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Introduction to Management Accounting Solutions Manual

Chapter 2: Building Blocks of Management Page 1 of 119

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Short Exercises

(5-10 min.) S 2-1

S2-1 Indentify type of company from balance sheets (Learning Objective 1)The current asset sections of the balance sheets of three companies follow. Whichcompany isa service company? Which is a merchandiser? Which is a manufacturer? Howcan you tell?

Solution:


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a

b

cdef

gh

ijk


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(10 min.) S 2-2

S2-2 Identify types of companies and inventories (Learning Objective 1)

Fill in the blanks with one of the following terms: manufacturing, service,merchandising,retailer(s), wholesaler(s), raw materials inventory, merchandise inventory, workin processinventory, finished goods inventory, freight-in, the cost of merchandise.

Solution:


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(5-10 min.) S 2-3

S2-3 Label value chain functions (Learning Objective 2)List the correct value chain element for each of the six business functions described below.

a. Delivery of products and servicesb. Detailed engineering of products and services and the processes for producing themc. Promotion and advertising of products or servicesd. Investigating new or improved products or services and the processes for producing theme. Support provided to customers after the salef. Resources used to make a product or obtain finished merchandiseSolution:


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(5-10 min.) S 2-4

S2-4 Classify costs by value chain function (Learning Objective 2)

Classify each of Hewlett-Packards (HPs) costs as one of the six business functions

in thevalue chain.a. Depreciation on Roseville, California, plantb. Costs of a customer support center Web sitec. Transportation costs to deliver laser printers to retailers such as Best Buyd. Depreciation on research labe. Cost of a prime-time TV ad featuring the new HP logo

Solution:


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(10 min.) S 2-5

S2-5 Classify costs as direct or indirect (Learning Objective 3)

Classify the following as direct or indirect costs with respect to a local

Blockbuster store(the store is the cost object). In addition, state whetherBlockbuster would trace or allocate these costs to the store.

Solution:


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a.b.c.d.e.

f.g.h.i.


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(5-10 min.) S 2-6

S2-6 Classify inventoriable product costs and period costs (Learning Objective 4)

Classify each of Georgia-Pacifics costs as either inventoriable product costs or periodcosts. Georgia-Pacific is a manufacturer of paper, lumber, and building material products.

Solution:


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S2-7 Classify a manufacturers costs (Learning Objective 4)

Solution:

COSTPeriod Cost or Inventoriable Product

Cost?

a. Depreciation on automated productionequipment

b. Telephone bills relating to customer servicecall centerc. Wages and benefits paid to assembly-lineworkers in the manufacturing plantd. Repairs and maintenance on factoryequipmente. Lease payment on administrativeheadquartersf. Salaries paid to quality control inspectors in

the plant

h. Standard packaging materials used topackage individual units of product for sale (e.g.,

cereal boxes in which cereal is packaged)

g. Property insurance 40% of building is usedfor sales and administration; 60% of building is

used for manufacturing

Classify each of the following costs as a period cost or an inventoriableyouclassify the cost as an inventoriable product cost, further classify it a(DM),direct labor (DL), or manufacturing overhead (MOH).


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(5 -10 min.) S 2-7

If an InventoriableProduct Cost: Is itDM, DL, or MOH?

roduct cost. Ifdirect material


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(5 -10 min.) S2-8

Solution:

Period Cost orInventoriable

Product Cost?

1. Cost of milk purchased from dairy farmers

2. Lubricants used in running bottling machines

3. Depreciation on refrigerated trucks used to collect

raw milk from dairy farms

4. Property tax on dairy processing plant

5. Television advertisements for DairyPlainsproducts

6. Gasoline used to operate refrigerated trucks usedto deliver finished dairy products to grocery stores

7. Company presidents annual bonus

8. Plastic gallon containers in which milk is

packaged9. Depreciation on marketing departmentscomputers

10. Wages and salaries paid to machine operatorsat dairy processing plant

11. Research and Development on improving milkpasteurization process

S2-8 Classify costs incurred by a dairy processing company (LO 4)

COST

If an InventoriableProduct Cost: Is it DM,

DL, or MOH?

Each of the following costs pertains to DairyPlains, a dairy processing company.Classify each of the companys costs as a period cost or an inventoriable product cost.Further classify inventoriable product costs as direct material (DM), direct labor (DL), ormanufacturing overhead (MOH).


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5 (min) S2-9

S2-9 Determine total manufacturing overhead (Learning Objective 4)

Solution:

Manufacturing overhead:

Glue for camera frames*

Plant depreciation expensePlant supervisors salary

Plant janitors salary

Oil for manufacturing equipment

Total manufacturing overhead

Snaps manufactures disposable cameras. Suppose the companys March recordsincludethe items described below. What is Snaps total manufacturing overheadcost in March?

Snaps

Total Manufacturing Overhead Computation


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(5 -10 min.) S2-10

S2-10 Compute Cost of Goods Sold for a merchandiser (LO 5)

Solution:

Cost of goods sold:Beginning inventoryPurchases

Import dutiesFreight-inCost of goods available for saleEnding inventoryCost of goods sold

Circuits PlusCost of Goods Sold Computation

Given the following information for Circuits Plus, an electronics e-tailer,compute the cost of goods sold.


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(5 min) S2-11

S2-11 Prepare a retailers income statement (Learning Objective 5)

Solution:

Sales revenueCost of goods sold:Beginning inventoryPurchasesCost of goods available for saleEnding inventoryCost of goods soldGross profitOperating expensesOperating income

Salon SecretsIncome Statement

Salon Secrets is a retail chain specializing in salon-quality hair care products.During theyear, Salon Secrets had sales of $38,230,000. The company beganthe year with$3,270,000 of merchandise inventory and ended the year with$3,920,000 of inventory.During the year, Salon Secrets purchased $23,450,000of merchandise inventory. The com-panys selling, general, and administrativeexpenses totaled $6,115,000 for the year.Prepare Salon Secrets incomestatement for the year.


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(5

S2-12 Calculate direct materials used (Learning Objective 5)

Solution:

Direct materials used:

Beginning raw materials inventory

Purchases of direct materials

Import dutiesFreight-in

Direct materials available for use

Ending raw materials inventory

Direct materials used

Sunnys Bikes

Computation of Direct Materials Used

You are a new accounting intern at Sunnys Bikes. Your boss gives you the follomation and asks you to compute the cost of direct materials used (assume thatpanys raw materials inventory contains only direct materials).


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min) S2-12

wing infor-he com-


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(5 min) S2-13

S2-13 Compute Cost of Goods Manufactured (Learning Objective 5)

Solution:

Beginning work in process inventory

Add: Direct materials used

Direct labor

Manufacturing overhead

Total manufacturing costs incurred during theperiod

Total manufacturing costs to account for

Less: Ending work in process inventory

Cost of goods manufactured

Smith Manufacturing found the following information in its accountingrecords: $524,000of direct materials used, $223,000 of direct labor, and$742,000 of manufacturing over-head. The Work in Process Inventoryaccount had a beginning balance of $76,000 and anending balance of$85,000. Compute the companys Cost of Goods Manufactured.

Smith Manufacturing

Schedule of Cost of Goods Manufactured


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(10 min) S2-14

S2-14 Consider relevant information (Learning Objective 6)

Solution:

You have been offered an entry-level marketing position at two highlyrespectable firms: onein Los Angeles, California, and one in Sioux Falls, SouthDakota. What quantitative andqualitative information might be relevant to yourdecision? What characteristics about thisinformation make it relevant?


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(10 min) S2-15

S2-15 Classify costs as fixed or variable (Learning Objective 7)

a. Apartment rentalb. Television cable servicec. Cost of groceriesd. Water and sewer bille. Cell phone billf. Health club duesg. Bus fare

Solution:a)b)c)d)e)f)g)

Classify each of the following personal expenses as either fixed or variable. Insome cases,your answer may depend on specific circumstances. If so, brieflyexplain your answer.


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Exercises (Group A)(10 min) E2-16

E2-16A Identify types of companies and their inventories (Learning Objective 1

Solution:

a.

b.c.d.e.

f.

g.

h.

i.

Complete the following statements with one of the terms listed here. You may usea term more than once, and some terms may not be used at all.


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E2-17A Classify costs along the value chain for a retailer (Learning Obj

Requirements

1. Use the following format to classify each cost according to its place in the value

2. Compute the total costs for each value chain category.3. How much are the total inventoriable product costs?

Solution:

Reqs. 1 and 2

Research on selling

satellite radio service

Purchases of merchandise

Rearranging store layout

Newspaper advertisements

Depreciation expense on

delivery trucks

Payment to consultant for advice

on location of new storeFreight-in

Salespersons salaries

Customer complaint department

Total

Req. 3

Suppose Radio Shack incurred the following costs at its Charleston, South Carolin

Radio Shack

Cost Classification

MarketingR & D Design Purchases


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(10-15 min) E2-17A

ective 2)

chain.

Customererv ce

, store:

Distribution


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(15 min)

E2-18A Classify costs along the value chain for a manufacturer (LO 2,3)

Solution:

Reqs. 1 and 2

Direct Direct Mfg

Material Labor O'headSalaries of telephonesalespeople

Depreciation onplant and equipment

Exterior case forphone

Scientists salaries

Delivery expense

Transmitters

Rearrange productionprocess

Assembly-lineworkers wages

Technical supporthotline

Total costs

Req. 3

Total inventoriable product costs:

Direct materialsDirect labor

1-800 (toll-free) linefor customer orders

Suppose the cell phone manufacturer Samsung Electronics provides thefollowing informa-tion for its costs last month (in hundreds of thousands):

Samsung Electronics

Cost Classification

Production

R & D Design Mktg


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ManufacturingoverheadTotal inventoriableproduct cost

Req. 4The total prime cost is:


Req. 5

The total conversion cost is:

Direct laborManufacturingoverhead


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E2-18A

Cust

Service

Distribu

tion


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(5-10 min) E2-1

E2-19A Classify costs as direct or indirect (Learning Objective 3)

Solution:

CostDirect or Indirect

cost?

a. Produce managers salary

b. Cost of the produce

c. Store utilities

d. Bags and twist ties provided to customers in the producedepartment for packaging fruits and vegetables.

e. Depreciation expense on refrigerated produce display shelves

f. Cost of shopping carts and baskets

g. Wages of check-out clerks

h. Cost of grocery stores advertisement flyer placed in theweekly newspaper

i. Store managers salary

j. Cost of equipment used to peel and core pineapples at the store

k. Free grocery delivery service provided to senior citizens

l. Depreciation on self-check-out machines

Classify each of the following costs as a direct cost or an indirect cost assuming thecost object is the Produce Department (fruits and vegetables) of a local grocerystore.


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A


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(10 min) E2-20A

E2-20A Define cost terms (Learning Objectives 3 & 4)

Solution:

a.

b.

c.

d.

e.

f.

g.

h.

i.

j.

k.

l.

Complete the following statements with one of the terms listed here. You may usea termmore than once, and some terms may not be used at all.


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(15-20 min) E2-20A

E2-21A Classify and calculate a manufacturers costs (Learning Objective

2. Calculate total manufacturing overhead costs.

3. Calculate total inventoriable product costs.

4. Calculate total prime costs.

5. Calculate total conversion costs.

6. Calculate total period costs.

Solution:

Req. 1

a. Airplane seats

c. Assembly workers wages

d. Plant utilities

f. Jet engines

g. Machine lubricants

h. Depreciation on forklifts

Property tax on

corporate marketingoffices

j. Cost of warranty repairs

k. Factory janitors wages

m. Machine operators health insurance

TOTAL

1. If the cost object is an airplane, classify each cost as one of the following:direct material (DM), direct labor (DL), indirect labor (IL), indirect materials(IM), other manufacturing overhead (other MOH), or period cost. (Hint: Set upa column for each type of cost.) What is the total for each type of cost?

e. Production supervisors salaries

l. Cost of designing new plant layout

IM IL

i.

b. Depreciation on administrative offices

DM DL


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Req. 2 Total manufacturing overhead costs = IM + IL + Other MOH

=

Req. 3 Total inventoriable product costs = DM + DL + MOH

=

Req. 4 Total prime costs = DM + DL

Req. 5 Total conversion costs = DL + MOH

Req. 6 Total period costs =


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3 & 4)

OtherMOH Period


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E2-22A Prepare the current assets section of the balance sheet (LO 5)

Requirement

Solution:

Current assets:

Cash

Accounts receivable

Inventories:

Raw materials inventory

Work in process inventory

Finished goods inventory

Total inventories

Prepaid expenses

Total current assets

1. Show how this company reports current assets on the balance sheet. Not all data areused. Is this company a service company, a merchandiser, or a manufacturer? How doyou know?

Lords

Current Assets


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(10 min) E2-22A


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(10-15 min) E

E2-23A Prepare a retailers income statement (Learning Objective 5)

Solution:

Sales revenue

Cost of goods sold:

Beginning inventory

Purchases and freight-in*

Cost of goods available for sale

Ending inventoryCost of goods sold

Gross profit

Operating expenses:

Web site expenses

Marketing expenses

Freight-out expenses

Total operating expenses

Operating income

Robbie Roberts is the sole proprietor of Precious Pets, an e-tail business sin the sale of high-end pet gifts and accessories. Precious Pets sales total$987,000 during the most recent year. During the year, the company spenton expenses relating to Web site maintenance; $22,000 on marketing; andon wrapping, boxing, and shipping the goods to customers. Precious Pets$642,000 on inventory purchases and an additional $21,000 on freight-in cThe company started the year with $17,000 of inventory on hand and endewith $15,000 of inventory. Prepare Precious Petsincome statement for therecent year.

Precious Pets

Income Statement

For Last Year


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2-23A

pecializinged$56,000$25,000lso spent

harges.d the yearmost


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(5 -10 min) E2

E2-24A Compute direct materials used and cost of goods manufactured (Learni

Solution:




Plus: Purchases of direct materials


Less: Ending raw materials inventory


Direct labor


Total manufacturing costs incurred during the period




Danielles Die-Cuts is preparing its Cost of Goods Manufactured Schedule at yaccounting records show the following: The Raw Materials Inventory accounthof $13,000 and an ending balance of $17,000. During the year, Danielle purchmaterials. Direct labor for the year totaled$123,000, while manufacturing overh$152,000. The Work inProcess Inventory account had a beginning balance ofbalanceof $15,000. Compute the Cost of Goods Manufactured for the year. (Hicalculate the direct materials used during the year. Model your answer afterExh

Danielles Die-Cuts

Cost of Goods Manufactured


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-24A

g Objective 5)

ar-end.Daniellesd a beginning balancesed $58,000 of directad amounted to21,000 and an endingnt:The firststep is toibit 2-15.)


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(15-20 min.) E 2-25A

E2-25A Compute cost of goods manufactured and cost of goods sold (LO 5)

Solution:


Add: Direct materials used:



Available for use



Direct labor


Indirect labor

Insurance on plant

Depreciation - plant building andequipment

Repairs and maintenance plant

Total manufacturing costs

incurred during the year

Total manufacturing costs to

account for

Less: Ending work in process

inventory


Compute the cost of goods manufactured and cost of goods sold for Strike Marinethe most recent year using the amounts described below. Assume that raw materiacontains only direct materials.

Strike Marine Company



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ompanyforlsinventory


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(10-15 min)

E2-26A Continues E2-25A: Prepare income statement (LO 5)

Solution:

Sales revenue (32,000 $12)

Cost of goods sold:

Beginning finished goods inventory


(E 2-25A)


Ending finished goods inventory

Cost of goods sold

Gross profit

Operating expenses:

Marketing expenses

General and administrative expensesOperating income

Students may simply use the $206,000 cost of goods sold computation frather than repeating the details of the computation here.

Prepare the income statement for Strike Marine Company in E2-25A forrecent year. Assume that the company sold 32,000 units of its product a$12 each during the year.

Strike Marine Company

Income Statement

For Last Year


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2-26A

rom E 2-25A,

the mostt a price of


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(25 min) E2-27A

E2-27A Work backwards to find missing amounts (Learning Objective 5)

Solution:

a.

Revenues

Cost of goods sold

Gross profit

b.



Available for use



c. To determine ending finished goods inventory, start by

computing the cost of goods manufactured:



Direct laborManufacturing overhead


Ending work in process inventory


Smooth Sounds manufactures and sells a new line of MP3 players. Unfortunately,SmoothSounds suffered serious fire damage at its home office. As a result, theaccounting recordsfor October were partially destroyedand completely jumbled.Smooth Sounds has hiredyou to help figure out the missing pieces of theaccounting puzzle. Assume that SmoothSounds raw materials inventory containsonly direct materials.


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Cost of goods manufactured (from above)


Ending finished goods inventoryCost of goods sold (from part A)


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(15-20 min) E2-28A

E2-28A Determine whether information is relevant (Learning Objective 6)

Solution:

a. Cost of operating automated production machinery versus the

cost of direct labor, when deciding whether to automateproduction.

b. Cost of computers purchased 6 months ago, when decidingwhether to upgrade to computers with faster processing speed.

c. Cost of purchasing packaging materials from an outsidevendor, when deciding whether to continue manufacturing thepackaging materials in-house.

d. The property tax rates in different locales, when deciding

where to locate the companys headquarters.

e. The type of gas (regular or premium) used by delivery vans,

when deciding which make and model of van to purchase for thecompanys delivery van fleet.

f. Depreciation expense on old manufacturing equipment whendeciding whether or not to replace it with newer equipment.

Classify each of the following costs as relevant or irrelevant to the decision at hand andbrieflyexplain your reason.


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g. The fair market value of old manufacturing equipment whendeciding whether or not to replace it with newer equipment.

h. The interest rate paid on invested funds, when deciding howmuch inventory to keep on-hand.i. The cost of land purchased 3 years ago, when deciding whetherto build on the land now or wait two more years before building.

j. The total amount of the restaurants fixed costs, when decidingwhether to add additional items to the menu.


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(10 min.) E2-29A

E2-29A Describe other cost terms (Learning Objectives 6 & 7)

Complete the following statements with one of the terms listed here. You mayuse a termmore than once, and some terms may not be used at all.

Solution:


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(10 min.) E2-30A

E2-30A Classify costs as fixed or variable (Learning Objective 7)

Classify each of the following costs as fixed or variable:

a. Thread used by a garment manufacturer

b. Property tax on a manufacturing facility

c. Yearly salaries paid to sales staff

d. Gasoline used to operate delivery vans

e. Annual contract for pest (insect) controlf. Boxes used to package breakfast cereal at Kelloggs

Solution:

COST Variable or Fixed

a. Thread used by a garment manufacturer

b. Property tax on manufacturing facility

c. Yearly salaries paid to sales staff

d. Gasoline used to operate delivery vans

e. Annual contract for pest (insect) control

f. Boxes used to package breakfast cereal at Kelloggs

g. Straight-line depreciation on production equipment

h. Cell-phone bills for sales staff- contract billed at $.03 centsper minute

i. Wages paid to hourly assembly-line workers in the

manufacturing plant

j. Monthly lease payment on administrative headquarters

k. Commissions paid to the sales staff- -5% of sales revenue

l. Credit card transaction fee paid by retailer- $0.20 pertransaction plus 2% of the sales amount

m. Annual business license fee from city

n. Cost of ice cream sold at Baskin-Robbins

o. Cost of shampoo used at a hair salon


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(10 min) E2-31A

E2-31A Compute total and average costs (Learning Objective 7)

Requirements:

Solution:

a) Variable costs = ==

Total costs =

b) =

c) =

d) Variable costs = ==

Total costs =

e) =

f) =

g)

+ Fixed costs

+ Fixed costs

Fizzy-Cola spends $1 on direct materials, direct labor, and variable manufacturingoverheadfor every unit (12-pack of soda) it produces. Fixed manufacturing overheadcosts $5 millionper year. The plant, which is currently operating at only 75% of capacity,produced 20 mil-lion units this year. Management plans to operate closer to full capacitynext year, producing25 million units. Management doesnt anticipate any changes in theprices it pays for mate-rials, labor, and manufacturing overhead.

1. What is the current total product cost (for the 20 million units), including

2. What is the current average product cost per unit?

3. What is the current fixed cost per unit?

4. What is the forecasted total product cost next year (for the 25 million

5. What is the forecasted average product cost next year?6. What is the forecasted fixed cost per unit?7. Why does the average product cost decrease as production


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Exercises (Group B)(10 min) E2-32B

E2-32-B Identify types of companies and their inventories (LO 1)

Solution:

a.

b.

c.

d.

e.

f.

g.

h.

i.

Complete the following statements with one of the terms listed here. You may usea term more than once, and some terms may not be used at all.


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E2-17A Classify costs along the value chain for a retailer (Learning Obj

Requirements

1. Use the following format to classify each cost according to its place in the value

2. Compute the total costs for each value chain category.3. How much are the total inventoriable product costs?

Solution:

Reqs. 1 and 2

Research on selling satellite

radio service


Rearranging store layout

Newspaper advertisements

Depreciation expense on

delivery trucks

Payment to consultant for advice

on location of new storeFreight-in

Salespersons salaries

Customer complaint department

Total

Req. 3

Purchases MarketingR & D

Suppose Accessory Shack incurred the following costs at its Buffalo NY, store:

Accessory Shack

Cost Classification

Design


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(10-15 min) E2-33B

ective 2)

chain.

Customererv ceDistribution


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(15 min)

E2-34B Classify costs along the value chain for a manufacturer (LO 2,3)

Requirements

Solution:

Reqs. 1 and 2

Direct Direct MfgMaterial Labor O'head

Salaries of telephonesa espeop e

Depreciation on

plant and equipmentExterior case forphone

Scientists salaries

Delivery expense

Transmitters

Rearrange production

process

ssem y- neworkers wages

Technical supporthotline

Total costs

1-800 (toll-free) linefor customer orders

Cost Classification

1. Classify each of these costs according to its place in the value chain. (Hint:You should have at least one cost in each value chain function.)2. Compute the total costs for each value chain category.3. How much are the total inventoriable product costs?4. How much are the total prime costs?5. How much are the total conversion costs?

R & D Design Mktg

Plum Electronics

Production


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Req. 3


Direct materialsDirect laborManufacturingoverheadTotal inventoriableproduct cost

Req. 4

The total prime cost is:


Req. 5

The total conversion cost is:

Direct laborManufacturingoverhead


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E2-34B

CustService

Distribution


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(5-10 min) E2-3

E2-35B Classify costs as direct or indirect (Learning Objective 3)

Solution:

CostDirect or Indirect

cost?

a. Garden managers salary

b. Cost of shopping carts and baskets

c. Wages of checkout clerks

d. Cost of the merchandisee. Depreciation expense on demonstration water feature

f. Cost of hardware stores advertisement flyer placed in theweekly newspaper

g. Depreciation on self-checkout machines

h. Bags provided to garden customer for packaging small items

i. Store managers salary

j. Free garden delivery service provided to senior citizens

k. Cost of equipment used to plant and water plants at the store

l. Store utilities

Classify each of the following costs as a direct cost or an indirect cost assuming thecost object is the Garden Department (fruits and vegetables) of a local grocerystore.


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B


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(10 min) E2-36B

E2-36B Define cost terms (Learning Objectives 3 & 4)

Solution:

a.

b.

c.

d.

e.

f.

g.

h.

i.

j.

k

l.

Complete the following statements with one of the terms listed here. You may use aterm more than once, and some terms may not be used at all.


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E2-37B Classify and calculate a manufacturers costs (Learning Objectives

Requirements

2. Calculate total manufacturing overhead costs.3. Calculate total inventoriable product costs.4. Calculate total prime costs.5. Calculate total conversion costs.6. Calculate total period costs.

Solution:

Req. 1

a. Airplane seats

b. Depreciation on admin offices

c. Assembly workers wages

d. Plant utilities

f. Jet engines

g. Machine lubricants

h. Depreciation on forklifts

Property tax on

corporate marketing offices

j. Cost of warranty repairs

k. Factory janitors wages

l. Cost of designing new plant layout

m. Machine operators health insurance

TOTAL

Req. 2 =

Req. 3 Total inventoriable product costs = DM + DL + MOH

e. Production supervisors salaries

i.

1. If the cost object is an airplane, classify each cost as one of the following: direcmaterial (DM), direct labor (DL), indirect labor (IL), indirect materials (IM), othermanufacturing overhead (other MOH), or period cost. What is the total for each tycost?

DM ILDL IM


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=

Req. 4 Total prime costs =

Req. 5 Total conversion costs =

Req. 6 Total period costs = $480

$1,470 + 750 + 455 =$2,675

DL + MOH $750 + 455 =$1,205

DM + DL $1,470 + 750 =$2,220


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(15-20 min) E2-37B

& 4)

OtherMOH

t

pe of

Period


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E2-38B Prepare the current assets section of the balance sheet (LO 5)

Consider the following selected amounts and account balances of Lords:Requirement

1. Show how Esquires reports current assets on the balance sheet. Not all dEsquires a service merchandiser, or a manufacturer? How do you know?

Solution:

Current assets:

Cash

Accounts receivable

Inventories:

Raw materials inventory

Work in process inventory

Finished goods inventory

Total inventories

Prepaid expenses

Total current assets

Esquires

Current Assets


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(10 min) E2-38B

ata are used. Is


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(10-15 min) E

E2-39B Prepare a retailers income statement (Learning Objective 5)

Solution:

Sales revenue

Cost of goods sold:

Beginning inventory

Purchases and freight-in*


Ending inventoryCost of goods sold

Gross profit

Operating expenses:

Web site expenses

Marketing expenses

Freight-out expenses

Total operating expenses

Operating income

Mike Leaver is the sole proprietor of Prestigious Pets, an e-tail business spinthe sale of high-end pet gifts and accessories. Prestigious Pets salestotaled$1,060,000 during the most recent year. During the year, the comp$53,000 on expenses relating to Web site maintenance, $33,000 on mark$28,500 on wrapping, boxing, and shipping the goods to customers. Prestialso spent $643,000 on inventory purchases and an additional $20,500 oncharges.The company started the year with $15,500 of inventory on hand,the year with $12,800 of inventory. Prepare Prestigious Pets income statemost recent year.

Prestigious Pets

Income Statement

For Last Year


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2-39B

ecializing

ny spentting, andious Pets

freight-inand ended

ent for the


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(5 -10 mi

E2-40B Compute direct materials used and cost of goods manufactured (Learni

Solution:




Plus: Purchases of direct materials


Less: Ending raw materials inventory


Direct labor


Total manufacturing costs incurred during the period




Lawrence's Die-Cuts is preparing its Cost of Goods Manufactured Schedule ataccounting records show the following: The Raw Materials Inventory account hof $18,000 and an ending balance of $14,000. During the year, Lawrence purcdirect materials. Direct labor for the year totaled $135,000, while manufacturingto $155,000. The Work in Process Inventory account had a beginning balanceending balanceof $21,000. Compute the Cost of Goods Manufactured for the yis to calculate the direct materials used during the year. Model your answer aft

Lawrence's Die-Cuts

Cost of Goods Manufactured


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) E2-40B

g Objective 5)

year-end. Lawrence'sd a beginning balanceased $66,000 ofoverhead amountedf $27,000 and an

ear. (Hint:The first stepr Exhibit 2-15.)


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(15-20 min.) E 2-41B

E2-41B Compute cost of goods manufactured and cost of goods sold (LO 5)

Solution:





Available for use



Direct labor


Indirect labor

Insurance on plant

Depreciation - plant building and equipmentRepairs and maintenance plant


incurred during the year


account for

Less: Ending work in process

inventory


South Marine Company

Schedule of Cost of Goods Sold


Cost of goods manufactured*



Cost of goods sold

*From schedule of cost of goods manufactured.

Compute the cost of goods manufactured and cost of goods sold for South Marinethe most recent year using the amounts described below. Assume that raw materiacontains only direct materials.




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Company forls inventory


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(10-15 min)

E2-42B Continues E2-41B: Prepare income statement (LO 5)

Solution:

Sales revenue (37,000 $14)

Cost of goods sold:



(E 2-41B)



Cost of goods sold

Gross profit

Operating expenses:

Marketing expenses

General and administrative expensesOperating income

Students may simply use the $215,200 cost of goods sold computation frather than repeating the details of the computation here.

Prepare the income statement for South Marine Company in E2-25A forrecent year. Assume that the company sold 37,000 units of its product a$14 each during the year.


Income Statement

For Last Year


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2-42B

rom E 2-41B,

the mostt a price of


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(25 min) E2-43B

E2-43B Work backwards to find missing amounts (Learning Objective 5)

Solution:

a.

Revenues

Cost of goods sold

Gross profit

b.



Available for use



c.



Direct labor

Manufacturing overheadTotal manufacturing costs to account for

Ending work in process inventory


Great Sounds manufactures and sells a new line of MP3 players. Unfortunately,Great Sounds suffered serious fire damage at its home office. As a result, theaccounting records for October were partially destroyedand completely jumbled.Great Sounds has hired you to help figure out the missing pieces of the accountingpuzzle. Assume that Great Sounds raw materials inventory contains only directmaterials.


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Cost of goods manufactured (from above)


Ending finished goods inventoryCost of goods sold (from part A)


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(15-20 min) E2-44B

E2-44B Determine whether information is relevant (Learning Objective 6)

Solution:

a. Cost of barcode scanners purchased six months ago when

deciding whether to upgrade to scanners that are faster andeasier to use.

b. The fair market value of an ice cream truck when decidingwhether to replace it with a newer ice cream truck.

c. Cost of operating automated production machinery versus thecost of direct labor, when deciding whether to automateproduction.

d. Cost of purchasing packaging materials from an outside

vendor, when deciding whether to continue manufacturing thepackaging materials in-house.

e. The cost of an expansion site purchased two years ago when

deciding whether to sell the site or to expand business to it now.

f. The property tax rates in different locales, when deciding whereto locate the companys headquarters.

Classify each of the following costs as relevant or irrelevant to the decision at hand andbrieflyexplain your reason.


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g. The interest rate paid on invested funds, when deciding howmuch inventory to keep on-hand.

h. The gas mileage of delivery vans, when deciding which makeand model of van to purchase for the companys delivery vani. Depreciation expense on old manufacturing equipment whendeciding whether or not to replace it with newer equipment.

j. The total amount of a coffee shops fixed costs when decidingwhether or not to introduce a new drink line.


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(10 min.) E2-45B

E2-45B Describe other cost terms (Learning Objectives 6 & 7)

Complete the following statements with one of the terms listed here. You mayuse a termmore than once, and some terms may not be used at all.

Solution:

a.

b.

c.

d.

e.

f.

g.

h.


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(10 min.) E2-46-B

E2-46B Classify costs as fixed or variable (Learning Objective 7)

Classify each of the following costs as fixed or variable:

Solution:

COST Variable or Fixed

a. Credit card transaction fee paid by retailer- $0.20 pertransaction plus 2% of the sales amount

b. Yearly salaries paid to marketing staff

c. Gasoline used to drive company shuttle

d. Syrup used by an ice cream parlor

e. Property tax on an electronics factoryf. Annual contract for company landscaping

g. Boxes used to package computer components at Dell

h. Wages paid to hourly retail staff at the company store

i. Annual web hosting fee for company website

j. Cost of coffee sold at Starbucks

k. Monthly lease payment on branch office

l. Straight-line depreciation on production equipment

m. Rental car fees for company business travelers contract

bills at 25 cents per mile

n. Commissions paid to the sales staff- -7% of sales revenue

o. Cost of paint used at an auto body shop


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(10 min) E2-47B

E2-47B Compute total and average costs (Learning Objective 7)

Solution:

a) Variable costs = ==Total costs =

b) =

c) =

d) Variable costs = ==

Total costs =

e) =

f) =

g)

+ Fixed costs

+ Fixed costs

Grand Cola spends $1 on direct materials, direct labor, and variablemanufacturing over-head for every unit (12-pack of soda) it produces.Fixed manufacturing overhead costs $6 million per year. The plant, whichis currently operating at only 85% of capacity, pro-duced 15 million unitsthis year. Management plans to operate closer to full capacity nextyear,producing 20 million units. Management doesnt anticipate any changesin the pricesit pays for materials, labor, or manufacturing overhead.


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Problems (Group A)

P2-48A Classify costs along the value chain (Learning Objectives 2 & 4)

Requirements

2.Compute the total costs for each value chain category.

3.How much are the total inventoriable product costs?

Solution:Reqs. 1 and 2

DM DL Mfg

Plant utilities

equipment

Payment for new recipe

Salt*

Replace products withexpireddates

Rearranging plant layout

Lemon syrup

Lime flavoring

Production costs of

cents-off store couponsfor customers

Delivery-truck driverswages

Bottles

Sales commissions

Plant janitors wagesWages of workers who

mix syrup

Customer hotline

Depreciation on delivery

trucks

Freight-in

(45-60 min.) P2-48A

ShaZam Cola produces a lemon-lime soda. The production process starts with workers mix-ing thelemon syrup and lime flavors in a secret recipe. The company enhances the com-bined syrup withcaffeine. Finally, ShaZam dilutes the mixture with carbonated water.ShaZam Cola incurs thefollowing costs (in thousands):

1. Use the following format to classify each of these costs according to its place in the value chain.(Hint:You should have at least one cost in each value chain function.)

4.Suppose the managers of the R&D and design functions receive year-end bonuses basedonmeeting their units target cost reductions. What are they likely to do? How might this affectcosts incurred in other elements of the value chain?

Cost R&D Design Mktg Distribution Cus Serv

ShaZam Cola

Value Chain Cost Classification

(In thousands)

Production


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Total costs


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Req. 3


Directmaterials.........................

............Direct

labor................................

............Manufacturing

overhead.......................Total inventoriable

product costs........

Req. 4


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P2-49A Prepare income statements (Learning Objective 5)

Requirement:

Solution:

Sales revenue

Cost of goods sold:

Beginning inventory



Ending inventory

Cost of goods sold

Gross profit

Operating expenses:

Utilities expense

Rent expense

Sales commission expense

Operating income

Part Two:

Req. 1

Beginning work in process inventory $0


Beginning raw materials inventory $13,500

Purchases of direct materials 31,000

Available for use 44,500

Ending raw materials inventory -9,275

Direct materials used $35,225

Direct labor 18,300


Utilities for plant $4,600

Plant janitorial services 1,250Rent on manufacturing plant 9,000

Manufacturing overhead 14,850

Total manufacturing costs incurred $68,375

during the year

Total manufacturing costs to $68,375

account for

Less: Ending work in process inventory -720

Cost of goods manufactured $67,655

(15-20 min.) P2-49A

Best Friends ManufacturingSchedule of Cost of Goods Manufactured

Year Ended December 31, 2009

Part One:In 2009, Hannah Summit opened Hannahs Pets, a small retail shop sellingpet supplies. On December 31, 2009, her accounting records show the following:

1.Prepare an income statement for Hannahs Pets, a merchandiser, for the yearended December 31, 2009.

Hannahs Pets

Income Statement



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Req. 2

Sales revenue $105,000

Cost of goods sold:

Beginning finished goods inventory $0

Cost of goods manufactured* 67,655

Cost of goods available for sale 67,655

Ending finished goods inventory -5,700

Cost of goods sold 61,955

Gross profit 43,045

Operating expenses:

Customer service hotline expense 1,000

Delivery expense 1,500

Sales salaries expense 5,000 7,500Operating income $35,545

Req. 3

(continued) P 2-49A

Part Three: Reqs. 1 and 2

Inventory $10,250 RM inventory $9,275

WIP 720

FG 5,700

Total Inv $15,695

Partial Balance Sheet31-Dec-09 31-Dec-10

Partial Balance Sheet

Best Friends Manufacturing


Income StatementYear Ended December 31, 2010

Hannahs Pets


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P2-50A Fill in missing amounts (Learning Objective 5)

Solution:



Beginning raw materials inventoryPurchases of direct materials

Available for use



Direct labor



incurred during the month


account for

Less: Ending work in process inventoryCost of goods manufactured

Sales revenue

Cost of goods sold:


Cost of goods manufactured*Cost of goods available for sale


Cost of goods sold

Gross profit

Operating expenses:

Marketing expense

Income Statement

Month Ended June 30, 2009

(25-35 min.) P 2-50A

Tretinik Manufacturing Company



Tretinik Manufacturing Company

Certain item descriptions and amounts are missing from the monthly schedule of

cost of goods manufactured below and the income statement of TretinikManufacturing. Fill in the missing items.


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Administrative expense

Operating income


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(10 min.) P 2-51A

P2-51A Identify relevant information (Learning Objective 6)

Requirements

2. What information is irrelevant? Why?

Solution:

a)

Attributes:

and live at and rent an

Salary

Rent

Food

Cable

Salary, net of living expenses

b)

c)

You receive two job offers in the same big city. The first job is close to your parentshouse,and they have offered to let you live at home for a year so you wont have to incurexpenses for housing, food, or cable TV. This job pays $30,000 per year. The second jobis far from your parents house, so youll have to rent an apartment with parking ($6,000per year), buy your own food ($2,400 per year), and pay for your own cable TV ($600 peryear). This job pays $35,000 per year. You still plan to do laundry at your parents houseonce a week if you live in the city, and you plan to go into the city once a week to visit withfriends if you live at home. Thus, the cost of operating your car will be about the sameeither way. In addition, your parents refuse to pay for your cell phone service ($720 peryear), and you cant function without it.

3. What qualitative information is relevant to your decision?

1. Based on this information alone, what is the net difference between the two alternatives(salary, net of relevant costs)?

4. Assume that you really want to take Job #2, but you also want to live at home to cutcosts. What new quantitative and qualitative information will you need to incorporate intoyour decision?


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d)


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(15-20 min.) P 2-52A

P2-52A Calculate the total and average costs (Learning Objective 7)

Requirements

Solution:

Req. 1

Monthly pizza volume 2,500 3,000 5,000

Total fixed costs

Total variable costs

Total costs

Fixed cost per pizza

Variable cost per pizza

Average cost per pizza

Sales price per pizzaAverage profit per pizza

Req. 2

The owner of Pizza-House Restaurant is disappointed because the restaurant has been

averaging 3,000 pizza sales per month, but the restaurant and wait staff can make and serve5,000 pizzas per month. The variable cost (for example, ingredients) of each pizza is $2.00.

Monthly fixed costs (for example, depreciation, property taxes, business license,

andmanagers salary) are $6,000 per month. The owner wants cost information aboutdifferentvolumes so that he can make some operating decisions.

1.Fill in the following chart to provide the owner with the cost information he wants. Then usethe

completed chart to help you answer the remaining questions.


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Req. 3

Total Sales Revenue Total Costs = MonthlyProfit

Total Sales Revenue at the new price and

volume Total Costs

at the newvolume

= New MonthlyProfit


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Introduction to Management Accounting Solutions Ma

Problems (Group B)(45-60 min.) P2-53B

P2-53B Classify costs along the value chain (Learning Objectives 2 & 4)

Requirements

2.Compute the total costs for each value chain category.

3.How much are the total inventoriable product costs?

Solution:

Reqs. 1 and 2

DM DL Mfg

Materials LaborOverhe

ad

Plant utilities

Depreciationon plant and

equipment

Payment for

new recipeSalt*

Replaceproducts withexpired

dates

Rearrangingplant layout

Lemon syrup

Lime flavoring

Productioncosts of

cents-off

store couponsfor customers

Delivery-truckdrivers wages

Bottles

Salescommissions

Plant janitors

wages

Wages ofworkers whomix syrup

Customerhotline

Depreciationon deliverytrucks

Freight-in

Best Value Cola produces a lemon-lime soda. The production process starts withworkersmixing the lemon syrup and lime flavors in a secret recipe. The company enhances the

com-bined syrup with caffeine. Finally, Best Value dilutes the mixture with carbonatedwater.Best Value Cola incurs the following costs (in thousands):

Cost R&D Design Mktg

Distributio

n

Cus Serv

Service

(In thousands)

Production

1. Use the following format to classify each of these costs according to its place in the valuechain. (Hint:You should have at least one cost in each value chain function.)

4.Suppose the managers of the R&D and design functions receive year-end bonuses based

onmeeting their units target cost reductions. What are they likely to do? How might thisaffectcosts incurred in other elements of the value chain?

Best Value Cola

Value Chain Cost Classification

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Introduction to Management Accounting Solutions Man

Total costs

Chapter 2: Building Blocks of Management Page 102 of

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Introduction to Management Accounting Solution

Req. 3


Directmaterials.....................................Directlabor............................................Manufacturingoverhead........

...............Totalinventoriableproductcosts........

Req. 4

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(15-20 min.) P2-54B

P2-54B Prepare income statements (Learning Objective 5)

Requirement:

Solution:

Sales revenue

Cost of goods sold:

Beginning inventory


Cost of goods available forsale

Ending inventory

Cost of goods sold

Gross profit

Operating expenses:Utilities expense

Rent expense

Sales commission expense

Operating income

Part One: In 2009, Lindsay Conway opened Lindsay's Pets, a small

retail shop selling pet supplies. On December 31, 2009, her accountingrecords show the following:

1.Prepare an income statement for Lindsays Pets, a merchandiser, forthe year ended December 31, 2009.

Lindseys Pets

Income Statement



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Part Two:

Req. 1

Beginning work in processinventory


Beginning raw materialsinventory


Available for use



Direct labor


Utilities for plant

Plant janitorial services

Rent on manufacturing plant


incurredduring the year


account for

Less: Ending work in processinventory






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Req. 2

Sales revenue

Cost of goods sold:

Beginning finished goodsinventory


Cost of goods available forsale

Ending finished goods

inventoryCost of goods sold

Gross profit

Operating expenses:

Customer service hotlineexpense

Delivery expense

Sales salaries expense

Operating income



Income Statement


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Req. 3

Part Three: Reqs. 1 and 2

Inventory........... Rawmaterialsinventor ...Work inprocessinventor ..Finishedgoods

Totalinventory...

31-Dec-09 31-Dec-10

Lindseys Pets Best FriendsManufacturing

Partial Balance Sheet Partial Balance Sheet


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(15-20 min.) P2-55B

P2-55B Fill in missing amounts (Learning Objective 5

Solution:

Beginning work in process inventoryAdd: Direct materials used:

Beginning raw materials inventoryPurchases of direct materialsAvailable for useEnding raw materials inventoryDirect materials usedDirect laborManufacturing overheadTotal manufacturing costsincurred during the monthTotal manufacturing costs to

account forLess: Ending work in process inventoryCost of goods manufactured

Sales revenue

Cost of goods sold:Beginning finished goods inventory




Chili Manufacturing Company

Income Statement


Certain item descriptions and amounts are missing from the monthly schedul

goods manufactured and income statement of Chili Manufacturing Companymissing items.

Chili Manufacturing Company




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(10-15 min.) P2-56B

P2-56B Identify relevant information (Learning Objective 6)

Requirements

2. What information is irrelevant? Why?

Solution:

a

Attributes:

Take Job #1and live at

home

Take Job #2and rent anapartment

Salary

Rent

Food

Cable

Salary, net of living expenses

b

c

You receive two job offers in the same big city. The first job is close to your parents house,and theyhave offered to let you live at home for a year so you wont have to incur expensesfor housing, food,or cable TV. This job pays $49,000 per year. The second job is far awayfrom your parents house, soyoull have to rent an apartment with parking ($9,000 peryear), buy your own food ($3,500 per year),and pay for your own cable TV ($550 per year).This job pays $54,000 per year. You still plan to dolaundry at your parents house once aweek if you live in the city and plan to go into the city once aweek to visit with friends ifyou live at home. Thus, the cost of operating your car will be about thesame either way.Additionally, your parents refuse to pay for your cell phone service ($690 per year),

and youcant function without it.

1. Based on this information alone, what is the net difference between the two alternatives

3. What qualitative information is relevant to your decision?

4. Assume that you really want to take Job #2, but you also want to live at home to cutcosts. What new quantitative and qualitative information will you need to incorporate intoyour decision?


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d


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(20-25min.) P2-57B

P2-57B Calculate the total and average costs (Learning Objective 7)

Requirements

Solution:

Req. 1

Monthly pizza volume 2,500 5,000 10,000

Total fixed costs

Total variable costs

Total costs

Fixed cost per pizzaVariable cost per pizza

Average cost per pizza

Sales price per pizzaAverage profit per pizza

Req. 2

The owner of Brooklyn Restaurant is disappointed because the restaurant has been averaging5,000 pizza sales per month but the restaurant and wait staff can make and serve 10,000pizzas per month. The variable cost (for example, ingredients) of each pizza is$1.20. Monthlyfixed costs (for example, depreciation, property taxes, business license,managers salary) are$5,000 per month. The owner wants cost information about differen tvolumes so that he canmake some operating decisions.

1.Fill in the chart to provide the owner with the cost information he wants. Then use thecompleted chart to help you answer the remaining questions.

2.From a cost standpoint, why do companies such as Brooklyn Restaurant want to operate

near or at full capacity?


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Req. 3

Total Sales Revenue TotalCosts = Monthly Profit

Total Sales Revenue at the newprice and volume

TotalCosts at thenew volume

= New MonthlyProfit

At the current volume, the restaurants monthly profit is $16,500 calculated as follows


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Decision Case

Requirements

Solution:

Req. 1

Beginning Beginning Beginningnventory nventory nventory

+ DirectMaterials + Cost of goods

Used manufactured

+ Direct labor

+ ManufacturingOverhead

= Direct Materials = Total = Cost of goods

available for use manufacturing available for sale

costs toaccount for

Ending inventory Endinginventory Ending inventory

= Direct Materials = Cost of goods = Cost of goodsused manufactured Sold

(G) = Amountgiven in the case.

C2-58 Determine ending inventory balances (Learning Objective 5)

PowerBox

Inventory Reconstruction Schedule

Raw materials inventory Work in Process Inventory

1. Exhibit 2-16 resembles the schedule Paul has in mind. Use it to determine the ending inventories of raw

materials, work in process, and finished goods.

2. Draft an insurance claim letter for the controller, seeking reimbursement for the flood damage to inventory.

PowerBoxs insurance representative is Gary Streer, at Industrial Insurance, 1122 Main Street, Hartford, CT 06268.The policy number is #3454340-23. PowerBoxs address is 5 Research Triangle Way, Raleigh, NC 27698.

Finished Goods Inventory

+ Purchases


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Discussion & Analysis

1 Briefly describe a service company, a merchandising company, and a manufacturingcompany. Give an example of each type of company, but do not use the same examplesas given in the chapter.

2How do service, merchandising, and manufacturing companies differ from each other?How are service, merchandising, and manufacturing companies similar to each other?

3. What is the value chain? What are the six types of business activities found in the

value chain? Which type(s) of business activities in the value chain generate costs thatgo directly to the income statement once incurred? What type(s) of business activities inthe value chain generate costs that flow into inventory on the balance sheet?

4. Compare direct costs to indirect costs. Give an example of a cost at a company thatcould be a direct cost at one level of the organization but would be considered an indirectcost at a different level of that organization. Explain why this same cost could be bothdirect and indirect (at different levels).

5. What is meant by the term inventoriable product costs? What is meant by the termperiod costs? Why does it matter whether a cost is an inventoriable product cost or aperiod cost?

6. Compare inventoriable product costs to period costs. Using a product of your choice,give examples of inventoriable product costs and period costs. Explain why youcategorized your costs as you did.


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7. Describe how the income statement of a merchandising company differs from theincome statement of a manufacturing company. Also comment on how the incomestatement from a merchandising company is similar to the income statement of amanufacturing company.

8. How are the cost of goods manufactured, the cost of goods sold, the incomestatement, and the balance sheet related for a manufacturing company? What specificitems flow from one statement or schedule to the next? Describe the flow of costsbetween the cost of goods manufactured, the cost of goods sold, the income statement,and the balance sheet for a

manufacturing company.

9. What makes a cost relevant or irrelevant when making a decision? Suppose acompany is evaluating whether to use its warehouse for storage of its own inventory orwhether to rent it out to a local theater group for housing props. Describe whatinformation might be relevant when making that decision.

10. Explain why differential cost and variable cost do not have the same meaning.Give an example of a situation in which there is a cost that is a differential cost but not avariable cost.


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Application and Analysis

2-1 Costs in the Value Chain at a Real Company and Cost Objects

Choose a company with which you are familiar that manufactures a product. In thisactivity, you will be making reasonable assumptions about the activities involved in thevalue chain for this product; companies do not typically publish information about theirvalue chain.

Basic Discussion Questions1. Describe the product that is being produced and the company that produces it.

2. Describe the six value chain business activities that this product would pass throughfrom its inception to its ultimate delivery to the customer.

3. List at least three costs that would be incurred in each of the six business activitiesin the value chain.

4. Classify each cost you identified in the value chain as either being an inventoriableproduct cost or a period cost. Explain your justification.


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5. A cost object can be anything for which managers want a separate measurement ofcost. List three different potential cost objects other than the product itself for thecompany you have selected.

6. List a direct cost and an indirect cost for each of the three different cost objects in#5. Explain why each cost would be direct or indirect.

CMA-1.

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FN3140 - Unit 2 - P2-49A

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