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Chapter 10 - Management Accounting: A Value-added Discipline
Answers to questions
1. Financial accounting deals with regulated, historical, financial information that
pertains to the whole company and is designed primarily to meet the information
2. The value-added principle means that management accountants are free to engage in
any information gathering and reporting activity so long as the activity adds value in
3. Both financial and managerial accountants need cost information about the
company’s products and services. In managerial accounting, cost information is
useful in product pricing decisions and is an essential part of cost control (comparing
4. A cost that has the future economic potential to increase assets is recorded as an asset
5. The cash paid to production workers is not used to produce revenue but to produce
6. Product costs associated with goods that have not been sold are recorded in the
account called inventory. Inventory cost is shown on the balance sheet as an asset.
7. An indirect product cost is a cost that cannot be easily or economically traced to a
specific product. Product costs that would be considered indirect include costs such
8. Product costs are all costs incurred to obtain a product or provide a service. These
costs are treated as assets, recorded in inventory, and expensed when the associated
products are sold. Period costs are all costs not associated with a product. They are
9. The effects of cost classification on the financial statements can have important
implications for managers with respect to the following:
(1) Availability of financing - Investors and creditors use financial statement data
to predict businesses’ future earnings. Favorable financial statements provide
evidence of favorable future performance whereas unfavorable financial
statements are an indication of possible poor future financial performance. A
and equity, enhances businesses’ ability to obtain financing.
(2) Management motivation - Executive compensation may be affected by
financial statement data. Many managers’ bonuses are based on a percentage
(3) Income tax considerations - With respect to taxes, managers prefer to classify
10. Cost allocation is the process of dividing a total cost into parts and assigning the parts
to relevant cost objects. A production manager is usually in charge of the
11. Some of the more common ethical conflicts encountered by accountants include the
following:
12. A pricing decision must include all costs associated with the product. The
manufacturing product cost as well as all upstream costs (costs that occur before the
13. JIT inventory system is a reengineering principle where inventory is made available
for customer consumption at the time of customer demand. A JIT inventory system
eliminated.
14. The two dimensions of the TQM program are: (1) management should follow a
continuous, systematic problem solving philosophy that engages all employees to eliminate
15. Reengineering is the term used to explain companies’ responses to world-wide
companies by changing production and delivery systems so as to eliminate waste,
16. In recognition of its responsibility to uphold high ethical standards of conduct, the
Institute of Management Accountants issued a Statement of Ethical Professional
17. Activity-based management assesses the value chain of an organization’s business
18. A value chain is the sequence of activities through which an organization provides
19. A value-added activity is any unit of work that contributes to a product’s ability to
satisfy customer needs. Value-added activities include the following:
(1) Input activities - research and development, product design, and hiring and
training.
Nonvalue-added activities are tasks undertaken that do not contribute to a product’s
ability to satisfy customer needs. Examples would include the following:
Exercise 10-1
Managerial Accounting
Financial Accounting
a.
X
b.
X
c.
X
d.
X
e.
X
f.
X
g.
X
h.
X
i.
X
j.
X
Exercise 10-2
Product Cost
General, Selling, and
Administrative Cost
a.
X
b.
X
c.
X
d.
X
e.
X
f.
X
g.
X
h.
X
i.
X
j.
X
Exercise 10-3
Cost Category
Product /
GS&A
Asset /
Expense
Utilities used in a manufacturing facility
Product
Asset
Cars for sales staff
SG&A
Asset
Real estate tax levied on a factory
Product
Asset
General office supplies
SG&A
Asset
Raw materials used in the manufacturing process
Product
Asset
Costs to rent office equipment
SG&A
Expense
Wages of production workers
Product
Asset
Advertising costs
SG&A
Expense
Promotion costs
SG&A
Expense
Production supplies
Product
Asset
Depreciation on administration building
SG&A
Expense
Depreciation on manufacturing equipment
Product
Asset
Research and development costs
SG&A
Expense
Cost to set up manufacturing equipment
Product
Asset
Exercise 10-4
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
1.
NA
+
–
NA
+
–
NA
2.
+
+
NA
NA
NA
NA
NA
Exercise 10-5
Assets
=
Equity
Event
Manuf.
Office
Com.
Ret.
No.
Cash
+
Inventory
+
Equip.
+
Furn.
=
Stk.
+
Earn.
Rev.
–
Exp.
=
Net Inc.
Cash Flow
1.
NA
NA
NA
D
NA
D
NA
I
D
NA
2.
NA
I
D
NA
NA
NA
NA
NA
NA
NA
Exercise 10-6
a. The three main components of product cost for a manufacturing entity are direct
materials, direct labor, and manufacturing overhead.
b. The product cost in a merchandising company, such as a retail toy store, is
relatively easy to determine. It includes vendor’s price charged on the invoice,
freight cost, and other necessary costs to make the inventory available for sale.
c. If each product is given a fixed amount of space for display, it is possible to use
the percentage of space occupied by each product to allocate the rental cost.
The salary of the store manager cannot be allocated to individual products easily,
Exercise 10-7
a. Payroll costs that would be classified as selling, general, and administrative
expense include the following:
Salary of the company president
$ 40,000
Salary of the chief financial officer
20,000
Salary of the vice president of marketing
18,000
Salaries of administrative secretaries
60,000
Commissions paid to sales staff
252,000
Total
$390,000
b. Payroll costs that would be classified as product cost include the following:
Salary of the vice president of manufacturing
$ 25,000
Salary of middle managers in manufacturing plant
196,000
Wages of production workers
938,000
Salaries of engineers and maintenance crew
178,000
Total
$1,337,000
Since 3,600 units of 4,000 finished products were sold, 90% (i.e. 3,600 ÷ 4,000) of
the product cost would be classified as cost of goods sold. Therefore, the payroll
cost that would be included in cost of goods sold is determined as follows:
Alternatrive computation for the same result follows :
Exercise 10-8
Assets
=
Equity
Event
Manuf.
Office
Cont.
Ret.
No.
Cash
+
Inventory
+
Equip.
+
Furn.
=
Cap.
+
Ear.
Rev.
–
Exp.
=
Net
Inc.
Cash Flow
1
NA
+
I
+
D
+
NA
=
NA
+
NA
NA
–
NA
=
NA
NA
2
NA
+
NA
+
NA
+
D
=
NA
+
D
NA
–
I
=
D
NA
3
I
+
NA
+
NA
+
NA
=
NA
+
I
I
–
NA
=
I
I OA
4
NA
+
D
+
NA
+
NA
=
NA
+
D
NA
–
I
=
D
NA
5
I
+
NA
+
NA
+
NA
=
I
+
NA
NA
–
NA
=
NA
I FA
6
D
+
I
+
NA
+
NA
=
NA
+
NA
NA
–
NA
=
NA
D OA
7
D
+
I
+
NA
+
NA
=
NA
+
NA
NA
–
NA
=
NA
D OA
8
D
+
NA
+
NA
+
NA
=
NA
+
D
NA
–
I
=
D
D OA
Exercise 10-9
a.
Raw materials purchased and used
$ 4,700
Wages of production workers
5,100
Depreciation on manufacturing equipment
3,800
Total product cost
$13,600
b.
Cost of inventory per unit = $13,600 ÷ 2,000 = $6.80
c.
Cost of goods sold = $6.80 x 1,650 = $11,220
Exercise 10-10
a. Event No. 1 represents the depreciation on the computers because no product
b. The computers in a service organization must be expensed as explained in Part a. This
The depreciation on production equipment in a manufacturing company decreases the
Exercise 10-11
Net Income
Cash Flow
Event No.
Amount of
Change
Amount of Change
1. Adjusting entry
($5,000)
NA
2. Adjusting entry
NA
NA
3. Adjusting entry
($8,000)
NA
4. Adjusting entry
NA
NA
5. Adjusting entry
($1,600)
NA
6. Adjusting entry
NA
NA
Exercise 10-12
Fischer Corporation
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2014
Beginning raw materials inventory
$ 28,000
Purchases
120,000
Raw materials available
148,000
Ending raw materials inventory
(24,000)
Cost of direct raw materials used
124,000
Direct labor
176,000
Manufacturing overhead
24,000
Total manufacturing costs
324,000
Beginning work in process inventory
42,000
Total work in process inventory
366,000
Ending work in process inventory
(46,000)
Cost of goods manufactured
$320,000
Exercise 10-13
a.
Flaxman Manufacturing Company
Schedule of Cost of Goods Manufactured and Sold
For March 2015
Beginning raw materials inventory
$100,000
Purchases
120,000
Raw materials available for Use
220,000
Ending raw materials inventory
(60,000)
Direct raw materials used
160,000
Direct labor
100,000
Overhead (actual)
63,000
Total manufacturing costs
323,000
Beginning WIP inventory
120,000
Total WIP inventory
443,000
Ending WIP inventory
(145,000)
Cost of goods manufactured
298,000
Beginning finish. goods inventory
78,000
Cost of goods available for sale
376,000
Less ending finished goods inventory
(80,000)
Cost of goods sold
$296,000
b. Sales revenues $380,000
Exercise 10-14
a. The $67,000,000 of research and development cost is an upstream cost while
packaging, shipping, and sales commissions are downstream costs.
b. Cost of goods sold: $250 x 400,000 = $100,000,000
Ending inventory: $250 x 40,000 = $10,000,00
Upstream cost per unit, $67,000,000 ÷ 2,000,000
$ 33.50
Manufacturing cost per unit
250.00
Downstream costs per unit
50.00
Total cost
333.50
Plus: 25% profit margin, $333.50 x 25%
83.38*
Price
$416.88
d.
Income Statement
Sales revenue ($416.88 X 400,000)
$ 166,752,000
Cost of goods sold
(100,000,000)
Gross margin
66,752,000
Research and development
(67,000,000)
Selling expenses ($50 x 400,000)
(20,000,000)
Net income (Loss)
$ (20,248,000)
e. The upstream cost of research and development is required by GAAP to be
expensed in the period that it is incurred. However, the R&D is expected to result in
Exercise 10-15
Income Statement
Sales revenue ($15 x 725)
$ 10,875
Cost of goods sold ($7 x 725)
(5,075)
Gross margin
5,800
Waste due to excess inventory ($7 x 75)
(525)
Net income
$ 5,275
b.
Income Statement
Sales revenue ($15 x 800)
$12,000
Cost of goods sold ($7 x 800)
(5,600)
Net income
$ 6,400
The opportunity cost of lost profit: ($15 – $7) x 25 = $200
c. If Ms. Connor can arrange an effective JIT system, the T-shirts would be delivered
by the supplier just in time for customers to purchase. To give an example of such a
system, assume that the supplier sets up a simple T-shirt printing facility at Meadow
School. The supplier could bring in enough generic T-shirts. When a customer wants
