Solutions manual managerial accounting 13e by garrison noreen

2-7 The income statement of a manufacturing company differs from the income statement of a merchandising company in the cost of goods sold section.. 2-8 The schedule of cost of goods

Managerial Accounting and

the Business Environment

Solutions to Questions

1-1 A strategy is a game plan that enables a

company to attract customers by distinguishing

itself from competitors The focal point of a

company’s strategy should be its target

custom-ers

1-2 Customer value propositions fall into

three broad categories—customer intimacy,

op-erational excellence, and product leadership A

company with a customer intimacy strategy

at-tempts to better understand and respond to its

customers’ individual needs than its competitors

A company that adopts an operational

excel-lence strategy attempts to deliver products

fast-er, more conveniently, and at a lower price than

its competitors A company that has a product

leadership strategy attempts to offer higher

quality products than its competitors

1-3 A person in a line position is directly

involved in achieving the basic objectives of the

organization A person in a staff position

pro-vides services and assistance to other parts of

the organization, but is not directly involved in

achieving the basic objectives of the

organiza-tion

1-4 The Chief Financial Officer is responsible

for providing timely and relevant data to support

planning and control activities and for preparing

financial statements for external users

1-5 The three main categories of inventories

in a manufacturing company are raw materials,

work in process, and finished goods

1-6 The five steps in the lean thinking model

around the flow of the business process; (4) create a pull system that responds to customer orders; and (5) continuously pursue perfection

in the business process

1-7 Successful implementation of the lean thinking model should result in lower invento- ries, fewer defects, less wasted effort, and quicker customer response times

1-8 In a pull production system, production

is not initiated until a customer order is ceived Inventories are reduced to a minimum

re-by purchasing raw materials and producing products only as needed to meet customer de-

mand

1-9 Some benefits from improvement efforts come from cost reductions, but the primary benefit is often an increase in capacity At non- constraints, increases in capacity just add to the already-existing excess capacity Therefore, im- provement efforts should ordinarily focus on the constraint

1-10 Six Sigma is a process improvement

method that relies on customer feedback and fact-based data gathering and analysis tech- niques to drive process improvement The goal

is to reduce defect rates below 3.4 defects per million

1-11 The five stages in the Six Sigma DMAIC

Framework are (1) Define; (2) Measure; (3) Analyze; (4) Improve; and (5) Control The goals for the define stage are to establish the scope and purpose of the project, to diagram

baseline performance data related to the

exist-ing process and to narrow the scope of the

project to the most important problems The

goal in the analyze stage is to identify the root

causes of the problems identified in the measure

stage The goal in the improve stage is to

devel-op, evaluate, and implement solutions to the

problems The goals in the control stage are to

ensure the problems remain fixed and to seek to

improve the new methods over time

1-12 If people generally did not act ethically

in business, no one would trust anyone else and

people would be reluctant to enter into business

transactions The result would be less funds

raised in capital markets, fewer goods and

ser-vices available for sale, lower quality, and higher

prices

1-13 Corporate governance is the system by

which a company is directed and controlled If properly implemented, the corporate gover- nance system should provide incentives for the board of directors and top management to pur- sue objectives that are in the best interests of the company’s owners and it should provide for effective monitoring of performance

1-14 Enterprise risk management is a process

used by a company to proactively identify the risks that it faces and to manage those risks

1-15 The stakeholder groups include

custom-ers, supplicustom-ers, stockholdcustom-ers, employees, munities, and environmental and human rights advocates

11 Corporate social responsibility

12 supply chain management

13 lean thinking model; pulls

14 customer value proposition

15 The Sarbanes-Oxley Act of 2002

16 non-value-added activity

17 Theory of Constraints

If cashiers routinely shortchanged customers whenever the opportunity presented itself, most of us would be careful to count our change before leaving the counter Imagine what effect this would have on the line at your favorite fast-food restaurant How would you like to wait in line while each and every customer laboriously counts out his or her change? Addi-tionally, if you can’t trust the cashiers to give honest change, can you trust the cooks to take the time to follow health precautions such as washing their hands? If you can’t trust anyone at the restaurant would you even want to eat out?

Generally, when we buy goods and services in the free market, we assume

we are buying from people who have a certain level of ethical standards If

we could not trust people to maintain those standards, we would be tant to buy The net result of widespread dishonesty would be a shrunken economy with a lower growth rate and fewer goods and services for sale at

reluc-a lower overreluc-all level of qureluc-ality

Problem 1-4 (20 minutes)

1 Failure to report the obsolete nature of the inventory would violate the IMA’s Statement of Ethical Professional Practice as follows:

Competence

• Perform duties in accordance with relevant technical standards

Gen-erally accepted accounting principles (GAAP) require the write-down

• Refrain from engaging in any conduct that would prejudice carrying

out duties ethically

• Abstain from activities that would discredit the profession

Members of the management team, of which Perlman is a part, are sponsible for both operations and recording the results of operations Because the team will benefit from a bonus, increasing earnings by ig-noring the obsolete inventory is clearly a conflict of interest Further-more, such behavior is a discredit to the profession

Credibility

• Communicate information fairly and objectively

• Disclose all relevant information

• Hiding the obsolete inventory impairs the objectivity and relevance of

financial statements

(Unofficial CMA solution)

2 As discussed above, the ethical course of action would be for Perlman to insist on writing down the obsolete inventory This would not, however,

be an easy thing to do Apart from adversely affecting her own sation, the ethical action may anger her colleagues and make her very unpopular Taking the ethical action would require considerable courage and self-assurance

compen-Problem 1-5 (30 minutes)

1 See the organization chart on the following page

2 Line positions include the university president, academic vice-president, the deans of the four colleges, and the dean of the law school In addi-tion, the department heads (as well as the faculty) are in line positions The reason is that their positions are directly related to the basic pur-pose of the university, which is education (Line positions are shaded on the organization chart.)

All other positions on the organization chart are staff positions The reason is that these positions are indirectly related to the educational process, and exist only to provide service or support to the line posi-tions

3 All positions would have need for accounting information of some type For example, the manager of central purchasing would need to know the level of current inventories and budgeted allowances in various

areas before doing any purchasing; the vice-president for admissions and records would need to know the status of scholarship funds as stu-dents are admitted to the university; the dean of the business college would need to know his/her budget allowances in various areas, as well

as information on cost per student credit hour; and so forth

1 Organization chart:

President

Academic Vice President

Records

Vice President, Financial Services (Controller)

Vice President, Physical Plant

Dean,

Business HumanitiesDean, Fine ArtsDean,

Dean, Engineering &

Quantitative Methods

Dean, Law School

Manager,

Central

Purchasing

Manager, University Press

Manager, University Bookstore

Manager, Computer Services

Manager, Accounting

& Finance

Manager, Grounds &

Custodial Services

Manager, Plant & Maintenance

Problem 1-6 (30 minutes)

1 No, Charlie would not be justified in ignoring the situation First, the Statement of Ethical Professional Practice states that the management accountant must ―Regularly communicate with business associates to avoid apparent conflicts of interest Advise all parties of any potential conflicts.‖ If J.B insists on continuing the relationship with A-1, Charlie has a responsibility to advise both the corporate counsel and WIW’s Board of Directors

Second, as the company’s controller, Charlie has a responsibility to sure that the JIT approach is properly implemented From the data giv-

en-en in the problem, it does not appear that A-1 Warehouse Sales is the best or most dependable supplier available Orders are late and not complete, and there is no way to ensure proper quality because nearly all orders are shipped directly from the manufacturer The present ar-rangement with A-1 negates most of the benefits that can accrue

from JIT

2 Charlie’s first step should be to verify the accuracy of his information

He states that A-1’s markup is 30%, but he does not indicate how he obtained this figure Also, the adverse financial impact on WIW is de-pendent in part on the price it would have to pay directly to the manu-facturers as compared to the price being paid to A-1 That is, can WIW purchase directly from the manufacturers for the same price as given to jobbers, who handle huge volumes of goods? If not, then the adverse financial impact of buying through A-1 may, in fact, be very small be-cause WIW may have to pay about the same price either way

Charlie’s second step should be to discuss the potential legal tions on a confidential basis with WIW’s corporate counsel Before meet-ing with the corporate counsel, Charlie may wish to discretely determine

ramifica-if Tony, the purchasing agent, and J.B., the president, worked together

in their prior employment (Remember that both have been with WIW for five years.) Armed with the information obtained from the discussion with counsel, Charlie should review the situation again with J.B., ex-plaining more directly his concerns about the apparent conflict of inter-est and ask that the Board of Directors approve the continued use of A-

1 as a supplier

If J.B refuses to follow this course of action, Charlie’s only alternative is

to submit a memorandum to the Board of Directors J.B should be fied of this action in advance The memorandum should present only the facts If the Board approves the continued relationship with A-1, Charlie may possibly conclude that his concerns about an apparent conflict of interest do not represent an actual conflict This presumes that legal counsel has advised the Board that the arrangement with A-1 does not violate any laws and that the company has made adequate disclosures

noti-in its public filnoti-ings Only Charlie can make the decision as to whether or not he can continue at WIW under these circumstances

Problem 1-7 (20 minutes)

1 If all automotive service shops routinely tried to sell parts and services

to customers that they didn’t really need, most customers would tually figure this out They would then be reluctant to accept the word

even-of the service representative that a particular problem needs to be rected—even when a real problem exists Either the work would not be done, or customers would learn to diagnose and repair problems them-selves, or customers would hire an independent expert to verify that the work is really needed All three of these alternatives impose costs and hassles on customers

cor-2 As argued above, if customers could not trust their service tives, they would be reluctant to follow the service representative’s ad-vice They would be inclined not to authorize work even when it is really necessary And, more customers would learn to do automotive repairs and maintenance themselves Moreover, customers would be unwilling

representa-to pay as much for work that is done because cusrepresenta-tomers would have reason to believe that the work may be unnecessary These two effects would reduce demand for automotive repair services The reduced de-mand would reduce employment in the industry and would lead to lower overall profits

1 Line authority is directly related to the achievement of an organization’s basic objectives Line managers have formal authority to direct opera-tions

Staff assists line management in the achievement of an organization’s basic objectives Persons with staff authority provide support services Staff managers typically have advisory authority because of their partic-ular expertise

2 Mark Johnson’s responsibility for maintaining the production schedule involves line authority Johnson would be directly concerned with meet-ing the company’s primary objective of producing metal parts

Johnson’s responsibility to consult with production supervisors is a staff role because he apparently cannot order changes in those consultations,

he can only advise Johnson’s supervision of new alloy testing and his role regarding the use of new alloys in product development is basically

a staff function as well He has limited authority regarding the use of new alloys because his authority applies only to product development and not to production

3 Mark Johnson may experience several conflicts because he has been given both line and staff authority

First, Johnson may initially find it difficult to communicate with the duction supervisors because he operates out of a staff position

Second, a conflict could easily develop if the supervisors lack a clear derstanding of Johnson’s responsibilities and authorities The supervi-sors could resent apparent staff interference and refuse to discuss their problems with Johnson, making the meetings fruitless The supervisors working on the new contract may fail to perceive Johnson’s line authori-

un-ty and refuse to follow his orders

Third, Johnson might have difficulty in understanding the nature of his position and job Johnson might also find it difficult to distinguish be-tween his staff capacity and line capacity For instance, Johnson might have difficulty in remaining objective if any production problems develop

in the alloys he tested

Research and Application 1-9

1 Whole Foods Market succeeds first and foremost because of its product leadership customer value proposition The first boldface heading in the company’s Declaration of Interdependence says ―We Sell the Highest Quality Natural and Organic Products Available.‖ Page 4 of the 10-K/A indicates that the real source of the company’s product leadership posi-tion centers on perishable products (e.g., produce, dairy, meat, seafood, bakery, and prepared foods) Perishable product sales account for about 67% of total retail sales Customers choose Whole Foods Market pri-marily because they are able to buy better natural and organic foods and higher-quality perishable products than in conventional supermar-kets

Customer service is also an important part of Whole Foods Market’s cess, but it is secondary in importance to product quality

suc-2 Whole Foods Market faces numerous business risks as described in

pag-es 11-15 of the 10-K/A Here are four of the more prominent risks with suggested control activities:

Risk: Customers will defect to conventional supermarkets that are ginning to stock more natural and organic foods Control activities:

be-Whole Foods Market can expand its selection of product offerings, ticularly perishables, and continue to invest heavily in employee training and retention so that it offers market-leading levels of informed custom-

par-er spar-ervice

Risk: Growth targets will not be realized due to failed new store ings Control activities: Implement formal reviews of the sight selection, construction, and new employee hiring and training processes

Risk: Adverse economic conditions could reduce consumer spending at retail locations Control activities: Continue to develop private label

product categories, such as the 365 Everyday Value category mentioned

on page 8 of the 10-K/A, which are less expensive but meet rigorous quality standards

Risk: Extended power outages could cause severe inventory losses cause of the company’s emphasis on perishable products Control activi-ties: Implement a contingency plan that specifies responses in the event

be-of a power outage

3 There are no absolute right and wrong answers to this question because the information available in the annual report is piecemeal Nonetheless, students could make the following observations based on available in-formation First, the CEO (John P Mackey) has a layer of senior manag-ers that report to him including two Co-Presidents/Chief Operating Of-ficers, and three Executive Vice Presidents Second, there are ten Re-gional Presidents In the organization chart shown below, we assume that the Regional Presidents report to the Chief Operating Officers

Third, each Regional President has a layer of management that reports

to him or her For example, the Global All-Stars include David Schwartz, who is the Vice President of the Midwest Region He would report to the President of the Midwest Region John Simrell is the Director of Finance for the South Region and he would report to the South Region Presi-dent Robin Graf is the Team Member Services Director for the Southern Pacific Region She would report to the President of the Southern Pacific Region

Fourth, each region has a manager/coordinator for each product

catego-ry For example, Theo Weening is the Meat Category Manager for the Mid-Atlantic Region and Bobby Turner is the Bakery Coordinator for the Midwest Region In the organization chart shown below, we assume that these regional managers/coordinators report to a Vice-President at the regional level Fifth, each region has Store Team Leaders for each retail location within the region For example, John Robertson is the Store Team Leader in Charlottesville, Va We have assumed that the store team leaders report to the regional vice-president level Finally, each store location has various team leaders that report to the store team leader For example, Rolando Alas is the Produce Team Leader at the Mill Valley Store location

Research and Application 1-9 (continued)

Based on insights such as these, students should be able to prepare an organization chart that resembles the one shown at the end of this solu-tion

The Global All-Stars include numerous line and staff employees Three staff employees are Roberta Lang, General Counsel, Chris Pine, Vice President of Real Estate, and Jennifer McFarlin, Payroll Benefit Special-ist, Madison Three line employees are Rocco Terrazano, Meat Team Leader, Yorkville, Don Hosfeld, Grocery Team Leader, Ft Lauderdale, and Joel Leonard, Prepared Foods Team Leader, Fresh Pond

4 Both documents emphasize that the respective companies serve a broad range of stakeholders (e.g., customers, employees, suppliers, communi-ties, and stockholders) Both companies mention that their most impor-tant stakeholder is the customer The first sentence of the Johnson & Johnson Credo says ―We believe our first responsibility is to the doctors, nurses, and patients, to mothers and fathers and all others who use our products and services.‖ Whole Foods Market says ―Our customers are the most important stakeholder in our business Therefore, we go to ex-traordinary lengths to satisfy and delight our customers.‖

The Whole Foods Market Declaration of Interdependence explicitly cognizes that satisfying all stakeholders’ interests will require balance and making trade-offs In fact, the company says ―One of the most im-portant responsibilities of Whole Foods Market’s leadership is to make sure the interests, desires and needs of our various stakeholders are kept in balance… Any conflicts must be mediated and win-win solutions found.‖ The Johnson & Johnson Credo does not explicitly acknowledge the need to strike a balance when managing the needs of its various stakeholders

re-5 Whole Foods Market’s mission statement differs from its Code of duct and Ethics in three important respects First, the mission statement sets forth goals that the company strives to achieve The tone of the document is positive because it focuses on goals the company hopes to achieve The Code of Conduct and Ethics defines prohibited conduct The tone of the document is appropriately negative because it describes those behaviors that are ―out of bounds.‖

Second, the mission statement refers to a broader set of stakeholders (e.g., suppliers, customers, and communities) than the Code of Conduct and Ethics, which pertains primarily to Whole Foods Market Team Mem-bers and Directors Third, the mission statement is values-based It re-flects a vision of what the company stands for The Code of Conduct and Ethics is rule-based The majority of the code is based on the rules

of governing bodies such as the Securities and Exchange Commission (SEC), the Nasdaq stock exchange, and the Financial Accounting Stan-dards Board (FASB)

Research and Application 1-9 (continued)

Chairman

& CEO

Executive

VP & CFO Executive VP of Growth

and Bus Dev

Bakery Coordinator – Florida Region

Whole Body Coordinator

― Florida Region

Director of Finance – Florida Region President(s) – Vice-

Florida Region

Director of Team Member Services – Florida Region

Store Team Leader – Ft Lauderdale store

Store Team Leaders – Other Florida stores

Store Team Leaders

– Other Florida

stores

Ft dale Produce Ft Lauderdale Seafood Team Ft Lauder-dale Other

Lauder-Managerial Accounting and Cost Concepts

Solutions to Questions

2-1 Managers carry out three major

activities in an organization: planning, directing

and motivating, and controlling Planning

involves establishing a basic strategy, selecting a

course of action, and specifying how the action

will be implemented Directing and motivating

involves mobilizing people to carry out plans and

run routine operations Controlling involves

ensuring that the plan is actually carried out and

is appropriately modified as circumstances

change

2-2 The planning and control cycle involves

formulating plans, implementing plans,

measuring performance, and evaluating

differences between planned and actual

performance

2-3 In contrast to financial accounting,

managerial accounting: (1) focuses on the needs

of managers rather than outsiders; (2)

emphasizes decisions affecting the future rather

than the financial consequences of past actions;

(3) emphasizes relevance rather than objectivity

and verifiability; (4) emphasizes timeliness

rather than precision; (5) emphasizes the

segments of an organization rather than

summary data concerning the entire

organization; (6) is not governed by GAAP; and

(7) is not mandatory

2-4 The three major elements of product

costs in a manufacturing company are direct

materials, direct labor, and manufacturing

overhead

2-5

a Direct materials are an integral part of a

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

c Direct labor consists of labor costs that

can be easily traced to particular products Direct labor is also called ―touch labor.‖

d Indirect labor consists of 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 Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs

2-6 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

2-7 The income statement of a manufacturing company differs from the income statement of a merchandising company in the cost of goods sold section A 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 Because a manufacturing company produces its goods rather than buying them

in this section as Finished Goods inventory,

rather than as Merchandise Inventory

2-8 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 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

2-9 A manufacturing company usually has

three inventory accounts: Raw Materials, Work

in Process, and Finished Goods A merchandising

company may have a single inventory account—

Merchandise Inventory

2-10 Product costs are assigned to units as

they are processed and hence are included in

inventories The flow is from direct materials,

direct labor, and manufacturing overhead to

Work in Process inventory As goods are

completed, their cost is removed from Work in

Process inventory and transferred to Finished

Goods inventory As goods are sold, their cost is

removed from Finished Goods inventory and

transferred to Cost of Goods Sold Cost of Goods

Sold is an expense on the income statement

2-11 Yes, costs such as salaries and

depreciation can end up as part of assets on the

balance sheet if they 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 the

period

average cost per unit changes with the level of activity

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 between the fixed costs of purchasing the two machines is a differential cost

1 Directing and motivating

Exercise 2-2 (10 minutes)

1 The cost of a hard drive installed in a computer: direct materials

2 The cost of advertising in the Puget Sound Computer User newspaper: selling

3 The wages of employees who assemble computers from components: direct labor

4 Sales commissions paid to the company’s salespeople: selling

5 The wages of the assembly shop’s supervisor: manufacturing overhead

6 The wages of the company’s accountant: administrative

7 Depreciation on equipment used to test assembled computers before release to customers: manufacturing overhead

8 Rent on the facility in the industrial park: a combination of

manufacturing overhead, selling, and administrative The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, selling, and administrative operations

Product Cost Period Cost

1 Depreciation on salespersons’ cars X

2 Rent on equipment used in the factory X

3 Lubricants used for machine maintenance X

4 Salaries of personnel who work in the finished

goods warehouse X

5 Soap and paper towels used by factory workers at

the end of a shift X

6 Factory supervisors’ salaries X

7 Heat, water, and power consumed in the factory X

8 Materials used for boxing products for shipment

overseas (units are not normally boxed) X

14 The cost of renting rooms at a Florida resort for

the annual sales conference X

15 The cost of packaging the company’s product X

Exercise 2-4 (15 minutes)

CyberGames Income Statement

Sales $1,450,000 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 1,020,000 Gross margin 430,000 Selling and administrative expenses:

Selling expense 210,000

Administrative expense 180,000 390,000 Net operating income $ 40,000

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 $ 705,000

Direct labor 135,000

Manufacturing overhead 370,000

Total manufacturing costs 1,210,000

Add: Beginning work in process inventory 120,000

1,330,000 Deduct: Ending work in process inventory 130,000

Cost of goods manufactured $1,200,000

Exercise 2-6 (15 minutes)

A few of these costs may generate debate For example, some may argue that the cost of advertising a rock concert is a variable cost because 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 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

Cost Behavior Cost (Measure of Activity) Variable Fixed

1 The cost of X-ray film used in the radiology lab at

Virginia Mason Hospital in Seattle (Number of X-rays

taken) X

2 The cost of advertising a rock concert in New York

City (Number of rock concert tickets sold) X

3 The cost of renting retail space for a McDonald’s

restaurant in Hong Kong (Total sales at the

restaurant) X

4 The electrical cost of running a roller coaster at Magic

Mountain (Number of times the roller coaster is run) X

5 Property taxes paid by your local cinema theater

(Number of tickets sold) X

6 The cost of sales commissions paid to salespersons at

a Nordstrom store (Total sales at the store) X

7 Property insurance on a Coca Cola bottling plant

(Number of cases of bottles produced) X

8 The costs of synthetic materials used to make a

particular model of running shoe (Number of shoes

of that model produced) X

9 The costs of shipping Panasonic televisions to retail

stores (Number of televisions sold) X

10 The cost of leasing an ultra-scan diagnostic machine

at the American Hospital in Paris (Number of

Cost Cost Object Direct Cost Indirect Cost

1 The wages of pediatric

2 Prescription drugs A particular patient X

3 Heating the hospital The pediatric

4 The salary of the head

of pediatrics The pediatric department X

5 The salary of the head

of pediatrics A particular pediatric patient X

6 Hospital chaplain’s

7 Lab tests by outside

8 Lab tests by outside

contractor A particular department X

Exercise 2-8 (15 minutes)

Item Differential Cost Opportunity Cost Sunk Cost

2 The salary of the head of the

in the future

1 Product cost; variable cost

2 Conversion cost

3 Opportunity cost

4 Prime cost

5 Sunk cost

6 Period cost; variable cost

7 Product cost; period cost; fixed cost

8 Product cost

9 Period cost

10 Fixed cost; product cost; conversion cost

Exercise 2-10 (15 minutes)

1

Mason Company Schedule of Cost of Goods Manufactured

Direct materials:

Beginning raw materials inventory $ 7,000

Add: Purchases of raw materials 118,000

Raw materials available for use 125,000

Deduct: Ending raw materials inventory 15,000

Raw materials used in production $110,000 Direct labor 70,000 Manufacturing overhead 80,000 Total manufacturing costs 260,000 Add: Beginning work in process inventory 10,000

270,000 Deduct: Ending work in process inventory 5,000 Cost of goods manufactured $265,000

2 The cost of goods sold section of Mason Company’s income statement: Beginning finished goods inventory $ 20,000

Add: Cost of goods manufactured 265,000

Goods available for sale 285,000

Deduct: Ending finished goods inventory 35,000

Cost of goods sold $250,000

Exercise 2-12 (30 minutes)

1 a Batteries purchased 8,000 Batteries drawn from inventory 7,600 Batteries remaining in inventory 400 Cost per battery × $10 Cost in Raw Materials Inventory at April 30 $4,000

b Batteries used in production (7,600 – 100) 7,500 Motorcycles completed and transferred to Finished Goods

(90% × 7,500) 6,750 Motorcycles still in Work in Process at April 30 750 Cost per battery × $10 Cost in Work in Process Inventory at April 30 $7,500

c Motorcycles completed and transferred to Finished Goods

(see above) 6,750 Motorcycles sold during the month

(70% × 6,750) 4,725 Motorcycles still in Finished Goods at April 30 2,025 Cost per battery × $10 Cost in Finished Goods Inventory at April 30 $20,250

d Motorcycles sold during the month (above) 4,725 Cost per battery × $10 Cost in Cost of Goods Sold at April 30 $47,250

e Batteries used in salespersons’ motorcycles 100 Cost per battery × $10 Cost in Selling Expense at April 30 $ 1,000

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

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; try to avoid

lengthy discussions about how a particular cost is classified

Variable or Selling Administrative (Product) Cost Manufacturing

2 Boxes used for packaging detergent

3 Salespersons’ commissions V X

5 Depreciation, executive autos F X

7 Insurance, finished goods warehouses F X

9 Advertising costs F X

11 Shipping costs on merchandise sold V X

14 Billing costs V X*

15 Executive life insurance F X

Problem 2-13 (continued)

Variable or Selling Administrative (Product) Cost Manufacturing

19 Wages of receptionist, executive offices F X

* Could be administrative cost

** Could be indirect cost

Product Cost (Selling Period Name of the Cost Variable Cost Fixed Cost Materials Direct Direct Labor

facturing Overhead

Manu-and Admin) Cost

tunity Cost Sunk Cost

Oppor-Rental revenue forgone, $30,000

Direct materials cost, $80 per unit X X

Rental cost of warehouse, $500

Rental cost of equipment, $4,000

per month X X

Direct labor cost, $60 per unit X X

Depreciation of the annex space,

Supervisor's salary, $1,500 per

month X X

Electricity for machines, $1.20 per

unit X X

Return earned on investments,

Problem 2-15 (30 minutes)

Cost Behavior To Units of Product

1 Electricity to run production equipment X X

2 Rent on a factory building X X

3 Cloth used to make drapes X X

4 Production superintendent’s salary X X

5 Wages of laborers assembling a product X X

6 Depreciation of air purification equipment used to

make furniture X X

7 Janitorial salaries X X

8 Peaches used in canning fruit X X

9 Lubricants for production equipment X X

10 Sugar used in soft drink production X X

11 Property taxes on the factory X X

12 Wages of workers painting a product X X

13 Depreciation on cafeteria equipment X X

14 Insurance on a building used in producing

helicopters X X

15 Cost of rotor blades used in producing helicopters X X

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 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

2

Swift Company Income Statement For the Month Ended August 31

Sales $450,000 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 Selling and administrative expenses 142,000 Net operating income $ 18,000

Problem 2-16 (continued)

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

1 The controller is correct 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, 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 in

Process 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