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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
*See solution to Exercise 2-40, Requirement 2.
aSales revenue: $3,360,000/$3,360,000 = 1.00, or 100%
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
