Issuu

Type:

Solution Manual

Resource:

Managerial Accounting

Edition:

16th Edition

Author(s):

Ray Garrison Eric Noreen Peter Brewer

Prologue Managerial Accounting: An Overview Questions P-1 Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. Managerial accounting is concerned with providing information to managers for use within the organization. Financial accounting emphasizes the financial consequences of past transactions, objectivity and verifiability, precision, and companywide performance, whereas managerial accounting emphasizes decisions affecting the future, relevance, timeliness, and segment performance. Financial accounting is mandatory for external reports and it needs to comply with rules, such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), whereas managerial accounting is not mandatory and it does not need to comply with externally imposed rules. P-2 Five examples of planning activities include (1) estimating the advertising revenues for a future period, (2) estimating the total expenses for a future period, including the salaries of all actors, news reporters, and sportscasters, (3) planning how many new television shows to introduce to the market, (4) planning each television show’s designated broadcast time slot, and (5) planning the network’s advertising activities and expenditures. Five examples of controlling activities include (1) comparing the actual number of viewers for each show to its viewership projections, (2) comparing the actual costs of producing a made-for-television movie to its budget, (3) comparing the revenues earned from broadcasting a sporting event to the costs incurred to broadcast that event, (4) comparing the actual costs of running a production studio to the budget, and (5) comparing the actual cost of providing global, on-location news coverage to the budget.

P-3 The quantitative analysis would focus on determining the potential cost savings from buying the part rather than making it. The qualitative analysis would focus on broader issues such as strategy, risks, and corporate social responsibility. For example, if the part is critical to the organization’s strategy, it may continue making the part regardless of any potential cost savings from outsourcing. If the overseas supplier might create quality control problems that could threaten the end consumers’ welfare, then the risks of outsourcing may swamp any cost savings. Finally, from a social responsibility standpoint, a company may decide against outsourcing if it would result in layoffs at its domestic manufacturing facility. P-4 Companies prepare budgets to translate plans into formal quantitative terms. Budgets are used for various purposes, such as forcing managers to plan ahead, allocating resources across departments, coordinating activities across departments, establishing goals that motivate people, and evaluating and rewarding employees. These various purposes often conflict with one another, which makes budgeting one of management’s most challenging activities. P-5 Managerial accounting is relevant to all business students because all managers engage in planning, controlling, and decision making activities. If managers wish to influence coworkers across the organization, they must be able to speak in financial terms to justify their proposed courses of action. P-6 The Institute of Management Accountants estimates that 80% of accountants work in nonpublic accounting environments. Accountants that work in corporate, nonprofit, and governmental organizations are expected to

use their planning, controlling, and decisionmaking skills to help improve performance. P-7 Deere & Company is an example of a company that competes in terms of product leadership. The company’s slogan “nothing runs like a Deere” emphasizes its product leadership customer value proposition. Amazon.com competes in terms of operational excellence. The company focuses on delivering products faster, more conveniently, and at a lower price than competitors. Charles Schwab competes in terms of customer intimacy. It focuses on building personal relationships with clients so that it can tailor investment strategies to individual needs. P-8 Planning, controlling, and decision making must be performed within the context of a company’s strategy. For example, if a company that competes as a product leader plans to grow too quickly, it may diminish quality and threaten the company’s customer value proposition. A company that competes in terms of operational excellence would select control measures that focus on time-based performance, convenience, and cost. A company that competes in terms of customer intimacy may decide against outsourcing employee training to cut costs because it might diminish the quality of customer service. P-9 This answer is based on Nike, which has suppliers in over 40 countries. One risk that Nike faces is that its suppliers will fail to manage their employees in a socially responsible manner. Nike conducts Management Audit Verifications at its overseas plants to minimize this risk. Nike faces the risk that unsatisfactory environmental performance will diminish its brand image. The company is investing substantial resources to develop products that minimize adverse impacts on the environment. Nike faces the risk that customers will not like its new products. The company uses focus group research to proactively assess the customers’ reaction to its new products. P-10 Airlines face the risk that large spikes in fuel prices will lower their profitability. Therefore, they may reduce this risk by spending money on hedging contracts that enable them to lock-in future fuel prices that will not change even if the market price increases.

Steel manufacturers face major risks related to employee safety, so they create and monitor control measures related to occupational safety compliance and performance. Restaurants face the risk that an economic downturn will reduce customer traffic and lower sales. They reduce this risk by choosing to create menus during economic downturns that offer more low-priced entrees. P-11 Barnes & Noble could segment its companywide performance by individual store, by sales channel (i.e., bricks-and-mortar versus on-line), and by product line (e.g. non-fiction books, fiction books, music CDs, toys, etc.). Procter & Gamble could segment its performance by product category (e.g., beauty and grooming, household care, and health and well-being), product line (e.g., Crest, Tide, and Bounty), and stock keeping units (e.g., Crest Cavity Protection toothpaste, Crest Extra Whitening toothpaste, and Crest Sensitivity toothpaste). P-12 Timberland publishes quarterly corporate social responsibility (CSR) metrics (see www.earthkeeper.com/CSR. Three of those metrics include metric tons of carbon emissions, the percentage of total cotton sourced that is organic, and renewable energy use as a percent of total energy usage. Timberland’s corporate slogan of “doing well by doing good” suggests that the company publishes CSR reports because it believes that its financial success (i.e., doing well) is positively influenced by its social and environmental performance (i.e., doing good). P-13 Companies that use Lean Production only make units in response to customer orders. They produce units just in time to satisfy customer demand, which results in minimal inventories. P-14 Organizations are managed by people that have their own personal interests, insecurities, beliefs, and data-supported conclusions that ensure unanimous support for a given course of action is the exception rather than the rule. Therefore, managers must possess strong leadership skills if they wish to channel their co-workers’ efforts towards achieving organizational goals.

Managerial Accounting, 16th Edition

P-15 Ethical behavior is the lubricant that keeps the economy running. Without that lubricant, the economy would operate much less efficiently—less would be available to consumers, quality would be lower, and prices would be higher. P-16 Examples of internal controls over cash include maintaining a locked cash register, limiting access to the cash register to one employee at a time, periodically reconciling the cash in the register drawer with the register’s sales records, and segregating the duties of (1) checking out customers, (2) counting the cash in the drawer, (3) reconciling the cash in the drawer with the register’s sales report, and (4) depositing the cash in the bank. P-17 You should review a properly authorized purchase order to verify that the goods were actually ordered by the company for legitimate purposes. You should review the original price quotes from the seller to ensure that they agree with prices contained in the sales invoice. You should also review a receiving report to verify that the goods were received in the proper quantities and in satisfactory condition. P-18 Examples of control activities over credit sales and accounts receivable include verifying the credit rating of customers before selling to them on credit, separating the duties of those responsible for generating sales leads and those responsible for the credit approval process, defining credit limits for each customer, and preparing an aging of accounts receivable to monitor subsequent cash collections. P-19 Companies usually count their inventory on hand once a year, often at the end of their fiscal year. The purpose of this control activity is to reconcile the inventory on hand with the company’s accounting records. If a difference exists between the physical inventory and the accounting records, the reason for the difference should be investigated and, if appropriate, an adjustment should be recorded to align the accounting records with the physical count. P-20 Using pre-numbered documents reduces the likelihood of unauthorized transactions. Prenumbering also makes it easy to ensure that all documents are recorded and to quickly identify a missing document. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Prologue

Exercise P-1 (30 minutes) 1. Having the boss unilaterally impose a sales budget on the sales manager is a bad idea for three reasons. First, the boss may not have access to information possessed by the sales manager that would result in a more accurate forecast. Second, the sales manager is unlikely to be committed to achieving a budget that she did not help create. Third, if the sales manager fails to achieve actual results that meet or exceed the budget, it would be easy for the sales manager to justify this outcome on the grounds that she had no input in creating the budget. 2. The company would probably not be comfortable with having the sales manager create the budget with no input from her boss. First, the boss is likely to possess a broad understanding of strategic issues that should be incorporated into the budgeting process. Second, the sales manager may be inclined to purposely underestimate future sales to increase her chances of producing actual results that exceed the budget. If she can produce actual results that exceed the budget it is likely to increase her pay raise and bonus as well as her chances for promotion. 3. If the company used the sales budget for the sole purpose of planning to deploy resources in a manner that best serves customers, then it is possible that the boss and the sales manager would both be focused on producing the most accurate forecast possible. They would strive for accuracy because if they overestimate sales it is likely to result in bloated inventories and if they underestimate sales it is likely to result in lost sales. 4. If the company used the sales budget for the sole purpose of motivating employees to strive for excellent results, then the boss may be inclined to challenge the sales manager by establishing a budget that intentionally exceeds expected sales. If the sales budget has absolutely no impact on the sales manager’s pay raises, promotions or bonuses, then she may be inclined to embrace the challenge of “aiming high” when establishing the sales forecast.

Managerial Accounting, 16th Edition

Exercise P-1 (30 minutes) 5. If the company used the sales budget for the sole purpose of determining pay raises, promotions, and bonuses, then the sales manager will be inclined to understate the sales budget to maximize her pay raise, bonus, and chance of promotion. The boss would expect the sales manager to understate the sale budget, so he would seek to increase the budget above the sales manager’s proposed forecast. 6. When a budget is used to deploy resources, to motivate employees through the use of stretch goals, and to evaluate and reward employees, it creates inevitable conflicts. As a resource deployment tool, the budget should be as accurate as possible. As a motivational tool, the budget should intentionally seek to stretch employees to perform to their full potential. When budgets are used to evaluate and reward employees, the employees will have a strong inclination to establish easily attainable goals to maximize their chances for large pay raises and bonuses as well as their chance for promotion.

Exercise P-2 (10 minutes) The student would feel unfairly criticized for unloading 150 pieces of luggage in 13 minutes. The student would perceive that, according to the boss’s expectations, he should be able to unload 10 pieces of luggage per minute. Therefore, if an airplane contains 150 pieces of luggage, he should be allowed 15 minutes to unload the airplane’s luggage. By unloading 150 pieces of luggage in 13 minutes, the student would rightly claim that he beat the boss’s expectation by two minutes. When companies design control systems, they compare actual performance to some pre-existing expectation. The pre-existing benchmark needs to make sense so that it can result in meaningful managerial insights and fairminded assessments of employee performance. This is the fundamental underlying principle of flexible budgets, which will be explained in a subsequent chapter.

Managerial Accounting, 16th Edition

Exercise P-3 (30 minutes) Examples of Decisions

Application in a University Setting

What products and services should be the focus of our marketing efforts?

How should we allocate our marketing resources among our undergraduate programs, our graduate programs, our research accomplishments, and our athletic programs? Should we introduce a new major for undergraduate students? What prices should we establish for our travel abroad programs? Should we discontinue our MBA program?

What should we be selling?

What new products and services should we offer? What prices should we charge for our products and services? What products and services should we discontinue?

Who should we be serving?

Who should be the focus of our marketing efforts? Who should we start serving? Who should pay price premiums or receive price discounts? Who should we stop serving?

How should we execute?

How should we supply our parts and services? How should we expand our capacity? How should we reduce our capacity? How should we improve our efficiency and effectiveness?

How much of our marketing budget should we channel towards attracting undergraduate students versus graduate students? Should we introduce on-line programs that enable us to serve customers across the globe? How much should we charge for out-of-state tuition? Which one of our branch campuses should we close? What portion of our faculty should be adjunct faculty? Should we increase our average class size to accommodate more students? Should we cut costs by eliminating administrative jobs or faculty jobs? Should we increase our research expectations for our faculty?

Exercise P-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. Generally accepted accounting principles (GAAP) require the writedown of obsolete inventory. • Prepare decision support information that is accurate. Integrity • Mitigate actual conflicts of interest and avoid apparent conflicts of interest. • Refrain from engaging in any conduct that would prejudice carrying out duties ethically. • Abstain from activities that would discredit the profession. Credibility • Communicate information fairly and objectively. • Disclose all relevant information. • Hiding the obsolete inventory impairs the objectivity and relevance of financial statements. Members of the management team, of which Perlman is a part, are responsible for both operations and recording the results of operations. Because the team will benefit from a bonus, increasing earnings by ignoring the obsolete inventory is clearly a conflict of interest. Furthermore, such behavior is a discredit to the profession. (Unofficial CMA solution)

Managerial Accounting, 16th Edition

Exercise P-4 (continued) 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 compensation, the ethical action may anger her colleagues and make her very unpopular. Taking the ethical action would require considerable courage and self-assurance.

Exercise P-5 (60 minutes) 1.

Company Deere

FedEx

State Farm Insurance

BMW

Amazon.com

Charles Schwab

Strategy Product leadership: “Nothing runs like a Deere” Operational excellence: “When it absolutely, positively has to be there overnight” Customer intimacy: “Like a good neighbor, State Farm is there” Product leadership: “The Ultimate Driving Machine” Operational excellence: Huge selection of products that are promptly delivered straight to your door Customer intimacy: “Talk to Chuck”

Managerial Accounting, 16th Edition

Exercise P-6 (15 minutes)

Airlines

Industry

Pharmaceutical drugs Package delivery Banking Oil & gas E-commerce Automotive

Example of Business Risk

An airplane might crash.

Example of Control to Reduce the Business Risk

Implement a preventive maintenance program. A customer might be Design tamper-proof harmed by a drug. packaging. A package may get Implement an lost. electronic package tracking system. Customer credit card Implement computer numbers may be system firewalls to foil stolen. computer hackers. An oil spill may Create contingency damage the response plans in the environment. event of an oil spill. The company’s website Develop a backup might crash. system that can be easily activated. Customers may not Use focus groups to like the appearance of assess reactions to a new car model. new model prototypes.

Exercise P-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 eventually figure this out. They would then be reluctant to accept the word of the service representative that a particular problem needs to be corrected—even when a real problem exists. Either the work would not be done, customers would learn to diagnose and repair problems themselves, 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. 2. As argued above, if customers could not trust their service representatives, they would be reluctant to follow the service representative’s advice. 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 to pay as much for work that is done because customers would have reason to believe that the work may be unnecessary. These two effects would reduce demand for automotive repair services. The reduced demand would reduce employment in the industry and would lead to lower overall profits.

Managerial Accounting, 16th Edition

Exercise P-8 (10 minutes) 1. The type of cognitive bias revealed by this data is called selfenhancement bias. This bias occurs when people overstate their strengths and understate their weaknesses relative to others. 2. This bias may cause managers to be overly-optimistic when making plans for the future. This bias might also cause managers to readily blame others if control data indicates unsatisfactory performance. It can also lead managers to make poor decisions because they believe their managerial prowess can overcome any potential obstacles revealed by an objective data analysis. 3. Managers can help reduce the potential adverse consequences of selfenhancement bias by establishing a “devil’s advocate” team of managers that are charged with challenging proposed courses of action.

Exercise P-9 (20 minutes) The purpose of this exercise is to present students with an opportunity to debate the ethicality of competing courses of action. Some students may argue that the ethical choice is to tell the truth when speaking with the professor from Oregon Coastal University. Other students may argue that it is okay to be untruthful with the professor from Oregon Coastal University because it serves a “greater good” from the standpoint of future Mountain State University students that will be able to avoid Dr. Candler. The power of rationalization is a very important topic when discussing ethics and decision making. When students are asked a generic question about the ethicality of breaking the law or lying, they quickly condemn these actions as unethical. However, when given specific contexts, such as the one presented in this problem, many students will rationalize unlawful or dishonest conduct.

Managerial Accounting, 16th Edition

Exercise P-10 (20 minutes) The purpose of this exercise is to create a platform for students to debate the merits of the shareholder-focused and stakeholder-focused philosophies of business management. Student responses are likely to fall in three categories. First, those students who believe that the purpose of a company is shareholder wealth maximization will tend to agree with the quote. Second, those students who believe that companies should serve the needs of a broadly defined group of stakeholders may disagree with the quote. Third, some students may argue that the shareholder-focused and stakeholder-focused philosophies of business management are not mutually exclusive. In other words, these students may assert that effectively or ineffectively serving the needs of various stakeholders can have a major impact on a company’s financial performance.

Exercise P-11 (20 minutes) 1. This question gives students a platform for discussing the merits of extrinsic motivators in organizations. Student responses should differ regarding the effectiveness of extrinsic rewards in creating an enduring commitment to a set of values or a course of action, thereby enabling a lively debate. 2.

This question gives students an opportunity to discuss the roles of intrinsic motivation and extrinsic motivation in organizational management.

This question gives students an opportunity to discuss the implementation of compensation systems within organizations. To enrich this discussion, professors can ask students questions such as: (1) Would your incentives be tied to individual performance or teambased performance? (2) Would your incentives be tied to easily attainable goals or stretch targets? and (3) How would you handle the fact that financial incentive systems are often influenced by factors that are beyond the control of those being evaluated?

Managerial Accounting, 16th Edition

Exercise P-12 (20 minutes) 1. Most students are likely to recommend reinforcing the sections of the plane that were hit most often by enemy fire. Indeed, during World War II, American military personnel drew the same conclusion. 2. Perceptive students may realize that this is a classic case of selection bias. Selection bias arises when decision makers rely on a sample that is not representative of the entire population being studied. In this case, the military was relying on a sample that included only those planes that had returned from combat. The sample did not include planes lost in combat. During World War II, statistician Abraham Ward recommended that the portions of the planes hit least often should be reinforced. “Ward reasoned that a plane would be less likely to return if it were hit in a critical area and, conversely, that a plane that did return even when hit had probably not been hit in a critical location.” Note: The above quote appears on page 118 of Jerker Denrell’s article titled “Selection Bias and the Perils of Benchmarking,” from the Harvard Business Review, Volume 83, Issue 4, pp. 114-119.

Exercise P-13 (20 minutes) The purpose of this exercise is to present students with an opportunity to debate the ethicality of competing courses of action. Some students may argue that the ethical choice is to report all gambling winnings to the Internal Revenue Service even though it will force them to pay additional federal income taxes. Other students may argue that it is okay to evade the additional income tax for various reasons, such as “everybody else does it so it is okay.” The power of rationalization is a very important topic when discussing ethics and decision making. When students are asked a generic question about the ethicality of breaking the law or lying, they quickly condemn these actions as unethical. However, when given specific contexts, such as the one presented in this problem, many students will rationalize unlawful or dishonest conduct. Note to instructors: Before beginning a classroom discussion, allow students to anonymously answer the question in writing. Summarize the results of the written responses and ask students to comment on them.

Managerial Accounting, 16th Edition

Chapter 1 Managerial Accounting and Cost Concepts Questions 1-1 The three major types of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead. 1-2 a. Direct materials are an integral part of a finished product and their costs can be conveniently traced to it. b. Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. 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. 1-3 A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.

1-4 a. Variable cost: The variable cost per unit is constant, but total variable cost changes in direct proportion to changes in volume. b. Fixed cost: The total fixed cost is constant within the relevant range. The average fixed cost per unit varies inversely with changes in volume. c. Mixed cost: A mixed cost contains both variable and fixed cost elements. 1-5 a. Unit fixed costs decrease as the activity level increases. b. Unit variable costs remain constant as the activity level increases. c. Total fixed costs remain constant as the activity level increases. d. Total variable costs increase as the activity level increases. 1-6 a. Cost behavior: Cost behavior refers to the way in which costs change in response to changes in a measure of activity such as sales volume, production volume, or orders processed. b. Relevant range: The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid. 1-7 An activity base is a measure of whatever causes the incurrence of a variable cost. Examples of activity bases include units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc. 1-8 The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range.

1-9 A discretionary fixed cost has a fairly short planning horizon—usually a year. Such costs arise from annual decisions by management to spend on certain fixed cost items, such as advertising, research, and management development. A committed fixed cost has a long planning horizon—generally many years. Such costs relate to a company’s investment in facilities, equipment, and basic organization. Once such costs have been incurred, they are “locked in” for many years. 1-10 Yes. As the anticipated level of activity changes, the level of fixed costs needed to support operations may also change. Most fixed costs are adjusted upward and downward in large steps, rather than being absolutely fixed at one level for all ranges of activity.

1-11 The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled. The contribution approach income statement organizes costs by behavior, first deducting variable expenses to obtain contribution margin, and then deducting fixed expenses to obtain net operating income. 1-12 The contribution margin is total sales revenue less total variable expenses. 1-13 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. 1-14 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.

Managerial Accounting, 16th edition

Chapter 1: Applying Excel The completed worksheet is shown below.

Chapter 1: Applying Excel (continued) The completed worksheet, with formulas displayed, is shown below.

[Note: To display formulas in cells instead of their calculated amounts, consult Excel Help.]

Managerial Accounting, 16th edition

Chapter 1: Applying Excel (continued) 1. When the variable selling cost is changed to $900, the worksheet changes as show below:

The gross margin is $6,000; the same as it was before. It did not change because the variable selling expense is deducted after the gross margin, not before it on the traditional format income statement.

Chapter 1: Applying Excel (continued) 2. The new worksheet appears below:

Managerial Accounting, 16th edition

Chapter 1: Applying Excel (continued) The variable costs increased by 10% when the sales increased by 10%, however the fixed costs did not increase at all. By definition, total variable cost increases in proportion to activity whereas total fixed cost is constant. (In the real world, cost behavior may be messier.) The contribution margin also increased by 10%, from $6,000 to $6,600, because both of its components—sales and variable costs—increased by 10%. The net operating income increased by more than 10%, from $700 to $1,170, because even though sales and variable expenses increased by 10%, the fixed costs did not increase by 10%.

The Foundational 15 1. Direct materials........................................... Direct labor................................................. Variable manufacturing overhead ................. Variable manufacturing cost per unit ............

$ 6.00 3.50 1.50 $11.00

Variable manufacturing cost per unit (a) ....... Number of units produced (b) ...................... Total variable manufacturing cost (a) × (b) ... Average fixed manufacturing overhead per unit (c) .................................................... Number of units produced (d) ...................... Total fixed manufacturing cost (c) × (d) ....... Total product (manufacturing) cost...............

$11.00 10,000 $4.00 10,000

$110,000

40,000 $150,000

Note: The average fixed manufacturing overhead cost per unit of $4.00 is valid for only one level of activity—10,000 units produced. 2. Sales commissions ...................................... Variable administrative expense ................... Variable selling and administrative per unit ...

$1.00 0.50 $1.50

Variable selling and admin. per unit (a) ........ Number of units sold (b).............................. Total variable selling and admin. expense (a) × (b) ............................................... Average fixed selling and administrative expense per unit ($3 fixed selling + $2 fixed admin.) (c) ....................................... Number of units sold (d).............................. Total fixed selling and administrative expense (c) × (d) ..................................... Total period (nonmanufacturing) cost ...........

$1.50 10,000 $15,000 $5.00 10,000 50,000 $65,000

Note: The average fixed selling and administrative expense per unit of $5.00 is valid for only one level of activity—10,000 units sold.

Managerial Accounting, 16th edition

The Foundational 15 (continued) 3. Direct materials ....................................... Direct labor ............................................. Variable manufacturing overhead ............. Sales commissions................................... Variable administrative expense ............... Variable cost per unit sold ........................

$ 6.00 3.50 1.50 1.00 0.50 $12.50

4. Direct materials ....................................... Direct labor ............................................. Variable manufacturing overhead ............. Sales commissions................................... Variable administrative expense ............... Variable cost per unit sold ........................

$ 6.00 3.50 1.50 1.00 0.50 $12.50

5. Variable cost per unit sold (a) .................. Number of units sold (b) .......................... Total variable costs (a) × (b)....................

$12.50 8,000 $100,000

6. Variable cost per unit sold (a) .................. Number of units sold (b) .......................... Total variable costs (a) × (b)....................

$12.50 12,500 $156,250

7. Total fixed manufacturing cost (see requirement 1) (a)......................... Number of units produced (b) .................. Average fixed manufacturing cost per unit produced (a) ÷ (b) ............................... 8. Total fixed manufacturing cost (see requirement 1) (a)......................... Number of units produced (b) .................. Average fixed manufacturing cost per unit produced (a) ÷ (b) ............................... 9. Total fixed manufacturing cost (see requirement 1) ..............................

$40,000 8,000 $5.00 $40,000 12,500 $3.20 $40,000

The Foundational 15 (continued) 10. Total fixed manufacturing cost (see requirement 1) ................................ 11. Variable overhead per unit (a) ..................... Number of units produced (b) ..................... Total variable overhead cost (a) × (b) ......... Total fixed overhead (see requirement 1) ..... Total manufacturing overhead cost ..............

$40,000 $1.50 8,000

Total manufacturing overhead cost (a)......... Number of units produced (b) ..................... Manufacturing overhead per unit (a) ÷ (b)... 12. Variable overhead per unit (a) ..................... Number of units produced (b) ..................... Total variable overhead cost (a) × (b) ......... Total fixed overhead (see requirement 1) ..... Total manufacturing overhead cost ..............

$52,000 8,000 $6.50 $1.50 12,500

Total manufacturing overhead cost (a)......... Number of units produced (b) ..................... Manufacturing overhead per unit (a) ÷ (b)... 13. Selling price per unit................................... Variable cost per unit sold (see requirement 4) ................................. Contribution margin per unit .......................

$12,000 40,000 $52,000

$18,750 40,000 $58,750 $58,750 12,500 $4.70

$22.00 12.50 $ 9.50

Managerial Accounting, 16th edition

The Foundational 15 (continued) 14. Direct materials per unit ............................. Direct labor per unit ................................... Direct manufacturing cost per unit ..............

$6.00 3.50 $9.50

Direct manufacturing cost per unit (a) Number of units produced (b) ..................... Total direct manufacturing cost (a) × (b) .....

$9.50 11,000 $104,500

Variable overhead per unit (a) ..................... Number of units produced (b) ..................... Total variable overhead cost (a) × (b) ......... Total fixed overhead (see requirement 1) ..... Total indirect manufacturing cost .................

$1.50 11,000

15. Direct materials per unit ............................. Direct labor per unit ................................... Variable manufacturing overhead per unit .... Incremental cost per unit produced .............

$6.00 3.50 1.50 $11.00

$16,500 40,000 $56,500

Note: Variable selling and administrative expenses are variable with respect to the number of units sold, not the number of units produced.

Exercise 1-1 (15 minutes)

1. 2. 3. 4. 5. 6. 7. 8.

Cost

The wages of pediatric nurses Prescription drugs Heating the hospital The salary of the head of pediatrics The salary of the head of pediatrics Hospital chaplain’s salary Lab tests by outside contractor Lab tests by outside contractor

Cost Object

The pediatric department A particular patient The pediatric department The pediatric department A particular pediatric patient A particular patient A particular patient A particular department

Direct Cost

Indirect Cost

X X X X X X X X

Managerial Accounting, 16th edition

Exercise 1-2 (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 salary of the assembly shop’s supervisor: manufacturing overhead. 6. The salary 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.

Exercise 1-3 (15 minutes)

1. Depreciation on salespersons’ cars ........................ 2. Rent on equipment used in the factory .................. 3. Lubricants used for machine maintenance ............. 4. Salaries of personnel who work in the finished goods warehouse .............................................. 5. Soap and paper towels used by factory workers at the end of a shift ............................................... 6. Factory supervisors’ salaries.................................. 7. Heat, water, and power consumed in the factory ... 8. Materials used for boxing products for shipment overseas (units are not normally boxed) ............. 9. Advertising costs .................................................. 10. Workers’ compensation insurance for factory employees......................................................... 11. Depreciation on chairs and tables in the factory lunchroom ......................................................... 12. The wages of the receptionist in the administrative offices ............................................................... 13. Cost of leasing the corporate jet used by the company's executives ........................................ 14. The cost of renting rooms at a Florida resort for the annual sales conference ..................................... 15. The cost of packaging the company’s product ........

Product Period Cost Cost X X

X X X X X X X X X X X

Managerial Accounting, 16th edition

Exercise 1-4 (15 minutes) 1. Fixed cost ................................. Variable cost ............................. Total cost ................................. Average cost per cup served * ...

Cups of Coffee Served in a Week 2,000 2,100 2,200

$1,200 440 $1,640 $0.820

$1,200 462 $1,662 $0.791

$1,200 484 $1,684 $0.765

* Total cost ÷ cups of coffee served in a week 2. The average cost of a cup of coffee decreases as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.

Exercise 1-5 (15 minutes)

Item

1. Cost of the old X-ray machine .... 2. The salary of the head of the Radiology Department ............. 3. The salary of the head of the Laboratory Department ........... 4. Cost of the new color laser printer .................................... 5. Rent on the space occupied by Radiology ............................... 6. The cost of maintaining the old machine ................................. 7. Benefits from a new DNA analyzer ................................. 8. Cost of electricity to run the Xray machines ..........................

Differential Cost

Sunk Cost X

Opportunity Cost

X X X

Note: The costs of the salaries of the head of the Radiology Department and Laboratory Department and the rent on the space occupied by Radiology are neither differential costs, nor opportunity costs, nor sunk costs. These costs do not differ between the alternatives and therefore are irrelevant in the decision, but they are not sunk costs because they occur in the future.

Managerial Accounting, 16th edition

Exercise 1-6 (15 minutes) 1. Traditional income statement Cherokee Inc. Traditional Income Statement Sales ($30 per unit × 20,000 units) .................... Cost of goods sold ($24,000 + $180,000 – $44,000) ..................... Gross margin .................................................... Selling and administrative expenses: Selling expenses (($4 per unit × 20,000 units) + $40,000) ...... Administrative expenses (($2 per unit × 20,000 units) + $30,000) ...... Net operating income ........................................

$600,000 160,000 440,000 $120,000 70,000

190,000 $250,000

2. Contribution format income statement Cherokee Inc. Contribution Format Income Statement Sales ($30 per unit × 20,000 units) .................... Variable expenses: Cost of goods sold ($24,000 + $180,000 – $44,000) .................. Selling expenses ($4 per unit × 20,000 units)... Administrative expenses ($2 per unit × 20,000 units) ......................... Contribution margin........................................... Fixed expenses: Selling expenses ............................................. Administrative expenses .................................. Net operating income ........................................

$600,000 $160,000 80,000 40,000 40,000 30,000

280,000 320,000 70,000 $250,000

Exercise 1-7 (20 minutes) 1a. The total direct manufacturing cost incurred is computed as follows: Direct materials per unit ............................ Direct labor per unit .................................. Direct manufacturing cost per unit (a) ........ Number of units sold (b)............................ Total direct manufacturing cost (a) × (b) ....

$7.00 4.00

$11.00 20,000 $220,000

1b. The total indirect manufacturing cost incurred is computed as follows: Variable manufacturing overhead per unit ... Fixed manufacturing overhead per unit....... Indirect manufacturing cost per unit (a) ..... Number of units sold (b)............................ Total indirect manufacturing cost (a) × (b) .

$1.50 5.00

$6.50 20,000 $130,000

Note: The average fixed manufacturing overhead cost per unit of $5.00 is valid for only one level of activity—20,000 units produced. 2a. The total manufacturing cost that is directly traceable to the Manufacturing Department is computed as follows: Direct materials per unit ............................ Direct labor per unit .................................. Variable manufacturing overhead per unit ... Fixed manufacturing overhead per unit....... Total manufacturing cost per unit (a).......... Number of units sold (b)............................ Total direct costs (a) × (b) .........................

$7.00 4.00 1.50 5.00

$17.50 20,000 $350,000

2b. None of the manufacturing costs should be treated as indirect costs when the cost object is the Manufacturing Department.

Managerial Accounting, 16th edition

Exercise 1-7 (continued) 3a. The first step in calculating the total direct selling expense is to determine the fixed portion of the sales representatives’ compensation as follows: Fixed selling expense per unit (a) ............... Number of units sold (b)............................ Total fixed selling expense (a) × (b) ...........

$3.50 20,000

Total fixed selling expense (a) .................... Advertising expenditures (b) ...................... Total fixed portion of the sales representatives’ compensation (a) ‒ (b) ...

$70,000 $70,000 $50,000 $20,000

The second step is to calculate the total direct selling expense that is traceable to individual sales representatives as follows: Sales commissions per unit (a)................... Number of units sold (b)............................ Total sales commission (a) × (b) ................ Fixed portion of sales representatives’ compensation ......................................... Total direct selling expense ........................

$1.00 20,000

$20,000 20,000 $40,000

3b. The total indirect selling expense that cannot be traced to individual sales representatives is $50,000. The advertising expenditures cannot be traced to specific sales representatives. 4. No. Kubin’s administrative expenses could be direct or indirect depending on the cost object. For example, the chief financial officer’s salary would be an indirect cost if the cost object is units of production; however, his salary would be a direct cost if the cost object is the Finance Department that he oversees.

Exercise 1-8 (20 minutes) 1. Direct materials........................................... Direct labor................................................. Variable manufacturing overhead ................. Variable manufacturing cost per unit ............

$ 7.00 4.00 1.50 $12.50

$12.50 20,000 $5.00 20,000

$250,000

100,000 $350,000

Note: The average fixed manufacturing overhead cost per unit of $5.00 is valid for only one level of activity—20,000 units produced. 2. Sales commissions ...................................... Variable administrative expense ................... Variable selling and administrative per unit ...

$1.00 0.50 $1.50

Variable selling and admin. per unit (a) ........ Number of units sold (b).............................. Total variable selling and admin. expense (a) × (b) ............................................... Average fixed selling and administrative expense per unit ($3.50 fixed selling + $2.50 fixed administrative) (c) ................... Number of units sold (d).............................. Total fixed selling and administrative expense (c) × (d) ..................................... Total period cost .........................................

$1.50 20,000 $30,000 $6.00 20,000 120,000 $150,000

Note: The average fixed selling and administrative expense per unit of $6.00 is valid for only one level of activity—20,000 units sold.

Managerial Accounting, 16th edition

Exercise 1-8 (continued) 3. Direct materials........................................... Direct labor................................................. Variable manufacturing overhead ................. Variable manufacturing cost per unit ............

$ 7.00 4.00 1.50 $12.50

Variable manufacturing cost per unit (a) ....... Number of units produced (b) ...................... Total variable manufacturing cost (a) × (b) ... Total fixed manufacturing cost (see requirement 1) ......................................... Total product cost .......................................

$12.50 22,000

4. Sales commissions ...................................... Variable administrative expense ................... Variable selling and administrative per unit ...

$1.00 0.50 $1.50

$1.50 18,000

$275,000 100,000 $375,000

$27,000 120,000 $147,000

Exercise 1-9 (20 minutes) 1. Direct materials ....................................... Direct labor ............................................. Variable manufacturing overhead ............. Sales commissions................................... Variable administrative expense ............... Variable cost per unit sold ........................

$ 7.00 4.00 1.50 1.00 0.50 $14.00

2. Direct materials ....................................... Direct labor ............................................. Variable manufacturing overhead ............. Sales commissions................................... Variable administrative expense ............... Variable cost per unit sold ........................

$ 7.00 4.00 1.50 1.00 0.50 $14.00

3. Variable cost per unit sold (a) .................. Number of units sold (b) .......................... Total variable costs (a) × (b)....................

$14.00 18,000 $252,000

4. Variable cost per unit sold (a) .................. Number of units sold (b) .......................... Total variable costs (a) × (b)....................

$14.00 22,000 $308,000

Note: The key to answering questions 5 through 8 is to calculate the total fixed manufacturing overhead costs as follows: Average fixed manufacturing overhead cost per unit (a) .................................... Number of units produced (b) .................. Total fixed manufacturing overhead (a) × (b) .......................................................

$5.00 20,000 $100,000

Note: The average fixed manufacturing overhead cost per unit of $5.00 is valid for only one level of activity—20,000 units produced. Once students understand that total fixed manufacturing overhead is $100,000, questions 5 through 8 are answered as follows: © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 22

Managerial Accounting, 16th edition

Exercise 1-9 (continued) 5. The average fixed manufacturing overhead per unit is: Total fixed manufacturing overhead (a)..... Number of units produced (b) .................. Average fixed manufacturing cost per unit produced (rounded) (a) ÷ (b)................

$100,000 18,000 $5.56

6. The average fixed manufacturing overhead per unit is: Total fixed manufacturing overhead (a)..... Number of units produced (b) .................. Average fixed manufacturing cost per unit produced (rounded) (a) ÷ (b)................

$100,000 22,000 $4.55

7. The total fixed manufacturing overhead remains unchanged at $100,000. 8. The total fixed manufacturing overhead remains unchanged at $100,000.

Exercise 1-10 (10 minutes) 1. Direct materials ....................................... Direct labor ............................................. Variable manufacturing overhead ............. Total incremental cost..............................

$ 7.00 4.00 1.50 $12.50

$ 7.00 4.00 1.50 1.00 0.50 $14.00

3. Because the 200 units to be sold to the new customer have already been produced, the incremental manufacturing cost per unit is zero. The variable manufacturing costs incurred to make these units have already been incurred and, as such, are sunk costs. 4. Sales commission .................................... Variable administrative expense ............... Variable cost per unit sold ........................

$1.00 0.50 $1.50

Managerial Accounting, 16th edition

Exercise 1-11 (20 minutes) 1. The company’s variable cost per unit is: $180,000 =$6 per unit. 30,000 units

The completed schedule is as follows:

Units produced and sold 30,000 40,000 50,000

Total costs: Variable cost............... $180,000 Fixed cost................... 300,000 Total costs .................. $480,000 Cost per unit: Variable cost............... $ 6.00 Fixed cost................... 10.00 Total cost per unit ....... $16.00

$240,000 $300,000 300,000 300,000 $540,000 $600,000 $ 6.00 7.50 $13.50

$ 6.00 6.00 $12.00

2. The company’s contribution format income statement is: Sales (45,000 units × $16 per unit) ........................ Variable expenses (45,000 units × $6 per unit) ....... Contribution margin .............................................. Fixed expense ....................................................... Net operating income ............................................

$720,000 270,000 450,000 300,000 $150,000

Exercise 1-12 (10 minutes) 1. The computations for parts 1a through 1e are as follows: a. The cost of batteries in Raw Materials: Beginning raw materials inventory............. Plus: Battery purchases ............................ Batteries available .................................... Minus: Batteries withdrawn ....................... Ending raw materials inventory (a) ............ Cost per battery (b) ................................. Raw materials on April 30th (a) × (b) .........

0 8,000 8,000 7,600

400 $80 $32,000

b. The cost of batteries in Work in Process: Beginning work in process inventory ......... Plus: Batteries withdrawn for production ... Batteries available .................................... Minus: Batteries transferred to finished goods (7,500 × 90%) ............................ Ending work in process inventory (a)......... Cost per battery (b) ................................. Work in process on April 30th (a) × (b) ......

0 7,500 7,500 6,750

750 $80 $60,000

c. The cost of batteries in Finished Goods: Beginning finished goods inventory ........... Plus: Batteries transferred in from work in process (see requirement b) .................. Batteries available .................................... Minus: Batteries transferred out to cost of goods sold (6,750 × (100% ‒ 30%)) ...... Ending finished goods inventory (a) .......... Cost per battery (b) ................................. Finished goods on April 30th (a) × (b)........

0 6,750 6,750 4,725

2,025 $80 $162,000

Managerial Accounting, 16th edition

Exercise 1-12 (continued) d. The cost of batteries in Cost of Goods Sold: Number of batteries (see requirement c) (a) ........................................................ Cost per battery (b) ................................. Cost of goods sold for April (a) × (b).........

4,725 $80 $378,000

e. The cost of batteries included in selling expense: Number of batteries (a) ............................ Cost per battery (b) ................................. Selling expense for April (a) × (b) .............

100 $80 $8,000

2. Raw Materials, Work in Process and Finished Goods would appear on the balance sheet. Cost of Goods Sold and Selling Expense would appear on the income statement.

Exercise 1-13 (30 minutes) 1.

True. The variable manufacturing cost per unit will remain the same within the relevant range.

False. The total fixed manufacturing cost will remain the same within the relevant range.

True. The total variable manufacturing cost will increase, so the total manufacturing cost will increase too.

True. The average fixed manufacturing cost per unit will decrease as the level of activity increases.

False. The total variable manufacturing cost will increase (rather than decrease) as the activity level increases.

False. The variable manufacturing cost per unit will remain the same, but the average fixed manufacturing cost per unit will decrease as the level of activity increases.

True. The variable manufacturing cost per unit of $28 will stay constant within the relevant range. The $28 figure is computed as follows: Total manufacturing cost per unit (a) .................. Variable manufacturing cost percentage (b) ........ Variable manufacturing cost per unit (a) × (b) ....

$70.00 40% $28.00

False. The total fixed manufacturing cost of $420,000 does not change within the relevant range. The $420,000 figure is computed as follows: Total manufacturing cost per unit (a) ........ Variable manufacturing cost per unit (b) ... Average fixed manufacturing cost per unit (a) ‒ (b) ............................................... Number of units produced........................ Total fixed manufacturing cost..................

$70.00 28.00 $42.00 × 10,000 $420,000

Managerial Accounting, 16th edition

Exercise 1-13 (continued) 9.

True. The underlying computations are as follows: Variable manufacturing cost per unit (see requirement 7) (a) ................................. Number of units produced (b) ................... Total variable manufacturing cost (a) × (b) Total fixed manufacturing cost (see requirement 8) ...................................... Total manufacturing cost ...........................

$28.00 10,050

$281,400 420,000 $701,400

10. True. The underlying computations are as follows: Total fixed manufacturing cost (see requirement 8) (a) ....................................................................... Number of units produced (b) .................................. Average fixed manufacturing cost per unit (a) ÷ (b) ..

$420,000 10,050 $41.79

11. False. The total variable manufacturing cost will equal $281,400, computed as follows: Variable manufacturing cost per unit (see requirement 7) (a) .......................................... Number of units produced (b) ............................ Total variable manufacturing cost (a) × (b) .........

$28.00 10,050 $281,400

12. True. The underlying computations are as follows: Variable manufacturing cost per unit (see requirement 7) ............................................... Average fixed manufacturing cost per unit (see requirement 10).............................................. Total manufacturing cost per unit .......................

$28.00 41.79 $69.79

Exercise 1-14 (30 minutes)

Name of the Cost

Rental revenue forgone, $30,000 per year ..................................... Direct materials cost, $80 per unit .. Rental cost of warehouse, $500 per month .................................. Rental cost of equipment, $4,000 per month .................................. Direct labor cost, $60 per unit ........ Depreciation of the annex space, $8,000 per year .......................... Advertising cost, $50,000 per year . Supervisor's salary, $3,500 per month ........................................ Electricity for machines, $1.20 per unit ............................................ Shipping cost, $9 per unit .............. Return earned on investments, $3,000 per year ..........................

(1) Predicting Cost behavior

Cost Classifications for: (3) Preparing (2) Financial Manufacturers Statements

None Variable

None Direct materials

None Product

Fixed

Period

Variable Variable

None Manufacturing overhead Direct labor Manufacturing overhead None Manufacturing overhead Manufacturing overhead None

None

Fixed Variable Fixed Fixed Fixed

Opportunity cost

Product Product Product Period

Sunk cost

Product Product Period None

(4) Decision Making

Managerial Accounting, 16th edition

Opportunity cost

Exercise 1-15 (20 minutes) 1. Traditional income statement The Alpine House, Inc. Traditional Income Statement Sales ................................................................ Cost of goods sold ($30,000 + $100,000 – $40,000) ..................... Gross margin .................................................... Selling and administrative expenses: Selling expenses (($50 per unit × 200 pairs of skis*) + $20,000)......................................... Administrative expenses (($10 per unit × 200 pairs of skis) + $20,000) .............................. Net operating income ........................................

$150,000 90,000 60,000 $30,000 22,000

52,000 $ 8,000

*$150,000 sales ÷ $750 per pair of skis = 200 pairs of skis. 2. Contribution format income statement The Alpine House, Inc. Contribution Format Income Statement Sales ................................................................ Variable expenses: Cost of goods sold ($30,000 + $100,000 – $40,000) .................. Selling expenses ($50 per unit × 200 pairs of skis) .................. Administrative expenses ($10 per unit × 200 pairs of skis) .................. Contribution margin........................................... Fixed expenses: Selling expenses ............................................. Administrative expenses .................................. Net operating income ........................................

$150,000 $90,000 10,000 2,000 20,000 20,000

102,000 48,000 40,000 $ 8,000

Exercise 1-15 (continued) 3. Since 200 pairs of skis were sold and the contribution margin totaled $48,000 for the quarter, the contribution margin per unit was $240 ($48,000 ÷ 200 pair of skis = $240 per pair of skis).

Managerial Accounting, 16th edition

Exercise 1-16 (10 minutes) 1. The differential cost is computed as follows: Cost of a new model 300 (a) .............................. Cost of a new model 200 (b) .............................. Differential cost (a) ‒ (b) ...................................

$313,000 $275,000 $38,000

2. The sunk cost is the cost of the machine purchased seven years ago for $319,000. 3. The opportunity cost is the $374,000 that could have been earned by pursuing the forgone option.

Exercise 1-17 (15 minutes)

Cost Item

1. Hamburger buns at a Wendy’s restaurant ... 2. Advertising by a dental office........................ 3. Apples processed and canned by Del Monte 4. Shipping canned apples from a Del Monte plant to customers................. 5. Insurance on a Bausch & Lomb factory producing contact lenses ...................... 6. Insurance on IBM’s corporate headquarters ............ 7. Salary of a supervisor overseeing production of printers at Hewlett-Packard .... 8. Commissions paid to automobile salespersons ............. 9. Depreciation of factory lunchroom facilities at a General Electric plant ........................ 10. Steering wheels installed in BMWs ......

Cost Classifications for: (2) (1) Preparing Predicting Cost Financial Behavior Statements Variable

Product

Fixed

Period

Variable

Product

Variable

Period

Fixed

Product

Fixed

Period

Fixed

Product

Variable

Period

Fixed

Product

Variable

Product

Managerial Accounting, 16th edition