Managerial Accounting and Cost Concepts: Solutions To Questions

Chapter 2
Manageri al Accounti ng and Cost Concepts

Solutions to Questions
2- 1 Managers carry out three major
activi ti es in an organization: planni ng,
directi ng and moti vati ng, and control li ng.
Planning invol ves establishi ng a basic
strategy, selecting a course of action, and
specifyi ng how the action will be
implemented. Directi ng and moti vati ng
invol ves mobi lizi ng people to carry out
plans and run routi ne operati ons.
Controlli ng invol ves ensuri ng that the
plan is actuall y carried out and is
appropriatel y modi fi ed as circumstances
change.
2- 2 he planni ng and control cycle
invol ves formul ati ng plans, impl ementi ng
plans, measuri ng performance, and
evaluati ng differences between planned
and actual performance.
2- 3 !n contrast to financial accounti ng,
manageri al accounti ng: "#$ focuses on the
needs of managers rather than outsiders%
"&$ emphasizes decisions affecti ng the
future rather than the financial
conse'uences of past actions% "($
emphasizes relevance rather than
objecti vi t y and verifiabi l i ty% ")$
emphasizes timeli ness rather than
precision% "*$ emphasizes the segments of
an organization rather than summary
data concerni ng the entire organizati on%
"+$ is not governed by ,--P% and ".$ is
not mandatory.
2- 4 he three major elements of
product costs in a manufacturi ng
company are direct materi als, direct
labor, and manufacturi ng overhead.
2- 5
a. Direct materi als are an integral part
of a finished product and their costs can
be conveni entl y traced to it.
b. !ndirect materials are generall y
small items of materi al such as glue and
nails. hey may be an integral part of a
finished product but their costs can be
traced to the product only at great cost or
inconveni ence.
c. Direct labor consists of labor costs
that can be easily traced to particul ar
products. Direct labor is also called /touch
labor. 0
d. !ndirect labor consists of the labor
costs of jani tors, supervisors, materi als
handlers, and other factory wor1ers that
cannot be conveni entl y traced to
particul ar products. hese labor costs are
incurred to support producti on, but the
wor1ers invol ved do not directl y wor1 on
the product.
e. Manufacturi ng overhead includes all
manufacturi ng costs e2cept direct
materi als and direct labor. Conse'uentl y,
manufacturi ng overhead includes indirect
materi als and indirect labor as well as
other manufacturi ng costs.
2- 6 - product cost is any cost invol ved
in purchasi ng or manufacturi ng goods. !n
the case of manufactured goods, these
costs consist of direct materials, direct
labor, and manufacturi ng overhead. -
period cost is a cost that is ta1en directl y
to the income statement as an e2pense in
the period in which it is incurred.
2- 7 he income statement of a
manufacturi ng company differs from the
income statement of a merchandisi ng
company in the cost of goods sold
3 he Mc,raw4 5ill Compani es, !nc., &6#6. -ll rights reserved.
7olutions Manual, Chapter & #8
section. - merchandisi ng company sells
finished goods that it has purchased from
a supplier. hese goods are listed as
/purchases0 in the cost of goods sold
section. 9ecause a manufacturi ng
company produces its goods rather than
buyi ng them from a supplier, it lists /cost
of goods manufactured0 in place of
/purchases. 0 -lso, the manufacturi ng
company identi fi es its inventory in this
section as :inished ,oods inventory,
rather than as Merchandise !nventory.
2- he schedule of cost of goods
manufactured lists the manufacturi ng
costs that have been incurred during the
period. hese costs are organized under
the three categori es of direct materi als,
direct labor, and manufacturi ng overhead.
he total costs incurred are adjusted for
any change in the ;or1 in Process
inventory to determi ne the cost of goods
manufactured "i.e. finished$ duri ng the
period.
he schedule of cost of goods
manufactured ties into the income
statement through the cost of goods sold
section. he cost of goods manufactured
is added to the begi nni ng :inished ,oods
inventory to determi ne the goods
available for sale. !n effect, the cost of
goods manufactured ta1es the place of
the Purchases account in a merchandisi ng
firm.
2- ! - manufacturi ng company usuall y
has three inventory accounts: <aw
Materials, ;or1 in Process, and :inished
,oods. - merchandisi ng company may
have a single inventory account=
Merchandise !nventory.
2- 1" Product costs are assigned to uni ts
as they are processed and hence are
included in inventori es. he flow is from
direct materi als, direct labor, and
manufacturi ng overhead to ;or1 in
Process inventory. -s goods are
compl eted, their cost is removed from
;or1 in Process inventory and transferred
to :inished ,oods inventory. -s goods are
sold, their cost is removed from :inished
,oods inventory and transferred to Cost
of ,oods 7old. Cost of ,oods 7old is an
e2pense on the income statement.
2- 11 >es, costs such as salaries and
depreciati on can end up as part of assets
on the balance sheet if they are
manufacturi ng costs. Manufacturi ng costs
are inventori ed until the associated
finished goods are sold. hus, if some
uni ts are still in inventory, such costs may
be part of either ;or1 in Process
inventory or :inished ,oods inventory at
the end of the period.
2- 12 ?o. - variable cost is a cost that
varies, in total, in direct proporti on to
changes in the level of activi ty. he
variable cost per unit is constant. - fi2ed
cost is fi2ed in total, but the average cost
per unit changes with the level of activi ty.
2- 13 - differenti al cost is a cost that
differs between alternati ves in a decision.
-n opportuni t y cost is the potenti al
benefi t that is given up when one
alternati ve is selected over another. -
sun1 cost is a cost that has already been
incurred and cannot be altered by any
decision ta1en now or in the future.
2- 14 ?o, differenti al costs can be either
variable or fi2ed. :or e2ampl e, the
alternati ves might consist of purchasing
one machi ne rather than another to ma1e
a product. he difference between the
fi2ed costs of purchasi ng the two
machi nes is a differenti al cost.
&6 Manageri al -ccounti ng, #(th @dition
#$ercise 2- 1 "#6 minutes$
#. Directing and motivati ng
&. 9udgets
(. Planning
). Precision% imeliness
*. Managerial accounti ng% :inancial accounti ng
+. Managerial accounti ng
. :inancial accounti ng% Managerial accounti ng
A. :eedbac1
8. Controller
#6. Performance report
7olutions Manual, Chapter & &#
#$ercise 2- 2 "#6 minutes$
#. he cost of a hard drive installed in a computer: direct
materials.
&. he cost of advertising in the Puget Sound Computer User
newspaper: selling.
(. he wages of employees who assemble computers from
components: direct labor.
). 7ales commissions paid to the companyBs salespeople: selling.
*. he wages of the assembl y shopBs supervisor: manufacturi ng
overhead.
+. he wages of the companyBs accountant: administrati ve.
.. Depreciation on e'uipment used to test assembled computers
before release to customers: manufacturi ng overhead.
A. <ent on the facility in the industrial par1: a combination of
manufacturi ng overhead, selling, and administrati ve. he rent
would most li1ely be prorated on the basis of the amount of
space occupied by manufacturi ng, selling, and administrati ve
operations.
&& Manageri al -ccounti ng, #(th @dition
#$ercise 2- 3 "#* minutes$
Produc
t Cost
Perio
d
Cost
#. Depreciation on salespersonsB cars................... C
&. <ent on e'uipment used in the factory ............ C
(. Dubricants used for machine maintenance ...... C
). 7alaries of personnel who wor1 in the
finished goods warehouse ................................ C
*. 7oap and paper towels used by factory
wor1ers at the end of a shift ............................ C
+. :actory supervisorsB salaries .............................. C
.. 5eat, water, and power consumed in the
factory .................................................................. C
A. Materials used for bo2ing products for
shipment overseas "units are not normall y
bo2ed$ .................................................................. C
8. -dvertising costs................................................... C
#6. ;or1ersB compensation insurance for factory
employees ........................................................... C
##. Depreciation on chairs and tables in the
factory lunchroom.............................................. C
#&. he wages of the receptionist in the
administrati ve offices........................................ C
#(. Cost of leasing the corporate jet used by the
companyE s e2ecuti ves ....................................... C
#). he cost of renting rooms at a :lorida resort
for the annual sales conference ...................... C
#*. he cost of pac1aging the companyBs product C
7olutions Manual, Chapter & &(
Cyber,ames
!ncome 7tatement
7ales........................................................ F#,)*6,66
6
Cost of goods sold:
9eginning merchandise inventory . . F &)6,66
6
-dd: Purchases................................... 8*6,666
,oods available for sale.................... #,#86,666
Deduct: @nding merchandise
inventory ...........................................
#.6,666 #,6&6,66
6
,ross margin ......................................... )(6,666
7elling and administrati ve
e2penses:
7elling e2pense.................................. &#6,666
-dministrati ve e2pense.................... #A6,666 (86,66
6
?et operating income .......................... F )6,66
6
&) Manageri al -ccounti ng, #(th @dition
Dompac Products
7chedule of Cost of ,oods Manufactured
Direct materials:
9eginning raw materials inventory ... F +6,66
6
-dd: Purchases of raw materials ....... +86,66
6
<aw materials available for use........ .*6,666
Deduct: @nding raw materials
inventory .............................................
)*,66
6
<aw materials used in production ..... F .6*,66
6
Direct labor .............................................. #(*,666
Manufacturing overhead ....................... (.6,66
6
otal manufacturi ng costs..................... #,&#6,666
-dd: 9eginning wor1 in process
inventory ................................................
#&6,66
6
#,((6,666
Deduct: @nding wor1 in process
inventory ................................................
#(6,66
6
Cost of goods manufactured ................. F#,&66,66
6
7olutions Manual, Chapter & &*
- few of these costs may generate debate. :or e2ample, some
may argue that the cost of advertising a roc1 concert is a variable
cost because the number of people who come to the roc1 concert
depends on the amount of advertising. 5owever, one can argue
that if the price is within reason, any roc1 concert in ?ew >or1 City
will be sold out and the function of advertising is simpl y to let
people 1now the event will be happening. Moreover, while
advertising may affect the number of persons who ulti matel y buy
tic1ets, the causation is in one direction. !f more people buy
tic1ets, the advertising costs donBt go up.
Cost
Behavior
Cost (Measure of Activity) Variabl
e
i!e
d
#.he cost of C4ray film used in the radiology lab
at Girginia Mason 5ospital in 7eattle "?umber
of C4rays ta1en$ ....................................................... C
&.he cost of advertising a roc1 concert in ?ew
>or1 City "?umber of roc1 concert tic1ets sold$ C
(.he cost of renting retail space for a
McDonaldBs restaurant in 5ong Hong "otal
sales at the restaurant$ ......................................... C
).he electrical cost of running a roller coaster at
Magic Mountain "?umber of ti mes the roller
coaster is run$ .......................................................... C
*.Property ta2es paid by your local cinema
theater "?umber of tic1ets sold$ .......................... C
+.he cost of sales commissions paid to
salespersons at a ?ordstrom store "otal sales
at the store$ ............................................................. C
..Property insurance on a Coca Cola bottling
plant "?umber of cases of bottles produced$ .... C
A.he costs of synthetic materials used to ma1e a
particular model of running shoe "?umber of
shoes of that model produced$ ............................ C
8.he costs of shipping Panasonic televisions to
retail stores "?umber of televisions sold$ ........... C
&+ Manageri al -ccounti ng, #(th @dition
#6. he cost of leasing an ultra4 scan diagnostic
machine at the -merican 5ospital in Paris
"?umber of patients scanned with the
machine$ ................................................................... C
7olutions Manual, Chapter & &.
Cost Cost "b#ect
$irect
Cost
%ndirec
t Cost
#
.
he wages of
pediatric nurses
he pediatric
depart ment C
&
.
Prescription drugs - particular patient
C
(
.
5eating the hospital he pediatric
depart ment C
)
.
he salary of the
head of pediatrics
he pediatric
depart ment C
*
.
he salary of the
head of pediatrics
- particular pediatric
patient C
+
.
5ospital chaplainBs
salary
- particular patient
C
.
.
Dab tests by outside
contractor
- particular patient
C
A
.
Dab tests by outside
contractor
- particular
depart ment C
&A Manageri al -ccounti ng, #(th @dition
#$ercise 2- "#* minutes$
%tem
$ifferenti
al Cost
"pportuni t
y Cost
Sun&
Cost
#
.
Cost of the old C4ray
machine .................................. C
&
.
he salary of the head of the
<adiology Depart ment .........
(
.
he salary of the head of the
Pediatrics Depart ment .........
)
.
Cost of the new color laser
printer ..................................... C
*
.
<ent on the space occupied
by <adiology ..........................
+
.
he cost of maintaini ng the
old machine ........................... C
.
.
9enefits from a new D?-
analyzer .................................. C
A
.
Cost of electrici ty to run the
C4ray machines ..................... C
?ote: he costs of the salaries of the head of the <adiology
Depart ment and Pediatrics Depart ment and the rent on the space
occupied by <adiology are neither differential costs, nor
opportuni t y costs, nor sun1 costs. hese costs do not differ
between the alternati ves and therefore are irrelevant in the
decision, but they are not sun1 costs because they occur in the
future.
7olutions Manual, Chapter & &8
#$ercise 2- ! "#* minutes$
#. Product cost% variable cost
&. Conversion cost
(. Ipportuni t y cost
). Prime cost
*. 7un1 cost
+. Period cost% variable cost
.. Product cost% period cost% fi2ed cost
A. Product cost
8. Period cost
#6
.
:i2ed cost% product cost% conversion
cost
(6 Manageri al -ccounti ng, #(th @dition
#$ercise 2- 1" "#* minutes$
Selling and
Cost Behavior
Administrati
ve
Produc
t
Cost %tem Variable i!ed Cost Cost
#. 5amburger buns at
a ;endyBs outlet ... C C
&. -dvertising by a
dental office........... C C
(. -pples processed
and canned by Del
Monte ...................... C C
). 7hipping canned
apples from a Del
Monte plant to
customers .............. C C
*. !nsurance on a
9ausch J Domb
factory producing
contact lenses....... C C
+. !nsurance on !9MBs
corporate
head'uarters ......... C C
.. 7alary of a
supervisor
overseeing
production of
printers at
5ewlett4 Pac1ard . . . C C
A. Commissions paid
to @ncyclopedia
9ritannica
salespersons.......... C C
8. Depreciation of
factory lunchroom
facilities at a
,eneral @lectric
plant ........................ C C
#6. 7teering wheels C C
7olutions Manual, Chapter & (#
installed in 9M;s.
(& Manageri al -ccounti ng, #(th @dition
#$ercise 2- 11 "(6 minutes$
#.
Mason Company
Direct materials:
9eginning raw materials inventory ............ F .,666
-dd: Purchases of raw materials ................ ##A,666
<aw materials available for use.................. #&*,666
Deduct: @nding raw materials inventory . . #*,666
<aw materials used in production .............. F##6,66
6
Direct labor ........................................................ .6,666
Manufacturing overhead ................................. A6,666
otal manufacturi ng costs.............................. &+6,666
-dd: 9eginning wor1 in process inventory . . #6,666
&.6,666
Deduct: @nding wor1 in process inventory . . *,666
Cost of goods manufactured .......................... F&+*,66
6
&. he cost of goods sold section of Mason CompanyBs income
statement:
9eginning finished goods inventory ...... F &6,666
-dd: Cost of goods manufactured ......... &+*,666
,oods available for sale.......................... &A*,666
Deduct: @nding finished goods
inventory .................................................
(*,666
Cost of goods sold.................................... F&*6,66
6
7olutions Manual, Chapter & ((
#$ercise 2- 12 "(6 minutes$
#. a. 9atteries purchased ........................................................ A,666
9atteries drawn from inventory .................................... .,+66
9atteries remaining in inventory .................................. )66
Cost per battery ............................................................... K F#6
Cost in <aw Materials !nventory at -pril (6................ F),666
b. 9atteries used in production ".,+66 L #66$ ................. .,*66
Motorcycles completed and transferred to :inished
,oods "86M K .,*66$ ................................................... +,.*6
Motorcycles still in ;or1 in Process at -pril (6.......... .*6
Cost in ;or1 in Process !nventory at -pril (6............. F.,*66
c. Motorcycles completed and transferred to :inished
,oods "see above$ ........................................................ +,.*6
Motorcycles sold during the month
".6M K +,.*6$ ............................................................... ),.&*
Motorcycles still in :inished ,oods at -pril (6........... &,6&*
Cost in :inished ,oods !nventory at -pril (6.............. F&6,&*6
d. Motorcycles sold during the month "above$ ............... ),.&*
Cost in Cost of ,oods 7old at -pril (6.......................... F).,&*6
e. 9atteries used in salespersonsB motorcycles .............. #66
Cost in 7elling @2pense at -pril (6............................... F #,666
&. <aw Materials !nventory=balance sheet
;or1 in Process !nventory=balance sheet
:inished ,oods !nventory=balance sheet
Cost of ,oods 7old=income statement
7elling @2pense=income statement
() Manageri al -ccounti ng, #(th @dition
%roble& 2- 13 "(6 minutes$
?ote to the !nstructor: here may be some e2ceptions to the answers below. he purpose of
this problem is to get the student to start thin&ing about cost behavior and cost purposes%
try to avoid lengthy discussions about how a particular cost is classified.
Variable
or Selling
Adminis trativ
e
Manufacturi n
g
(Product)
Cost
Cost %tem i!ed Cost Cost
$irec
t %ndirect
#. Property ta2es, factory ............................. : C
&. 9o2es used for pac1aging detergent
produced by the company .................... G C
(. 7alespersonsB commissions ..................... G C
). 7upervisorBs salary, factory ..................... : C
*. Depreciation, e2ecuti ve autos................ : C
+. ;ages of wor1ers assembling
computers ................................................ G C
.. !nsurance, finished goods warehouses.. : C
A. Dubricants for production e'uipment .. . . G C
8. -dvertising costs....................................... : C
#6. Microchips used in producing
calculators ................................................ G C
##. 7hipping costs on merchandise sold...... G C
#&. Magazine subscriptions, factory
lunchroom................................................ : C
7olutions Manual, Chapter & (*
#(. hread in a garment factory .................... G C
#). 9illing costs................................................. G CN
#*. @2ecutive life insurance ........................... : C
(+ Manageri al -ccounti ng, #(th @dition
%roble& 2- 13 "continued$
Variable
or Selling
Adminis trativ
e
Manufacturi n
g
(Product)
Cost
Cost %tem i!ed Cost Cost
$irec
t %ndirect
#+. !n1 used in te2tboo1 production ............. G C
#.. :ringe benefi ts, assembl y4 line wor1ers . G CNN
#A. >arn used in sweater production ............ G C
#8. ;ages of receptionist, e2ecutive
offices........................................................ : C
N Could be administrati ve cost.
NN Could be indirect cost.
7olutions Manual, Chapter & (.
Product Cost
Period
(Sellin
g
'ame of the Cost
Variabl
e Cost
i!e
d
Cost
$irect
Material
s
$irec
t
(abor
Manu)
facturing
"verhea
d
and
Admin
) Cost
"ppor
)
tuni ty
Cost
Sun
&
Cost
<ental revenue forgone,
F(6,666 per year ..................... C
Direct materials cost, FA6 per
unit ............................................. C C
<ental cost of warehouse,
F*66 per month ....................... C C
<ental cost of e'uipment,
F),666 per month .................... C C
Direct labor cost, F+6 per unit . C C
Depreciation of the anne2
space, FA,666 per year .......... C C C
-dvertising cost, F*6,666 per
year ............................................ C C
7upervisorEs salary, F#,*66
per month ................................. C C
@lectricity for machines, F#.&6
per unit ...................................... C C
7hipping cost, F8 per unit ......... C C
<eturn earned on C
(A Manageri al -ccounti ng, #(th @dition
investments, F(,666 per
year ............................................
7olutions Manual, Chapter & (8
Cost Behavior
*o Units of
Product
Cost %tem Variable i!ed $irect %ndirect
#. @lectrici ty to run production e'uipment .............. C C
&. <ent on a factory building ...................................... C C
(. Cloth used to ma1e drapes .................................... C C
). Production superintendent Bs salary ...................... C C
*. ;ages of laborers assembling a product ............ C C
+. Depreciation of air purification e'uipment used
to ma1e furni ture .................................................. C C
.. Oanitorial salaries...................................................... C C
A. Peaches used in canning fruit ................................ C C
8. Dubricants for production e'uipment ................... C C
#6. 7ugar used in soft drin1 production ...................... C C
##. Property ta2es on the factory ................................ C C
#&. ;ages of wor1ers painting a product ................... C C
#(. Depreciation on cafeteria e'uipment .................. C C
#). !nsurance on a building used in producing
helicopters .............................................................. C C
#*. Cost of rotor blades used in producing
helicopters .............................................................. C C
)6 Manageri al -ccounti ng, #(th @dition
%roble& 2- 16 ")* minutes$
#.
7wift Company
:or the Month @nded -ugust (#
Direct materials:
<aw materials inventory, -ugust #.......... F A,66
6
-dd: Purchases of raw materials .............. #+*,66
6
<aw materials available for use................ #.(,666
Deduct: <aw materials inventory,
-ugust (#...................................................
#(,66
6
<aw materials used in production ............ F#+6,666
Direct labor ...................................................... .6,666
Manufacturi ng overhead ............................... A*,666
otal manufacturi ng costs............................ (#*,666
-dd: ;or1 in process inventory, -ugust #. #+,666
((#,666
Deduct: ;or1 in process inventory,
-ugust (#......................................................
&#,666
Cost of goods manufactured ........................ F(#6,666
&.
7wift Company
!ncome 7tatement
:or the Month @nded -ugust (#
7ales................................................................. F)*6,66
6
Cost of goods sold:
:inished goods inventory, -ugust #......... F
)6,666
-dd: Cost of goods manufactured ............ (#6,66
6
,oods available for sale............................. (*6,666
Deduct: :inished goods inventory,
-ugust (#...................................................
+6,66
6
&86,666
7olutions Manual, Chapter & )#
,ross margin ................................................... #+6,666
7elling and administrati ve e2penses .......... #)&,666
?et operating income .................................... F
#A,666
)& Manageri al -ccounti ng, #(th @dition
(. !n preparing the income statement for -ugust, 7am failed to
distinguish between product costs and period costs, and he also
failed to recognize the changes in inventories between the
beginning and end of the month. Ince these errors have been
corrected, the financial condition of the company loo1s much
better and selling the company may not be advisable.
7olutions Manual, Chapter & )(
%roble& 2- 17 "#* minutes$
#. he controller is correct that the salary cost should be classified
as a selling "mar1eti ng$ cost. he duties described in the
problem have nothing to do with manufacturi ng a product, but
rather deal with moving finished units from the factory to
distribution warehouses. 7elling costs include all costs
necessary to secure customer orders and to get the finished
product into the hands of customers. Coordination of shipments
of finished units from the factory to distribution warehouses
falls in this category.
&. ?o, the president is not correct. he reported net operati ng
income for the year will differ depending on how the salary cost
is classified. !f the salary cost is classified as a selling e2pense
all of it will appear on the income statement as a period cost.
5owever, if the salary cost is classified as a manufacturi ng
"product$ cost, it will be added to ;or1 in Process inventory
along with other manufacturi ng costs for the period. o the
e2tent that goods are still in process at the end of the period,
part of the salary cost will remain with these goods in the ;or1
in Process inventory account. Inly that portion of the salary
cost that has been assigned to finished units will leave the ;or1
in Process inventory account and be transferred into the
:inished ,oods inventory account. !n li1e manner, to the e2tent
that goods are unsold at the end of the period, part of the
salary cost will remain with these goods in the :inished ,oods
inventory account. Inly the portion of the salary that has been
assigned to finished units that are sold during the period will
appear on the income statement as an e2pense "part of Cost of
,oods 7old$ for the period. he remainder of the salary costs
will be on the balance sheet as part of inventories.
)) Manageri al -ccounti ng, #(th @dition
#.
Meriwell Company
Direct materials:
<aw materials inventory, beginning ..... F 8,666
-dd: Purchases of raw materials ........... #&*,666
<aw materials available for use............. #(),666
ending ...................................................... +,666
<aw materials used in production .........
F#&A,66
6
Direct labor ................................................... .6,666
Manufacturing overhead ............................ #6*,666
otal manufacturi ng costs......................... (6(,666
-dd: ;or1 in process inventory,
beginning ................................................... #.,66 6
(&6,666
ending ......................................................... (6,666
Cost of goods manufactured .....................
F&86,66
6
&.
Meriwell Company
!ncome 7tatement
7ales.............................................................. F*66,666
Cost of goods sold:
:inished goods inventory, beginning .... F &6,666
-dd: Cost of goods manufactured ......... &86,666
,oods available for sale.......................... (#6,666
ending ...................................................... )6,666 &.6,666
,ross margin ................................................ &(6,666
7elling and administrati ve e2penses:
7elling e2penses....................................... A6,666
-dministrati ve e2penses......................... ##6,666 #86,666
7olutions Manual, Chapter & )*
?et operating income ................................. F )6,666
)+ Manageri al -ccounti ng, #(th @dition
(. Direct materials: F#&A,666 P #6,666 units Q F#&.A6 per unit.
:i2ed manufacturi ng overhead: F86,666 P #6,666 units Q F8.66
per unit.
). Direct materials:
Rnit cost: F#&.A6 "unchanged$
otal cost: #*,666 units K F#&.A6 per unit Q F#8&,666.
:i2ed manufacturi ng overhead:
Rnit cost: F86,666 P #*,666 units Q F+.66 per unit.
otal cost: F86,666 "unchanged$
*. Rnit cost for fi2ed manufacturi ng overhead dropped from F8.66
to F+.66, because of the increase in production between the
two years. 9ecause fi2ed costs do not change in total as the
activi ty level changes, they will decrease on a unit basis as the
activi ty level rises.
7olutions Manual, Chapter & ).
%roble& 2- 1! ")* minutes$
#.
Cost Behavior
Selling or
Administrati
ve Product Cost
Cost %tem
Variabl
e i!ed Cost $irect
%ndirec
t
:actory labor, direct ................ F##A,66
6
F##A,66
6
-dvertising ................................ F*6,666 F*6,666
:actory supervision ..................
)6,666
F)6,66
6
Property ta2es, factory
building ................................... (,*66 (,*66
7ales commissions................... A6,666 A6,666
!nsurance, factory .................... &,*66 &,*66
Depreciation, administrati ve
office e'uipment ................... ),666 ),666
Dease cost, factory
e'uipment .............................. #&,666 #&,666
!ndirect materials, factory ...... +,666 +,666
Depreciation, factory
building ................................... #6,666 #6,666
-dministrati ve office supplies (,666 (,666
-dministrati ve office salaries . +6,666 +6,666
Direct materials used.............. 8),666 8),666
Rtilities, factory ........................ &6,66
6
&6,66
6
)A Manageri al -ccounti ng, #(th @dition
otal costs................................. F(&#,66
6
F#A&,66
6 F#8.,666
F&#&,66
6
F8),66
6
7olutions Manual, Chapter & )8
%roble& 2- 1! "continued$
&.
Direct .................................................... F&#&,66
6
!ndirect ................................................. 8),66
6
otal ...................................................... F(6+,66
6
F(6+,666 P &,666 sets Q F#*( per
set
(. he average product cost per set would increase if the
production drops. his is because the fi2ed costs would be
spread over fewer units, causing the average cost per unit to
rise.
). a. >es, the president may e2pect a mini mum price of F#*(,
which is the average cost to manufacture one set. 5e might
e2pect a price even higher than this to cover a portion of the
administrati ve costs as well. he brother4 in4law probabl y is
thin1ing of cost as including only direct materials, or, at most,
direct materials and direct labor. Direct materials alone
would be only F). per set, and direct materials and direct
labor would be only F#6+.
b. he term is opportuni t y cost. he full, regular price of a set
might be appropriate here, because the company is
operating at full capacity, and this is the amount that must
be given up "benefi t forgone$ to sell a set to the brother4 in4
law.
*6 Manageri al -ccounti ng, #(th @dition
%roble& 2- 2" "(6 minutes$
#.
Product Cost
Period
(Sellin
g
'ame of the Cost
Variabl
e Cost
i!e
d
Cost
$irect
Materia
ls
$irec
t
(abo
r
Manuf+
"verhe
ad
and
Admin
) Cost
"ppor
)
tuni ty
Cost
Sun
&
Cost
7taciEs current salary,
F(,A66 per month ............. C C
9uilding rent, F*66 per
month ................................. C C
Clay and glaze, F& per pot . C C
;ages of production
wor1ers, FA per pot .......... C C
-dvertising, F+66 per
month ................................. C C
7ales commission, F) per
pot ....................................... C C
<ent of production
e'uipment, F(66 per
month ................................. C C
Degal and filing fees, F*66 C C C
<ent of sales office, F&*6
per month .......................... C C
Phone for ta1ing orders, C C
*# Manageri al -ccounti ng, #(th @dition
F)6 per month ..................
!nterest lost on savings
account, F#,&66 per
year ..................................... C C
*& Manageri al -ccounti ng, #(th @dition
%roble& 2- 2" "continued$
&. he F*66 cost of incorporati ng the business is not a differential
cost. @ven though the cost was incurred to start the business, it
is a sun1 cost. ;hether 7taci produces pottery or stays in her
present job, she will have incurred this cost.
7olutions Manual, Chapter & *(
%roble& 2- 21 "+6 minutes$
#. 7uperior Company
:or the >ear @nded December (#
Direct materials:
<aw materials inventory, beginning
"given$ .....................................................
F )6,666
-dd: Purchases of raw materials
"given$ .....................................................
&86,666
<aw materials available for use............. ((6,666
ending "given$ ........................................
#6,666
<aw materials used in production ......... F(&6,66
6
Direct labor ................................................... 8(,666 N
Manufacturi ng overhead "given$ .............. &.6,666
otal manufacturi ng costs "given$ ........... +A(,666
beginning ...................................................
)&,666 N
.&*,666
ending "given$ ...........................................
(*,666
Cost of goods manufactured ..................... F+86,66
6
he cost of goods sold section of the income statement follows:
:inished goods inventory, beginning
"given$ ........................................................
F *6,666
-dd: Cost of goods manufactured ........... +86,666 N
,oods available for sale "given$ ............... .)6,666
ending ........................................................
A6,666 N
Cost of goods sold "given$ ......................... F++6,66
6
N hese items must be computed by wor1ing bac1wards up
through the statements.
&. Direct materials: F(&6,666 P )6,666 units Q FA.66 per unit.
*) Manageri al -ccounti ng, #(th @dition
Manufacturing overhead: F&.6,666 P )6,666 units Q F+..* per
unit.
(. Direct materials: FA.66 per unit.
Manufacturing overhead: F&.6,666 P *6,666 units Q F*.)6 per
unit.
7olutions Manual, Chapter & **
%roble& 2- 21 'continued(
). he average cost per unit for manufacturi ng overhead dropped
from F+..* to F*.)6 because of the increase in production
between the two years. 9ecause fi2ed costs do not change in
total as the activi ty level changes, the average cost per unit will
decrease as the activi ty level rises.
*+ Manageri al -ccounti ng, #(th @dition
#. - cost that is classified as a period cost will be recognized on
the income statement as an e2pense in the current period. -
cost that is classified as a product cost will be recognized on the
income statement as an e2pense "i.e., cost of goods sold$ only
when the associated units of product are sold. !f some units are
unsold at the end of the period, the costs of those unsold units
are treated as assets. herefore, by reclassifying period costs
as product costs, the company is able to carry some costs
forward in inventories that would have been treated as current
e2penses.
&. he discussion below is divided into two parts=,allantBs actions
to postpone e2pendi tures and the actions to reclassify period
costs as product costs.
he decision to postpone e2pendi tures is 'uestionable. !t is one
thing to postpone e2pendi tures due to a cash bind% it is 'uite
another to postpone e2pendi tures in order to hit a profit target.
Postponing these e2pendi tures may have the effect of
ulti matel y increasing future costs and reducing future profits. !f
orders to the companyBs suppliers are changed, it may disrupt
the suppliersB operations. he additional costs may be passed
on to ,allantBs company and may create ill will and a feeling of
mistrust. Postponing maintenance on e'uipment is particularl y
'uestionable. he result may be brea1downs, inefficient andSor
unsafe operations, and a shortened life for the machinery.
!nterestingl y, in a survey of +)8 managers reported in
Management Accounti ng , only #&M stated that it is unethical to
defer e2penses and thereby manipulate 'uarterl y earnings. he
proportion who felt it was unethical increased to &)M when it
involved annual earnings. -nother )#M said that deferring
e2penses is a 'uestionable practice when it involved 'uarterl y
reports and (*M said this when annual reports were involved.
:inally, ).M said that it is completel y ethical to manipulate
'uarterl y reports in this way and )#M gave the green light for
annual reports. "7ee ;illiam O. 9runs, Or. and Henneth -.
Merchant, /he Dangerous Morality of Managing @arnings,0
Management Accounti ng , -ugust #886, pp. &&4 &*$
7olutions Manual, Chapter & *.
,allantBs decision to reclassify period costs is not ethical=
assuming that there is no intention of disclosing in the financial
reports this reclassification. 7uch a reclassification would be a
violation of the principle of consistency in financial reporting
and is a clear attempt to mislead readers of the financial
reports. -lthough some may argue that the overall effect of
,allantBs action will be a /wash0=that is, profits gained in this
period will simpl y be ta1en from the ne2t period=the trend of
earnings will be affected. 5opefully, the auditors would discover
any such attempt to manipulate annual earnings and would
refuse to issue an un'ualified opinion due to the lac1 of
consistency. 5owever, recent accounting scandals may lead to
some s1epticism about how forceful auditors have been in
enforcing tight accounting standards.
*A Manageri al -ccounti ng, #(th @dition
%roble& 2- 23 "&6 minutes$
$irect or
%ndirect Cost of
the Meals)"n)
,heels
Program
$irect or
%ndirect Cost
of Particular
Seniors
Served by the
Meals)"n)
,heels
Program
Variable or i!ed
-ith .espect to
the 'umber of
Seniors Served
by the Meals)"n)
,heels Program
%tem $escripti on $irect %ndirect
$irec
t %ndirect
Variabl
e i!ed
a. he cost of leasing the meals4 on4 wheels
van.................................................................... C C C
b. he cost of incidental supplies such as
salt, pepper, nap1ins, and so on................ C CN C
c. he cost of gasoline consumed by the
meals4 on4 wheels van .................................... C C C
d. he rent on the facili ty that houses
Madison 7eniors Care Center, includi ng
the meals4 on4wheels program .................... C CN C
e. he salary of the part4 ti me manager of the
meals4 on4 wheels program ........................... C C C
f. Depreciati on on the 1itchen e'uipment
used in the meals4 on4wheels program ..... C C C
g. he hourl y wages of the caregi ver who
drives the van and delivers the meals ...... C C C
h. he costs of compl yi ng with health safety
regulati ons in the 1itchen ............................ C C C
i. he costs of mailing letters soliciti ng C C C
7olutions Manual, Chapter & *8
donations to the meals4 on4wheels
program ...........................................................
Nhese costs could be direct costs of servi ng particular seniors.
+6 Manageri al -ccounti ng, #(th @dition
%roble& 2- 24 "+6 minutes$
#.
Gisic Corporation
Direct materials:
<aw materials inventory, beginning ............... F
&6,666
-dd: Purchases of raw materials ..................... )A6,666
<aw materials available for use....................... *66,666
Deduct: <aw materials inventory, ending ...... (6,666
<aw materials used in production ................... F).6,66
6
Direct labor ............................................................. 86,666
Manufacturi ng overhead ...................................... (66,666
otal manufacturi ng costs................................... A+6,666
-dd: ;or1 in process inventory, beginning ...... *6,666
8#6,666
Deduct: ;or1 in process inventory, ending ...... )6,666
Cost of goods manufactured ............................... FA.6,66
6
&. a. o compute the number of units in the finished goods
inventory at the end of the year, we must first compute the
number of units sold during the year.
otal sales F#,(66,666
Q Q &+,666 units sold
Rnit selling price F*6 per unit sold
Rnits in the finished goods inventory,
beginning ...........................................................
6
Rnits produced during the year ........................ &8,666
Rnits available for sale....................................... &8,666
Rnits sold during the year "above$ .................. &+,666
Rnits in the finished goods inventory, ending (,666
b. he average production cost per unit during the year is:
g Cost of oods manufactured FA.6,666
Q Q F(6 per unit
?umber of units produced &8,666 units
7olutions Manual, Chapter & +#
hus, the cost of the units in the finished goods inventory at
the end of the year is: (,666 units K F(6 per unit Q F86,666.
+& Manageri al -ccounti ng, #(th @dition
(. Gisic Corporation
!ncome 7tatement
7ales.............................................................. F#,(66,666
Cost of goods sold:
:inished goods inventory, beginning .... F 6
-dd: Cost of goods manufactured ........ A.6,666
,oods available for sale.......................... A.6,666
:inished goods inventory, ending ......... 86,666 .A6,666
,ross margin ............................................... *&6,666
7elling and administrati ve e2penses ...... (A6,666
?et operating income ................................ F #)6,666
7olutions Manual, Chapter & +(
Case / Case 0 Case 1 Case 2
Direct materials ..................................... F ),*66 F +,666 F *,666 F (,666
Direct labor ............................................. 8,666 N (,666 .,666 ),666
Manufacturing overhead ...................... *,666 ),666 A,666 N 8,666
otal manufacturi ng costs................... #A,*66 #(,666 N &6,666 #+,666 N
9eginning wor1 in process inventory &,*66 &,666 N (,666 ),*66 N
@nding wor1 in process inventory ...... "(,666 $N "#,666 $ "),666 $ "(,666 $
Cost of goods manufactured ............... F#A,666
F#),66
6
F#8,66
6 N
F#.,*6
6
7ales........................................................ F(6,666
F&#,66
6
F(+,66
6
F)6,66
6
9eginning finished goods inventory . . #,666 &,*66 (,*66 N &,666
Cost of goods manufactured ............... #A,666 #),666 #8,666 N #.,*66
,oods available for sale....................... #8,666 N #+,*66 N &&,*66 N #8,*66 N
@nding finished goods inventory ........ "&,666 $N "#,*66 $ "),666 $ "(,*66 $
Cost of goods sold................................. #.,666 #*,666 N #A,*66 #+,666 N
,ross margin .......................................... #(,666 +,666 N #.,*66 &),666 N
7elling and administrati ve e2penses . "8,666 $N "(,*66 $ "#&,*66 $N "#*,666 $ N
?et operating income ........................... F ),666 F &,*66 N F *,666 F 8,666
N Missing data in the problem.
+) Manageri al -ccounti ng, #(th @dition
Case 2- 26 "+6 minutes$
he following cost items are needed before a schedule of cost of
goods manufactured can be prepared:
Materials used in production:
Prime cost .................................................... F)#6,66
6
Dess direct labor cost ................................ #A6,666
Direct materials cost ................................. F&(6,66
6
Manufacturing overhead cost:
Direct labor cost F#A6,666
Q
Percentage of conversion cost (6MN
Q F+66,666 total conversion cost
N#66M L .6M Q (6M.
Conversion cost ......................................... F+66,666
Dess direct labor cost ................................ #A6,666
Manufacturing overhead cost ................. F)&6,666
Cost of goods manufactured:
,oods available for sale............................ FA#6,666
Dess finished goods inventory,
beginning ..................................................
)*,666
Cost of goods manufactured .................... F.+*,666
he easiest way to proceed from this point is to place all 1nown
amounts in a partiall y completed schedule of cost of goods
manufactured and a partiall y completed income statement. hen
fill in the missing amounts by analysis of the available data.
7olutions Manual, Chapter & +*
Case 2- 26 "continued$
Direct materials:
<aw materials inventory, beginning ..................
F
#A,666
-dd: Purchases of raw materials ........................
&86,66
6
<aw materials available for use......................... (6A,666
Deduct: <aw materials inventory, ending ........ -
<aw materials used in production "see
above$ .................................................................. &(6,666
Direct labor cost .......................................................
#A6,66
6
Manufacturing overhead cost "see above$ .........
)&6,66
6
otal manufacturi ng costs..................................... A(6,666
-dd: ;or1 in process inventory, beginning ........
+*,66
6
A8*,666
Deduct: ;or1 in process inventory, ending ........ 9
Cost of goods manufactured "see above$ ...........
F.+*,66
6
herefore, /-0 "<aw materials inventory, ending$ is F.A,666%
and /90 ";or1 in process inventory, ending$ is F#(6,666.
7ales...................................................................
F#,&66,66
6
Cost of goods sold:
:inished goods inventory, beginning .........
F
)*,666
-dd: Cost of goods manufactured "see
above$ .......................................................... .+*,666
,oods available for sale............................... A#6,666
ending .......................................................... C
.&6,66
6
,ross margin ....................................................
F )A6,66
6
NF#,&66,666 K "#66M L )6M$ Q F.&6,666.
++ Manageri al -ccounti ng, #(th @dition
herefore, /C0 ":inished goods inventory, ending$ is F86,666.
he procedure outlined above is just one way in which the
solution to the case can be approached. 7ome may wish to start
at the bottom of the income statement "with gross margin$ and
wor1 upwards from that point. -lso, the solution can be
obtained by use of 4accounts.
7olutions Manual, Chapter & +.
Case 2- 27 "+6 minutes$
#. ?o distinction has been made between period e2penses and
product costs on the income statement filed by the companyBs
accountant. Product costs "e.g., direct materials, direct labor,
and manufacturi ng overhead$ should be assigned to inventory
accounts and flow through to the income statement as cost of
goods sold only when finished products are sold. 9ecause there
were ending inventories, some of the product costs should
appear on the balance sheet as assets rather than on the
income statement as e2penses.
&. 7olar echnology, !nc.
:or the Tuarter @nded March (#
Direct materials:
<aw materials inventory, beginning ....... F 6
-dd: Purchases of raw materials ............. (+6,666
<aw materials available for use.............. (+6,666
ending ........................................................
#6,666
<aw materials used in production ........... F(*6,666
Direct labor .................................................... .6,666
Manufacturi ng overhead ............................. )#6,666
otal manufacturi ng costs........................... A(6,666
beginning .....................................................
6
A(6,666
ending ..........................................................
*6,666
Cost of goods manufactured ....................... F.A6,666
+A Manageri al -ccounti ng, #(th @dition
(. 9efore an income statement can be prepared, the cost of the
A,666 batteries in the ending finished goods inventory must be
determi ned. -ltogether, the company produced )6,666
batteries during the 'uarter% thus, the production cost per
battery was:
Cost of goods manufactured F.A6,666
Q QF#8.*6 per unit
9atteries produced during the 'uarter )6,666 units
9ecause A,666 batteries ")6,666 L (&,666 Q A,666$ were in the
finished goods inventory at the end of the 'uarter, the total
cost of this inventory was:
A,666 units K F#8.*6 per unit Q F#*+,666.
;ith this and other data from the case, the companyBs income
statement for the 'uarter can be prepared as follows:
7olar echnology, !nc.
!ncome 7tatement
:or the Tuarter @nded March (#
7ales "(&,666 batteries$ .......................... F8+6,66
6
Cost of goods sold:
:inished goods inventory, beginning . F 6
-dd: Cost of goods manufactured ..... .A6,66
6
,oods available for sale....................... .A6,666
ending ...................................................
#*+,66
6
+&),666
,ross margin ............................................. ((+,666
7elling and administrati ve e2penses .... &86,666
?et operating income .............................. F )+,666
7olutions Manual, Chapter & +8
). ?o, the insurance company probabl y does not owe 7olar
echnology F&&+,666. he 1ey 'uestion is how /cost 0 was
defined in the insurance contract. !t is most li1ely that the
insurance contract limi ts reimbursement for losses to those
costs that would normall y be considered product costs=in other
words, direct materials, direct labor, and manufacturi ng
overhead. he F&&+,666 is overstated because it includes
elements of selling and administrati ve e2penses as well as
product costs. he F&&+,666 also does not recognize that some
costs incurred during the period are in the ending <aw
Materials and ;or1 in Process inventory accounts, as e2plained
in part "#$ above. he insurance companyBs liability is probabl y
just F#*+,666, which is the amount of cost associated with the
ending :inished ,oods inventory as shown in part "($ above.
.6 Manageri al -ccounti ng, #(th @dition
)esearch and Application 2- 2
#. Dell succeeds because of its operational e2cellence customer
value proposition. Page # of the #64 H "under the heading
9usiness 7trategy$ lists the 1ey tenets of DellBs business
strategy. he first three tenets focus on operational e2cellence.
he first tenet discusses the direct business model, which
/eli mi nates wholesale and retail dealers that add unnecessary
time and cost or diminish DellBs understandi ng of customer
e2pectations.0 he second tenet is DellBs build4 to4 order
manufacturi ng process that /enables Dell to turn over inventory
every four days on average, and reduce inventory levels.0 he
third tenet is /DellBs relentless focus on reducing its costs
UwhichV allows it to consistentl y provide customers with superior
value.0 -lso, the first bullet point on Page A of the #64 H says
/DellBs success is based on its ability to profitabl y offer its
products at a lower price than its competi tors.0
&. Dell faces numerous business ris1s as described in pages .4#6
of the #64 H. 7tudents may mention other ris1s beyond those
specifically mentioned in the #64 H. 5ere are four ris1s faced by
Dell with suggested control activi ties:
<is1: Profits may fall short if DellBs product, customer, and
geographic mi2 is substantiall y different than anticipated.
Control activi ties: Maintain a budgeting program that
forecasts sales by product line, customer segment, and
geographic region. ;hile the budget is not going to be
perfectl y accurate, a reasonably accurate forecast would
help Dell manage investor e2pectations.
<is1: Disruptions in component availabili ty from suppliers
could reduce DellBs ability to meet customer orders. his is of
particular concern for Dell because its lean production
practices result in mini mal inventory levels and because Dell
relies on several single4 sourced suppliers. Control activi ties:
Develop a plan with single4 sourced suppliers to ensure that
they can produce the necessary components at more than
one plant location and to ensure that each location has more
than one means of delivering the parts to DellBs assembl y
facilities.
7olutions Manual, Chapter & .#
)esearch and Application 2- 2 "continued$
<is1: !nfrastructure failures "e.g., computer viruses,
intentional disruptions of ! systems and website outages$
may threaten DellBs ability to boo1 or process orders,
manufacture products, or ship products in a timel y manner.
Control activi ties: !nstall controls such as physical security,
data storage bac1up sites, firewalls and passwords that
protect technology assets.
<is1: Dosing government contracts could adversely affect the
companyBs revenues. Control activi ties: Develop a formal
review process, supervised by legal counsel, to ensure that
Dell complies with governmental regulations.
(. Pages ()4 (* of DellBs :orm #64 H contain the audit report issued
by PricewaterhouseCoopers "P;C$. he audit report ma1es
reference to the role of the Public Company -ccounti ng
Iversight 9oard "PC-I9$ that was created by the 7arbanes4
I2ley -ct of &66& "7IC$. he audit report also contains two
opinions dealing with internal control. he first opinion relates
to management B s assessment of its internal controls. he
second opinion relates to the auditorBs assessment of the
effectiveness of DellBs internal controls. hese two opinions
were re'uired by 7IC at the time of this #64 H filing. Page *8
includes management B s report on internal control over financial
reporting. his report includes a reference to 7IC. :inally,
pages .+4 .A contain signed certifications from the C@I "Hevin
<ollins$ and the C:I "Oames 7chneider$. 7IC re'uires the C@I
and C:I to certify that the #64 H and its accompanyi ng financial
statements do not contain any untrue statements and are fairly
stated in all material respects.
). 9ased solely on the inventories number on the balance sheet,
students cannot determi ne the answer to this 'uestion.
:urthermore, given that DellBs total amount of inventories is so
small, the company does not report the brea1 down of its
inventories between raw materials, wor14 in4process, and
finished goods. ?onetheless, students should be able to readily
ascertain that Dell is a manufacturer. Page & of the #64 H says
.& Manageri al -ccounti ng, #(th @dition
/Dell designs, develops, manufactures, mar1ets, sells, and
supports a wide range of products that are customized to
customer re'uirements. 0 Page * states /DellBs manufacturi ng
process consists of assembl y,
7olutions Manual, Chapter & .(
software installation, functional testing, and 'uality control. 0
Page . states that Dell has manufacturi ng facilities in -ustin,
e2as, @ldorado do 7ul, 9razil, ?ashville and Debanon,
ennessee, Dimeric1, !reland, Penang, Malaysia, and Ciamen,
China.
*. @2amples of direct inventoriable costs include the component
parts that go into ma1ing DellBs main product families, which
include enterprise systems, client systems, printing and
imaging systems, software, and peripherals. he /touch0
laborers that wor1 in each of the aforementi oned plants would
also be a direct inventoriable cost. @2amples of indirect
inventoriable costs include the costs to sustain the
manufacturi ng plants that cannot be convenientl y traced to
specific products. he utili ty bills, insurance premi ums, plant
management salaries, and e'uipment4 related costs, etc. that
are incurred to sustain plant operations would all be indirect
inventoriable costs.
he gross margin "in dollars$ has steadily increased and the
gross margin as a percent of sales has remained fairly steady
for two reasons. :irst, the cost of goods sold consists largely of
variable costs "e.g., direct materials and direct labor costs$. -s
sales grow, these variable costs increase in total, but as a
percentage of sales, they remain fairly stable over ti me.
7ome students may as1 about the fi2ed overhead costs that are
incurred to run the plants. 7preading fi2ed overhead costs over
a higher volume of sales would increase the gross margin
percentage. 5owever, the fi2ed overhead costs are relativel y
small in relation to the dollar value of raw materials that flows
through DellBs plants each year.
7econd, pages &&4 &( mention that Dell plans to reduce product
costs in four areas: manufacturi ng costs, warrant y costs, design
costs, and overhead costs. he company says that its /general
practice is to aggressively pass on declines in costs to its
customers in order to add customer value while increasing
global mar1et share.0 !n other words, rather than holding price
.) Manageri al -ccounti ng, #(th @dition
constant when costs decline, thereby increasing the gross
margin percentage, the company lowers prices. Rsing
termi nology that will be defined in Chapter #&, Dell grows
profits by increasing turnover while holding margin reasonably
constant.
7olutions Manual, Chapter & .*
+. he inventory balance on Oanuary &A, &66* is F)*8 million. -s
discussed on Page & of the #64 H, the balance is low because of
DellBs build4 to4 order "lean$ manufacturi ng process that enables
the company to /turn over inventory every four days on
average, and reduce inventory levels.0 ;hen units are built to
order rather than built to stoc1, it not only reduces finished
goods inventory, it reduces wor14 in4process inventory because
large batches of partially completed goods do not accumulate
in front of wor1stations or in temporary storage areas. !t also
reduces raw materials inventory because suppliers provide just4
in4ti me delivery of the 'uanti ties needed to satisfy customer
orders.
-s stated on page &, this offers Dell a competi ti ve advantage
because it allows the company to /rapidl y introduce the latest
relevant technology more 'uic1ly than companies with slow4
moving, indirect distribution channels, and to rapidly pass on
component cost savings directl y to customers. 0
he negative cash conversion cycle is a good sign for Dell.
-lthough this term is not defined in the chapter, students can
ascertain from page &. of the #64 H that it is computed as
follows: days sales outstanding W days of supply in inventory L
days in accounts payable. -s stated on pages &+4 &., the
negative cash conversion cycle means that Dell is /collecti ng
amounts due from customers before paying vendors, thus
allowing the company to generate annual cash flows from
operating activi ties that typically e2ceed net income. 0
.. -s shown on page &(, DellBs two main categories of operati ng
e2penses are selling, general, and administrati ve "F),&8A
million$ and research, development, and engineering "F)+(
million$. Page )& e2plains that DellBs selling, general, and
administrati ve e2penses /include items such as sales
commissions, mar1eti ng and advertising costs, and contractor
services.0 !t also mentions that advertising costs totaled F*.+
million in fiscal &66*. ,eneral and administrati ve costs include
/:inance, Degal, 5uman <esources and information technology
support. 0 DellBs website development costs are included in
.+ Manageri al -ccounti ng, #(th @dition
<esearch, Development, and @ngineering costs along with
payroll, infrastructure, and administrati ve costs related directl y
to research and development.
7olutions Manual, Chapter & ..
:or financial reporti ng purposes, costs are classified as either
product costs or period costs. Product costs include those costs
involved with ma1ing or ac'uiring the product. Period costs
include all costs that are not product costs. he e2penses
mentioned in the paragraph above are not involved with
ma1ing the product so they are e2pensed as incurred. ;hen
the focus changes from e2ternal reporting to internal decision
ma1ing, the need to comply with ,--P disappears. 7o for
e2ample, on page )& it says /<esearch, development, and
engineering costs are e2pensed as incurred, in accordance with
7:-7 ?o. &, Accounting for .esearch and $evelopment Costs.0
5owever, for internal reporti ng purposes it may be entirely
appropriate to assign some research and development costs to
particular products.
A. 5ere are four e2amples of cost objects for Dell including one
direct and one indirect cost for each cost object.
- product line, such as a particular type of server. - direct
cost would be the cost of raw material component parts and
an indirect cost would be factory utili ty costs.
- particular product family, such as enterprise systems,
which according to page & includes servers, storage,
wor1stations, and networ1ing products. - direct cost would
be the component parts used to ma1e these products and an
indirect cost would be factory insurance costs that are
assigned to these products.
- particular geographic region, such as -sia Pacific4 Oapan,
which is mentioned on page **. - direct cost would be the
salary of ;illiam -melio, 7enior Gice4President, -sia Pacific4
Oapan "see page ##$ and an indirect cost would be the salary
of Martin O. ,arvin, 7enior Gice President, ;orldwide
Procurement and ,lobal Customer @2perience "see page ##$,
given that he oversees worldwide procurement operations.
- particular customer segment, such as the government
segment as mentioned on page ). - direct cost would be a
sales representati ve who is dedicated to serving the
government segment and an indirect cost would be research
.A Manageri al -ccounti ng, #(th @dition
and development costs that are e2pended on products
purchased by more than one customer segment.
7olutions Manual, Chapter & .8
Appendi $ 2A
*urther Classi+ication o+ ,abor Costs
#$ercise 2A- 1 "#6 minutes$
Direct labor "() hours K F#* per hour$ .... F*#6
Manufacturing overhead
"idle ti me: + hours K F#* per hour$ ...... 86
otal wages earned ...................................... F+66
A6 Manageri al -ccounti ng, #(th @dition
#$ercise 2A- 2 "#6 minutes$
Direct labor ")* hours K F#) per hour$ .... F+(6
Manufacturing overhead
"overti me: * hours K F. per hour$ ........ (*
otal wages earned ...................................... F++*
7olutions Manual, -ppendi 2 &- A#
#$ercise 2A- 3 "#* minutes$
#. ?o. !t appears that the overti me spent completi ng the job was
simply a matter of how the job happened to be scheduled.
Rnder these circumstances, an overti me premium probabl y
should not be charged to a customer whose job happens to fall
at the end of the dayBs schedule.
&. Direct labor "8 hours K F#) per hour$ ........... F#&+
,eneral overhead "# hour K F. per hour$ .... .
otal cost ............................................................ F#((
(. - charge for an overti me premium might be justified if the
customer re'uested a /rush0 order that caused the overti me.
A& Manageri al -ccounti ng, #(th @dition
#$ercise 2A- 4 "#* minutes$
#. Direct labor "(# hours K F#) per hour$ F)()
Manufacturi ng overhead
"idle time: 8 hours K F#) per hour$ .. . #&+
otal cost ................................................... F*+6
&. Direct labor ")A hours K F#) per hour$ F+.&
"overti me: A hours K F. per hour$ ..... *+
otal cost ................................................... F.&A
(. - company could treat the cost of fringe benefi ts relating to
direct labor wor1ers as part of manufacturi ng overhead. his
approach spreads the cost of such fringe benefi ts uniforml y
over all units of output. -lternati vel y, the company could treat
the cost of fringe benefits relating to direct labor wor1ers as
additional direct labor cost. his latter approach charges the
costs of fringe benefi ts to specific jobs rather than to all units of
output.
7olutions Manual, -ppendi 2 &- A(
%roble& 2A- 5 "(6 minutes$
#. otal wages for the wee1:
<egular time ")6 hours K F&6 per hour$ ........... FA66
Iverti me "+ hours K F(6 per hour$ .................... #A6
otal wages................................................................ F8A6
-llocation of total wages:
Direct labor ")+ hours K F&6 per hour$ ............. F8&6
"Iverti me: + hours K F#6 per hour$ ................ +6
otal wages................................................................ F8A6
&. otal wages for the wee1:
<egular time ")6 hours K F&6 per hour$ ........... F A66
Iverti me "A hours K F(6 per hour$ .................... &)6
otal wages............................................................. F#,6)6
-llocation of total wages:
Direct labor ")* hours K F&6 per hour$ ............. F 866
Manufacturi ng overhead:
"!dle ti me: ( hours K F&6 per hour$ ................. F+6
"Iverti me: A hours K F#6 per hour$ ................ A6 #)6
otal wages............................................................. F#,6)6
(. otal wages and fringe benefi ts for the wee1:
<egular time ")6 hours K F&6 per hour$ ........... F A66
Iverti me "#6 hours K F(6 per hour$ .................. (66
:ringe benefi ts "*6 hours K F+ per hour$ .......... (66
otal wages and fringe benefi ts .......................... F#,)66
-llocation of wages and fringe benefits:
Direct labor ")A hours K F&6 per hour$ ............. F 8+6
"!dle ti me: & hours K F&6 per hour$ ................. F )6
"Iverti me: #6 hours K F#6 per hour$ .............. #66
":ringe benefits: *6 hours K F+ per hour$ ...... (66 ))6
A) Manageri al -ccounti ng, #(th @dition
%roble& 2A- 5 "continued$
). -llocation of wages and fringe benefits:
Direct labor:
;age cost ")A hours K F&6 per hour$ ............. F8+6
:ringe benefi ts ")A hours K F+ per hour$ ....... &AA F#,&)A
"!dle ti me: & hours K F&6 per hour$ ................. )6
"Iverti me: #6 hours K F#6 per hour$ .............. #66
":ringe benefits: & hours K F+ per hour$ ........ #& #*&
7olutions Manual, -ppendi 2 &- A*
Appendi $ 2-
Cost o+ Qualit.
#$ercise 2-- 1 "#6 minutes$
#. Tuality of conformance
&. Tuality costs
(. Tuality circles
). Prevention costs, appraisal costs
*. !nternal failure costs, e2ternal failure costs
+. @2ternal failure costs
.. -ppraisal costs
A. Prevention costs
8. !nternal failure costs
#6. @2ternal failure costs
##. Prevention costs, appraisal costs
#&. Tuality cost report
A+ Manageri al -ccounti ng, #(th @dition
#$ercise 2--2 "#* mi nutes$
#.
Preventio
n Cost
Appraisa
l Cost
%nternal
ailure
Cost
3!ternal
ailure
Cost
a. Product testing ................. C
b. Product recalls.................. C
c. <ewor1 labor and
overhead ......................... C
d. Tuality circles................... C
e. Downti me caused by
defects ............................. C
f. Cost of field servicing ...... C
g. !nspection of goods.......... C
h. Tuality engineering ......... C
i. ;arranty repairs.............. C
j. 7tatistical process
control ............................. C
1. ?et cost of scrap.............. C
l. Depreciation of test
e'uipment ...................... C
m. <eturns and allowances
arising from poor
'uality .............................. C
n. Disposal of defective
products .......................... C
o. echnical support to
suppliers.......................... C
p. 7ystems development ..... C
'. ;arranty replacements . . C
r. :ield testing at customer
site................................... C
s. Product design .................. C
&. Prevention costs and appraisal costs are incurred in an effort to
1eep poor 'uality of conformance from occurring. !nternal and
e2ternal failure costs are incurred because poor 'uality of
conformance has occurred.
7olutions Manual, -ppendi 2 &9 A.
%roble& 2-- 3 "+6 minutes$
#. :lore2 Company
Tuality Cost <eport
(ast 4ear *his 4ear
Amount
(in
thousand
s)
Percen
t of
Sales
Amount
(in
thousand
s)
Percent
of
Sales
Prevention costs:
Tuality engineering ..... F )&6 6.*+ F *.6 6..+
7ystems development )A6 6.+) .*6 #.66
7tatistical process
control ......................... 6 6.66 #A6 6.&)
otal prevention costs... 866 #.&6 #,*66 &.66
-ppraisal costs
!nspection ...................... .*6 #.66 866 #.&6
Product testing ............. A#6 #.6A #,&66 #.+6
7upplies used in
testing ......................... (6 6.6) +6 6.6A
Depreciation of
testing e'uipment .... &#6 6.&A &)6 6.(&
otal appraisal costs. . . #,A66 &.)6 &,)66 (.&6
!nternal failure costs:
?et cost of scrap.......... +(6 6.A) #,#&* #.*6
<ewor1 labor ................ #,6*6 #.)6 #,*66 &.66
Disposal of defective
products ...................... .&6 6.8+ 8.* #.(6
otal internal failure
costs............................... &,)66 (.&6 (,+66 ).A6
@2ternal failure costs:
Cost of field servicing .. #,&66 #.+6 866 #.&6
;arranty repairs .......... (,+66 ).A6 #,6*6 #.)6
Product recalls............. &,#66 &.A6 .*6 #.66
otal e2ternal failure
costs............................... +,866 8.&6 &,.66 (.+6
otal 'uality cost ............ F#&,666 #+.66 F#6,&66 #(.+6
AA Manageri al -ccounti ng, #(th @dition
%roble& 2-- 3 "continued$
&.
F6
F&,666
F),666
F+,666
FA,666
F#6,666
F#&,666
F#),666
Dast >ear his >ear
Q
u
a
l
i
t
.

C
o
s
t
s

'
i
n

t
h
o
u
s
a
n
d
s
(
@2ternal :ailure
!nternal :ailure
-ppraisal
Prevention
6M
&M
)M
+M
AM
#6M
#&M
#)M
#+M
#AM
Dast >ear his >ear
Q
u
a
l
i
t
.

C
o
s
t
s

a
s

a

%
e
r
c
e
n
t
a
g
e

o
+

S
a
l
e
s
@2ternal :ailure
!nternal :ailure
-ppraisal
Prevention
7olutions Manual, -ppendi 2 &9 A8
(. he overall impact of the companyBs increased emphasis on
'uality over the past year has been positive in that total 'uality
costs have decreased from #+M of sales to #(.+M of sales.
Despite this improvement, the company still has a poor
distribution of 'uality costs. he bul1 of the 'uality costs in both
years is traceable to internal and e2ternal failure, rather than to
prevention and appraisal. -lthough the distribution of these
costs is poor, the trend this year is toward more prevention and
appraisal as the company has given more emphasis on 'uality.
Probably due to the increased spending on prevention and
appraisal activi ties during the past year, internal failure costs
have increased by one half, going from F&.) million to F(.+
million. he reason internal failure costs have gone up is that,
through increased appraisal activi ty, defects are being caught
and corrected before products are shipped to customers. hus,
the company is incurring more cost for scrap, rewor1, and so
forth, but it is saving huge amounts in field servicing, warrant y
repairs, and product recalls. @2ternal failure costs have fallen
sharply, decreasing from F+.8 million last year to just F&..
million this year.
!f the company continues its emphasis on prevention and
appraisal=and particularl y on prevention=its total 'uality costs
should continue to decrease in future years. -lthough internal
failure costs are increasing for the moment, these costs should
decrease in ti me as better 'uality is designed into products.
-ppraisal costs should also decrease as the need for inspection,
testing, and so forth decreases as a result of better engineering
and tighter process control.
86 Manageri al -ccounti ng, #(th @dition
%roble& 2-- 4 "+6 minutes$
#. -n analysis of the companyBs 'uality cost report is presented
below:
(ast 4ear *his 4ear
Amoun
t Percent5
Amoun
t Percent5
Prevention costs:
Machine
maintenance ......... F.6 #.. #6.) F #&6 &.* &6.(
raining suppliers . . . 6 6.6 6.6 #6 6.& #..
Tuality circles..........
................................. 6 6.6 6.6 &6 6.) (.)
otal prevention
costs.......................... .6 #.. #6.) #*6 (.# &*.)
-ppraisal costs:
!ncoming
inspection .............. &6 6.* (.6 )6 6.A +.A
:inal testing ............. A6 #.8 ##.8 86 #.8 #*.(
otal appraisal costs. #66 &.) #).8 #(6 &.. &&.6
!nternal failure costs:
<ewor1 ...................... *6 #.& ..* #(6 &.. &&.6
7crap......................... )6 #.6 +.6 .6 #.* ##.8
otal internal failure
costs.......................... 86 &.# #(.) &66 ).& ((.8
@2ternal failure
costs:
;arranty repairs..... 86 &.# #(.) (6 6.+ *.#
Customer returns .... (&6 ..+ )..A A6 #.. #(.+
otal e2ternal failure
costs.......................... )#6 8.A +#.& ##6 &.( #A.+
otal 'uality cost ....... F+.6
#+.
6
#66.
6 F *86
#&.
(
#66.
6
otal production cost
F),&6
6
F),A6
6
N Percentage figures may not add down due to rounding.
7olutions Manual, -ppendi 2 &9 8#
:rom the above analysis it would appear that Mercury, !nc.Bs
program has been successful.
otal 'uality costs have declined from #+.6M to #&.(M as a
percentage of total production cost. !n dollar amount, total
'uality costs went from F+.6,666 last year to F*86,666 this
year.
@2ternal failure costs, those costs signaling customer
dissatisfaction, have declined from 8.AM of total production
costs to &.(M. hese declines in warranty repairs and
customer returns should result in increased sales in the
future.
-ppraisal costs have increased from &.)M to &..M of total
production cost.
!nternal failure costs have increased from &.#M to ).&M of
production costs. his increase has probabl y resulted from
the increase in appraisal activi ties. Defective units are now
being spotted more fre'uentl y before they are shipped to
customers.
Prevention costs have increased from #..M of total
production cost to (.#M and from #6.)M of total 'uality costs
to &*.)M. he FA6,666 increase is more than offset by
decreases in other 'uality costs.
&. he initial effect of emphasizing prevention and appraisal was
to reduce e2ternal failure costs and increase internal failure
costs. he increase in appraisal activi ties resulted in catching
more defective units before they were shipped to customers. -s
a conse'uence, rewor1 and scrap costs increased. !n the future,
an increased emphasis on prevention should result in a
decrease in internal failure costs. -nd as defect rates are
reduced, resources devoted to appraisal can be reduced.
(. o measure the cost of not implementi ng the 'uality program,
management could assume that sales and mar1et share would
continue to decline and then calculate the lost profit. Ir,
management might assume that the company will have to cut
8& Manageri al -ccounti ng, #(th @dition
its prices to hang on to its mar1et share. he impact on profits
of lowering prices could be esti mated.
7olutions Manual, -ppendi 2 &9 8(

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Chapter 2

Manageri al Accounti ng and Cost Concepts

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