Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 14
Chapter 14
Managerial Accounting
Concepts and Principles
QUESTIONS
1. The managerial accountant plays an important role in preparing the information
necessary for effective planning and control decisions. One example is the budget,
which is a quantitative expression of a company’s long-run and short-run plans.
The budget is used to compare actual results to planned performance. With this
type of information provided by the managerial accountant, management strives to
continuously improve a business.
2.
Financial Accounting
Managerial Accounting
(a) Users and decision
makers
Investors, creditors, and
other users external to the
organization
Managers, employees, and
decision makers internal to
the organization
(b) Purpose of
information
Assist external users in
making investment, credit,
and other decisions
Assist managers in making
planning and control
decisions
(d) Time dimension
Historical information with
minimum predictions
Many projections and
estimates; historical
information also presented
(f) Nature of
information
Monetary information
Mostly monetary; but also
nonmonetary information
3. A customer orientation has led companies to adopt the principles of the lean
business model in response to consumer demands. The essence of customer
orientation is that all managers and employees should be sensitive to the wants and
needs of customers, attempting to develop flexible product designs and production
processes that are responsive to changes in customer demands along with
minimization of defects. They are increasingly adopting management practices
such as total quality management (TQM), just-in-time (JIT) manufacturing, and
continuous improvement (CI).
5. Factory overhead is limited to indirect costs that are incurred in the production
6. Direct materials are raw materials that physically become part of the product and
can be clearly traced to specific units or batches of product. Indirect materials are
used in the production process but either do not become a part of the product or are
not easily traceable to units or batches of product. Some materials are identified as
indirect because they are of insignificant value or it is not cost beneficial to trace
them to finished products.
7. Direct labor is both a prime cost and a conversion cost.
8. Direct costs of iPhones include: costs of materials such as smartphone cameras,
memory chips, screens, and processors, as well as the labor of workers who
assemble the products.
Indirect costs include: cost of supervisors’ salaries, factory lighting, factory heat,
wages of maintenance workers, depreciation of factory equipment, insurance on the
factory buildings, and property taxes on the factory buildings. Note: Other answers
are possible as these lists are not comprehensive.
11. Product costs are capitalized because they represent a future value (an asset) to the
business. Period costs are expensed because they are consumed in the current
period.
12. A manufacturing business produces a product, whereas in a merchandising or
service business this is not the case. In making a product, the manufacturing
business must control and measure three types of inventories: raw materials, work
in process, and finished goods. A merchandising business, on the other hand, must
control and measure only merchandise inventory, and a service firm typically does
not control and measure any inventory.
14. A manufacturing firm converts raw materials into finished products. A
manufacturing company would report three types of inventories on its balance
sheet: raw materials, work in process, and finished goods. The finished goods are
included on the income statement as part of cost of goods sold. A merchandising
company purchases inventories to resell. A merchandising company would report
only one inventory item (merchandise inventory) on its balance sheet, and would
include the merchandise inventory on the income statement as part of cost of goods
sold. (Note: The manufacturer would add cost of goods manufactured to the
beginning finished goods to determine the goods available for sale. The
merchandising firm adds purchases to its beginning merchandise inventory to
determine the goods available for sale.)
16. Manufacturing firms have inventories at various stages of completion.
19. Examples of factory overhead costs include: indirect materials, indirect labor,
depreciation of the factory equipment and plant, amortization of patents, the cost of
small tools used, factory utilities, insurance on the factory and equipment, property
taxes on plant and equipment, property taxes on materials and work in process
inventories, and repairs and maintenance on the factory building and equipment.
More generally, all costs associated with manufacturing a good that are not
classified as direct material or direct labor are included in overhead.
20.
Components of Schedule of COGM
Direct material ……………………………………………………….
Direct labor ……………………………………………………….
Factory overhead ……………………………………………………..
Computation of cost of goods manufactured ……………..
21.
Google
Schedule of Cost of Goods Manufactured
For Year Ended December 31, 2019
The date matches the period of the income statement. The “schedule of cost of
goods manufactured” supports the income statement in computing cost of goods
available for sale for the cost of goods sold section.
22. The income statement describes the revenues and expenses for the year. Included
23. Raw materials inventory turnover and days’ sales in raw materials inventory can be
24. The triple bottom line reports on an organization’s financial, social, and
environmental performance.
25.
Inventory Components ($ millions)
3M Co. (December 31, 2017)
Finished goods ……………………………………………………….
$1,915
Work in process ……………………………………………………….
1,218
Raw materials and supplies ………………………………………
901
Total inventories ………………………………………………………
$4,034
QUICK STUDIES
1. Its primary users are company managers.
Managerial
2. Its information is often available only after an audit is
complete.
Financial
3. Its primary focus is on the organization as a whole.
Financial
4. Its principles and practices are very flexible.
Managerial
5. It focuses mainly on past results.
Financial
Quick Study 14-2 (5 minutes)
1. At her normal usage, your sister’s total cost with Plan A is $80 (fixed).
Under Plan B, her total cost is $500, computed as ($0.20 x 1,700) +
($0.10 x 1,600).
Quick Study 14-3 (5 minutes)
1. Variable 2. Fixed 3. Variable 4. Variable 5. Fixed 6. Fixed
Quick Study 14-4 (5 minutes)
1. Indirect cost
2. Direct cost
5. Direct cost
Quick Study 14-5 (10 minutes)
1. Direct materials
2. Factory overhead
5. Factory overhead
6. Direct materials
Quick Study 14-6 (10 minutes)
1. Product cost
2. Period cost
3. Product cost
4. Period cost
Quick Study 14-7 (5 minutes)
Ending work in process inventory is computed as:
Direct materials used in production …………………………………………..
$74,300
Direct labor used in production …………………………………………………
55,000
Factory overhead used in production ………………………………………..
95,700
225,000
Quick Study 14-8 (5 minutes)
Total manufacturing cost is computed as:
Direct materials used in production …………………………………………..
$53,750
Direct labor used in production …………………………………………………
Factory overhead used in production* ……………………………………….
Total manufacturing costs …………………………………………………………
$78,500
Quick Study 14-9 (10 minutes)
Cost of goods sold is computed as:
Beginning finished goods inventory ………………………………………….
$ 500
Cost of goods manufactured ……………………………………………………..
Goods available for sale ……………………………………………………………
Quick Study 14–10 (10 minutes)
Finished goods inventory, beginning …………………………………..
$ 345,000
Plus cost of goods manufactured ………………………………………..
918,700
Cost of goods available for sale …………………………………………..
1,263,700
Less finished goods inventory, ending…………
283,600
Cost of goods sold ………………………………………………………………
$ 980,100
Quick Study 14-11 (15 minutes)
Barton Company
Schedule of Cost of Goods Manufactured
Direct materials …………………………..……………………………………………..
$190,500
Direct labor ……………………………………………………………………………….
63,150
Factory overhead costs ………………………………………………………………
24,000
Total manufacturing costs …………………………………………………………
277,650
Add work in process, beginning ………………………………………………….
157,600
Total cost of work in process ………………………………………………………
435,250
Less work in process, ending ……………………………………………………..
142,750
Beg. Inv. 157,600
RM 190,500
DL 63,150
OH 24,000
Avail 435,250
292,500 COGM
End. Inv. 142,750
Work in Process Inventory
Quick Study 14-12 (5 minutes)
Raw materials inventory, beginning ……………………………………
$ 6,000
Plus raw materials purchased …………………………………………….
Less raw materials inventory, ending ………………………………….
Quick Study 14-13 (10 minutes)
1. E
Quick Study 14-14 (5 minutes)
(Amounts in $ millions)
Raw materials inventory, beginning ……………………………………
855
Plus raw materials purchased …………………………………………….
3,646
Raw materials available for use ………………………………………….
4,501
Beg. Inv. 855
Purchases 3,646
Avail for Use 4,501
3,784 Mtls. Used
End. Inv. 717
Raw Materials inventory
Quick Study 14-15 (10 minutes)
(in $ millions)
Cost of raw materials used ……………………………………………….
$3,784
Beginning raw materials inventory ……………………………………
855
Ending raw materials inventory ………………………………………..
717
Total beginning plus ending raw materials inventory…………
1,572
Average raw materials inventory (Total / 2) ……………………….
786
Quick Study 14–16 (5 minutes)
(Amounts in millions of Swiss francs)
Raw materials inventory, beginning ……………………………………
3,815
Plus raw materials purchased …………………………………………….
Raw materials available for use ………………………………………….
Quick Study 14–17 (10 minutes)
(in millions of Swiss francs)
Cost of raw materials used ……………………………………………….
14,176
Beginning raw materials inventory ……………………………………
3,815
Ending raw materials inventory ………………………………………..
3,499
Total beginning plus ending raw materials inventory…………
7,314
Average raw materials inventory (Total / 2) ……………………….
3,657
EXERCISES
Exercise 14-1 (10 minutes)
Primary Information
Source
Financial
Managerial
Financial
Managerial
Managerial
6. Measure profitability of an individual store
Financial
Managerial
7. Prepare financial reports according to GAAP
8. Determine location and size for a new plant
Business Decision
1. Determine whether to lend to a company
2. Evaluate a purchasing department’s performance
3. Report financial performance to board of directors
4. Estimate product cost for new line of shoes
Exercise 14-2 (20 minutes)
Product Cost
Variable
or Fixed
Direct
or Indirect
1. Leather cover for soccer balls Variable Direct
2. Annual flat fee paid for office security Fixed Indirect
3. Coolants for machinery Fixed Indirect
5. Lace to hold the leather together Variable Indirect
6. Taxes on factory Fixed Indirect
7. Machinery depreciation (straight-line) Fixed Indirect
Most fixed costs are indirect. Fixed costs normally are resources acquired to
support the production process rather than being traceable to individual
products or batches of product. However, not all indirect costs are fixed.
Some, like indirect materials, are variable.
Exercise 14-3 (10 minutes)
1. Fixed, indirect
6. Variable, direct
Exercise 14-4 (20 minutes)
Cost
Variable
Fixed
Direct
Indirect
1. Advertising ……………………………………..
X
X
2. Beverages served on planes ……………
X
X
3. Regional VP salary ………………………….
X
X
4. Depreciation on ground equip. ………..
X
X
5. Fuel used in planes …………………………
X
X
6. Flight attendant wages …………………….
7. Pilot wages ……………………………………..
X
X
8. Aircraft maintenance mgr. salary ……..
X
X
Exercise 14-5 (15 minutes)
1. Direct material
2. Factory overhead
7. Selling expense
8. Factory overhead
Exercise 14-6 (20 minutes)
If Product Cost, Then:__
Direct or Indirect
Product or
Period
Product Cost
Type
Prime or
Conversion
1) Factory electricity Indirect Product Overhead Conversion
2) Advertising NA Period NA NA
3)
Amortization of patents on
Indirect
Product Overhead Conversion
Cost
Exercise 14-7 (20 minutes)
Part 1
Company 1, Sunrise Foods, is a merchandising firm with only one
inventory item, merchandise inventory. Company 2, Rayzer Skis Mfg., is a
manufacturing company with three inventory categories (raw materials,
work in process, and finished goods).
Exercise 14–7 (concluded)
Part 2
Company 1
Sunrise Foods
Balance Sheet—Current Assets Section
Fiscal Year-end
Cash ………………………………………………………………………………………………..
$ 7,000
Accounts receivable …………………………………………………………………………
62,000
Merchandise inventory …………………………..…………………………………………
45,000
Prepaid expenses …………………………………………………………………………….
1,500
Total current assets ……………………………………………………….…………………
$115,500
Company 2
Rayzer Skis Mfg.
Balance Sheet—Current Assets Section
Fiscal Year-end
Cash ………………………………………………………………………………………………..
$ 5,000
Accounts receivable …………………………………………………………………………
75,000
Raw materials inventory …………………………………………………………………..
42,000
Total current assets ……………………………………………………….…………………
$202,900
Discussion: The current assets section of the balance sheet for these two
companies differs because one is a merchandiser and one is a
manufacturer. Sunrise Foods purchases items for resale, so it has only
Exercise 14-8 (30 minutes)
Garcon
Company
Pepper
Company
1. COST OF GOODS MANUFACTURED
Direct materials
Beginning raw materials inventory ……………..
$ 7,250
$ 9,000
Raw materials purchases …………………………..
33,000
52,000
Raw materials available for use ………………….
40,250
61,000
Less ending raw materials inventory …………..
5,300
7,200
Direct materials used …………………………………
34,950
53,800
Direct labor …………………………………………………..
19,000
35,000
Rental cost on factory equipment ……………….
27,000
22,750
Factory utilities ………………………………………….
12,000
Factory supplies used ………………………………..
Indirect labor ……………………………………………..
4,780
1,500
Total manufacturing costs …………………………..
104,180
135,910
Beginning work in process inventory …………….
14,500
19,950
Total cost of work in process ………………………..
118,680
155,860
Less ending work in process inventory …………
16,000
Cost of goods manufactured …………………………
$ 96,680
$139,860
2. COST OF GOODS SOLD
Beginning finished goods inventory ……………..
$ 12,000
$ 16,450
Cost of goods manufactured …………………………
96,680
139,860
Cost of goods available for sale …………………….
108,680
156,310
Less ending finished goods inventory …………..
17,650
13,300
Cost of goods sold ……………………………………….
$ 91,030
$143,010
Exercise 14–9 (30 minutes)
GARCON COMPANY
Income Statement
For Year Ended December 31, 2019
Sales …………………………………………………………………………………
$195,030
Cost of goods sold (from Ex. 14–8) …………………………………….
91,030
Gross profit ……………………………………………………….……………..
104,000
PEPPER COMPANY
Income Statement
For Year Ended December 31, 2019
Sales …………………………………………………………………………………
$290,010
Cost of goods sold (from Ex. 14–8) …………………………………….
143,010
Gross profit ……………………………………………………….……………..
147,000
Exercise 14–9 (continued)
GARCON COMPANY
Partial Balance Sheet
As of December 31, 2019
Cash ………………………………………………………………………………
$20,000
Accounts receivable, net ………………………………………………..
13,200
Inventories
Raw materials inventory ………………………………………………
$ 5,300
Work in process inventory ……………………………………………
22,000
Finished goods inventory …………………………………………….
17,650
44,950
Total current assets ……………………………………………………….
$78,150
PEPPER COMPANY
Partial Balance Sheet
As of December 31, 2019
Cash ………………………………………………………………………………
$15,700
Accounts receivable, net ………………………………………………..
19,450
Inventories
Raw materials inventory ………………………………………………
$ 7,200
Work in process inventory ……………………………………………
16,000
Finished goods inventory …………………………………………….
13,300
36,500
Total current assets ……………………………………………………….
$71,650
Exercise 14-10 (20 minutes)
Garcon
Company
Pepper
Company
1. PRIME COSTS
Direct materials
Beginning raw materials inventory ……………..
$ 7,250
$ 9,000
Raw materials purchases …………………………..
33,000
52,000
Raw materials available for use ………………….
40,250
61,000
Less ending raw materials inventory …………..
19,000
2. CONVERSION COSTS
Direct labor …………………………………………………..
Factory overhead
$19,000
$35,000
Rental cost on factory equipment ……………….
27,000
22,750
Factory utilities ………………………………………….
9,000
12,000
Factory supplies used ………………………………..
8,200
Indirect labor ……………………………………………..
1,250
4,780
Total conversion costs …………………………..……..
Exercise 14–11 (20 minutes)
Merchandising Business
UNIMART
Computation of Cost of Goods Sold
Cost of goods sold
Merchandise inventory, beginning …………………………………….
$275,000
Merchandise purchases …………………………………………………….
500,000
Goods available for sale ……………………………………………………
Less merchandise inventory, ending …………………………………
115,000
Beginning Inventory 275,000
Purchases 500,000
Goods available for sale 775,000
660,000 Cost of Goods Sold
Ending Inventory 115,000
Merchandise Inventory