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Chapter 2 Building Blocks of Managerial Accounting
Chapter 2
Building Blocks of Managerial Accounting
Quick Check Questions
Answers:
Managerial Accounting 4e Solutions Manual
(5-10 min.) S2-3
a. Marketing
b. Design
(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.
Managerial Accounting 4e Solutions Manual
(5-10 min.) S2-6
a. Period cost
b. Inventoriable product cost
(5-10 min.) S2-7
COST
Period Cost or
Inventoriable
Product Cost?
If an Inventoriable
Product Cost: Is it
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
administration; 60% of building is used for manufacturing
40% Period;
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
Managerial Accounting 4e Solutions Manual
(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
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
Managerial Accounting 4e Solutions Manual
(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
Managerial Accounting 4e Solutions Manual
Exercises (Group A)
(10-15 min.) E2-18A
Reqs. 1 and 2
Value Chain Cost Classification
R & D
Design
Purchases
Marketing
Distribution
Customer
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.
Chapter 2 Building Blocks of Managerial Accounting
(15 min.) E2-19A
Reqs. 1, 2, and 3
Value Chain Cost Classification
Production
R & D
Design
Direct
Materials
Direct
Labor
Manufactur-
ing
Overhead
Marketing
Distribution
Customer
Service
Delivery expense
$7
Salaries of
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
Chapter 2 Building Blocks of Managerial Accounting
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.
Managerial Accounting 4e Solutions Manual
(10-15 min.) E2-23A
Cost of goods sold calculation:
Beginning inventory
$ 18,000
Plus: Purchases and freight-in*
659,500
Cost of goods available for sale
677,500
Less: Ending inventory
(12,800)
Cost of goods sold
$ 664,700
Pampered Pets
Income Statement
For Last Year
Sales revenue
$ 986,000
Less: Cost of goods sold
(664,700)
Gross profit
321,300
Less operating expenses:
Website expenses
$ 58,500
Marketing expenses
30,700
Freight-out expenses
28,500
Total operating expenses
(117,700)
Operating income
$ 203,600
*purchases of $640,000 + freight-in of $19,500 = $659,500
(5-10 min.) E2-24A
Calculation of Direct Materials Used
Beginning Raw Materials Inventory
$ 17,000
Plus: Purchases of direct materials, freight-in, and import
duties
63,000
Materials available for use
$ 80,000
Less: Ending Raw Material Inventory
(15,000)
Direct materials used
$ 65,000
Schedule of Cost of Goods Manufactured
Beginning Work in Process Inventory
$ 26,000
Plus: Manufacturing costs incurred
Direct materials used (from previous schedule)
65,000
Direct labor
123,000
Manufacturing overhead
148,000
Total manufacturing costs to account for
$ 362,000
Less: Ending Work in Process Inventory
(19,000)
Cost of goods manufactured
$ 343,000
Managerial Accounting 4e Solutions Manual
(15-20 min.) E2-26A
Blue Sea Company
Income Statement
For Current Year
Sales revenue (39,000 units x $10)
$ 390,000
Less: Cost of goods sold (from previous exercise)
230,800
Gross profit
$ 159,200
Less operating expenses:
Marketing expenses
76,000
General and administrative expenses
27,500
Total operating expenses
$ 103,500
Operating income
$ 55,700
Students may simply use the $230,800 cost of goods sold computation from E2-25A, rather than repeating the details
of the computation of cost of goods sold here.
Chapter 2 Building Blocks of Managerial Accounting
(25 min.) E2-27A
Instructional note: This is a fairly challenging exercise that requires students to work backwards through financial
statement elements.
a.
Revenues
$27,700
Less: Cost of goods sold
15,600
Gross profit
$12,100
b.
To determine beginning raw materials inventory, start with the materials used computation and work backwards:
Beginning raw materials inventory
$ 2,700
Plus: Purchases of direct materials
9,500
Available for use
12,200
Less: Ending raw materials inventory
(3,600)
Direct materials used
$ 8,600
c.
To determine ending finished goods inventory, start by computing the cost of goods manufactured:
Beginning work in process inventory
$ 0
Plus: Manufacturing costs incurred
Direct materials used
$8,600
Direct labor
3,400
Manufacturing overhead
6,100
18,100
Total manufacturing costs to account for
18,100
Less: Ending work in process inventory
(1,100)
Cost of goods manufactured
$17,000
Now use the cost of goods sold computation to determine ending finished goods inventory:
Beginning finished goods inventory
$ 4,500
Plus: Cost of goods manufactured (from above)
17,000
Cost of goods available for sale
21,500
Less: Ending finished goods inventory
(5,900)
Cost of goods sold (from part A)
$15,600
Chapter 2 Building Blocks of Managerial Accounting
Copyright © 2015 Pearson Education, Inc.
2-19
(10 min.) E2-29A
1)
Variable costs
=
($1 x 25,000,000)
=
$25,000,000
+ Fixed costs
=
6,000,000
= Total costs
=
$31,000,000
2)
$31,000,000
÷
25,000,000 units
=
$1.24 per unit
3)
$ 6,000,000
÷
25,000,000 units
=
$0.24 per unit
4)
Variable costs
=
($1 x 30,000,000)
=
$30,000,000
+ Fixed costs
=
6,000,000
= Total costs
=
$36,000,000
5)
$36,000,000
÷
30,000,000 units
=
$1.20 per unit
6)
$ 6,000,000
÷
30,000,000 units
=
$0.20 per unit
7)
The average product cost decreases as production volume
increases because the company is spreading its fixed costs over
5 million more units. The company will be operating more
efficiently, so the average cost of making each unit decreases.
Managerial Accounting 4e Solutions Manual
Exercises (Group B)
(10-15 min.) E2-30B
Reqs. 1 and 2
Value Chain Cost Classification
R & D
Design
Purchases
Marketing
Distribution
Customer
Service
Newspaper
advertisements
$5,700
Payment to consultant for
advice on location of new
store
2,200
Purchases of merchandise
$32,000
Freight-in
3,700
Salespersons’ salaries
4,900
Depreciation expense on
delivery trucks
$1,800
Research on selling
satellite
radio service
$500
Customer complaint
department
$600
Rearranging store layout
$750
Total
$2,700
$750
$35,700
$10,600
$1,800
$600
Req. 3
The total inventoriable product costs are the $32,000 of purchases plus the $3,700 freight-in = $35,700.
