophanes' Clouds
Path: Michigan State University >> PLS >> 170H Fall, 2007
Apology of Socrates
Path: Michigan State University >> PLS >> 170H Fall, 2007
Review Q's
Path: Texas A&M >> COMM >> 325 Spring, 2008
Ch6 Form
Path: Colorado >> EMUS >> 1832 Spring, 2008
Geog Review 1
Path: Texas A&M >> GEOG >> 203 Spring, 2008
Atmospheric Moisture and Precipitation
Path: Texas A&M >> GEOG >> 203 Spring, 2008
Persuasion Review Number Two
Path: Texas A&M >> COMM >> 325 Spring, 2008
PersuasionReview1
Path: Texas A&M >> COMM >> 325 Spring, 2008
Euthyphro notes
Path: University of Iowa >> RELIGION >> 002 Spring, 2008
Chapter 4 Harmony
Path: Colorado >> EMUS >> 1832 Spring, 2008
Euthyphro_notes
Path: University of Iowa >> RELIGION >> 002 Spring, 2008
Earthquakes
Path: Colorado >> GEOL >> 1010 Spring, 2008
Sea Level
Path: Colorado >> GEOL >> 1010 Spring, 2008
Glacier erosion and transport
Path: Colorado >> GEOL >> 1010 Spring, 2008
Ch 9 Rock
Path: Colorado >> EMUS >> 1832 Spring, 2008
Shorelines and Coastal Processes
Path: Colorado >> GEOL >> 1010 Spring, 2008
Review
Path: Colorado >> GEOL >> 1010 Spring, 2008
Frederich Nietzsche 1844
Path: Colorado >> PHIL >> 1100 Spring, 2008
TEST 1 Songs
Path: Colorado >> EMUS >> 1832 Spring, 2008