Accounting Chapter 2 A direct cost is one that can be traced to the cost

1. Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that are

expected to bring a current or future benefit to the organization. An expense is an expired cost;

the benefit has been used up.

2. Accumulating costs is the way that costs are measured and recorded. Assigning costs is linking

costs to some cost object. For example, a company accumulates or tracks costs by entering

4. A direct cost is one that can be traced to the cost object, typically by physical observation. An

indirect cost cannot be traced easily and accurately to the cost object. The same cost can be direct

for one purpose and indirect for another. For example, the salaries paid to purchasing department

employees in a factory are a direct cost to the purchasing department but an indirect cost

(overhead) to units of product.

5. Allocation means that an indirect cost is assigned to a cost object using a reasonable and

convenient method. Since no causal relationship exists, allocating indirect costs is based on

convenience or some assumed linkage.

6. A product is tangible in that you can see, feel, and take it with you. Examples of products include a

tube of toothpaste, a car, or an orange. A service is a task or an activity performed for a customer.

For example, the dental hygienist who cleans your teeth provides a service.

2BASIC MANAGERIAL

ACCOUNTING CONCEPTS

DISCUSSION QUESTIONS

CHAPTER 2 Basic Managerial Accounting Concepts

10.

A

period cost is one that is expensed immediately, rather than being inventoried like a product cost

13. The cost of goods manufactured is the cost of direct materials, direct labor, and overhead for the

units produced (completed) during a time period. The cost of goods sold is the cost of direct

materials, direct labor, and overhead for the units sold during a time period. The number of units

produced is not necessarily equal to the number of units sold during a period. For example, a

company may produce 1,000 pairs of jeans in a month but sell only 900 pairs.

14. The income statement for a manufacturing firm includes the cost of goods sold, which is the sum

of direct materials, direct labor, and manufacturing overhead. The income statement for a service

2-2

CHAPTER 2 Basic Managerial Accounting Concepts

2-1. c

2-5. e

2-6. d

2-7. c

2-8. d

2-14. c Total Conversion Cost = $20,000 + $130,000 = $150,000

Conversion Cost per Unit = $150,000/10,000 units = $15.00

2-15. b Cost of Goods Sold = $50,000 + $20,000 + $130,000 = $200,000

Cost of Goods Sold per Unit = $200,000/10,000 units = $20.00

MULTIPLE-CHOICE QUESTIONS

2-3

CHAPTER 2 Basic Managerial Accounting Concepts

CE 2-19

1. Direct materials…………………………………………………

…

$ 32,000

CE 2-20

1. Direct materials…………………………………………………

…

$32,000

Direct labor………………………………………………………

…

28,000

Total prime cost………………………………………………… $60,000

…

CE 2-21

Materials inventory, June 1…………………………………………………………

…

$ 48,000

CORNERSTONE EXERCISES

2-4

…

CHAPTER 2 Basic Managerial Accounting Concepts

CE 2-22

1. Direct materials*………………………………………………………………

…

$135,000

Direct labor……………………………………………………………………

…

113,000

Manufacturing overhead……………………………………………………

…

187,000

CE 2-23

1.

Cost of goods manufactured………………………………….……………

…

$437,000

Finished goods inventory, June 1…………………………………….…

…

80,000

…

For the Month of June

1,900 units

Slapshot Company

Cost of Goods Sold Statement

2-5

…

CHAPTER 2 Basic Managerial Accounting Concepts

CE 2-24

Sales revenue (1,880 × $400)………………………………

…

$752,000

Cost of goods sold ……………………………………..……

…

433,000

CE 2-25

Percent*

Sales revenue (1,880 × $400)………………

…

$752,000 100.0

Cost of goods sold …………………………

…

433,000 57.6

*Steps in calculating the percentages (the percentages are rounded):

1. Sales Revenue Percent = $752,000/$752,000 = 1.00, or 100% (sales revenue is

always 100% of sales revenue)

Slapshot Company

Income Statement

For the Month of June

Slapshot Company

Income Statement

For the Month of June

CE 2-26

1.

Sales revenues………………………………………………

…

$410,000

Less operating expenses:

2. Allstar has no Cost of Goods Sold line item because the company is a service

provider, rather than a manufacturer. Therefore, as a service provider, Allstar has no

For the Past Month

Allstar Exposure

Income Statement

2-7

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-27

1. Salaries

Derek………………………………………………………

…

$25,000 $6,000

2. All of Derek’s time is spent selling, so all of his salary cost is selling cost.

Selling Administrative

Costs

Derek’s salary……………………………………………

…

$25,000 —

…

E 2-28

1. The two products that Holmes sells are playhouses and the installation of

playhouses. The playhouse itself is a product, and the installation is a service.

Costs

Cost Commissions

EXERCISES

Cost

2-8

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-29

a. Salary of cell supervisor—Direct

b. Power to heat and cool the plant in which the cell is located—Indirect

c. Materials used to produce the motors—Direct

E 2-30

1. Direct materials—Product cost

Direct labor—Product cost

Manufacturing overhead—Product cost

Selling expense—Period cost

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-31

1.

Direct Direct Manufact. Selling

Materials Labor Overhead Expense

Direct materials………………

…

$216,000

Factory rent……………………

…

$ 24,000

Direct labor……………………

…

$120,000

2. Direct materials…………………………………………………………………… $216,000

Direct labor………………………………………………………………………… 120,000

Manufacturing overhead………………………………………………………

…

147,300

Total product cost……………………………………………………………

…

$483,300

Costs

Product Cost Period Cost

Administrative

Expense

2-10

…

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-32

Direct Direct Manufact.

Materials Labor Overhead

Jars……………………………………………………

…

X

Sugar…………………………………………………

…

X

Fruit…………………………………………………… X

Pectin…………………………………………………

…

X

E 2-33

1. Direct materials…………………………………………………

…

$400,000

Direct labor………………………………………………………

…

80,000

Costs

2-11

…

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-34

1. Direct materials…………………………………………………………………… $400,000

Direct labor………………………………………………………………………

…

80,000

=

3. Direct labor………………………………………………………………………

…

$ 80,000

Manufacturing overhead………………………………………………………

…

320,000

Total conversion cost………………………………………………………

…

$400,000

E 2-35

1. Materials inventory, June 1……………………………………………………

…

$ 3,700

2. As shown in the exercise, the cost of direct materials purchased in June is $15,500.

Also, as calculated in response to Requirement 1, the cost of direct materials used

in production in June is $17,600. Therefore, in this case, the cost of direct materials

used is greater than the cost of direct material purchased, which means that—for

whatever reason—Hannah Banana Bakers decided to let its ending inventory (of

$120.00

2-12

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-36

1. Finished goods inventory, January 1…………………………………

…

6,800

2. Units sold…………………………………………………………………

…

93,600

× Unit cost…………………………………………………………………

…

$2,200

Cost of goods sold……………………………………………………

…

E 2-37

1. Materials inventory, March 1………………………………………………

…

$14,000

2. Direct materials………………………………………………………………

…

$32,500

Direct labor……………………………………………………………………

…

10,000

Manufacturing overhead……………………………………………………

…

42,000

Total manufacturing cost………………………………………………

…

$84,500

…

E 2-38

Cost of goods manufactured*…………………………………………………

…

$88,500

E 2-39

Direct materials……………………………………………………………………

…

$180,000

$205,920,000

×

…

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-40

2.

Sales revenue……………………………………………………………

…

Cost of goods sold*………………………………………………………

…

E 2-41

1.

Sales &

Expenses

Sales revenue………………………………………

…

$3,360,000 100.0 a

Cost of goods sold*………………………………… 795,000 23.7

b

…

d

f

*See solution to Exercise 2-40, Requirement 2.

aSales revenue: $3,360,000/$3,360,000 = 1.00, or 100%

b

d

f

of Sales

Percent

Jasper Company

Income Statement

For the Last Year

795,000

Jasper Company

Income Statement

For the Last Year

$3,360,000

2-14

CHAPTER 2 Basic Managerial Accounting Concepts

E 2-41 (Concluded)

2. The income statement showing each account as a percentage of sales helps focus

managerial attention on those expenses that are relatively high. For Jasper, it

E 2-42

a (Direct Materials Used in Production) = Beginning Inventory Direct Materials +

Purchases – Ending Inventory Direct Materials

Thus, in order to find b, we first need to calculate Cost of Goods Manufactured as

follows:

d (Direct Materials Purchases for Year 2) = Direct Materials Used in Production –

Direct Materials Beginning Inventory + Direct Materials Ending Inventory

d = $50,000 – $15,000 + $17,000

= $52,000

e (Cost of Goods Sold for Year 2) = Beginning Finished Goods Inventory + Cost of

Goods Manufactured – Ending Finished Goods Inventory

e = $7,000 + COGM – $11,000; therefore, we must first calculate COGM to be able to

calculate COGS.

2-15