CHAPTER 2 Basic Managerial Accounting Concepts
E 2-48
1. Sales Revenue = Number of Units Sold × Selling Price
= 280,000 units × $12 280,000 × 12 = 3,360,000
= $3,360,000
2.
Sales revenue…………………………………………………………………………………………………..……………………………………………….
Cost of goods sold*………………………………………………………………………………………………..…………………………………………..
Gross profit…………………………………………………………………………………………………………..………………………………………….
Less:
Selling expense……………………………………………………………………………………………………..……………………………………….
437,000
Administrative expense………………………………………………………………………………………………..…………………………………..
854,000
Operating income……………………………………………………………………………………………………..………………………………………..
E 2-49
1.
Sales &
Expenses
Sales revenue……………………………………………………………………………………………………………………………………….
$3,360,000 100.0
a
Cost of goods sold*………………………………………………………………………………………………………………………………….
795,000 23.7
b
Gross profit………………………………………………………………………………………………………………………………….
$2,565,000 76.3
c
Less:
Selling expense………………………………………………………………………………………………………………………………….
437,000 13.0
d
Administrative expense………………………………………………………………………………………………………………………………….
854,000 25.4
e
Operating income………………………………………………………………………………………………………………………………….
$1,274,000 37.9 f
*See solution to Exercise 2-48, Requirement 2.
aSales revenue: $3,360,000/$3,360,000 = 1.00, or 100% 3,360,000 / 3,360,000 = 1.000 , or 100%
bCost of goods sold: $795,000/$3,360,000 = 0.237, or 23.7% 795,000 / 3,360,000 = 0.237 , or 23.7%
cGross profit: $2,565,000/$3,360,000 = 0.763, or 76.3% 2,565,000 / 3,360,000 = 0.763 , or 76.3%
dSelling expense: $437,000/$3,360,000 = 0.130, or 13.0% 437,000 / 3,360,000 = 0.130 , or 13.0%
eAdministrative expense: $854,000/$3,360,000 = 0.254, or 25.4% 854,000 / 3,360,000 = 0.254 , or 25.4%
Selling expense
Admin. expense
$2,565,000
of Sales
Percent
$1,274,000
Jasper Company
Income Statement
For the Last Year
437,000
854,000
Jasper Company
Income Statement
For the Last Year
$3,360,000
795,000
CHAPTER 2 Basic Managerial Accounting Concepts
E 2-49 (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
appears as though administrative expense is twice as large as selling expense.
Perhaps management could explain ways to reduce certain administrative
expenses, such as research and development or fees incurred for general counsel
(e.g., size of Jasper’s legal staff).
E 2-50
a (Direct Materials Used in Production) = Beginning Inventory Direct Materials +
Purchases – Ending Inventory Direct Materials
a= $10,000 + $45,000 – $15,000 10,000 + 45,000 – 15,000 = 40,000
= $40,000
To find b, one can rearrange the Cost of Goods Manufactured equation to solve for
Direct Labor Used in Production (i.e., the unknown, or b):
b (Direct Labor Used in Production) = Cost of Goods Manufactured – Direct
Materials Used in Production – Manufacturing Overhead Costs Used in
Production – Beginning WIP Inventory + Ending WIP Inventory
b = COGM – $40,000 (from a) – $80,000 – $17,000 + $14,000 COGM – 40,000 – 80,000 – 17,000
Thus, in order to find b, we first need to calculate Cost of Goods Manufactured as + 14,000 = B
follows:
Cost of Goods Manufactured = Cost of Goods Sold – Beginning Finished Goods
Inventory + Ending Finished Goods Inventory
COGM
= $169,000 – $8,000 + $7,000 169,000 – 8,000 + 7,000 = 168,000
= $168,000
Finally, inserting Cost of Goods Manufactured into the earlier equation:
b= $168,000 – $40,000 – $80,000 – $17,000 + $14,000 168,000 – 40,000 – 80,000 – 17,000
= $45,000 + 14,000 = 45,000
c (Direct Materials Beginning Inventory for Year 2) = Direct Materials Ending
Inventory for Year 1 = $15,000 15,000
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 50,000 – 15,000 + 17,000 = 52,000
= $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 7,000 + COGM – 11,000 = E
calculate COGS.
CHAPTER 2 Basic Managerial Accounting Concepts
E 2-50 (Concluded)
So, COGM = Direct Materials Used in Production + Direct Labor Used in Production +
CHAPTER 2 Basic Managerial Accounting Concepts
1. Direct Direct Manufact. hamburger meat 4,500
Materials Labor Overhead buns 800
Hamburger meat……………………………………………………………………………………………….
$4,500 frozen potato 1,250
Buns, lettuce, pickles, and onions……………………………………………………………………………………….
800 warppers 600
Frozen potato strips……………………………………………………………………………………….
Other ingredients……………………………………………………………………………………….
Part-time employees’ wages……………………………………………………………………………………….
John Peterson’s salary……………………………………………………………………………………….
Utilities……………………………………………………………………………………….
Rent……………………………………………………………………………………….
1,800 janitor’s wages 520
Depreciation, cooking equipment janitorial supplies 150
and fixtures……………………………………………………………………………………….
600 accounting fees 1,500
Advertising……………………………………………………………………………………….
500 taxes 4,250
Janitor’s wages……………………………………………………………………………………….
520
Janitorial supplies……………………………………………………………………………………….
150
Accounting fees……………………………………………………………………………………….
Taxes……………………………………………………………………………………….
Explanation of Classification
Direct materials include all the food items that go into a burger bag, as well as the
condiment packages and the wrappers and bags themselves. These materials go
“out the door” in the final product. “Other ingredients” might include the oil to fry
the potato strips and grease the frying surface for the hamburgers and the salt for
the fries. They are direct materials but could also be classified as overhead because
of cost and convenience.
Selling and
Administrative
Cost
PROBLEMS
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-51 (Concluded)
2.
Sales ($3.50 × 10,000)……………………………………………………………………………………………………………………………………………………………………
$35,000 3.50 × 10,000 = 35,000
Less cost of goods sold:
Direct materials……………………………………………………………………………………………………………………………………….
$7,810
Direct labor…………………………………………………………………………………………………………………………………………….
Manufacturing overhead…………………………………………………………………………………………………………………………….
Gross margin………………………………………………………………………………………………………………………………………………
Less: Selling and administrative expense……………………………………………………………………………………………………………
3. Elena’s simplifying assumptions were:
(1) all part-time employees are production workers,
(2) John Peterson’s salary is for selling and administrative functions,
These make it easy to classify 100% of each expense as product cost or selling
and administrative cost. The result is that she does not have to perform studies
of the time spent by each employee on producing versus selling burger bags. In
addition, it is likely that John Peterson pitches in to help fry burgers or assemble
burger bags when things get hectic. Of course, during those times, he is engaged
in production—not selling or administration. The cost of determining just exactly
how many minutes of each employee’s day is spent in production versus selling
is probably not worth it. (Remember, accountants charge by the number of hours
spent—the more time Elena spends separating costs into categories, the higher
her fees.)
Pop’s Drive-Thru Burger Heaven
Income Statement
For the Month of December
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-52
1. Cost per Page for Black Ink = $25.50 = $0.03 25.50 ÷ 850 = 0.03
850 pages
Total Owed to Harry by Mary = $0.03 × 500 pages = $15 0.03 × 500 = 15
Total Owed to Harry by Natalie = $0.03 × 1,000 pages = $30 0.03 × 1,000 = 30
2. Cost per Sheet for Paper = $2.50 = $0.005 2.50 ÷ 500 = 0.005
500 sheets
Total Cost for Mary = 500 pages × ($0.03 + $0.005) = $17.50 500 × 0.03 + 0.005 = 17.50
Total Cost for Natalie = 1,000 pages × ($0.03 + $0.005) = $35 1,000 × 0.03 + 0.005 = 35.00
3. Cost per Page for Color Ink = $31 = $0.10 31.00 ÷ 310 = 0.10
310 pages
Number of Black Ink Pages for Natalie = 1,000 × 0.80 = 800 1,000 × 0.80 = 800
Number of Color Ink Pages for Natalie = 1,000 × 0.20 = 200 1,000 × 0.20 = 200
Total Owed to Harry by Natalie = ($0.03 × 800 pages) + ($0.10 × 200) = $44 0.03 × 800 + 0.10 × 200 = 44
Total Cost to Natalie = [($0.03 + $0.005) × 800 pages] + [($0.10 + $0.005) 0.03 + 0.005 × 800 + 0.10 + 0.005
P 2-53
1. Direct Materials = $40,000 + $64,000 – $19,800 = $84,200 40,000 + 64,000 – 19,800 = 84,200
2.
Direct materials used…………………………………………………………………………………………………………………………
$ 84,200
Direct labor……………………………………………………………………………………………………………………
43,500
Manufacturing overhead……………………………………………………………………………………………………………………
108,750 21,000
Total manufacturing cost for July……………………………………………………………………………………………………………………
$236,450 23,200
Work in process, July 1……………………………………………………………………………………………………………………
21,000 43,500
Work in process, July 31……………………………………………………………………………………………………………………
(32,500) 108,750
Cost of goods manufactured……………………………………………………………………………………………………………………
$224,950
3.
Cost of goods manufactured……………………………………………………………………………………………………………………
$224,950 (32,500)
Finished goods inventory, July 1……………………………………………………………………………………………………………………
23,200 (22,100)
Finished good inventory, July 31……………………………………………………………………………………………………………………
(22,100)
Cost of goods sold……………………………………………………………………………………………………………………
$226,050
End inv.
End. WIP
Beg. WIP
Beg inv.
Dir labor
Overhead
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-54
1.
Direct materials……………………………………………………………………………………………………………………
$18 18
Direct labor……………………………………………………………………………………………………………………
12 12
Manufacturing overhead……………………………………………………………………………………………………………………
2.
Sales revenue ($60 × 200,000)……………………………………………………………………………………………………………………………………………………………..
$12,000,000 60 × 200,000 = 12,000,000
Cost of goods sold………………………………………………………………………………………………………………………………………………..
9,200,000
Gross margin……………………………………………………………………………………………………………………………………………
$ 2,800,000
Less:
No, we do not need to prepare a statement of cost of goods manufactured
because there were no beginning or ending inventories of work in process.
As a result, total manufacturing cost is equal to the cost of goods manufactured.
3. The 10,000 tents in beginning finished goods inventory have a cost of $40, and 10,000 40
that is lower than the year’s unit product cost of $46. The FIFO assumption says 46
that beginning inventory is sold before current year production. Therefore, the
cost of goods sold will be lower than it would be if there were no beginning
Cost of goods manufactured ($46 × 200,000)………………………………………………………………………………………………………………………………………..
Beginning finished goods inventory ($40 × 10,000)………………………………………………………………………………………………………………………………………..
Ending finished goods inventory ($46 × 10,000)………………………………………………………………………………………………………………………………………..
Laworld Inc.
Income Statement
For Last Year
Direct materials
Direct labor
P 2-54 (Concluded)
Sales revenue ($60 × 200,000)……………………………………………………………………………………………………………………………………………………………………….
$12,000,000 60 × 200,000 = 12,000,000
Cost of goods sold……………………………………………………………………………………………………………………………………………..
9,140,000
Gross margin………………………………………………………………………………………………………………………
$ 2,860,000
Commissions ($2 × 200,000)…………………………………………………………………………………………………………………………………………………………
Fixed selling expense………………………………………………………………………………………………………………………………………………
Administrative expense……………………………………………………………………………………………………………………………………………
P 2-55
1. Direct Materials = $3,475 + $15,000 – $9,500 = $8,975 3,475 + 15,000 – 9,500 = 8,975
10,500
15,000
Direct materials used…………………………………………………………………………………………………………………………
$ 8,975 675
Direct labor…………………………………………………………………………………………………………………………………….
10,500 350
Manufacturing overhead: 2,500
Factory supplies…………………………………………………………………………………………………………………………..
$ 675 2,225
Factory insurance…………………………………………………………………………………………………………………………
350 800
Factory supervision………………………………………………………………………………………………………………………
2,225 3,750
Material handling………………………………………………………………………………………………………………………….
Total manufacturing cost for May……………………………………………………………………………………………………………………………………
Work in process, May 1……………………………………………………………………………………………………………………………………………..
Work in process, May 31……………………………………………………………………………………………………………………………………………
(4,250)
2.
Cost of goods manufactured……………………………………………………………………………………………………………………………
$24,725
Finished goods inventory, May 1………………………………………………………………………………………………………………………
6,685
Finished goods inventory, May 31……………………………………………………………………………………………………………………..
Commissions
End. finished goods
Factory supervision
Advertising
Materials handling
Direct materials
Purchases
Supplies
Factory ins.
For the Month of May
Hayward Company
Statement of Cost of Goods Manufactured
For the Month of May
Hayward Company
Revised Income Statement
For Last Year
Laworld Inc.
Statement of Cost of Goods Sold
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-56
1. c. These costs include direct materials, direct labor, and manufacturing
overhead. The total of these three types of costs equals product cost.
4. j. Jamie is working at company headquarters, and her salary is part of
administrative cost.
5. i. All factory costs other than direct materials and direct labor are, by definition,
overhead.
6. d. The design engineer is estimating the total number of labor hours required to
complete the manufacturing of a product. This total will be used to compute
direct labor cost.
7. h. This is direct materials cost.
8. g. The sum of direct materials and direct labor is, by definition, prime cost.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-57
1. Before COGM can be calculated, Direct Materials Used in Production must first be
calculated as:
Direct Materials Used in Production = Beginning Direct Materials Inventory +
Direct Materials Purchases – Ending Direct Materials Inventory
= $50,000
Now,
COGM = Direct Materials Used in Production + Direct Labor Costs Used in
Production + Manufacturing Overhead Costs Used in Production + Beginning
WIP Inventory – Ending WIP Inventory
= $50,000 + $800,000 + $100,000 + $60,000 – $100,000
50,000 + 800,000 + 100,000 + 60,000
= $910,000
– 100,000 = 910,000
Inventory
= $300,000 + $910,000 – $280,000
= $930,000
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-57 (Concluded)
3.
Sales ($2,100 × 700)……………………………………………………………….………
$1,470,000 2,100 × 700 = 1,470,000
Cost of goods sold………………………………………………………………………….
930,000 930,000
Gross margin…………………………………………………………………………….
$ 540,000
Less:
Selling expense…………………………………………..……………………………………..
60,000 60,000
Administrative expense…………………………………………….……………………………….
150,000 150,000
Operating income…………………………………………………………………………
$ 330,000
P 2-58
1. 320,000
46,800
(66,800)
Direct materials*………………………………………………………………….……………………………………………….…..
$300,000 200,000
Direct labor……………………………………………………………………….…………………………..………………………
200,000 40,000
Manufacturing overhead: 42,000
Indirect labor……………………………………………………………………….…………..……………………………
$40,000 60,000
Rent, factory building…………………………………………………………….……………….……………………………
42,000 11,900
Depreciation, factory equipment…………………………………………………….……………………………………….………
60,000 90,000
Utilities, factory……………………………………………………………………….………………………………..…………………
Total cost of product………………………………………………………………….………………………..…………………..
Beginning work in process………………………………………………………….……………………………………………….………………
Ending work in process……………………………………………………………….…………………….…………..………………………….
Factory rent
Deprec. – factory
Utilities – factory
Sales Supv Salary
Income Statement
Purchases
Beg. inv.
End. inv.
Direct labor
Indirect labor
Berry Company
Statement of Cost of Goods Manufactured
For Last Year
For Last Year
W. W. Phillips Company
P 2-58 (Concluded)
2. Average Cost of One Unit of Product = $652,000 = $163 652,000 ÷ 4,000 = 163
4,000
3. 200,000
40,000
Sales ($400 × 3,800*)……………………………….……………………………………………….……………………………………………………….……………………
$1,520,000 400 × 3,800 = 1,520,000
Cost of goods sold**………………………………………………………..……………………………………………………..
617,900
Gross margin………………………………………………………………..……………...……………………………………….
$ 902,100 90,000
P 2-59
1. The Internet payment of $40 is an expense that would appear on the income Luisa 40
statement. This is because the Internet services are used up each month—Luisa
cannot “save” any unused Internet time for the next month.
j
2. The opportunity cost is the $100 that Luisa would have made if she had been able 100
to accept the movie role. It is an opportunity cost because it is the cost of the next
dog services
internet service
opportunity cost
Supv Salary
W. W. Phillips Company
Income Statement
For Last Year
P 2-60
1. Direct materials:
Magazine (5,000 × $0.40)………………………………………………………………………………………………………………………………………………………….
$2,000 5,000 × 0.40 = 2,000
Brochure (10,000 × $0.08)………………………………………………………………………………………………………………………………………………………….
800 $2,800 10,000 × 0.08 = 800
Direct labor:
Magazine (5,000/20 × $10)………………………………………………………………………………………………………………………………………………………..
$2,500 5,000 / 20 × 10 = 2,500
Brochure (10,000/100 × $10)………………………………………………………………………………………………………………………………………………………..
Depreciation ($40,000/20,000 × 350*)………………………………………………………………………………………………………………………………………………….
$9,490
*Production is 20 units per printing hour for magazines and 100 units per printing hour for 20 100
brochures, yielding monthly machine hours of 350 [(5,000/20) + (10,000/100)]. This is also 5,000 / 20 + 10,000 / 100 = 350
monthly labor hours as machine labor only operates the presses.
2.
Direct materials……………………………………………………………………………………………………………………………………………………..
$2,800
Direct labor…………………………………………………………………………………………………………………………………………………..
3,500
Total prime costs……………………………………………………………………………………………………………………………………………..
$6,300
Magazine:
Direct materials…………………………………………………………………………………………………………………………………………………….
$2,000
Direct labor………………………………………………………………………………………………………………………………………………………..
2,500
$4,500
Direct materials…………………………………………………………………………………………………………………………………………………….
Direct labor………………………………………………………………………………………………………………………………………………………..
$1,800
3. Total monthly conversion cost:
Direct labor………………………………………………………………………………………………………………………………………………………..
$3,500
Manufacturing overhead……………………………………………………………………………………………………………………………………….
3,190
Total…………………………………………………………………………………………………………………………………………………..
$6,690
Magazine:
Direct labor………………………………………………………………………………………………………………………………………………………..
$2,500
Manufacturing overhead:
Power ($1 × 250)…………………………………………………………………………………………………………………………………………………………………….
Depreciation ($2 × 250)…………………………………………………………………………………………………………………………………………………………………….
Setups (2/3 × $600)……………………………………………………………………………………………………………………………………………………….
Rent and insurance ($4.40 × 250 DLH)*……………………………………………………………………………………………………………………………………………………………………
Total…………………………………………………………………………………………………………………………………………………..
$4,750
Brochure
Magazine
↓ magazine
↓ brochure
P 2-60 (Concluded)
Brochures:
Direct labor……………………………………………………………………………………………………………………
$1,000
Manufacturing overhead:
Power ($1 × 100)…………………………………………………………………………………………………………………………………………………………………….
$100 1 × 100 = 100
Depreciation ($2 × 100)…………………………………………………………………………………………………………………………………………………………………….
Setups (1/3 × $600)……………………………………………………………………………………………………………………………………………………….
Rent and insurance ($4.40 × 100 DLH)*……………………………………………………………………………………………………………………………………………………………………
*Rent and insurance cannot be traced to each product so the costs are assigned using direct ↓ rent
↓ insurance
labor hours: $1,540/350 DLH = $4.40 per direct labor hour. The other overhead costs are traced 1,400 + 140 /350 = 4.40
according to their usage. Depreciation and power are assigned by using machine hours (250
for magazines and 100 for brochures); $350/350 = $1.00 per machine hour for power and
↓ magazine
↓ brochure
$40,000/20,000 = $2.00 per machine hour for depreciation. Setups are assigned according to the 250 + 100 /350 = 1.00
time required. Since magazines use twice as much time, they receive twice the cost: Letting X = 40,000 / 20,000 = 2.00
the proportion of setup time used for brochures, 2X + X = 1 implies a cost assignment ratio of
2/3 for magazines and 1/3 for brochures.
4.
Sales [(5,000 × $1.80) + (10,000 × $0.45)]………………………………………………..…………………………………..…………………………………..…………………………..…
$13,500 5,000 × 1.80 + 10,000 × 0.45 = 13,500
Less cost of goods sold…………………………………………...……………….
9,490 9,490
Gross margin………………………………………………………..………….
$ 4,010
Selling ………………………………………………………………………………….
Administrative …………………………………………………….……………..
responsible for coordinating and managing all business functions, an administrative classification
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-61
1. The costs of the tent sales are accounted for as selling expense. The tent
2.
Revenue…………………………………………………………………………………………………………………………..
$ 20,000
Cost of goods sold……………………………………………………………………………………………………………………..
(7,000)
Tent sale expense……………………………………………………………………………………………………………………..
(14,300)
Tent sale loss………………………………………………………………………………………………………………..
$ (1,300)
A couple of actions could be taken. First, it could look for a more
appropriate venue. The outer parking lot of a shopping center, or even a
CHAPTER 2 Basic Managerial Accounting Concepts
Case 2-62
1.
(DL) Machine operators Sales salaries
(DL) Other direct labor Advertising
2. Traceable costs using equipment hours:
Machine operators…………………………………………………………………………………………………………….
$ 218,000
Other direct labor……………………………………………………………………………………………………….
265,700
Pipe……………………………………………………………………………………………………….
1,401,340
Tires and fuel……………………………………………………………………………………………………….
418,600
Depreciation, equipment……………………………………………………………………………………………………….
198,000
Salaries of mechanics……………………………………………………………………………………………………….
50,000
Total……………………………………………………………………………………………………….
$2,551,640
Machine operators, tires and fuel, and depreciation are all directly caused by
equipment usage, which is measured by equipment hours. One can also argue that
CASES
Production
Selling
Administrative
Utilities
Rent
CHAPTER 2 Basic Managerial Accounting Concepts
Case 2-63
1. Leroy should politely and firmly decline the offer. The offer includes an implicit
request to use confidential information to help Jean win the bid. Use of such
information for personal advantage is wrong. Leroy has a professional and
personal obligation to his current employer. This obligation must take
precedence over the opportunity for personal financial gain.
2. If Leroy agrees to review the bid, he will likely use his knowledge of his current
employer’s position to help Jean win the bid. In fact, agreement to help probably
would reflect a desire for the bonus and new job with the associated salary
increase. Helping would likely ensure that Jean would win the bid. Leroy was
concerned about the political fallout and subsequent investigation revealing
his involvement—especially if he sent up a red flag by switching to his friend’s