Solution manual accounting 25th editon warren chapter 18

CHAPTER 18 MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES DISCUSSION QUESTIONS Financial accounting and managerial accounting are different in several ways Financial accounting information is reported in statements that are useful to persons or groups outside of a company These statements objectively report the results of past operations for fixed periods of time and the financial condition of the business under generally accepted accounting principles Managerial accounting information uses both subjective and objective information to meet the specific needs of management This non-GAAP information can be reported periodically or as needed by management and can be reported for the entire entity or for segments of the organization This information includes (i) historical data, which provide objective measures of past operations, and (ii) estimated data, which provide subjective estimates about future decisions a A line department is directly involved in the basic objectives of the organization, while a staff department provides service, assistance, or advice to line departments or other staff departments b (1) Sales Department (2) Personnel Department Direct materials cost Prime costs are the combination of direct materials and direct labor costs, while conversion costs are the combination of direct labor costs and factory overhead costs Product costs are composed of three elements of manufacturing costs: direct materials cost, direct labor cost, and factory overhead cost These costs are treated as assets until the product is sold Product costs are sometimes referred to as inventoriable costs Period costs are costs that are used in generating revenue during the current period They are recognized as expenses on the current period’s income statement The three inventory accounts for a manufacturing business are as follows: a Finished goods, representing goods in the state in which they are to be sold b Work in process, representing goods in the process of manufacture c Materials, representing goods in the state in which they were acquired Finished goods, work in process, and materials The cost of finished goods and the cost of work in process included the following: 10 a Direct materials—the costs of materials that enter directly into the finished product b Direct labor—the wages of factory workers who convert materials into a finished product c Factory overhead—the remaining costs, other than direct materials and direct labor, of operating a factory Cost of goods sold A merchandising business purchases merchandise (products) in a finished state for resale to customers The cost of product sold is called cost of merchandise sold A manufacturer makes the product it sells using direct materials, direct labor, and factory overhead The cost of the product sold is generally called cost of goods sold 18-1 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 18 Managerial Accounting Concepts and Principles PRACTICE EXERCISES PE 18–1A Controlling (a) Planning (c) Decision making (b) PE 18–1B Planning (a) Directing (c) Controlling (b) PE 18–2A a b c d DL FO DM FO PE 18–2B a b c d DM (or FO if the cost is immaterially small) DL FO DM PE 18–3A a b c d B C P C PE 18–3B a b c d P B C (or P if significant) C PE 18–4A a b c d Product cost Product cost Period cost Period cost PE 18–4B a b c d Period cost Product cost Product cost Period cost PE 18–5A a b Work in process inventory, January 1……………………………… Cost of direct materials used in production……………………… $16,800 Direct labor……………………………………………………………… 43,400 28,000 Factory overhead……………………………………………………… Total manufacturing costs incurred during January…………… Total manufacturing costs………………………………………… Less work in process inventory, January 31……………………… Cost of goods manufactured………………………………………… $ 70,000 Finished goods inventory, January 1……………………………… Cost of goods manufactured………………………………………… Cost of finished goods available for sale………………………… Less finished goods inventory, January 31……………………… Cost of goods sold…………………………………………………… $ 29,400 84,000 88,200 $158,200 74,200 $ 84,000 $113,400 33,600 $ 79,800 PE 18–5B a b Work in process inventory, July 1………………………………… Cost of direct materials used in production……………………… $67,200 Direct labor……………………………………………………………… 88,000 44,800 Factory overhead……………………………………………………… Total manufacturing costs incurred during July………………… Total manufacturing costs………………………………………… Less work in process inventory, July 31…………………………… Cost of goods manufactured………………………………………… $ 32,800 Finished goods inventory, July 1………………………………… Cost of goods manufactured………………………………………… Cost of finished goods available for sale………………………… Less finished goods inventory, July 31…………………………… Cost of goods sold…………………………………………………… $ 37,600 203,200 200,000 $232,800 29,600 $203,200 $240,800 27,200 $213,600 EXERCISES Ex 18–1 a b c d Direct materials cost Factory overhead cost Factory overhead cost Direct materials cost e f g h Direct labor cost Direct materials cost Direct materials cost Factory overhead cost f g h i j Direct materials cost Factory overhead cost Direct labor cost Direct materials cost Factory overhead cost j k l m n o p q Period cost Period cost Product cost Product cost Period cost Product cost Product cost Product cost e f g conversion costs cost object Ex 18–2 a b c d e Factory overhead cost Direct labor cost Factory overhead cost Direct materials cost Factory overhead cost Ex 18–3 a, c, e, g, h Ex 18–4 a b c d e f g h i Period cost Product cost Period cost Period cost Period cost Product cost Product cost Product cost Period cost Ex 18–5 a b c d improve decreases period work in process inventory Ex 18–6 a b c d product operational improving prime e f g materials inventory indirect plant depreciation g h i j k l indirect indirect direct indirect direct indirect Ex 18–7 a b c d e f direct indirect indirect indirect indirect direct Ex 18–8 The maintenance salaries and indirect materials should be included as factory overhead The factory overhead incorrectly includes the following items: sales salaries, promotional expenses, corporate office insurance and property taxes, and corporate office depreciation These items should not be included as factory overhead The corrected report is as follows: FARRAR INC Manufacturing Costs For the Quarter Ended June 30, 2014 Cost of direct materials used in production Direct labor Factory overhead: Maintenance salaries Indirect materials Supervisor salaries Heat, light, and power Insurance and property taxes—plant Depreciation—plant and equipment Total $ 612,500 531,250 $ 93,750 62,500 575,000 156,250 168,750 137,500 1,193,750 $2,337,500 Ex 18–9 CHATERJEE MANUFACTURING COMPANY Income Statement For the Month Ended January 31, 2014 a Revenues Cost of goods sold $450,000 280,000 Gross profit Operating expenses: Selling expenses Administrative expenses $170,000 $65,400 54,600 Total operating expenses Net income b 120,000 $ 50,000 Inventory balances on January 31, 2014: Materials ($95,200 – $67,200)……………………………………………………… $28,000 Work in Process ($67,200 + $128,800 + $151,200 – $303,800)………………… $43,400 Finished Goods ($303,800 – $280,000)…………………………………………… $23,800 Ex 18–10 BERENTE COMPANY Balance Sheet December 31, 2014 Current assets: Cash Accounts receivable Inventories: Finished goods Work in process Materials Supplies Prepaid insurance Total current assets $ 89,600 84,000 $ 32,200 126,000 70,000 228,200 57,040 22,000 $480,840 Ex 18–11 Materials inventory, April 1, 2014……………………………………………………… Add materials purchased during April……………………………………………… Cost of materials available for use…………………………………………………… Less materials inventory, April 30, 2014……………………………………………… Cost of direct materials used in production…………………………………… $ 310,000 920,000 $1,230,000 280,000 $ 950,000 Ex 18–12 a b c d e f $153,600 $124,800 $208,800 $194,400 $8,400 $7,200 ($19,200 + $134,400) ($153,600 – $28,800) ($252,000 – $43,200) ($252,000 – $57,600) ($58,800 – $50,400) ($58,800 – $51,600) Ex 18–13 Work in process inventory, January 1, 2014……………………… Add manufacturing costs incurred during January: Cost of direct materials used in production…………………… $325,000 Direct labor…………………………………………………………… 280,000 195,000 Factory overhead…………………………………………………… Total manufacturing costs incurred……………………………… Total manufacturing costs…………………………………………… Less work in process inventory, January 31, 2014………………… Cost of goods manufactured………………………………………… Ex 18–14 a b c d e f $334,800 $272,400 $183,600 $170,400 $36,800 $17,600 ($52,800 + $282,000) ($334,800 – $62,400) ($223,200 – $39,600) ($223,200 – $52,800) ($360,000 – $323,200) ($360,000 – $342,400) $135,000 800,000 $935,000 142,000 $793,000 Ex 18–15 TIWANA MANUFACTURING COMPANY Statement of Cost of Goods Manufactured For the Month Ended May 31, 2014 a Work in process inventory, May 1, 2014 Direct materials: Materials inventory, May 1, 2014 Purchases Cost of materials available for use Less materials inventory, May 31, 2014 $ 142,800 $210,000 403,200 $613,200 184,800 Cost of direct materials used in production $428,400 Direct labor Factory overhead: Indirect labor Machinery depreciation 378,000 $ 40,320 24,000 Heat, light, and power 8,400 Supplies 6,720 Property taxes Miscellaneous cost Total factory overhead 5,880 10,920 96,240 Total manufacturing costs incurred during May b 902,640 Total manufacturing costs Less work in process inventory, May 31, 2014 $1,045,440 159,600 Cost of goods manufactured $ 885,840 Finished goods inventory, May 1, 2014………………………………………… Cost of goods manufactured……………………………………………………… Cost of finished goods available for sale………………………………………… Less finished goods inventory, May 31, 2014………………………………… Cost of goods sold………………………………………………………………… $109,200 885,840 $995,040 126,000 $869,040 Ex 18–16 a b c Finished goods inventory, July 1, 2014…………………………… Cost of goods manufactured………………………………………… Cost of finished goods available for sale………………………… Less finished goods inventory, July 31, 2014…………………… Cost of goods sold……………………………………………………… $ 81,000 360,000 Sales……………………………………………………………………… Cost of goods sold……………………………………………………… Gross profit……………………………………………………………… $729,000 366,000 Gross profit…………………………………………………………… Operating expenses: Selling expenses…………………………………………………… $114,750 60,750 Administrative expenses………………………………………… Total operating expenses……………………………………… Net income……………………………………………………………… $363,000 $441,000 75,000 $366,000 $363,000 175,500 $187,500 Ex 18–17 a b c d Sales……………………………………………………………………… Less gross profit………………………………………………………… Cost of goods sold……………………………………………………… $792,000 462,000 Cost of goods manufactured………………………………………… Less cost of goods sold……………………………………………… Finished goods inventory…………………………………………… $396,000 330,000 Purchased materials………………………………………………… Less materials inventory……………………………………………… Direct materials cost…………………………………………………… $244,200 33,000 Total manufacturing costs…………………………………………… Less: Direct materials……………………………………………… $211,200 Factory overhead costs (indirect labor and factory depreciation)*………………………………… 198,000 Direct labor cost……………………………………………………… $455,400 $330,000 $ 66,000 $211,200 409,200 $ 46,200 * $171,600 + $26,400 e Total manufacturing costs…………………………………………… Less cost of goods manufactured…………………………………… Work in process inventory…………………………………………… $455,400 396,000 $ 59,400 PROBLEMS Prob 18–1A Product Costs Cost Direct Materials Cost Direct Labor Cost Period Costs Factory Overhead Cost c X X X X d e f X X g h X X X i j k X X l m n X X X o X X p q X r s X X t X u v w x y z Administrative Expense X a b Selling Expense X X X X X Prob 18–5A (Concluded) THE LUCILLE CORPORATION Income Statement For the Year Ended December 31, 2014 $2,574,000 Sales Cost of goods sold: Finished goods inventory, January 1, 2014 Cost of goods manufactured $ 507,000 1,262,816 $1,769,816 Cost of finished goods available for sale Less finished goods inventory, December 31, 2014 480,000 1,289,816 Cost of goods sold $1,284,184 Gross profit Operating expenses: Administrative expenses: Office salaries expense Depreciation expense—office equipment Property taxes—office building Selling expenses: Advertising expense Sales salaries expense Total operating expenses Net income $191,750 35,100 31,590 $ 258,440 $247,000 315,900 562,900 821,340 $ 462,844 Prob 18–1B Product Costs Cost a b Direct Materials Cost Direct Labor Cost Period Costs Factory Overhead Cost Selling Expense X X X X X c d e X f X X g h X i X j k l X X X m X n X o p X X q r s X X X t u X X v w Administrative Expense X X x y z X* X *Item y might also be classified as direct material cost if the cost is significant, since it can be directly traced to the end product Prob 18–2B Product Costs Cost Direct Materials Cost Direct Labor Cost Period Costs Factory Overhead Cost X b c f X X X X X X g h X i j X X k X l X X m n X o X X X p q r s t X X X u v w x Administrative Expense X a d e Selling Expense X X X CHAPTER 18 Managerial Accounting Concepts and Principles Prob 18–3B The most logical definition for the final cost object would be a hotel guest Guests consume services such as a meal, a night’s stay in a hotel room, room service, a telephone call, etc Cost Direct a X b c d e X X X X X f g h X X X i j k l X X X X X X X m n o p q r s t u v w Indirect X X X X X X X CHAPTER 18 Managerial Accounting Concepts and Principles Prob 18–4B On Company a b c d e f $30,800 $854,000 $800,800 $827,400 $299,600 $182,000 ($282,800 + $65,800 – $317,800) ($317,800 + $387,800 + $148,400) ($854,000 + $119,000 – $172,200) ($224,000 + $800,800 – $197,400) ($1,127,000 – $827,400) ($299,600 – $117,600) Off Company a b c d e f $581,560 $685,720 $195,300 $256,060 $399,280 $234,360 ($685,720* + $91,140 – $195,300) ($1,519,000 – $256,060 – $577,220) ($1,727,320 – $1,532,020) ($1,532,020 + $269,080 – $1,545,040) ($1,944,320 – $1,545,040) ($399,280 – $164,920) * Note: The student must calculate part (b) prior to calculating part (a), since the solution to part (b) is needed as an input to part (a) ON COMPANY Statement of Cost of Goods Manufactured For the Month Ended December 31, 2014 $119,000 Work in process inventory, December 1, 2014 Direct materials: Materials inventory, December 1, 2014 Purchases Cost of materials available for use Less materials inventory, December 31, 2014 Cost of direct materials used in production Direct labor Factory overhead Total manufacturing costs incurred during December Total manufacturing costs Less work in process inventory, December 31, 2014 Cost of goods manufactured $ 65,800 282,800 $348,600 30,800 $317,800 387,800 148,400 854,000 $973,000 172,200 $800,800 Prob 18–4B (Concluded) ON COMPANY Income Statement For the Month Ended December 31, 2014 Sales $1,127,000 Cost of goods sold: Finished goods inventory, December 1, 2014 Cost of goods manufactured $ Cost of finished goods available for sale Less finished goods inventory, December 31, 2014 $ 224,000 800,800 1,024,800 197,400 Cost of goods sold Gross profit 827,400 $ Operating expenses Net income 299,600 117,600 $ 182,000 Prob 18–5B SHANIKA COMPANY Statement of Cost of Goods Manufactured For the Year Ended December 31, 2014 Work in process inventory, January 1, 2014 $109,200 Direct materials: Materials inventory, January 1, 2014 Purchases $ 77,350 Cost of materials available for use Less materials inventory, December 31, 2014 $200,850 123,500 95,550 Cost of direct materials used in production Direct labor $105,300 186,550 Factory overhead: Indirect labor Depreciation expense—factory equipment $ 23,660 14,560 Heat, light, and power—factory 5,850 Property taxes—factory 4,095 Rent expense—factory 6,825 Supplies—factory Miscellaneous cost—factory 3,250 Total factory overhead 4,420 62,660 Total manufacturing costs incurred during the year 354,510 Total manufacturing costs Less work in process inventory, December 31, 2014 $463,710 Cost of goods manufactured $367,510 96,200 Prob 18–5B (Concluded) SHANIKA COMPANY Income Statement For the Year Ended December 31, 2014 Sales $864,500 Cost of goods sold: Finished goods inventory, January 1, 2014 Cost of goods manufactured $113,750 Cost of finished goods available for sale Less finished goods inventory, December 31, 2014 $481,260 367,510 100,100 Cost of goods sold 381,160 $483,340 Gross profit Operating expenses: Administrative expenses: Office salaries expense Depreciation expense—office equipment Property taxes—headquarters building Selling expenses: Advertising expense Sales salaries expense Total operating expenses Net income $ 77,350 22,750 13,650 $113,750 $ 68,250 136,500 204,750 318,500 $164,840 CASES & PROJECTS CP 18–1 Although Fred may appear to have technically complied with company policy, his computation of the cost of lumber is unethical Fred has created an apparent conflict-of-interest situation Thus, although it is appropriate for Fred to take advantage of H Jeckel’s policy of allowing employees to purchase materials at cost, he should have had someone else (such as his supervisor) determine the amount that he owed for the lumber Clearly, selecting the lowest price has opened the door for criticism CP 18–2 The objectives of managerial accounting and financial accounting are different; therefore, the vice president’s statement is very incomplete In one sense, the statement may be true at only very high levels in the organization For example, the division manager may be evaluated on the basis of financial accounting profit Thus, the divisional manager would be evaluated by central management in nearly the same way that central management is evaluated by shareholders Lower in the organization, the financial concerns of the stockholder begin to diverge significantly from the day-to-day operating decision needs of the manager As such, the statement becomes very inaccurate the closer one gets to the actual operations Operational performance measures will focus on cost, quality, delivery time, equipment availability, inventory levels, scrap, waste, and efficiency This list is much broader and more detailed than the financial statement numbers provided to the stockholders The stockholders’ interest in profit is related to increasing shareholder value Managers must increase long-term shareholder value by engaging in strategies that enhance people, product, and processes in the delivery of value to customers These strategies can be measured by both financial and nonfinancial means Therefore, it is not surprising to see a much broader set of objective and subjective measures used internally in the organization to guide strategy and operations CP 18–3 The vice president of the Information Systems Division can use managerial accounting information in a number of different ways For example, the vice president might use these data to determine resources that will be required based on a projection of amount and type of work required for the next period Managerial accounting information would also be used to determine whether the bank should lease additional processing capacity or purchase a new central processing unit Additionally, managerial accounting information could also be used to achieve better control over information systems activities by evaluating the costs of ongoing operations, based on the demand for information services The hospital administrator can use managerial accounting information in a number of different ways One way is for cost planning and control The administrator could use managerial information to keep costs commensurate with services provided and to plan for staffing and nursing levels This information can be used to determine the cost of various services, and thereby in making decisions with respect to the amount of service that is appropriate in each particular case The administrator can also use managerial accounting information to determine if the hospital’s costs are being covered by fixed payments from Medicare, Medicaid, or insurance If not, the administrator needs to know the source of the cost overruns Does the hospital allow too many procedures? Require longer bed days? Have resources that are underutilized (e.g., a cancer wing with three patients)? The CEO of the food company will use managerial accounting information to support the control of the three divisions Each of the three divisions will be subject to a number of financial goals The CEO also needs to support strategic decision making In this regard, the CEO needs managerial accounting information on the profitability of various product families, profitability of different regions, and profitability of various customer segments This information can guide the CEO in allocating future effort and resources The copy shop manager needs fairly simple managerial accounting information At the most basic level, the copy shop manager needs to know the costs of performing various copy tasks, such as one-sided copy, two-sided copy, collating, binding, etc These activities will have some direct costs, such as paper, and some indirect costs, such as copy machine time The manager will need to estimate the impact of both of these costs in order to price the various copy jobs to the public Managerial accounting information will include the cost details necessary to price the various copy shop services at a level to cover equipment costs, lease expenses, and profit CP 18–4 Obie’s bill has a number of points that should be considered Some of the points, with the appropriate argument, are identified below a The trip back to the shop resulted in an $80 labor charge Obie should argue that the whole hour should not be billed The hour is the result of stocking out of a circuit board on the truck The circuit board should have been with the repair person There was a board for the previous customer However, since only one was stocked, the repair person had to go back to the shop The trip back to the shop was nonproductive time that should not have been directly charged to Obie but should be part of Geek Chic’s overhead cost to all customers In other words, Obie should not be responsible for this mistake b The overtime premium should not have been charged to Obie What if Obie was the first appointment in the morning? If so, then there would be no overtime premium It’s only random misfortune that Obie was the last client of the day and therefore received the overtime premium Add to this the fact that the overtime would not have been necessary without the trip back to the shop, and the conclusion is that Obie should not be directly charged for overtime The overtime premium should be part of Geek Chic’s overhead charged to all clients equally Obie should be charged the overtime only if the decision for overtime was caused by or required by Obie Thus, the labor portion of the bill should only be $70 + $60 + $60 = $190 There are other parts of the bill that should not be in dispute ● The materials storage and handling charge is a normal charge of maintaining a parts inventory for the benefit of clients that need parts ● The fringe benefits and overhead added to the hourly rate are both reasonable The fringe benefit attaches directly to the direct labor Fringe benefits are just another form of compensation The overhead must be covered by all customers Therefore, including overhead in the hourly rate is the most logical method of covering these costs ● The additional charge for the first hour is also reasonable The first hour charge covers the costs of transit, which are directly attributable to making a home visit Obie requires a home visit, so Obie should be responsible for the costs of making the visit If Obie brought the computer to the shop, this cost would not be incurred CP 18–4 (Concluded) Cost Circuit board………………………………… Storage and handling……………………… Straight-time labor…………………………… Fringe benefits*……………………………… Overhead……………………………………… Vehicle depreciation and fuel……………… Overtime premium………………………… Direct Materials Direct Labor Overhead X X X X X X X *Could be considered overhead CP 18–5 The High Times manager will use managerial accounting information to accumulate the costs associated with different menu items The costs, direct and indirect, will help in determining the pricing strategy The plant manager is going to use cost information on scrap and rework to identify the amount of waste occurring in the plant This measure of waste is fairly common in fabrication-type facilities The measures can guide the plant manager to locations or products where significant waste is occurring The plant manager can use the scrap and rework measures to guide operational improvement toward the location that is experiencing the greatest level of scrap or rework The measures can also monitor improvement in rework and control the number of network hours charged by floor personnel The cost of ending inventory must be determined as financial statements are prepared The division controller will likely require inventory valuation at the close of every month, in order to have a good understanding of the month-by-month earnings of the division The division controller will provide the ending inventory information by using managerial accounting information in determining the cost of products To determine the appropriate cost, the product cost is multiplied by the units left in inventory The Maintenance Department manager needs to be able to plan the resources to be used by his department The planning process involves identifying the required resources to fulfill the department’s objective For example, the Maintenance Department manager may know the repair histories of various machines These histories can be used to forecast the repairs anticipated during the next year The manager may also know that a new process will be brought online during the next year New processes are frequently troublesome, so the manager will need to budget additional resources to accommodate introduction of the new technology CP 18–6 Note to Instructors: Consider having the teams compete for the most examples Have half the class the pizza restaurant and the other the copy shop, and compare results Some examples that may be offered by the students are the following: Copy and Graphics Shop Cost Paper………………………………………… Graphic designer wages………………… Manager salary…………………………… Lease cost of copy machine……………… Coupon costs……………………………… Advertising………………………………… Packaging (bags and boxes)…………… Ink…………………………………………… Repair costs………………………………… Property taxes……………………………… Store depreciation………………………… Cashier salary……………………………… Building heat and A/C……………………… Copy machine operator wages………… Computer depreciation…………………… Brochures…………………………………… Direct Direct Materials Labor Selling Overhead Expenses X X X X X X X X X X X X X X X X CP 18–6 (Concluded) Pizza Restaurant Cost Ingredients………………………………………… Cook wages……………………………………… Manager salary…………………………………… Depreciation on equipment and fixtures…………………………………… Coupon costs…………………………………… Advertising……………………………………… To-go boxes……………………………………… Disposable plates, utensils, cups…………… Nondisposable plates, utensils, cups……… Repair costs……………………………………… Property taxes…………………………………… Store depreciation……………………………… Cashier salary…………………………………… Beverages………………………………………… Building heat and A/C………………………… Salad ingredients………………………………… Delivery person wages………………………… Power costs for ovens………………………… Direct Direct Materials Labor Selling Overhead Expenses X X X X X X X X X X X X X X X X X X In service businesses, such as those above, the distinction between direct labor and overhead will not always be clear .. .CHAPTER 18 Managerial Accounting Concepts and Principles PRACTICE EXERCISES PE 18 1A Controlling (a) Planning (c) Decision making (b) PE 18 1B Planning (a) Directing (c) Controlling (b) PE 18 2A... v w Indirect X X X X X X X CHAPTER 18 Managerial Accounting Concepts and Principles Prob 18 4B On Company a b c d e f $30,800 $854,000 $800,800 $827,400 $299,600 $182 ,000 ($282,800 + $65,800... X X u v w x Administrative Expense X a d e Selling Expense X X X CHAPTER 18 Managerial Accounting Concepts and Principles Prob 18 3B The most logical definition for the final cost object would