1
MANAGERIAL CHAPTER ACCOUNTING CONCEPTS AND
DECISION-MAKING SUPPORT
DISCUSSION QUESTIONS
1. Managerial accounting is the provision of information for internal users in a firm.
8.
Todays management accountant must understand many functions of the business,
from manufacturing to marketing to distribution to customer service, in order to provide
appropriate information for managing the
value chain. Increased international trade
means that the management accountant
must be familiar not only with business prac tices and laws in his or her own country but
also in the countries with which his or her
company trades.
9.
The value chain is the set of activities required to design, develop, produce, market,
and deliver products and services to customers. It is important because it helps the
company to understand its role in serving
customers and to develop strategic competence.
10.
As the environment in which most businesses operate becomes increasingly complex, so too does the managerial accounting
information that is prepared to measure and
evaluate that environment. In addition, more
and more diverse stakeholder groups, including environmental watchdog organizations, pension fund groups, and human
rights groups, are demanding and receiving
more types of managerial accounting information about organizations business practices. Finally, managerial accountants must
be able to explain complex, often quantitative, information to individuals who vary
widely in their comfort and familiarity with
numerical analyses (i.e., individuals from
mechanical engineers to marketing personnel to fashion designers).
2. The three broad objectives of managerial
accounting are planning, controlling, and decision making.
3. The users of managerial accounting information are typically managers and other employees of a firm. Managerial accounting information is typically not provided to outsiders but may be in selected cases. For example, a bank may require budgeting information for the next few years before
agreeing to grant a loan.
4. A managerial accounting information system
typically provides both financial and nonfinancial information. For example, financial information on cost of production is tracked.
Other information, such as the number of
warranty returns, may also be tracked by the
management information system.
5. Controlling is sometimes called performance
evaluation. It involves comparing the expected outcome with the actual outcome to see
what differences, if any, exist.
6. Managerial accounting is internally focused,
does not follow mandatory rules, keeps track
of both financial and nonfinancial information, emphasizes the future, and relies on a
broad range of disciplines. Financial accounting, on the other hand, is externally focused, follows externally imposed rules
(such as GAAP), has a historical orientation,
and provides information about the company
as a whole.
7. Customer value is the difference between
what a customer pays for a product or service and what she or he receives in return.
The focus on customer value forces managerial accounting to look at many types of
costs, not simply manufacturing cost. These
may include the price of the good or service,
maintenance costs, search costs, learning
costs, and disposal costs.
11. A cost object is something for which you
want to know the cost. For example, a cost
object may be the human resources department of a company. The costs related to that
cost object might include salaries of employees of that department, telephone costs for
that department, and depreciation on office
equipment. Another example is a customer
group of a company. Atlantic City and Las
1
Vegas casinos routinely treat heavy gamblers to free rooms, food, and drink. The
casinos know the benefits yielded by these
high rollers and need to know the costs of
keeping them happy, such as the opportunity cost of lost revenue from the rooms, the
cost of the food, and so on.
18.
19.
Marketing or selling cost is the cost of selling
and delivering products and services. Examples include free samples, advertising,
sponsorship of sporting events, commissions on sales, and the depreciation on delivery trucks (such as Coca-Cola or Pepsi
trucks).
22.
The cost of goods manufactured is the cost
of direct materials, direct labor, and overhead for the units produced (completed) during a time period. The cost of goods sold is
the cost of direct materials, direct labor, and
overhead for the units sold during a time
period. The number of units produced is not
necessarily equal to the number of units sold
during a period.
23.
14. Prime cost is the sum of direct materials and
direct labor. Conversion cost is the sum of
direct labor and overhead. Total product
cost consists of direct materials, direct labor,
and overhead. This is not equal to the sum
of prime cost and conversion cost because
then direct labor would be double counted.
The income statement for a manufacturing
firm includes the cost of goods sold which is
the sum of direct materials, direct labor, and
overhead. Because a service firm is not in
the business of buying (or producing) inventory for sale to other parties, the income
statement for a service firm does not contain
cost of goods sold (or gross margin).
21.
13. A direct cost is one that can be traced to the
cost object, typically by physical observation. An indirect cost cannot be traced to the
cost object. The same cost can be direct for
one purpose and indirect for another. For
example, the salaries paid to purchasing department employees in a factory are a direct
cost to the purchasing department but an indirect cost (overhead) to units of product.
The percentage column on the income
statement gives some insight into the relative spending on the various expense categories. These percentages can then be
compared with those of other firms in the
same industry to see if the companys
spending appears to be in line or out of line
with the experiences of others.
20.
12. Accumulating costs is the way that costs are
measured and tracked. Assigning costs is
linking costs to some cost object. For example, a company accumulates or tracks
costs by entering them into the chart of accounts. Direct materials would be entered
into the materials account; direct labor would
be entered into the direct labor account.
Then, these costs are assigned to units of
product.
Direct materials purchases are first entered
into the materials inventory. They may or
may not be used during the month. Only
when the materials are withdrawn from inventory for use in production are they known
as direct materials.
Ethical behavior involves choosing actions
that are right, proper, and just. Yes, it is possible to teach aspects of ethical behavior in
a managerial accounting classroom. Students need to see examples of right and
wrong in business. These examples help
them to recognize ethical dilemmas later on
the job.
15. Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that
are expected to bring a current or future benefit to the organization. An expense is an
expired cost; the benefit has been used up.
16. A period cost is one that is expensed immediately, rather than being inventoried like a
product cost.
17. Overhead includes all product costs other
than direct materials and direct labor. It is
because the remaining manufacturing
(product) costs are gathered into one category that overhead is often thought of as a
catch all.
2
MULTIPLE-CHOICE EXERCISES
11
a
12
b
13
e
14
c
15
c
16
d
17
d (Conversion cost per unit = $6 + $10 = $16)
18
b Sales = $75 1,000 units = $75,000
Production cost per unit = $15 + $6 + $10 = $31
Cost of goods sold = $31 1,000 = $31,000
Gross profit = $75,000 $31,000 = $44,000
19
e
110
c
111
d
112
c
113
a
114
b
115
d
116
a
117
a
Total prime cost = $50,000 + $20,000 = $70,000
Prime cost per unit = $70,000/10,000 = $7.00
118
c
Total conversion cost = $20,000 + $130,000 = $150,000
Conversion cost per unit = $150,000/10,000 = $15.00
119
b
Cost of goods sold = $50,000 + $20,000 + $130,000 = $200,000
Cost of goods sold per unit = $200,000/10,000 = $20.00
120
b
Sales = $31 10,000 = $310,000
Gross margin = $310,000 $200,000 = $110,000
Gross margin per unit = $110,000/10,000 = $11.00
121
c
Period expense = $40,000 + $36,000 = $76,000
122
a
Operating income = $310,000 $200,000 $76,000 = $34,000
Prime cost per unit = $1.50 + $0.75 = $2.25
3
EXERCISES
Exercise 123
1. The total product is the product and its features (processing speed, disk
drives, software packages, and so on), the service, the operating and mainten ance requirements, and the delivery speed.
2. One company is emphasizing low costs, and the other is attempting to differ entiate its PC by offering faster delivery and higher-quality service.
3. The Confiars service component and its delivery time appear to be better than
Drantexs. Thus, the realization of these features appears to outweigh the additional sacrifice (the additional operating and maintenance cost) associated
with the Confiar PC. The implications for managerial accounting are straight forward. The managerial accounting information system should collect and report information about customer realization and sacrifice. Much of this information is external to the firm but clearly needed by management.
4. Better quality and shorter delivery time increase what the customer receives,
while lowering the price decreases the amount paid. In total, customer value
has increased and presumably this should make the Drantex PC much more
competitive. This example illustrates how quality, time, and costs are essential
competitive weapons. It also illustrates how critical it is for the managerial ac counting system to collect and report data concerning these three dimen sions.
Exercise 124
1.
Costs
Salaries
Dereks salary.........................................................
Lawannas salary...................................................
Dereks commissions............................................
Lawannas commissions............................
Total...................................................................
Commissions
$25,000
30,000
$55,000
$6,000
1,500
$7,500
2. All of Dereks time is spent selling, so all of his salary cost is selling cost.
Lawanna spends two-thirds of her time selling, so $20,000 ($30,000 2/3) of
her salary is selling cost. The remainder is administrative cost. All commissions are selling costs.
4
Selling
Costs
Dereks salary.........................................................
Lawannas salary...................................................
Dereks commissions............................................
Lawannas commissions......................................
Total...................................................................
$25,000
20,000
6,000
1,500
$52,500
Administrative
Costs
$10,000
$10,000
Exercise 125
1. The two products that Holmes sells are playhouses and the installation of
playhouses. The playhouse itself is a tangible product, and the installation is a
service.
2. Holmes could assign the costs to production and to installation, but if the installation is a minor part of its business, it probably does not go to the trouble.
3. The opportunity cost of the installation process is the loss of the playhouses
that could have been built by the two workers who were pulled off the produc tion line.
Exercise 126
a. Salary of cell supervisorDirect
b. Power to heat and cool the plant in which the cell is locatedIndirect
c. Materials used to produce the motorsDirect
d. Maintenance for the cells equipmentIndirect
e. Labor used to produce motorsDirect
f. Cafeteria that services the plants employeesIndirect
g. Depreciation on the plantIndirect
h. Depreciation on equipment used to produce the motorsDirect
i. Ordering costs for materials used in productionIndirect
j. Engineering supportIndirect
k. Cost of maintaining the plant and groundsIndirect
l. Cost of the plants personnel officeIndirect
m. Property tax on the plant and landIndirect
5
Exercise 127
1. Direct materials Product cost
Direct labor Product cost
Overhead Product cost
Selling expense Period cost
2. Direct materials
Direct labor
Overhead
Total product cost
$ 5,000
2,500
3,700
$ 11,200
3. Unit product cost = $11,200/8,000 = $1.40
6
Exercise 128
Costs
Direct materials
Factory rent
Direct labor
Factory utilities
Supervision in
the factory
Indirect labor in
the factory
Depreciation on
factory
equipment
Sales
commissions
Sales salaries
Advertising
Depreciation on
the headquarters
building
Salary of the
corporate
receptionist
Other
administrative
costs
Salary of the
factory
receptionist
Totals
Product Cost
Direct
Direct
Overhead
Materials
Labor
$216,000
$ 24,000
$120,000
6,300
Period Cost
Selling
Administrative
Expense
Expense
50,000
30,000
9,000
$ 27,000
65,000
37,000
$ 10,000
30,000
175,000
28,000
$147,300
$216,000 $120,000
2. Direct materials
Direct labor
Overhead
Total product cost
$129,000
$216,000
120,000
147,300
$483,300
3. Total period cost = $129,000 + $215,000 = $344,000
4. Unit product cost = $483,300/30,000 = $16.11
7
$215,000
Exercise 129
Direct
Materials
Costs
Jars
X
Fruit
X
Pectin
X
Boxes
Overhead
X
Sugar
Direct
Labor
X
Depreciation on the factory building
X
Cooking equipment operators wages
X
Filling equipment operators wages
X
Packers wages
X
Janitors wages
X
Receptionists wages
X
Telephone
X
Utilities
X
Rental of Santa Claus suit
X
Supervisory labor salaries
X
Insurance on factory building
X
Depreciation on factory equipment
X
Oil to lubricate filling equipment
X
Exercise 130
1. Direct materials
Direct labor
Overhead
Total product cost
$560,000
96,000
220,000
$876,000
2. Product cost per unit = Total product cost/Number of units
= $876,000/10,000 = $87.60
8
Exercise 131
1. Direct materials
Direct labor
Total prime cost
$560,000
96,000
$656,000
2. Prime cost per unit = Total prime cost/Number of units
= $656,000/10,000 = $65.60
3. Direct labor
Overhead
Total conversion cost
$ 96,000
220,000
$316,000
4. Conversion cost per unit = Total conversion cost/Number of units
= $316,000/10,000 = $31.60
Exercise 132
Materials inventory, July 1
Materials purchases in July
Materials inventory, July 31
Direct materials used in July
$ 2,300
12,700
(4,900)
$10,100
Exercise 133
1. Finished goods inventory, January 1
Units completed during the year
Finished goods inventory, December 31
Units sold
2. Units sold
Unit cost
Cost of goods sold
1,430
114,000
(2,650)
112,780
112,780
$15
$1,691,700
9
Exercise 134
1. Materials inventory, March 1
Materials purchases in March
Materials inventory, March 31
Direct materials used in March
$ 8,600
14,000
(2,300)
$20,300
2. Direct materials
Direct labor
Overhead
Total manufacturing cost
$20,300
20,000
36,000
$76,300
3. Total manufacturing cost
Add: Work in process, March 1
Less: Work in process, March 31
Cost of goods manufactured
$76,300
1,700
(9,000)
$69,000
Exercise 135
Materials inventory, March 1
Materials purchases in March
Materials inventory, March 31
Direct materials used in March
$ 8,600
14,000
(2,300)
$20,300
Direct materials
Direct labor
Overhead
Total manufacturing cost
$20,300
20,000
36,000
$76,300
Total manufacturing cost
Add: Work in process, March 1
Less: Work in process, March 31
Cost of goods manufactured
$76,300
1,700
(9,000)
$69,000
Cost of goods manufactured
Add: Finished goods, March 1
Less: Finished goods, March 31
Cost of goods sold
$69,000
7,000
(6,500)
$69,500
10
Exercise 136
Direct materials
Direct labor
Overhead
Cost of goods sold
$ 145,000
335,000
670,000
$1,150,000
Note: Because there were no beginning nor ending Work in Process or Finished Goods inventories, no adjustments were made for them in this statement.
Exercise 1-37
1. Sales revenue = Number of units sold Selling price
= 200,000 $14
= $2,800,000
2.
Landes Company
Income Statement
For the Past Year
Sales revenue...............................................................................
Cost of goods sold......................................................................
Gross profit..................................................................................
Less:
Selling expense......................................................................
Administrative expense.........................................................
Operating income........................................................................
*
Direct materials
Direct labor
Overhead
Cost of goods sold
$ 145,000
335,000
670,000
$1,150,000
11
$2,800,000
1,150,000*
$1,650,000
367,000
415,000
$ 868,000
Exercise 138
Landes Company
Income Statement
For the Past Year
Sales & Expenses Percent of Sales*
Sales revenue................................................... $2,800,000
100.0
Cost of goods sold...........................................
1,150,000
41.1
Gross profit....................................................... $1,650,000
58.9
Less:
Selling expense...........................................
367,000
13.1
Administrative expense..............................
415,000
14.8
Operating income............................................. $ 868,000
31.0
*
See solution to Exercise 2-33
Sales revenue: $2,800,000/$2,800,000 = 1.00 or 100%
Cost of goods sold: $1,150,000/$2,800,000 = 0.4107 = 41.1%
Gross profit: $1,650,000/$2,800,000 = 0.5892 = 58.9%
Selling expense: $367,000/$2,800,000 = 0.131 = 13.1%
Administrative expense: $415,000/$2,800,000 = 0.148 = 14.8%
Operating income: $868,000/$2,800,000 = 0.31 = 31.0%
Exercise 139
A manager has a responsibility to the company as well as society. If he or she
lays off the employees, he or she ignores both of these responsibilities. In effect,
the manager would be pursuing his or her self-interest at the expense of the com pany and the salespeople. While pursuit of self-interest is not necessarily uneth ical, it can be if it harms others. In this case, the managers action could result in
lower profits for the company because sales may decrease and unnecessary
training costs will be incurred when the positions are refilled the following year.
Similarly, it is unjust to penalize productive employees simply to earn a bonus.
The right choice is to retain the three salespeople. In ethical terms, the manager
is not behaving with integrity.
The reward system, in part, encouraged this behavior. Apparently, the manager is
paid a bonus if profits exceed 10 percent of planned profits. By basing reward on
a short-run measure such as profits, the manager has the incentive to manipulate
earnings in the short run. One way of manipulating annual earnings is to reduce
discretionary expenditures.
This type of behavior can be discouraged by expanding the performance meas ures to include long-run factors like market share, productivity, and personnel de velopment. The accounting system can also be used to track trends (e.g., training
costs over time). Moreover, managers can be required to provide extensive justification for significant changes in discretionary expenses.
12
Exercise 140
The employees should not follow the suggestion of their boss to purchase more
shares in anticipation of a buyout. This is insider trading and is illegal. Insider
trading is prohibited by many corporate codes of ethics. Even when it is not expli citly prohibited by the corporate code of ethics, it is still wrong and illegal.
Exercise 141
Answers will vary.
13
PROBLEMS
Problem 142
1.
Cost
Direct
Materials
Hamburger meat
Buns, lettuce, pickles,
and onions
Frozen potato strips
Wrappers, bags, and
condiment packages
Overhead
Selling
and
Administrative
$4,500
Other ingredients
Part-time employees
wages
John Petersons salary
Utilities
Rent
Depreciation, cooking
equipment and
fixtures
Advertising
Janitors wages
Janitorial supplies
Accounting fees
Taxes
Total
Direct
Labor
660
800
1,250
600
$7,250
$3,000
$1,500
1,800
600
500
520
150
$7,810
$7,250
$4,570
1,500
4,250
$9,250
Explanation of Classification
Direct materials include all the food items that go into a burger bag, as well as
the condiment packages and the wrappers and bags themselves. These mater ials go out the door in the final product. Other ingredients might include
the oil to fry the potato strips and grease the frying surface for the ham burgers and the salt for the fries. They are direct materials but could also be
classified as overhead because of cost and convenience.
Direct labor consists of the part-time employees who cook food and fill orders.
Overhead consists of all indirect costs associated with the production pro cess. These utilities, are the rent for the building, the depreciation on the
equipment and register, and the cost of janitorial fees and supplies.
14
Problem 142
(Concluded)
Selling and administrative expense includes John Petersons salary, advertising, accounting fees, and taxes.
2. Sales ($3.50 10,000)...........................................
Less cost of goods sold:
Direct materials.................................................
Direct labor........................................................
Overhead...........................................................
Gross margin..........................................................
Less: Selling and administrative expense..........
Net income........................................................
$35,000
$7,810
7,250
4,570
19,630
$15,370
9,250
$ 6,120
3. Elenas simplifying assumptions were: (1) all part-time employees are production workers, (2) John Petersons salary is for selling and administrative func tions, (3) all building-related expense as well as depreciation on cooking
equipment and fixtures are for production, and (4) all taxes are administrative
expense. These make it easy to classify 100% of each expense as product cost
or selling and administrative cost. The result is that she does not have to perform studies of the time spent by each employee on producing versus selling
burger bags. In addition, it is likely that John Peterson pitches in to help fry
burgers or assemble burger bags when things get hectic. Of course, during
those times, he is engaged in productionnot selling or administration. The
cost of determining just exactly how many minutes of each employees day is
spent in production versus selling is probably not worth it. (Remember, ac countants charge by the number of hours spentthe more time Elena spends
separating costs into categories, the higher her fees.)
For this small business, there is little problem with misclassifying these expenses. Pops Drive-Thru Burger Heaven is not a publicly traded company,
and its income statements do not have to conform to GAAP. Outside use of
the statements is confined to government taxing authorities and a bank (if a
loan or line of credit is necessary). Elenas accounting works well for those
purposes.
Problem 143
1. Cost per page for black ink = $25.50/850 pages = $0.03
Total owed to Harry by Mary = $0.03 500 pages = $15
Total owed to Harry by Natalie = $0.03 1,000 pages = $30
2. Cost per sheet for paper = $2.50/500 sheets = $0.005
Total cost for Mary = 500 pages ($0.03 + $0.005) = $17.50
Total cost for Natalie = 1,000 pages ($0.03 + $0.005) = $35.00
15
Problem 143 (Continued)
3. Cost per page for color ink = $31/310 pages = $0.10
Number of black ink pages for Natalie = 1,000 0.8 = 800
Number of color ink pages for Natalie = 1,000 0.2 = 200
Total owed to Harry by Natalie = ($0.03 800 pages) + ($0.10 200) = $44
Total cost to Natalie = [($0.03 + $0.005) 800 pages] + [($0.10 + $0.005) 200
pages] = $49
Problem 144
1. Direct materials = $40,000 + $64,000 $19,800 = $84,200
2. Direct materials used
Direct labor
Overhead
Total manufacturing cost for July
Work in process, July 1
Work in process, July 31
Cost of goods manufactured
$ 84,200
43,500
108,750
$236,450
21,000
(32,500)
$224,950
3. Cost of goods manufactured
Finished goods inventory, July 1
Finished good inventory, July 31
Cost of goods sold
$224,950
23,200
(22,100)
$226,050
Problem 145
1. Direct materials
Direct labor
Overhead
Unit product cost
$18
12
16
$46
Total product cost = $46 200,000 = $9,200,000
16
Problem 145
2.
(Concluded)
Laworld, Inc.
Income Statement
For Last Year
Sales ($60 200,000)..................................................................
Cost of goods sold......................................................................
Gross margin...............................................................................
Less:
Commissions ($2 200,000)................................................
Fixed selling expense............................................................
Administrative expense.........................................................
Operating income........................................................................
$12,000,000
9,200,000
$ 2,800,000
400,000
100,000
300,000
$ 2,000,000
No, we do not need to prepare a statement of cost of goods manufactured because there were no beginning or ending inventories of work in process. As a
result, total manufacturing cost is equal to the cost of goods manufactured.
3. The 10,000 tents in beginning finished goods inventory have a cost of $40, and
that is lower than the years unit product cost of $46. The FIFO assumption
says that beginning inventory is sold before current year production. Therefore, the cost of goods sold will be lower than it would be if there were no be ginning inventory. This can be seen in the following statement of cost of
goods sold.
Cost of goods manufactured ($46 200,000)
Add: Beginning inventory finished goods ($40 10,000)
Less: Ending inventory finished goods ($46 10,000)
Cost of goods sold
$9,200,000
400,000
(460,000)
$9,140,000
Laworld, Inc.
Revised Income Statement
For Last Year
Sales ($60 200,000)..................................................................
Cost of goods sold......................................................................
Gross margin...............................................................................
Less:
Commissions ($2 200,000)................................................
Fixed selling expense............................................................
Administrative expense.........................................................
Operating income........................................................................
17
17
$12,000,000
9,140,000
$ 2,860,000
400,000
100,000
300,000
$ 2,060,000
Problem 146
1. Direct materials = $3,475 + $15,000 $9,500 = $8,975
Hayward Company
Statement of Cost of Goods Manufactured
For the Month of May
Direct materials used.............................................
Direct labor.............................................................
Overhead:
Factory supplies...............................................
Factory insurance.............................................
Factory supervision.........................................
Material handling..............................................
Total manufacturing cost for May........................
Work in process, May 1.........................................
Work in process, May 31.......................................
Cost of goods manufactured..........................
2.
$ 8,975
10,500
$ 675
350
2,225
3,750
7,000
$26,475
12,500
(14,250)
$24,725
Hayward Company
Statement of Cost of Goods Sold
For the Month of May
Cost of goods manufactured......................................................
Finished goods inventory, May 1...............................................
Finished goods inventory, May 31.............................................
Cost of goods sold.................................................................
Problem 147
1. Beginning inventory of materials
Purchases of materials
Less: Ending inventory of materials
Cost of materials used in April
$ 26,300
200,000
(14,250)
$212,050
2. Prime cost = Cost of materials + Direct labor
= $212,050 + $53,000
= $265,050
3. Conversion cost
= Direct labor + Overhead
= $53,000 + $120,000
= $173,000
18
$24,725
6,685
(4,250)
$27,160
Problem 147
(Concluded)
4. Cost of materials used in April
Direct labor
Overhead
Cost of services for April
5.
$212,050
53,000
120,000
$385,050
Confiable Muffler
Income Statement
For the Month of April
Sales..............................................................................................
Cost of services sold...................................................................
Gross margin...............................................................................
Less:
Advertising..............................................................................
Franchise fees (3 $3,000)..................................................
Operating income........................................................................
$500,000
385,050
$114,950
15,000
9,000
$ 90,950
6. Remington Company is a manufacturer. It produces mufflers, a tangible
product, which can have both work-in-process and finished goods inventories.
Remington would most likely use both cost of goods manufactured and cost
of goods sold statements. Confiable, on the other hand, is a service company.
This service takes very little time to complete. Therefore, Confiable would
have no work-in-process inventory or finished goods (i.e., installed mufflers)
inventory. It can, of course, have a materials inventory (mufflers on hand that
have not been installed).
Problem 148
1.
c. These costs include direct materials, direct labor, and overhead. The total
of these three types of costs equals product cost.
2.
a. If Linda returns to school, she will need to quit her job. The lost salary is
the opportunity cost of returning to school.
3.
b. If Randy were engaged in manufacturing a product, his salary would be a
product cost. Instead, the product has been manufactured. It is in finished
goods warehouse waiting to be sold. This is a period cost.
4.
j. Jamie is working at company headquarters, and her salary is part of ad ministrative cost.
5.
i. All factory costs other than direct materials and direct labor are, by defini tion, overhead.
19
Problem 148
(Concluded)
6.
d. The design engineer is estimating the total number of labor hours re quired to complete the manufacturing of a product. This total will be used
to compute direct labor cost.
7.
h. This is direct materials cost.
8.
g. The sum of direct materials and direct labor is, by definition, prime cost.
9.
f. The cost of converting direct materials into finished product is the sum of
direct labor and overhead. This is conversion cost.
10. e. The depreciation on the delivery trucks is part of selling cost, the cost of
selling and delivering product.
Problem 149
1.
W. W. Phillips Company
Statement of Cost of Goods Manufactured
For Last Year
Direct materials......................................................
Direct labor.............................................................
Overhead:
Indirect labor.....................................................
Rent, factory building......................................
Depreciation, factory equipment....................
Utilities, factory.................................................
Total cost of product.............................................
Beginning work in process...................................
Ending work in process........................................
Cost of goods manufactured..........................
$300,000*
200,000
$40,000
42,000
60,000
11,900
*Direct materials used = $46,800 + $320,000 $66,800 = $300,000
2. Average cost of one unit of product = $652,000/4,000 = $163
20
153,900
$653,900
13,040
(14,940)
$652,000
Problem 149
3.
(Concluded)
W. W. Phillips Company
Income Statement
For Last Year
Sales ($400 3,800*).............................................
Cost of goods sold................................................
Gross margin..........................................................
Selling expense:
Sales supervisors salary................................
Commissions....................................................
General administration expense..........................
Operating income.............................................
$1,520,000
617,900**
$ 902,100
$ 90,000
180,000
270,000
300,000
$ 332,100
* Units sold = 4,000 + 500 700 = 3,800
**Cost of goods sold = $652,000 + $80,000 $114,100 = $617,900
Problem 150
1. The Internet payment of $40 is an expense that would appear on the income
statement. This is because the Internet services are used up each monthLu isa cannot save any unused Internet time for the next month.
2. The opportunity cost is the $100 that Luisa would have made if she had been
able to accept the movie role. It is an opportunity cost because it is the cost of
the next best alternative to dog walking.
3. The price is $250 per month per dog. (Note: The price is charged by Luisa to
her clients; it is not her cost.)
Total revenue for a month = $250 12 dogs = $3,000
21
Problem 151
1. Direct materials:
Magazine (5,000 $0.40)
Brochure (10,000 $0.08)...............................
Direct labor:
Magazine [(5,000/20) $10]............................
Brochures [(10,000/100) $10]......................
Manufacturing overhead:
Rent....................................................................
Depreciation [($40,000/20,000) 350*]..........
Setups................................................................
Insurance...........................................................
Power.................................................................
Cost of goods manufactured................................
$2,000
800
$2,800
$2,500
1,000
3,500
$1,400
700
600
140
350
3,190
$9,490
*Production is 20 units per printing hour for magazines and 100 units per printing hour for
brochures, yielding monthly machine hours of 350 [(5,000/20) + (10,000/100)]. This is also
monthly labor hours as machine labor only operates the presses.
2. Direct materials......................................................
Direct labor.............................................................
Total prime costs..............................................
Magazine:
Direct materials.................................................
Direct labor........................................................
Total prime costs........................................
Brochure:
Direct materials.................................................
Direct labor........................................................
Total prime costs........................................
22
$2,800
3,500
$6,300
$2,000
2,500
$4,500
$ 800
1,000
$1,800
Problem 151
(Continued)
3. Total monthly conversion cost:
Direct labor........................................................
Overhead...........................................................
Total..............................................................
Magazine:
Direct labor........................................................
Overhead:
Power ($1 250).........................................
Depreciation ($2 250)..............................
Setups (2/3 $600)....................................
Rent and insurance ($4.40 250 DLH)*...
Total........................................................
Brochures:
Direct labor........................................................
Overhead:
Power ($1 100).........................................
Depreciation ($2 100)..............................
Setups (1/3 $600)....................................
Rent and insurance ($4.40 100 DLH)*...
Total........................................................
$3,500
3,190
$6,690
$2,500
$ 250
500
400
1,100
2,250
$4,750
$1,000
$ 100
200
200
440
940
$1,940
* Rent and insurance cannot be traced to each product so the costs are assigned using direct labor hours: $1,540/350 DLH = $4.40 per direct labor
hour. The other overhead costs are traced according to their usage. Depreci ation and power are assigned by using machine hours (250 for magazines
and 100 for brochures): $350/350 = $1.00 per machine hour for power and
$40,000/20,000 = $2.00 per machine hour for depreciation. Setups are as signed according to the time required. Since magazines use twice as much
time, they receive twice the cost: Letting X = the proportion of setup time
used for brochures, 2X + X = 1 implies a cost assignment ratio of 2/3 for
magazines and 1/3 for brochures.
23
Problem 151
(Concluded)
4. Sales[(5,000 $1.80) + (10,000 $0.45)]..........
Less cost of goods sold........................................
Gross margin..........................................................
Less operating expenses:
Selling................................................................
Administrative...................................................
Income before taxes..............................................
$13,500
9,490
$4,010
$ 500a
1,500b
2,000
$2,010
a
Distribution of goods is a selling expense.
b
A case could be made for assigning part of her salary to production.
However, since she is responsible for coordinating and managing all business functions, an administrative classification is more convincing.
Problem 152
1. The costs of the tent sales are accounted for as selling expense. The tent
sales are designed to sell outdated or remanufactured products. They are not
the main reason that Kicker is in business. In fact, an important objective is
simply to increase awareness of the Kicker brand. As a result, these related
costs are selling expense.
2. Revenue
Cost of goods sold
Tent sale expense
Tent sale loss
$ 20,000
(7,000)
(14,300)
$ (1,300)
A couple of actions could be taken. First, it could look for a more appropriate
venue. The outer parking lot of a shopping center, or even a large grocery
store, would enable Kicker employees to easily load purchased product into
customer cars. Second, the deejay could be dispensed with; instead, music
could be played from CDs over the audio system in the truck. Third, Kicker
could spend a year or so raising brand awareness in the Austin market before
attempting another tent sale.
24
CASES
Case 153
1.
Production
Selling
Administrative
(DL) Machine operators
Utilities
(DL) Other direct labor
Rent
(OH) Supervisory salaries
CPA fees
(DM)Pipe
Sales salaries
(OH) Tires and fuel
Adm. salaries
Advertising
(OH) Depreciation
(OH) Salaries of mechanics
2.
Traceable costs using equipment hours:
Machine operators
Other direct labor
Supervisory salaries
Pipe
Tires and fuel
Depreciation, equipment
Salaries of mechanics
Total
$
218,000
265,700
70,000
1,401,340
418,600
198,000
50,000
$ 2,621,640
Machine operators, tires and fuel, and depreciation are all directly caused by
equipment usage, which is measured by equipment hours. One can also argue that the maintenance required is also a function of equipment hours and
so the salaries of mechanics can be assigned using equipment hours. Pipe
and other direct labor can be assigned using equipment hours because their
usage should be highly correlated with equipment hours. That is, equipment
hours increase because there is more pipe being laid. As hours increase, so
does the pipe usage. A similar argument can be made for other direct labor.
Actually, it is not necessary to use equipment hours to assign pipe or other
direct labor because these two costs are directly traceable to jobs.
Traceable cost per equipment hour = $2,621,640/18,200
= $144.05 per hour
25
Case 154
1. Leroy should politely and firmly decline the offer. The offer includes an impli cit request to use confidential information to help Jean win the bid. Use of
such information for personal advantage is wrong. Leroy has a professional
and personal obligation to his current employer. This obligation must take precedence over the opportunity for personal financial gain.
Corporate codes of conduct emphasize honesty and integrity. Leroy has a re sponsibility to act on behalf of his company, and clearly, disclosing confidential information acquired in the course of his work to a competitor would be
prohibited. In addition, codes of corporate conduct also require employees to
avoid conflicts of interest and to refuse any gift, favor, or hospitality that
would influence employee actions inappropriately.
2. If Leroy agrees to review the bid, he will likely use his knowledge of his cur rent employers position to help Jean win the bid. In fact, agreement to help
probably would reflect a desire for the bonus and new job with the associated
salary increase. Helping would likely ensure that Jean would win the bid.
Leroy was concerned about the political fallout and subsequent investigation
revealing his involvement especially if he sent up a red flag by switching to
his friends firm. An investigation may reveal the up-front bonus and increase
the suspicion about Leroys involvement. There is a real possibility that Leroy
could be implicated. Whether this would lead to any legal difficulties is another issue. At the very least, some tarnishing of his professional reputation and
personal character is possible. Some risk to Leroy exists. The amount of risk,
though, should not be a factor in Leroys decision. What is right should be the
central issue, not the likelihood of getting caught.
26