Chapter 16
Introduction to Managerial Accounting
Review Questions
1. What is the primary purpose of managerial accounting?
2. Explain the difference between planning and controlling.
3. List six differences between financial accounting and managerial accounting.
Financial accounting and managerial accounting differ on the following 6 dimensions: (1) primary
4. How does managerial accounting assist managers with their responsibilities to the company’s stake-
holders?
Management accountability is the manager’s responsibility to the various stakeholders of the com-
5. List the four IMA standards of ethical practice, and briefly describe each.
The four IMA standards of ethical practice and a description of each follow.
I. Competence.
• Maintain an appropriate level of professional expertise.
6. Describe a service company, and give an example.
Service companies sell time, skills, and knowledge. They seek to provide services that are high
7. Describe a merchandising company, and give an example.
Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory
8. What are product costs?
Product costs are all costs of a product that GAAP requires companies to treat as an asset for exter-
9. How do period costs differ from product costs?
Period costs are operating costs that are expensed in the same accounting period in which they are
10. How do manufacturing companies differ from merchandising companies?
Merchandising companies resell products they previously bought from suppliers, whereas manufac-
11. List the three inventory accounts used by manufacturing companies, and describe each.
The three inventory accounts used by manufacturing companies are Raw Materials Inventory, Work-
in-Process Inventory, and Finished Goods Inventory.
12. How does a manufacturing company calculate cost of goods sold? How is this different from a mer-
chandising company?
For a manufacturing company, the activity in the Finished Goods Inventory account provides the in-
formation for determining Cost of Goods Sold. A manufacturing company calculates Cost of Goods
13. Explain the difference between a direct cost and an indirect cost.
14. What are the three product costs for a manufacturing company? Describe each.
The three product costs for a manufacturing company are direct materials, direct labor, and manufac-
15. Give five examples of manufacturing overhead.
Examples of manufacturing overhead include costs of indirect materials, indirect labor, repair and
16. What are prime costs? Conversion costs?
17. How is cost of goods manufactured calculated?
18. How does a manufacturing company calculate unit product cost?
A manufacturing company calculates unit product cost as Cost of Goods Manufactured / Total num-
ber of units produced.
19. How does a service company calculate unit cost per service?
ed.
20. How does a merchandising company calculate unit cost per item?
Short Exercises
S16-1 Comparing managerial accounting and financial accounting
Learning Objective 1
For each of the following, indicate whether the statement relates to managerial accounting (MA) or fi-
nancial accounting (FA):
a. Helps investors make investment decisions.
b. Provides detailed reports on parts of the company.
c. Helps in planning and controlling operations.
d. Reports must follow Generally Accepted Accounting Principles (GAAP).
e. Reports audited annually by independent certified public accountants.
SOLUTION
a.
FA
b.
c.
d.
FA
e.
FA
S16-2 Identifying management accountability and the stakeholders
Learning Objective 1
For each of the following management responsibilities, indicate the primary stakeholder group to whom
management is responsible.
SOLUTION
1.
e.
2.
3.
d.
4.
a.
5.
b.
S16-3 Matching business trends terminology
Learning Objective 1
Match the term with the correct definition.
SOLUTION
1.
d.
2.
3.
e.
5.
b.
S16-4 Identifying ethical standards
Learning Objective 1
The Institute of Management Accountants’ Statement of Ethical Professional Practice requires manage-
rial accountants to meet standards regarding competence, confidentiality, integrity, and credibility. Con-
sider the following situations. Which standard(s) are violated in each situation?
a. You tell your brother that your company will report earnings significantly above financial analysts’
estimates.
b. You see others take home office supplies for personal use. As an intern, you do the same thing, as-
suming that this is a “perk.”
c. At a company-paid conference on e-commerce, you skip the afternoon session and go sightseeing.
d. You failed to read the detailed specifications of a new accounting software package that you asked
your company to purchase. After it is installed, you are surprised that it is incompatible with some of
your company’s older accounting software.
e. You do not provide top management with the detailed job descriptions they requested because you
fear they may use this information to cut a position in your department.
SOLUTION
a.
Confidentiality
b.
Integrity
c.
Competence (skipping the session); Integrity (company-paid conference)
d.
Competence
e.
Credibility; Integrity
S16-5 Computing cost of goods sold, merchandising company
Learning Objective 2
Use the following information for The Windshield Pro, a retail merchandiser of auto windshields, to
compute the cost of goods sold:
SOLUTION
Beginning merchandise inventory
$ 8,200
Purchases
Freight in
42,700
Cost of goods available for sale
Ending merchandise inventory
Cost of goods sold
S16-6 Computing cost of goods sold and operating income, merchandising company
Learning Objective 2
Consider the following partially completed income statements for merchandising companies and com-
pute the missing amounts:
SOLUTION
Solutions:
Calculations:
(a)
$15,100
$65,100 [b, below] – $50,000
(b)
$65,100
$63,000 + $2,100
(c)
$23,000
$36,000 – $13,000
(d)
$115,000 + $89,900 [f, below]
$89,900
$92,000 – $2,100
(g)
$29,000
$115,000 – $86,000
S16-7 Distinguishing between direct and indirect costs
Learning Objective 3
Granger Cards is a manufacturer of greeting cards. Classify its costs by matching the costs to the terms.
SOLUTION
a.
2
4
c.
1
5
e.
4
5
3
S16-8 Computing manufacturing overhead
Learning Objective 3
Glass Doctor Company manufactures sunglasses. Following is a list of costs the company incurred dur-
ing May. Use the list to calculate the total manufacturing overhead costs for the month.
SOLUTION
Glue for frames
$ 200
Plant depreciation
Oil for manufacturing equipment
Total manufacturing overhead
$ 10,450
S16-9 Identifying product costs and period costs
Learning Objective 3
Classify each cost of a paper manufacturer as either product cost or period cost:
a. Salaries of scientists studying ways to speed forest growth.
b. Cost of computer software to track WIP Inventory.
c. Cost of electricity at the paper mill.
d. Salaries of the company’s top executives.
e. Cost of chemicals to treat the paper.
f. Cost of TV ads.
g. Depreciation on the manufacturing plant.
h. Cost to purchase wood pulp.
i. Life insurance on the CEO.
SOLUTION
a.
Period cost
b.
Product cost
c.
Product cost
d.
Period cost
e.
Product cost
f.
Period cost
g.
Product cost
h.
Product cost
i.
Period cost
S16-10 Computing direct materials used
Learning Objective 4
Lazio, Inc. has compiled the following data:
Assume all materials used are direct materials (none are indirect). Compute the amount of direct materi-
als used.
SOLUTION
Beginning Raw Materials Inventory
$ 3,700
Purchases of Raw Materials
Freight In
Raw Materials Available for Use
10,800
Ending Raw Materials Inventory
Direct Materials Used
$ 9,500
S16-11 Computing cost of goods manufactured
Learning Objective 4
Use the following inventory data for Slicing Golf Company to compute the cost of goods manufactured
for the year:
SOLUTION
Beginning Work-in-Process Inventory
$ 7,000
Direct Materials Used
$ 12,000
Direct Labor
Manufacturing Overhead
Total Manufacturing Costs Incurred during the Year
Total Manufacturing Costs to Account For
Ending Work-in-Process Inventory
Cost of Goods Manufactured
$ 49,000
S16-12 Computing cost of goods sold, manufacturing company
Learning Objective 4
Use the following information to calculate the cost of goods sold for The Eaton Company for the month
of June:
SOLUTION
Beginning Finished Goods Inventory
Cost of Goods Manufactured
Cost of Goods Available for Sale
Ending Finished Goods Inventory
Cost of Goods Sold
S16-13 Calculating unit cost per service
Learning Objective 5
Knots and Reynolds provides hair-cutting services in the local community. In February, the business cut
the hair of 240 clients, earned $4,900 in revenues, and incurred the following operating costs:
What was the cost of service to provide one haircut?
SOLUTION
Cost of one haircut
=
Total operating costs / Total number of haircuts
=
=
$1,896 / 240 haircuts
=
$7.90 per haircut
Exercises
E16-14 Comparing managerial accounting and financial accounting
Learning Objective 1
Match the following terms to the appropriate statement. Some terms may be used more than once, and
some terms may not be used at all.
a. Accounting systems that must follow GAAP.
b. External parties for whom financial accounting reports are prepared.
c. The role managers play when they are comparing the company’s actual results with the planned re-
sults.
d. Internal decision makers.
e. Accounting system that provides information on a company’s past performance.
f. Accounting system not restricted by GAAP but chosen by comparing the costs versus the benefits of
the system.
g. The management function that involves choosing goals and the means to achieve them.
SOLUTION
a.
Financial
Creditors and Stockholders
c.
Controlling
Managers
e.
Financial
Managerial
Planning
E16-15 Understanding today’s business environment
Learning Objective 1
Match the following terms to the appropriate statement. Some terms may be used more than once, and
some terms may not be used at all.
a. A management system that focuses on maintaining lean inventories while producing products as
needed by the customer.
b. A philosophy designed to integrate all organizational areas in order to provide customers with supe-
rior products and services while meeting organizational objectives.
c. Integrates all of a company’s functions, departments, and data into a single system.
d. Adopted by firms to conduct business on the Internet.
SOLUTION
a.
JIT
TQM
c.
ERP
E-Commerce
E16-16 Making ethical decisions
Learning Objective 1
Sue Peters is the controller at Vroom, a car dealership. Dale Miller recently has been hired as the
bookkeeper. Dale wanted to attend a class in Excel spreadsheets, so Sue temporarily took over Dale’s
duties, including overseeing a fund used for gas purchases before test drives. Sue found a shortage in the
fund and confronted Dale when he returned to work. Dale admitted that he occasionally uses the fund to
pay for his own gas. Sue estimated the shortage at $450.
Requirements
1. What should Sue Peters do?
2. Would you change your answer if Sue Peters was the one recently hired as controller and Dale Mil-
ler was a well-liked, longtime employee who indicated he always eventually repaid the fund?
SOLUTION
Requirement 1
A new employee who has engaged in this behavior is unlikely to become a valued and trusted employee.
Requirement 2
Being a new employee, Sue Peters may want to discuss the situation with the her immediate supervisor
Use the following data for Exercises E16-17, E16-18, and E16-19.
Selected data for three companies are given below. All inventory amounts are ending balances and all
amounts are in millions.
E16-17 Identifying differences between service, merchandising, and manufacturing companies
Learning Objective 2
Using the above data, determine the company type. Identify each company as a service company, mer-
chandising company, or manufacturing company.
SOLUTION
E16-18 Identifying differences between service, merchandising, and manufacturing companies
Learning Objective 2
Company B: $29
Using the above data, calculate operating income for each company.
SOLUTION
Company A (all amounts in millions):
Sales Revenue
$ 28
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling Expenses
Administrative Expenses
Total Operating Expenses
3
Company B (all amounts in millions):
Service Revenue
$ 54
Expenses:
Wages Expense
$ 16
Rent Expense
9
Total Expenses
25
Operating Income
$ 29
Sales Revenue
$ 28
Cost of Goods Sold
Gross Profit
12
Operating Expenses:
Selling Expenses
Administrative Expenses
E16-19 Identifying differences between service, merchandising, and manufacturing companies
Learning Objective 2
Company C: $51
Using the above data, calculate total current assets for each company.
SOLUTION
Company A (all amounts in millions):
Cash
$ 5
Accounts Receivable
Raw Materials Inventory
Finished Goods Inventory
Cash
Accounts Receivable
Total current assets
$ 20
E16-20 Classifying costs
Learning Objective 3
Wheels, Inc. manufactures wheels for bicycles, tricycles, and scooters. For each cost given below, de-
termine if the cost is a product cost or a period cost. If the cost is a product cost, further determine if the
cost is direct materials (DM), direct labor (DL), or manufacturing overhead (MOH) and then determine
if the product cost is a prime cost, conversion cost, or both. If the cost is a period cost, further determine
if the cost is a selling expense or administrative expense (Admin). Cost (a) is answered as a guide.
SOLUTION
Cost
Product
Product
Period
DM
DL
MOH
Prime
Conversion
Selling
Admin
a. Metal used for rims
X
X