Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

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Chapter 2

Building Blocks of Managerial Accounting

Quick Check Questions

Answers:

QC2-1. c QC2-3. a QC2-5. c QC2-7. b QC2-9. a

QC2-2. b QC2-4. c QC2-6. d QC2-8. c QC2-10. C

Short Exercises

(5 min.) S2-1

Flash Co. is a manufacturer, because it has three kinds of inventory: Raw Materials Inventory, Work in Process
Inventory, and Finished Goods Inventory.

Zippy Co. is a merchandiser, because it has a single inventory account.

Woody Co. is a service company, because it has no inventory.

(10 min.) S2-2

a. Service companies typically do not have an inventory account.

b. Honda Motors converts raw materials inventory into finished products.
c. An insurance company, a health care provider, and a bank are all examples of service companies.
d. Wholesalers buy products in build from producers, mark them up, and resell them to retailers.
e. Manufacturing companies report three types of inventory on a balance sheet.
Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) S2-3

f. Inventory (merchandise) for a company such as Staples includes all of the costs necessary to purchase
products and get them onto the store shelves.
g. Most for-profit organizations can be described as being in one (or more) of three categories: merchandising,
service, and manufacturing.
h. Work in process inventory is composed of goods partially through the manufacturing process (not finished
yet).
i. Land’s End, Sears Roebuck & Co., and LL Bean are all examples of merchandising companies.

Copyright © 2015 Pearson Education, Inc. 2-1

Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) S2-3

a. Marketing
b. Design
c. Production
d. Distribution
e. Distribution
f. Customer service
g. Production
h. Production
i. Research and Development (R&D)

(5-10 min.) S2-4

Cost Direct or Indirect cost?

a. Depreciation of the building Indirect
b. Cost of costume jewelry on the mannequins in the Juniors department Direct
c. Cost of bags used to package customer purchases at the main registers for the
store Indirect
d. The Medina Kohl’s store manager’s salary Indirect
e. Cost of security staff at the Medina store Indirect
f. Manager of Juniors department Direct
g. Juniors department sales clerks Direct
h. Cost of Juniors clothing Direct
i. Cost of hangers used to display the clothing in the store Indirect
j. Electricity for the building Indirect
k. Cost of radio advertising for the store Indirect
l. Juniors clothing buyers’ salaries (these buyers buy for all Juniors departments of
Kohl’s stores) Indirect

(10 min.) S2-5

a. Indirect costs cannot be directly traced to a(n) cost object .

b. Total costs include the costs of all resources used throughout the value chain.
c. GAAP requires companies to use only inventoriable product costs for external financial reporting.
d. Company-paid fringe benefits may include health insurance, retirement plan contributions, payroll taxes, and
paid vacations.
e. When manufacturing companies sell their finished products, the costs of those finished products are removed
from inventory and expensed as cost of goods sold.
f. Conversion costs are the costs of transforming direct materials into finished goods.
g. Period costs include R&D, marketing, distribution, and customer service costs.
h. Direct material plus direct labor equals prime costs.
i. Steel, tires, engines, upholstery, carpet, and dashboard instruments are used in the assembly of a car. Since
the manufacturer can trace the cost of these materials (including freight-in and import duties) to specific units
or batches of vehicles, they are considered direct costs of the vehicles.
j. Costs that can be traced directly to a(n) cost object are called direct costs .
k. Inventoriable product costs are initially treated as assets on the balance sheet.
l. The allocation process results into a less precise cost figure being assigned to the cost objects.
2-2 Copyright © 2015 Pearson Education, Inc.
Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) S2-3

Copyright © 2015 Pearson Education, Inc. 2-3

Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) S2-6

a. Period cost
b. Inventoriable product cost
c. Period cost
d. Inventoriable product cost
e. Period cost
f. Inventoriable product cost
g. Period cost
h. Inventoriable product cost
i. Inventoriable product cost

(5-10 min.) S2-7

Period Cost or If an Inventoriable

COST Inventoriable Product Cost: Is it
Product Cost? DM, DL, or MOH?
a. Standard packaging materials used to package individual
units of product for sale (e.g., cereal boxes in which cereal is
packaged) Product DM
b. Lease payment on administrative headquarters Period
c. Telephone bills relating to customer service call center Period
d. Property insurance – 40% of building is used for sales and 40% Period; —
administration; 60% of building is used for manufacturing 60% Product MOH
e. Wages and benefits paid to assembly-line workers in the
manufacturing plant Product DL
f. Depreciation on automated production equipment Product MOH
g. Salaries paid to quality control inspectors in the plant Product MOH
h. Repairs and maintenance on factory equipment Product MOH

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) S2-6

(5-10 min.) S2-8

Period Cost or If an Inventoriable

COST
Inventoriable Product Cost: Is it
Product Cost? DM, DL, or MOH?
1. Cost of milk purchased from dairy farmers Product DM
2. Depreciation on Marketing Department’s computers Period (marketing
element of value
chain)
3. Property tax on dairy processing plant Product MOH
4. Gasoline used to operate refrigerated trucks used to deliver Period (distribution
finished dairy products to grocery stores element of value
chain)
5. Company president’s annual bonus Period
6. Depreciation on refrigerated trucks used to collect raw milk MOH (part of the
from dairy farms cost of acquiring
Product DM)
7. Plastic gallon containers in which milk is packaged Product DM
8. Research and Development on improving milk Period (R&D
pasteurization process element of value
chain)
9. Television advertisements for DairyPlains’ products Period
10. Lubricants used in running bottling machines Product MOH
11. Wages and salaries paid to machine operators at dairy
processing plant Product DL

(5 min.) S2-9

Frame Place
Computation of Total Manufacturing Overhead

Manufacturing overhead:
Plant depreciation expense $ 10,000
Plant supervisor’s salary 4,500
Plant janitor’s salary 1,200
Glue for picture frames* 200
Oil for manufacturing equipment 35
Total manufacturing overhead $15,935

*Assuming that it is not cost-effective to trace the low-cost glue to individual frames.
The following explanation is provided for instructional purposes, but it is not required.
Depreciation on company cars used by the sales force is a marketing expense, interest expense is a financing expense,
and the company president’s salary is an administrative expense. None of these expenses is incurred in the
manufacturing plant, so they are not part of manufacturing overhead.
The wood for frames is a direct material, not part of manufacturing overhead.

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting
(10 min.) S2-13
(5 min.) S2-10

Calculation of Cost of Goods Sold

Beginning inventory $ 3,600

Purchases $45,000
Import duties 700
Freight-in 3,300 49,000
Cost of goods available for sale 52,600
Less: Ending inventory (5,500)
Cost of goods sold $47,100

(5-10 min.) S2-11

Simply Hair
Income Statement
For the Year Ended
Sales revenue $39,225,000
Cost of goods sold:
Beginning inventory $ 2,500,000
Purchases 21,400,000
Cost of goods available for sale 23,900,000
Less: Ending inventory (3,245,000)
Less: Cost of goods sold (20,655,000)
Gross profit 18,570,000
Less: Operating expenses (6,850,000)
Operating income $ 11,720,000

(5 min.) S2-12

Thomas Bikes
Calculation of Direct Materials Used

Beginning raw materials inventory $ 4,100

Purchases of direct materials $16,400
Import duties 1,300
Freight-in 200 17,900
Direct materials available for use 22,000
Less: Ending raw materials inventory (1,900)
Direct materials used $20,100

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting
(10 min.) S2-13

Hansen Manufacturing
Schedule of Cost of Goods Manufactured

Beginning work in process inventory $ 79,500

Plus: manufacturing costs incurred:
Direct materials used $515,500
Direct labor 226,700
Manufacturing overhead 774,800 1,517,000
Total manufacturing costs to account for 1,596,500
Less: Ending work in process inventory (86,500)
Cost of goods manufactured $1,510,000

(10 min.) S2-14

Relevant quantitative information might include:

Difference in benefits
Difference in costs of food
Difference in salaries
Difference in costs of transportation
Difference in costs of housing

Relevant qualitative information might include:

Difference in job description
Difference in lifestyle
Difference in future career development opportunities
Proximity to family and friends
Difference in weather

Relevant information always pertains to the future and differs between alternatives.

Student responses may vary.

(10 min.) S2-15

a. Costs that differ between alternatives are called differential costs.

b. In the long-run, most costs are controllable, meaning that management is able to influence or change the
amount of the cost.
c. Sunk costs are costs that have already been incurred.
d. A marginal cost is the cost of making one more unit.
e. Gasoline is one of many variable costs in the operation of a motor vehicle.
f. A product’s fixed costs and variable costs, not the product’s average cost, should be used to forecast total
costs at different production volumes.

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting
(10 min.) S2-13
g. Within the relevant range, fixed costs do not change in total with changes in product volume.
h. The average cost per unit declines as a production facility produces more units.

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting
(10 min.) S2-13

(10 min.) S2-16

COST Variable or Fixed

a. Cost of coffee used at a Starbucks store Variable
b. Hourly wages paid to sales clerks at Best Buy Variable
c. Monthly flower costs for a florist Variable
d. Cost of fuel used for a national trucking company Variable
e. Shipping costs for Amazon.com Variable
f. Monthly rent for a nail salon Fixed
g. Sales commissions at a car dealership Variable
h. Monthly insurance costs for the home office of a company Fixed
i. Monthly depreciation of equipment for a customer service office Fixed
j. Cost of fabric used at a clothing manufacturer Variable
k. Cost of fruit sold at a grocery store Variable
l. Monthly office lease costs for a CPA firm Fixed
m. Monthly cost of French fries at a McDonald’s restaurant Variable
n. Property taxes for a restaurant Fixed
o. Depreciation of exercise equipment at the YMCA Fixed

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Managerial Accounting 4e Solutions Manual Chapter 2
Chris overhears a subordinate at a mutual friend's
party tell others about a confidential deal with a
supplier to get raw materials for a price lower than
market price. Chris does not do anything about the
1. subordinate's indiscrete conversation.
Maxwell pays a Mexican official a bribe of $50,000 to
allow the company to locate a factory in that
jurisdiction so that the company can take advantage
of the cheaper labor costs. Without the bribe, the
2. factory cannot be located in that location.
There is a failure in the company's backup systems
after a system crash. Month end reports will be
delayed. Mark, the manager of the division with the
system failure, does not report this upcoming delay to
anyone since he does not want to be the bearer of
3. bad news.
To reduce the company's tax bill, Jillian uses total cost
to value inventory instead of using product cost as
4. required by law.
Since Michael works in the accounting department,
he is aware that profits are going to fall short of
analysts' projections. He tells his father to sell stock
5. in the company before the earnings release date.
2- Copyright © 2015 Pearson Education, Inc.
10
Building Blocks of Managerial Accounting
(5 min.) S2-17
Confidentiality - Keep information
confidential except when disclosure is
authorized or legally required.
Integrity - Refrain from engaging in any
conduct that would prejudice carrying
out duties ethically.
Credibility - Disclose delays or
deficiencies in information, timeliness,
processing, or internal controls in
conformance with organization policy
and/or applicable law.
Competence - Perform professional
duties in accordance with relevant
laws, regulations, and technical
standards.
Confidentiality - Refrain from using
confidential information for unethical
or illegal advantage.
2-10
Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting
(5 min.) S2-17

Exercises (Group A)
(10-15 min.) E2-18A
Reqs. 1 and 2
Value Chain Cost Classification

Customer
R&D Design Purchases Marketing Distribution Service

Newspaper
advertisements $5,100
Payment to
consultant for
advice on location
of new store 2,900
Purchases of
merchandise $38,000
Freight-in 3,100
Salespersons’
salaries 4,800
Depreciation
expense on
delivery trucks $1,000
Research on
selling satellite
radio service $ 300
Customer
complaint
department $500
Rearranging store
layout $850

Total $3,200 $850 $41,100 $9,900 $1,000 $500

Req. 3
The total inventoriable product costs are $41,100.

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) E2-20A

(15 min.) E2-19A
Reqs. 1, 2, and 3

Value Chain Cost Classification

Production
Manufactur-
Direct Direct ing Customer
R&D Design Materials Labor Overhead Marketing Distribution Service

Salaries
Deliveryof
expense $7
salespeople $ 4
Chip set $56
Exterior case for
phone $ 9
Assembly-line
workers’ wages $10
Technical support
hotline $3
Depreciation on
plant and
equipment $60
Rearrange
production
process $ 2
1-800 (toll-free) line
for customer orders 5
Scientists’ salaries $11

-
Total costs $11 $ 2 $65 $10 $60 $9 $ 7 $ 3

Req. 4
Total inventoriable product costs:
Direct materials……………………………………… $ 65
Direct labor…………………………………………… 10
Manufacturing overhead…………………………… 60
Total inventoriable product cost…………………. $135

Req. 5
The total prime cost is:
Direct materials……………………………………… $ 65
Direct labor…………………………………………… 10
$ 75

Req. 6
The total conversion cost is:
Direct labor…………………………………………… $ 10
Manufacturing overhead…………………………… 60
$ 70

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) E2-20A

a. Design
b. Research and Development (R&D)
c. Distribution
d. Purchasing
e. Marketing
f. Customer Service
(15-20 min.) E2-21A
Req. 1

Other
DM DL IM IL MOH Period
a. Airplane seats $260
b. Production
supervisors’ $140
salaries
c. Depreciation on $80
forklifts
d. Machine lubricants $45
e. Factory janitors’ $20
wages
f. Assembly workers’
wages $660
g. Property tax on
corporate
marketing
offices $30
h. Plant utilities $130
i. Cost of warranty $225
repairs
j. Machine operators’
health insurance $40
k. Depreciation on
administrative $70
offices
l. Cost of designing
new plant layout $195
m. Jet engines $1,400
TOTAL $1,660 $700 $45 $160 $210 $520

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Managerial Accounting 4e Solutions Manual Chapter 2 Building Blocks of Managerial Accounting

(5-10 min.) E2-20A

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

= $45 + 160 + 210 = $415

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

= $1,660 + 700 + 415 = $2,775

Req. 4 Total prime costs = DM + DL

= $1,660 + 700 = $2,360

Req. 5 Total conversion costs = DL + MOH

= $700 + 415 = $1,115

Req. 6 Total period costs = $520

(10 min.) E2-22A

Current Assets

Current assets:
Cash $ 15,200
Accounts receivable 75,000
Inventories:
Raw materials inventory $9,700
Work in process inventory 35,000
Finished goods inventory 59,000
Total inventories 103,700
Prepaid expenses 5,500
Total current assets $199,400

The company must be a manufacturer, because it has three kinds of inventory: raw materials, work in process, and
finished goods.

2- Copyright © 2015 Pearson Education, Inc. 2-14

14
Another random document with
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 XIII
Then, at the drooping of the twilight hour,
We wander in the ancient plaza where
We breathe the attar of the jasmine flower
Like incense on the altar of the air;
And list, as music swells
Down drifting from the old cathedral tower,
The arpeggio of the bells.
 XIV
We linger by the sea-wall while the tide
Below us murmurs like a sad refrain,
Bearing from outer ocean reaches wide
The lore and legend of the Spanish main,
Nor leave that spot serene
Till Sleep, as with the mantle of the bride,
Wraps fair Saint Augustine.
 XV
Days dedicate to rapturous things were these;
It was as though Youth came again, and brought
Past aims, past ardors and past ecstasies,
And toward the shrine of Beauty turned our thought.
And there were after times
Of exultation, prismic harmonies,
When hours ran by in rhymes.
 XVI
Once, ’mid cathedral Carolinian pines,
We saw the Springtide, at its radiant birth,
Kindle to fragrant gold the coiling vines,
And make a garden of the wakened earth;
And every morning heard
Within the treetops, melody linked with mirth,
The hidden mocking-bird.
 XVII
And while the cardinal through the waving bredes
Of pendulous moss swift flitted like a flame,
Back flooded to our minds the illustrious deeds,
Emblazoned on the honor-scroll of Fame,
When Liberty was won,
Hearkening the Ashley whisper to its reeds
The name of Marion.
 XVIII
From Gloucester cliffs and brown Nantucket dunes
The mountains lured you, and the mountain star;
For us the Woodland sang its lyric runes
Where’er we followed it, or near or far,
In sun or shadow cool,
Or loitered through long languorous afternoons
By Dian’s darkling pool.
 XIX
Far up the valley Wittenberg’s vast form,
Its summit beckoning, with you I view,
And above sweeping slopes where wild bees swarm
Glimpse timid deer at dawn and fall of dew;
Through Panther Kill we roam,
And mark the purple streamers of the storm
Ascend behind the Dome.
 XX
And, too, in bookmen’s mines of dusty ore
Ever shall I remember how we delved,
Plucking from out the musty treasure-store
Rich rarities within the darkness shelved,
Elated if we found
Leaves that some name we long had honored bore
In frayed morocco bound.
 XXI
Thus, step by step, we trod adown the years,
Thus, side by side, with ne’er a break between;
We shared our laughter and we shared our tears,
Nor deemed inexorable Fate might intervene
To sever the strong cord
That bound us, Fate with its “abhorrèd shears,”
That is man’s over-lord.
 XXII
You that in Autumn came, in Autumn went;
How vain to say the mourning word! how vain
To beat the bars of that arbitrament
That metes to mortals pleasurement or pain!
How vain!—how vain!—and yet
We beat upon them, and we only gain
The poignance of regret!
 XXIII
Autumn again with all its loveliness;
Autumn again that brought an end to joy,
Despite the sight of earth in amber dress,
And airs that bear the blitheness of a boy!
Autumn, and leaves that toss
In bright brief triumphing, while they express
The brooding sense of loss.
 XXIV
Autumn again down every winding way
That, in the days gone by, our footsteps pressed!—
Instead of woven amaranth would I lay
Above your dust—you gone by paths unguessed—
Love’s deathless asphodel;
Until some happier hour,—when, who shall say?—
Brother in song, farewell!
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