Chapter 10 – An Introduction to Management Accounting
10-1
Teaching Notes for Chapter 10
Managerial accounting requires teaching methods different from those used in
financial accounting. In the introductory financial accounting course, instructors teach
students about accounting standards. A primary goal in teaching managerial accounting
is to develop students’ conditional assessment skills (critical thinking skills). For
example, in a later chapter, students are frequently confused by the fact that, in different
situations, a given cost can be classified as fixed or variable, direct or indirect, relevant or
not relevant. The salary cost of store managers may be fixed with respect to the number
of customers that enter their stores. However, managers’ salary cost is variable relative
to the number of stores a company operates. A manager’s salary cost is directly traceable
to a particular store but not traceable to a sale occurring in the store. Students must learn
to assess the conditions that determine cost classification. Chapter 10 offers the first
opportunity to develop the students’ conditional assessment skills. Here, students learn
that depreciation can be classified as an asset or an expense depending on certain
conditions. If a depreciable asset is used to produce inventory, the depreciation cost will
first be classified as an asset (inventory) and later as an expense (cost of goods sold). If
the depreciable asset is used to support selling and administrative activities, depreciation
will be reported directly on the income statement as depreciation expense.
Students typically enter managerial accounting with rigid ideas about expense
recognition. In financial accounting they learned that depreciation and employee
compensation costs are expensed directly on the income statement. The idea that
depreciation related to manufacturing equipment and wages of production workers will
pass through an inventory account before being expensed as cost of goods sold is
contrary to their existing knowledge base. Expanding that knowledge base requires a
significant commitment of teaching time. Your students are developing their analytical
skills. They are learning how to assess the conditions that influence cost classification.
This type of learning requires more time than merely memorizing definitions. If you
sometimes feel that progress is too slow, remember that you are building a foundation
upon which subsequent learning will rest. There is no more important teaching task than
helping students form a sound conceptual framework. We recommend using
approximately three hours of class time for Chapter 10.
Chapter 10 – An Introduction to Management Accounting
10-2
Detailed Outline of a Lesson Plan for Chapter 10
A comprehensive lesson plan for the first day of class begins in the Introduction to this manual. Please
read it before implementing steps II-VIII of the following lesson plan.
I. Distinguish between managerial and financial accounting. The best way to
differentiate between managerial and financial accounting is to highlight
differences where they occur in the subject matter throughout the course. For
example, when using estimated data in a decision-making context, point out that
managerial accounting is future-oriented rather than historically based. A long
monologue about the differences between financial and managerial accounting
will only bore your students. In a brief introduction to this topic, you might
discuss the information needs for internal users (managers) to plan, direct, and
control. The information needed by a manager depends on his/her position in the
organization and the particular decision facing the manager. If you want to spend
more time on the topic, Exercise 10-1 from the end-of-chapter materials in the
text might be an appropriate in-class activity at this point.
II. Use Demonstration Problem 10-1 as a problem-based learning exercise. (See
the introduction to this manual for details about problem-based learning.)
III. After giving the students a few minutes to digest the problem and formulate
solutions, engage them in some form of collaborative learning experience.
IV. Introduce the concept of product costing by providing the solution to
requirement (a) of Demonstration Problem 10-1.
V. Continuing Demonstration Problem 10-1, determine the cost per unit and the
sales price using a cost-plus pricing strategy.
VI. Show how product costs are expensed through cost of goods sold.
VII. Introduce the cost category of general, selling, and administrative costs
(GS&A costs).
VIII. Use Problem 10-19 as an in-class reinforcement exercise.
IX. Copy and distribute Demonstration Problem 10-2. Demonstration Problem
10-2 expands the classification concepts introduced in Demonstration Problem
10-1 to include accounting for the depreciation of manufacturing equipment.
Explain that depreciation on manufacturing facilities and equipment is a product
cost. Point out that the entry to record depreciation on manufacturing equipment
represents an asset exchange transaction. The book value of manufacturing
equipment decreases, and the balance in the Inventory account increases.
Chapter 10 – An Introduction to Management Accounting
10-3
Students are so accustomed to the idea that depreciation is an expense, they are
not likely to grasp the product cost concept until they work a problem. After your
explanation, assign Demonstration Problem 10-2 to students and have them
attempt to work the problem. Students should be able to work the problem with
minimal help. Walk around the room; if you find that students are having trouble,
help as needed.
If you desire further reinforcement of product versus GS&A cost classifications,
see Problem 10-21. Students may need help getting started with these problems.
X. Discuss the importance of product costing in real-world businesses. Students
are interested in how product costing affects real-world decision-making. After
showing them how the classification of costs as product versus general, selling,
and administrative can affect the amounts reported in a company’s balance sheet
and income statement, we discuss how the amounts reported in the financial
statements can affect business decisions. Specifically, we discuss the implications
for acquiring capital or debt, the potential effect on executive compensation, and
the impact on income taxes. To address these issues we suggest you use Problem
10-22 as a demonstration problem. Then, you may wish to use Problem 10-23 as
a homework problem.
XI. The Appendix provides a brief introduction to emerging trends in
managerial accounting including benchmarking, total quality management,
activity-based management, and value chain analysis. If you are running short
of time, you may minimize the time you allocate to these subjects. If you wish to
cover these topics, we suggest that you use a problem from the end-of-chapter
materials, like Problem 10-27 on value chain analysis, in the text as a
demonstration problem. Then you may wish to use ATC Problem 10-4 as a
homework problem.
Summary Outline of a Lesson Plan for Chapter 10
I. Distinguish between managerial and financial accounting by discussing the
differences as they emerge in problems and exercises throughout the course.
II. Use Demonstration Problem 10-1 as a problem-based learning exercise.
III. After giving the students a few minutes to digest the problem and formulate
solutions, engage them in some form of collaborative learning experience.
IV. Introduce the concept of product costing by providing the solution to
requirement a of Demonstration Problem 10-1.
V. Determine the cost per unit and the sales price using a cost-plus pricing
strategy.
Chapter 10 – An Introduction to Management Accounting
10-4
VI. Show how product costs are expensed through cost of goods sold.
VII. Introduce the cost category of general, selling, and administrative costs
(GS&A costs).
VIII. Use Problem 10-19 as an in-class reinforcement exercise.
IX. Copy and distribute Demonstration Problem 10-2. Demonstration Problem
10-2 expands the classification concepts introduced in Demonstration Problem
10-1 to include accounting for depreciation of manufacturing equipment.
X. Discuss the importance of product costing in real-world businesses. Discuss
the implications for acquiring capital or debt, the potential effect on executive
compensation, and the impact on income taxes. Use Problem 10-22 as a
demonstration problem. Use Problem 10-23 as a homework problem.
XI. The chapter provides a brief introduction to emerging trends in managerial
accounting including benchmarking, total quality management, activity-
based management, and value chain analysis. Cover these topics to the extent
that time allows.
Quiz Questions for Chapter 10
1. Waverly Company paid $5,000 cash for wages of production workers. This business event would:
a. increase total assets and total equity.
b. increase one asset account and decrease another asset account.
c. decrease total assets and total equity.
d. decrease one asset account and increase an equity account.
2. Warren Company makes candy. During the most recent accounting period, Warren paid $3,000 for
raw materials, $4,000 for labor, and $2,000 for overhead costs that were incurred to make candy.
Warren started and completed 10,000 units of candy, of which 7,000 were sold. Based on this
information, Warren would recognize which of the following amounts of expense on the income
statement?
a. $2,700
b. $6,300
c. $7,200
d. $9,000.
3. Bandera Manufacturing Company paid cash for wages of production workers. Which of the
following choices accurately reflects how this event would affect the company’s financial
statements?
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
a.
+ ─
NA
NA
NA
+
─
b.
─
NA
─
NA
+
─
c.
+ ─
NA
NA
NA
NA
NA
d.
─
NA
─
NA
NA
NA
10-5
4. Carson Manufacturing Company paid cash for commissions paid to sales staff. Which of the
following choices accurately reflects how this event would affect the company’s financial
statements?
Assets
=
Liab.
+
Equity
Rev.
─
Exp.
=
Net Inc.
a.
+ ─
NA
NA
NA
NA
NA
b.
─
NA
─
NA
+
─
c.
─
NA
─
NA
NA
NA
d.
+ ─
NA
NA
NA
+
─
5. Shelling Company owns $30,000 of manufacturing equipment. The equipment has a 10-year useful
life and a $6,000 salvage value. Shelling uses straight-line depreciation. During the most recent
annual accounting period the company made 1,200 units of product. Assuming Shelling sold 1,000
units of product, the amount of depreciation that would be included in cost of goods sold is:
a. zero.
b. $3,000
c. $2,500
d. $2,000
6. Which of the following items is not a product cost?
a. Cash paid for wages of production workers.
b. Cash paid for salary of production supervisor.
c. Cash paid for wages of a maintenance crew that cleans the manufacturing facility.
d. All of the above are product costs.
7. Consolidated Company makes cardboard boxes. During the most recent accounting period
Consolidated paid $60,000 for raw materials, $48,000 for labor, and $52,000 for overhead costs that
were incurred to make boxes. Consolidated Company started and completed 400,000 boxes. Based
on this information, what is the average manufacturing cost per box?
a. $0.40
b. $0.56
c. $0.50
d. $0.27
8. Consolidated Company makes cardboard boxes. During the most recent accounting period
Consolidated paid $60,000 for raw materials, $48,000 for labor, and $52,000 for overhead costs that
were incurred to make boxes. Consolidated Company started and completed 400,000 boxes.
Consolidated desires to earn a gross margin that is equal to 40% of product cost. Based on this
information the selling price per box is:
a. $0.40
b. $0.56
c. $0.50
d. $0.70
9. Which of the following is a characteristic of managerial accounting information?
a. It is historically based.
b. It involves continuous reporting.
c. It is regulated by the SEC.
d. It is directed to external users.
10. Pearson and Associates provides auditing and tax services to its clients. During the most recent
annual accounting period, Pearson provided 40,000 hours of auditing service and 50,000 hours of tax
service. During the same accounting period, the company incurred $900,000 of overhead costs.
Chapter 10 – An Introduction to Management Accounting
10-6
Based on this information, a client job that required 800 hours of tax services should be allocated
which of the following amounts of overhead?
a. $8,000
b. $5,000
c. $3,200
d. $4,000
Solutions to Quiz Questions
Question
Answer
1
B
2
B
3
C
4
B
5
D
6
D
7
A
8
B
9
B
10
A
Demonstration Problems for Chapter 10
Demonstration Problem 10-1 Identifying Product Costs
Eiffel Manufacturing Company makes small replicas of major landmarks that it sells to
souvenir shops. The company was started on January 1, 2014, when it acquired $60,000
cash from the issue of common stock. During 2014, the company purchased and used
raw materials that cost $16,000 cash. It paid wages of $22,000 cash to the workers who
made the replicas. Finally, manufacturing overhead costs, including rental fees paid for
facilities and equipment, amounted to $12,000 cash. The company started and completed
the production of 1,000 replicas during 2014.
Chapter 10 – An Introduction to Management Accounting
10-7
Required
a. Determine the amount of expense Eiffel incurred in 2014, assuming none of the
replicas was sold in 2014.
b. Record the accounting events associated with making the 1,000 replicas in a financial
statements model like the one shown below. The event pertaining to the issue of
common stock is recorded in the model as an example.
Assets
=
Equity
Com.
Ret.
Events
Cash
+
Inv.
=
Stk.
+
Ear.
Rev.
–
Exp.
=
Net Inc.
1
60,000
+
=
60,000
+
–
=
c. Determine the cost per unit of the 1,000 replicas. Determine the sales price per unit
assuming the products are sold for cost plus 40% of cost.
d. Record the sale of 800 replicas.
e. Record the payment of a $4,000 sales commission to the salesperson who sold the
replicasDemonstration Problem 10-2 Effect of Product and
Period Costs
Klyn Manufacturing Company experienced the following accounting events during its
first year of operation. Except for the depreciation adjusting entries, all transactions are
cash transactions.
1. Acquired $50,000 cash from the issue of common stock.
2. Paid $6,800 for the materials that were used to make its products. All products
started were completed during the period.
3. Paid salaries of $4,300 to selling and administrative employees.
4. Paid wages of $7,200 to production workers.
5. On January 1, paid $9,000 to buy furniture used in selling and administrative offices.
6. Recorded annual depreciation on the furniture referred to in Event 5. The furniture
had a $1,000 estimated salvage value and a 5-year useful life.
7. On January 1, paid $23,000 to buy manufacturing equipment.
8. Recorded annual depreciation on the equipment referred to in Event 7. It had a
$3,000 estimated salvage value and a 4-year useful life.
9. Completed 4,000 units of product. Determine the cost per unit and the sales price per
unit assuming the sales price is cost plus 60% of cost. Record the sale of 3,000 units
of product.
10. Code the recognition of cost of goods sold for the units sold in Event 9.
Required
Show how these events would affect the balance sheet and income statement by
recording them in a horizontal financial statements model like the one shown below. The
first event is recorded as an example.
Chapter 10 – An Introduction to Management Accounting
10-8
Horizontal Statements Model
Assets
=
Equity
Event
Office
Manuf.
Com.
Ret.
No.
Cash
+
Furn.*
+
Equip.
*
+
Inv.
=
Stk.
+
Ear.
Rev.
–
Exp.
=
Net Inc.
1
50,000
50,000
SOLUTIONS TO
DEMONSTRATION PROBLEMS
Demonstration Problem 10-1 Solution
a. The amount of expense is zero. All of the costs are product
Assets
=
Equity
Com.
Ret.
Events
Cash
+
Inv.
=
Stk.
+
Ear.
Rev.
–
Exp.
=
Net Inc.
1
60,000
+
=
60,000
+
–
=
2
(16,000)
+
16,000
=
+
–
=
3
(22,000)
+
22,000
=
+
–
=
4
(12,000)
+
12,000
=
+
–
=
5
56,000
+
=
+
56,000
56,000
–
=
56,000
6
+
(40,000)
=
+
(40,000)
–
40,000
=
(40,000)
7
(4,000)
+
=
+
(4,000)
–
4,000
=
(4,000)
Totals
62,000
+
10,000
=
60,000
+
12,000
56,000
–
44,000
=
12,000
(5) Sales Revenue ($70 x 800 units = $56,000)
(6) Cost of Goods Sold ($50 x 800 units = $40,000)
c. Product costs ($16,000 + $22,000 + $12,000) ÷ 1,000 units =
$50 per unit.
Chapter 10 – An Introduction to Management Accounting
10-9
Horizontal Statements Model
Assets
=
Equity
Event
Office
Manuf.
Inv.
Com.
Ret.
No.
Cash
+
Furn.*
+
Equip.*
=
Stk.
+
Ear.
Rev.
–
Exp.
=
Net Inc.
1
50,000
+
+
+
=
50,000
+
–
=
2
(6,800)
+
+
+
6,800
=
+
–
=
3
(4,300)
+
+
+
=
+
(4,300)
–
4,300
=
(4,300)
4
(7,200)
+
+
+
7,200
=
+
–
=
5
(9,000)
+
9,000
+
+
=
+
–
=
6
+
(1,600)
+
+
=
+
(1,600)
–
1,600
=
(1,600)
7
(23,000)
+
+
23,000
+
=
+
–
=
8
+
+
(5,000)
+
5,000
=
+
–
=
9
22,800
+
+
+
=
+
22,800
22,800
–
=
22,800
10
+
+
+
(14,250)
=
+
(14,250)
–
14,250
=
(14,250)
Totals
22,500
+
7,400
+
18,000
+
4,750
=
50,000
+
2,650
22,800
–
20,150
=
2,650
The cost per unit is $4.75 [($6,800 + $7,200 + $5,000) ÷ 4,000
units].
WORK PAPERS FOR
DEMONSTRATION PROBLEMS
Demonstration Problem 10-1 Work Papers
b. d. e. Horizontal Statements Model
Chapter 10 – An Introduction to Management Accounting
10–10
Assets
=
Equity
Com.
Ret.
Events
Cash
+
Inv.
=
Stk.
+
Ear.
Rev.
–
Exp.
=
Net Inc.
1
60,000
+
=
60,000
+
–
=
2
3
4
5
6
7
Totals
62,000
+
10,000
=
60,000
+
12,000
56,000
–
44,000
=
12,000
Demonstration Problem 10-2 Work Papers
Horizontal Statements Model
Assets
=
Equity
Event
Office
Manuf.
Com.
Ret.
No.
Cash
+
Furn.*
+
Equip.
*
+
Inv.
=
Stk.
+
Ear.
Rev.
–
Exp.
=
Net Inc.
1
50,000
+
+
+
=
50,000
+
–
=
2
+
+
+
=
+
–
=
3
+
+
+
=
+
–
=
4
+
+
+
=
+
–
=
5
+
+
+
=
+
–
=
6
+
+
+
=
+
–
=
7
+
+
+
=
+
–
=
8
+
+
+
=
+
–
=
9
+
+
+
=
+
–
=
10
+
+
+
=
+
–
=
Totals
22,500
+
7,400
+
18,000
+
4,750
=
50,000
+
2,650
22,800
–
20,150
=
2,650