Solution manual for introduction to managerial accounting 5th edition by brewer

In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.. The total costs incurred are adjusted for any change in the Work i

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Chapter 1

Managerial Accounting and Cost Concepts

Solutions to Questions

1-1 Managers carry out three major

activities in an organization: planning,

directing and motivating, and controlling

Planning involves establishing a basic

strategy, selecting a course of action, and

specifying how the action will be

implemented Directing and motivating

involves mobilizing people to carry out

plans and run routine operations

Controlling involves ensuring that the plan

is actually carried out and is appropriately

modified as circumstances change.

1-2 The planning and control cycle

involves formulating plans, implementing

plans, measuring performance, and

evaluating differences between planned

and actual performance.

1-3 In contrast to financial accounting,

managerial accounting: (1) focuses on the

needs of managers rather than outsiders;

(2) emphasizes decisions affecting the

future rather than the financial

consequences of past actions; (3)

emphasizes relevance rather than

objectivity and verifiability; (4)

emphasizes timeliness rather than

precision; (5) emphasizes the segments of

an organization rather than summary

data concerning the entire organization;

(6) is not governed by GAAP; and (7) is

not mandatory.

1-4 The three major elements of

1-5

a Direct materials are an integral part

of a finished product and their costs can

be conveniently traced to it.

b Indirect materials are generally

small items of material such as glue and nails They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience.

c Direct labor consists of labor costs

that can be easily traced to particular products Direct labor is also called “touch labor.”

d Indirect labor consists of the labor

costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to

particular products These labor costs are incurred to support production, but the workers involved do not directly work on the product.

e Manufacturing overhead includes all

manufacturing costs except direct materials and direct labor Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.

1-6 A product cost is any cost involved

in purchasing or manufacturing goods In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead A period cost is a cost that is taken directly

1-7 The income statement of a

manufacturing company differs from the

income statement of a merchandising

company in the cost of goods sold section.

A merchandising company sells finished

goods that it has purchased from a

supplier These goods are listed as

“purchases” in the cost of goods sold

section Because a manufacturing

company produces its goods rather than

buying them from a supplier, it lists “cost

of goods manufactured” in place of

“purchases.” Also, the manufacturing

company identifies its inventory in this

section as Finished Goods inventory,

rather than as Merchandise Inventory.

1-8 The schedule of cost of goods

manufactured lists the manufacturing

costs that have been incurred during the

period These costs are organized under

the three categories of direct materials,

direct labor, and manufacturing

overhead The total costs incurred are

adjusted for any change in the Work in

Process inventory to determine the cost of

goods manufactured (i.e finished) during

the period.

The schedule of cost of goods

manufactured ties into the income

statement through the cost of goods sold

section The cost of goods manufactured

is added to the beginning Finished Goods

inventory to determine the goods

available for sale In effect, the cost of

goods manufactured takes the place of

the Purchases account in a merchandising

firm.

1-9 A manufacturing company usually

has three inventory accounts: Raw

Materials, Work in Process, and Finished

Goods A merchandising company may

have a single inventory account—

Merchandise Inventory.

1-10 Product costs are assigned to units

as they are processed and hence are

included in inventories The flow is from

direct materials, direct labor, and

manufacturing overhead to Work in

Process inventory As goods are

completed, their cost is removed from

Work in Process inventory and transferred

to Finished Goods inventory As goods are sold, their cost is removed from Finished Goods inventory and transferred to Cost of Goods Sold Cost of Goods Sold is an expense on the income statement.

Full file at Introduction-to-Managerial-Accounting-5th-Edition-by-Brewer

http://testbanksstore.eu/Solution-Manual-for-1-11 Yes, costs such as salaries and

depreciation can end up as part of assets

on the balance sheet if they are

manufacturing costs Manufacturing costs

are inventoried until the associated

finished goods are sold Thus, if some

units are still in inventory, such costs may

be part of either Work in Process inventory

or Finished Goods inventory at the end of

the period.

1-12 No A variable cost is a cost that

varies, in total, in direct proportion to

changes in the level of activity The

variable cost per unit is constant A fixed

cost is fixed in total, but the average cost

per unit changes with the level of activity.

1-13 A differential cost is a cost that

differs between alternatives in a decision

An opportunity cost is the potential benefit

that is given up when one alternative is

selected over another A sunk cost is a

cost that has already been incurred and

cannot be altered by any decision taken

now or in the future.

1-14 No, differential costs can be either

variable or fixed For example, the

alternatives might consist of purchasing

one machine rather than another to make

a product The difference between the

fixed costs of purchasing the two

machines is a differential cost.

Brief Exercise 1-1 (10 minutes)

1 Directing and motivating

Brief Exercise 1-2 (10 minutes)

1 The cost of a hard drive installed in a computer: direct

materials

2 The cost of advertising in the Puget Sound Computer User

newspaper: selling

3 The wages of employees who assemble computers from

components: direct labor

4 Sales commissions paid to the company’s salespeople: selling

5 The wages of the assembly shop’s supervisor: manufacturing overhead

6 The wages of the company’s accountant: administrative

7 Depreciation on equipment used to test assembled computers before release to customers: manufacturing overhead

8 Rent on the facility in the industrial park: a combination of

manufacturing overhead, selling, and administrative The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, selling, and administrative operations

Brief Exercise 1-3 (15 minutes)

Produc

t Cost

Perio d Cost

1 Depreciation on salespersons’ cars X

2 Rent on equipment used in the factory X

3 Lubricants used for machine maintenance X

4 Salaries of personnel who work in the finished

goods warehouse X

5 Soap and paper towels used by factory

workers at the end of a shift X

6 Factory supervisors’ salaries X

7 Heat, water, and power consumed in the

factory X

8 Materials used for boxing products for

shipment overseas (units are not normally

14 The cost of renting rooms at a Florida resort

for the annual sales conference X

15 The cost of packaging the company’s product X

Brief Exercise 1-4 (15 minutes)

CyberGamesIncome Statement

Sales $1,450,00

0Cost of goods sold:

Beginning merchandise inventory $ 240,00

0Add: Purchases 950,000

Goods available for sale 1,190,000

Deduct: Ending merchandise

inventory 170,000 1,020,000Gross margin 430,000Selling and administrative expenses:

Selling expense 210,000

Administrative expense 180,000 390,00

0Net operating income $ 40,00

0

Brief Exercise 1-5 (15 minutes)

Lompac ProductsSchedule of Cost of Goods ManufacturedDirect materials:

Beginning raw materials inventory $ 60,00

0Add: Purchases of raw materials 690,00

0Raw materials available for use 750,000

Deduct: Ending raw materials

inventory 45,000

Raw materials used in production $ 705,00

0Direct labor 135,000

Manufacturing overhead 370,00

0Total manufacturing costs 1,210,000

Add: Beginning work in process

inventory 120,000

1,330,000Deduct: Ending work in process

inventory 130,000

Cost of goods manufactured $1,200,00

0

Brief Exercise 1-6 (15 minutes)

A few of these costs may generate debate For example, some may argue that the cost of advertising a rock concert is a variable cost because the number of people who come to the rock concert depends on the amount of advertising However, one can argue that if the price is within reason, any rock concert in New York City will be sold out and the function of advertising is simply to let

people know the event will be happening Moreover, while

advertising may affect the number of persons who ultimately buy tickets, the causation is in one direction If more people buy

tickets, the advertising costs don’t go up

Cost Behavior Cost (Measure of Activity) Variabl

e

Fixe d

1.The cost of X-ray film used in the radiology lab

at Virginia Mason Hospital in Seattle (Number

of X-rays taken) X

2.The cost of advertising a rock concert in New

York City (Number of rock concert tickets sold) X3.The cost of renting retail space for a McDonald’s

restaurant in Hong Kong (Total sales at the

restaurant) X4.The electrical cost of running a roller coaster at

Magic Mountain (Number of times the roller

coaster is run) X

5.Property taxes paid by your local cinema

theater (Number of tickets sold) X6.The cost of sales commissions paid to

salespersons at a Nordstrom store (Total sales

at the store) X

7.Property insurance on a Coca Cola bottling plant

(Number of cases of bottles produced) X8.The costs of synthetic materials used to make a

10.The cost of leasing an ultra-scan diagnostic

machine at the American Hospital in Paris

(Number of patients scanned with the

machine) X

Brief Exercise 1-7 (15 minutes)

Cost Cost Object Direct Cost Indirec t Cost

Brief Exercise 1-8 (15 minutes)

1 Cost of the old X-ray

Cost of electricity to run the X-ray machines X

Note: The costs of the salaries of the head of the Radiology

Department and Pediatrics Department and the rent on the space occupied by Radiology are neither differential costs, nor

opportunity costs, nor sunk costs These costs do not differ

between the alternatives and therefore are irrelevant in the

decision, but they are not sunk costs because they occur in the future

6 Period cost; variable cost

7 Product cost; period cost; fixed cost

installed in BMWs.

Exercise 1-11 (30 minutes)

1

Mason CompanySchedule of Cost of Goods Manufactured

Direct materials:

Beginning raw materials inventory $ 7,000

Add: Purchases of raw materials 118,000

Raw materials available for use 125,000

Deduct: Ending raw materials inventory 15,000

Raw materials used in production $110,00

0Direct labor 70,000Manufacturing overhead 80,000Total manufacturing costs 260,000Add: Beginning work in process inventory 10,000

270,000Deduct: Ending work in process inventory 5,000Cost of goods manufactured $265,00

0

2 The cost of goods sold section of Mason Company’s income statement:

Beginning finished goods inventory $ 20,000

Add: Cost of goods manufactured 265,000

Goods available for sale 285,000

Deduct: Ending finished goods

inventory 35,000

Cost of goods sold $250,00

0

Exercise 1-12 (30 minutes)

1 a.Batteries purchased 8,000

Batteries drawn from inventory 7,600Batteries remaining in inventory 400Cost per battery × $10Cost in Raw Materials Inventory at April 30 $4,000

b.Batteries used in production (7,600 – 100) 7,500Motorcycles completed and transferred to Finished

Goods (90% × 7,500) 6,750Motorcycles still in Work in Process at April 30 750Cost per battery × $10Cost in Work in Process Inventory at April 30 $7,500

c.Motorcycles completed and transferred to Finished

Goods (see above) 6,750Motorcycles sold during the month

(70% × 6,750) 4,725Motorcycles still in Finished Goods at April 30 2,025Cost per battery × $10Cost in Finished Goods Inventory at April 30 $20,250

d.Motorcycles sold during the month (above) 4,725Cost per battery × $10Cost in Cost of Goods Sold at April 30 $47,250

e.Batteries used in salespersons’ motorcycles 100Cost per battery × $10Cost in Selling Expense at April 30 $ 1,000

2 Raw Materials Inventory—balance sheet

Work in Process Inventory—balance sheet

Finished Goods Inventory—balance sheet

Cost of Goods Sold—income statement

Selling Expense—income statement

Problem 1-13A (30 minutes)

Note to the Instructor: There may be some exceptions to the answers below The purpose of

this problem is to get the student to start thinking about cost behavior and cost purposes;

try to avoid lengthy discussions about how a particular cost is classified

Cost Item Fixed Cost Cost Direc t Indirect

2 Boxes used for packaging detergent

3 Salespersons’ commissions V X

5 Depreciation, executive autos F X

6 Wages of workers assembling

computers V X

7 Insurance, finished goods warehouses F X

9 Advertising costs F X

10 Microchips used in producing

calculators V X

11 Shipping costs on merchandise sold V X

12 Magazine subscriptions, factory

13 Thread in a garment factory V X

14 Billing costs V X*

15 Executive life insurance F X

Problem 1-13A (continued)

Cost Item Fixed Cost Cost Direc t Indirect

19 Wages of receptionist, executive

offices F X

* Could be administrative cost

** Could be indirect cost

Problem 1-14A (30 minutes)

Product Cost

Period (Sellin

Direct Material s

Direc t Labor

facturing Overhea d

Manu-and Admin ) Cost

Oppor - tunity Cost

Sun k Cost

Rental revenue forgone,

Depreciation of the annex

Advertising cost, $50,000 per

$3,000 per year

Problem 1-15A (30 minutes)

Cost Behavior

To Units of Product Cost Item Variable Fixed Direct Indirect

2 Rent on a factory building X X

3 Cloth used to make drapes X X

4 Production superintendent’s salary X X

5 Wages of laborers assembling a product X X

6 Depreciation of air purification equipment used

to make furniture X X

7 Janitorial salaries X X

8 Peaches used in canning fruit X X

10 Sugar used in soft drink production X X

11 Property taxes on the factory X X

12 Wages of workers painting a product X X

13 Depreciation on cafeteria equipment X X

14 Insurance on a building used in producing

helicopters X X

15 Cost of rotor blades used in producing

helicopters X X

Problem 1-16A (45 minutes)

1

Swift CompanySchedule of Cost of Goods ManufacturedFor the Month Ended August 31

Direct materials:

Raw materials inventory, August 1 $ 8,00

0Add: Purchases of raw materials 165,00

0Raw materials available for use 173,000

Deduct: Raw materials inventory,

August 31 13,000

Raw materials used in production $160,000Direct labor 70,000Manufacturing overhead 85,000Total manufacturing costs 315,000Add: Work in process inventory, August 1 16,000

331,000Deduct: Work in process inventory,

August 31 21,000Cost of goods manufactured $310,000

2

Swift CompanyIncome StatementFor the Month Ended August 31

Sales $450,00

0Cost of goods sold:

Finished goods inventory, August 1 $ 

40,000Add: Cost of goods manufactured 310,00

0Goods available for sale 350,000

Deduct: Finished goods inventory,

August 31 60,000 290,000

Gross margin 160,000Selling and administrative expenses 142,000Net operating income $ 

18,000

Problem 1-16A (continued)

3 In preparing the income statement for August, Sam 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 Once these errors have been corrected, the financial condition of the company looks much better and selling the company may not be advisable

Problem 1-17A (15 minutes)

1 The controller is correct that the salary cost should be classified

as a selling (marketing) cost The duties described in the

problem have nothing to do with manufacturing a product, but

rather deal with moving finished units from the factory to

distribution warehouses Selling 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

(product) cost, it will be added to Work in Process inventory along with other manufacturing costs for the period To the

extent that goods are still in process at the end of the period, part of the salary cost will remain with these goods in the Work

in Process inventory account Only that portion of the salary costthat has been assigned to finished units will leave the Work in Process inventory account and be transferred into the Finished Goods inventory account In like manner, to the extent that

goods are unsold at the end of the period, part of the salary costwill remain with these goods in the Finished Goods inventory account Only 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 expense (part of Cost of Goods Sold) for the period The remainder of the salary costs will be onthe balance sheet as part of inventories

Problem 1-18A (45 minutes)

1

Meriwell CompanySchedule of Cost of Goods Manufactured

Direct materials:

Raw materials inventory, beginning $  9,000

Add: Purchases of raw materials 125,000

Raw materials available for use 134,000

Deduct: Raw materials inventory,

ending 6,000

Raw materials used in production $128,000Direct labor 70,000Manufacturing overhead 105,000Total manufacturing costs 303,000Add: Work in process inventory,

beginning 17,000

320,000Deduct: Work in process inventory,

ending 30,000Cost of goods manufactured $290,000

2

Meriwell CompanyIncome Statement

Sales $500,000Cost of goods sold:

Finished goods inventory, beginning $ 20,000

Add: Cost of goods manufactured 290,000

Goods available for sale 310,000

Deduct: Finished goods inventory,

ending 40,000 270,000Gross margin 230,000Selling and administrative expenses:

Selling expenses 80,000

Administrative expenses 110,000 190,000

Net operating income $ 40,000