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
them into the general ledger accounts. Direct materials would be entered into the materials
account; direct labor would be entered into the direct labor account. Then, these costs are
assigned to units of product.
3. A cost object is something for which you want to know the cost. For example, a cost object may be
the human resources department of a company. The costs related to that cost object might include
salaries of employees of that department, telephone costs for that department, and depreciation on
office equipment. Another example is a customer group of a company. Atlantic City and Las Vegas
casinos routinely treat heavy gamblers to free rooms, food, and drink. The casino owners know the
benefits yielded by these high rollers and need to know the costs of keeping them happy, such as
the opportunity cost of lost revenue from the rooms, the cost of the food, and so on.
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.
7. Manufacturing overhead includes all product costs other than direct materials and direct labor. It is
because the remaining manufacturing (product) costs are gathered into one category that
overhead is often thought of as a “catchall.”
8. Direct materials purchases are first entered into the materials inventory. They may or may not be
used during the month. Only when the materials are withdrawn from inventory for use in production
are they known as “direct materials.”
9. Prime cost is the sum of direct materials and direct labor. Conversion cost is the sum of direct
labor and overhead. Total product cost consists of direct materials, direct labor, and overhead.
This is not equal to the sum of prime cost and conversion cost because then direct labor would
be double counted.
2 BASIC MANAGERIAL
ACCOUNTING CONCEPTS
DISCUSSION QUESTIONS
2-1
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CHAPTER 2 Basic Managerial Accounting Concepts
10. A period cost is one that is expensed immediately, rather than being inventoried like a product
cost.
11. Selling cost is the cost of selling and delivering products and services. Examples include free
samples, advertising, sponsorship of sporting events, commissions on sales, and the
depreciation on delivery trucks (such as Coca-Cola or Pepsi trucks).
12. The cost of goods manufactured is the sum of direct materials, direct labor, and overhead used in
producing the units completed during the current period and transferred to finished goods
inventory.
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
firm contains no cost of goods sold because there is no product to purchase or to manufacture
and, thus, there is no inventory account to expense as cost of goods sold. In addition, because
there is no cost of goods sold on the income statement of a service firm, there is no gross margin,
unlike a manufacturing firm.
15. The percentage column on the income statement gives some insight into the relative spending
on the various expense categories. These percentages can then be compared with those of other
firms in the same industry to see if the company’s spending appears to be in line or out of line with
the experiences of others. These percentages can also be compared to prior periods of the
company for variance analysis.
2-2
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CHAPTER 2 Basic Managerial Accounting Concepts
2-1. c
2-2. d
2-3. b Conversion Cost per Unit = $6 + $19 = $25
2-4. b Sales = $75 × 2,000 units = $150,000
Production Cost per Unit = $15 + $6 + $19 = $40
Cost of Goods Sold = $40 × 2,000 = $80,000
Gross Margin = $150,000 – $80,000 = $70,000
2-5. e
2-6. d
2-7. c
2-8. d
2-9. b
2-10. a
2-11. e Prime Cost per Unit = $8.65 + $1.10 = $9.75
2-12. b
2-13. a Total Prime Cost = $50,000 + $20,000 = $70,000
Prime Cost per Unit = $70,000/10,000 units = $7.00
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
2-16. b Sales = $31 × 10,000 = $310,000
Gross Margin = $310,000 – $200,000 = $110,000
Gross Margin per Unit = $110,000/10,000 units = $11.00
2-17. c Period Expense = $40,000 + $36,000 = $76,000
2-18. a Operating Income = $310,000 – $200,000 – $76,000 = $34,000
MULTIPLE-CHOICE QUESTIONS
2-3
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-19
1. Direct materials…………………………………………………… $ 32,000
Direct labor………………………………………………………… 28,000
Manufacturing overhead………………………………………… 60,000
Total product cost……………………………………………… $120,000
2. Per-Unit Product Cost = $120,000 = $240
500 units
Therefore, one hockey stick costs $240 to produce.
BE 2-20
1. Direct materials…………………………………………………… $32,000
Direct labor………………………………………………………… 28,000
Total prime cost………………………………………………… $60,000
2. Per-Unit Prime Cost = $60,000 = $120
500 units
3. Direct labor………………………………………………………… $28,000
Manufacturing overhead………………………………………… 60,000
Total conversion cost…………………………………………… $88,000
4. Per-Unit Conversion Cost = $88,000 = $176
500 units
BE 2-21
Materials inventory, June 1…………………………………………………………… $ 48,000
Purchases………………………………………………………………………………… 132,000
Materials inventory, June 30…………………………………………………………… (45,000)
Direct materials used in production………………………………………………… $135,000
BRIEF EXERCISES: SET A
2-4
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-22
1. Direct materials*……………………………………………………………… $135,000
Direct labor……………………………………………………………………… 113,000
Manufacturing overhead……………………………………………………… 187,000
Total manufacturing cost for June………………………………………… $435,000
Work in process, June 1………………………………………………… 65,000
Work in process, June 30………………………………………………… (63,000)
Cost of goods manufactured………………………………………………… $437,000
* Direct Materials = $48,000 + $132,000 – $45,000 = $135,000
[This was calculated in Brief Exercise 2-21.]
2. Per-Unit Cost of Goods Manufactured = = $230
BE 2-23
1.
Cost of goods manufactured………………………………….…………… $437,000
Finished goods inventory, June 1…………………………………….…… 80,000
Finished goods inventory, June 30…………………………………….…… (84,000)
Cost of goods sold…………………………………………………………… $433,000
2. Number of units sold:
Finished goods inventory, June 1…………………………………….…… 350
Units finished during June………………………………………….……… 1,900
Finished goods inventory, June 30…………………………………….…… (370)
Units sold during June……………………………………………….……… 1,880
For the Month of June
$437,000
1,900 units
Slapshot Company
Cost of Goods Sold Statement
2-5
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-24
Sales revenue (1,880 × $400)……………………………………… $752,000
Cost of goods sold ……………………………………..…………… 433,000
Gross margin……………………………………………………… $319,000
Less:
Selling expense:
Commissions (0.10 × $752,000)…………………………… $75,200
Fixed selling expense ………………….…………………… 65,000 140,200
Administrative expense ………………………………………… 53,800
Operating income…………………………………..………… $125,000
BE 2-25
Percent*
Sales revenue (1,880 × $400)………………………… $752,000 100.0
Cost of goods sold …………………………………… 433,000 57.6
Gross margin……………………………………… $319,000 42.4
Less:
Selling expense:
Variable commissions (0.10 × $752,000)…… $75,200
Fixed selling expense………………………… 65,000 140,200 18.6
Administrative expense…………………………… 53,800 7.2
Operating income…………………………….. $125,000 16.6
* 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)
2. Cost of Goods Sold Percent = $433,000/$752,000 = 0.576, or 57.6%
3. Gross Margin Percent = $319,000/$752,000 = 0.424, or 42.4%
4. Selling Expense Percent = $140,200/$752,000 = 0.186, or 18.6%
5. Administrative Expense Percent = $53,800/$752,000 = 0.072, or 7.2%
6. Operating Income Percent = $125,000/$752,000 = 0.166, or 16.6%
Slapshot Company
Income Statement
For the Month of June
Slapshot Company
Income Statement
For the Month of June
2-6
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-26
1.
Sales revenues………………………………………………… $410,000
Less operating expenses:
Sales commissions……………………………………… $ 50,000
Technology………………………………………………… 75,000
Research and development……………………………… 200,000
Selling expenses…………………………………………… 10,000
Administrative expenses ………………………………… 35,000 370,000
Operating income………………………………………… $ 40,000
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
inventory costs (raw materials, work in process, or finished goods) to flow through
to cost of goods sold when it recognizes its sales revenue. Instead, all of the costs
it incurs in providing advertising services appear as operating expenses on the
income statement.
For the Past Month
Allstar Exposure
Income Statement
2-7
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-27
1. Direct materials…………………………………………………… $100,000
Direct labor………………………………………………………… 18,000
Manufacturing overhead………………………………………… 50,000
Total product cost……………………………………………… $168,000
2. Per-Unit Product Cost = $168,000 = $84
2,000 units
Therefore, one coffee maker costs $84 to produce.
BE 2-28
1. Direct materials…………………………………………………… $100,000
Direct labor………………………………………………………… 18,000
Total prime cost………………………………………………… $118,000
2. Per-Unit Prime Cost = $118,000 = $59
2,000 units
3. Direct labor………………………………………………………… $18,000
Manufacturing overhead………………………………………… 50,000
Total conversion cost…………………………………………… $68,000
4. Per-Unit Conversion Cost = $68,000 = $34
2,000 units
BE 2-29
Materials inventory, March 1…………………………………………………………… $ 25,000
Purchases………………………………………………………………………………… 350,000
Materials inventory, March 31………………………………………………………… (40,000)
Direct materials used in production………………………………………………… $335,000
BRIEF EXERCISES: SET B
2-8
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-30
1. Direct materials*……………………………………………………………… $335,000
Direct labor……………………………………………………………………… 74,000
Manufacturing overhead……………………………………………………… 190,000
Total manufacturing cost for March……………………………………… $599,000
Work in process, March 1………………………………………………… 55,000
Work in process, March 31……………………………………………… (46,500)
Cost of goods manufactured………………………………………………… $607,500
* Direct Materials = $25,000 + $350,000 – $40,000 = $335,000
[This was calculated in Brief Exercise 2-29.]
2. Per-Unit Cost of Goods Manufactured = = $75
BE 2-31
1.
Cost of goods manufactured………………………………….…………… $607,500
Finished goods inventory, March 1…………………………………….… 70,000
Finished goods inventory, March 31…………………………………….… (65,000)
Cost of goods sold…………………………………………………………… $612,500
2. Number of units sold:
Finished goods inventory, March 1…………………………………….… 1,000
Units finished during March………………………………………….……… 8,100
Finished goods inventory, March 31…………………………………….… (1,100)
Units sold during March……………………………………………….……… 8,000
$607,500
8,100 units
Morning Smiles Coffee Company
Cost of Goods Sold Statement
For the Month of March
2-9
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-32
Sales revenue (8,000 × $100)……………………………………… $800,000
Cost of goods sold ……………………………………..…………… 612,500
Gross margin……………………………………………………… $187,500
Less:
Selling expense:
Variable commissions (0.05 × $800,000)………………… $40,000
Fixed selling expense ………………….…………………… 45,000 85,000
Administrative expense ………………………………………… 47,500
Operating income…………………………………..………… $ 55,000
BE 2-33
Percent*
Sales revenue (8,000 × $100)………………………… $800,000 100.0
Cost of goods sold …………………………………… 612,500 76.6
Gross margin……………………………………… $187,500 23.4
Less:
Selling expense:
Variable commissions (0.05 × $800,000)…… $40,000
Fixed selling expense………………………… 45,000 85,000 10.6
Administrative expense………………………… 47,500 5.9
Operating income…………………………….. $ 55,000 6.9
* Steps in calculating the percentages (the percentages are rounded):
1. Sales Revenue Percent = $800,000/$800,000 = 1.00, or 100% (sales revenue is
always 100% of sales revenue)
2. Cost of Goods Sold Percent = $612,500/$800,000 = 0.766, or 76.6%
3. Gross Margin Percent = $187,500/$800,000 = 0.234, or 23.4%
4. Selling Expense Percent = $85,000/$800,000 = 0.106, or 10.6%
5. Administrative Expense Percent = $47,500/$800,000 = 0.059, or 5.9%
6. Operating Income Percent = $55,000/$800,000 = 0.069, or 6.9%
For the Month of March
Morning Smiles Coffee Company
Income Statement
For the Month of March
Morning Smiles Coffee Company
Income Statement
2-10
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CHAPTER 2 Basic Managerial Accounting Concepts
BE 2-34
1.
Sales revenues………………………………………………… $200,000
Less operating expenses:
Technology………………………………………………… $ 10,000
Wages expense…………………………………………… 100,000
Rent expense……………………………………………… 15,000
Selling (advertising) expenses………………………… 5,000
Administrative expenses ………………………………… 20,000 150,000
Operating income………………………………………… $ 50,000
2. Healing Hands has no cost of goods sold line item because the company is a service
provider (i.e., of massage therapy activities), rather than a manufacturer. Therefore,
as a service provider, Healing Hands has no inventory costs (raw materials, work in
process, or finished goods) to flow through to cost of goods sold when it recognizes
its sales revenue. Instead, all of the costs it incurs in providing massage and other
beauty services appear as operating expenses on the income statement.
Healing Hands Massage Hut
Income Statement
For the Past Month
2-11
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-35
1. Salaries
Derek………………………………………………………… $25,000 $6,000
Lawanna……………………………………………………… 30,000 1,500
Total……………………………………………………… $55,000 $7,500
2. All of Derek’s time is spent selling, so all of his salary cost is selling cost.
Lawanna spends two-thirds of her time selling, so $20,000 ($30,000 × 2/3) of
her salary is selling cost. The remainder is administrative cost. All commissions
are selling costs.
Selling Administrative
Costs
Derek’s salary……………………………………………… $25,000 —
Lawanna’s salary…………………………………………… 20,000 $10,000
Derek’s commissions……………………………………… 6,000 —
Lawanna’s commissions………………………………… 1,500 —
Total……………………………………………………… $52,500 $10,000
E 2-36
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.
2. Holmes could assign the costs to production and to installation, but if the
installation is a minor part of its business, it probably does not go to the trouble.
3. The opportunity cost of the installation process is the loss of the playhouses that
could have been built by the two workers who were pulled off the production line.
Costs
Cost Commissions
EXERCISES
Cost
2-12
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-37
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
d. Maintenance for the cell’s equipment—Indirect
e. Labor used to produce motors—Direct
f. Cafeteria that services the plant’s employees—Indirect
g. Depreciation on the plant—Indirect
h. Depreciation on equipment used to produce the motors—Direct
i. Ordering costs for materials used in production—Indirect
j. Engineering support—Indirect
k. Cost of maintaining the plant and grounds—Indirect
l. Cost of the plant’s personnel office—Indirect
m. Property tax on the plant and land—Indirect
E 2-38
1. Direct materials—Product cost
Direct labor—Product cost
Manufacturing overhead—Product cost
Selling expense—Period cost
2. Direct materials………………………………………………………………… $ 7,000
Direct labor……………………………………………………………………… 3,000
Manufacturing overhead……………………………………………………… 2,000
Total product cost………………………………………………………… $12,000
3. Unit Product Cost = $12,000 = $3.00
4,000 units
2-13
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-39
1.
Direct Direct Manufact. Selling
Materials Labor Overhead Expense
Direct materials………………… $216,000
Factory rent……………………… $ 24,000
Direct labor……………………… $120,000
Factory utilities………………… 6,300
Supervision in the factory…… 50,000
Indirect labor in the
factory………………………… 30,000
Depreciation on factory
equipment……………………… 9,000
Sales commissions…………… $ 27,000
Sales salaries…………………… 65,000
Advertising……………………… 37,000
Depreciation on the
headquarters building……… $ 10,000
Salary of the corporate
receptionist…………………… 30,000
Other administrative costs…… 175,000
Salary of the factory
receptionist…………………… 28,000
Totals………………………… $216,000 $120,000 $147,300 $129,000 $215,000
2. Direct materials…………………………………………………………………… $216,000
Direct labor………………………………………………………………………… 120,000
Manufacturing overhead………………………………………………………… 147,300
Total product cost……………………………………………………………… $483,300
3. Total Period Cost = $129,000 + $215,000 = $344,000
Costs Expense
Product Cost Period Cost
4. Unit Product Cost = $483,300
30,000 units = $16.11
Administrative
2-14
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-40
Direct Direct Manufact.
Materials Labor Overhead
Jars……………………………………………………… X
Sugar…………………………………………………… X
Fruit…………………………………………………… X
Pectin…………………………………………………… X
Boxes…………………………………………………… X
Depreciation on the factory building……………… X
Cooking equipment operators’ wages…………… X
Filling equipment operators’ wages……………… X
Packers’ wages……………………………………… X
Janitors’ wages……………………………………… X
Receptionist’s wages………………………………… X
Telephone……………………………………………… X
Utilities………………………………………………… X
Rental of Santa Claus suit………………………… X
Supervisory labor salaries………………………… X
Insurance on factory building……………………… X
Depreciation on factory equipment……………… X
Oil to lubricate filling equipment………………… X
E 2-41
1. Direct materials…………………………………………………… $400,000
Direct labor………………………………………………………… 80,000
Manufacturing overhead………………………………………… 320,000
Total product cost……………………………………………… $800,000
2.
$800,000
4,000 units
Costs
Total Product Cost
Product Cost per Unit = Number of Units
= = $200.00
2-15
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-42
1. Direct materials…………………………………………………………………… $400,000
Direct labor………………………………………………………………………… 80,000
Total prime cost…………………………………………………………………… $480,000
=
3. Direct labor………………………………………………………………………… $ 80,000
Manufacturing overhead………………………………………………………… 320,000
Total conversion cost………………………………………………………… $400,000
$400,000
4,000 units
= $100.00
E 2-43
1. Materials inventory, June 1……………………………………………………… $ 3,700
Materials purchases in June…………………………………………………… 15,500
Materials inventory, June 30…………………………………………………… (1,600)
Direct materials used in June……………………………………………… $17,600
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
$1,600) drop below its beginning inventory (of $3,700). The difference in beginning
and ending inventories ($3,700 – $1,600 = $2,100) accounts for the difference
between the cost of direct materials purchased and the cost of direct materials
used in production (also $2,100; or $17,600 – $15,500). Hannah might have elected
to let its ending materials inventory drop in order to save cash for purchases other
than buying materials inventory. Also, it might have elected to do so to reduce its
materials inventory holding costs (e.g., inspection, handling, insurance, etc.).
Furthermore, Hannah might have reduced its ending materials inventory because
it foresaw that demand in July would be lower than in June and did not want to be
left holding additional inventory at the end of July. Alternately, Hannah might have
experienced stronger than expected sales in June and used more direct materials
in production than it had anticipated when purchasing materials. Regardless of the
reason, it is helpful for students to understand the relationship between the cost of
materials purchased versus the cost of materials used in production in a given
period.
2. Prime Cost per Unit =
Total Conversion Cost
Number of Units
Total Prime Cost
Number of Units
$120.00
$480,000
4,000 units
=
4. Conversion Cost per Unit =
=
2-16
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-44
1. Finished goods inventory, January 1………………………………… 6,800
Units completed during the year……………………………………… 94,000
Finished goods inventory, December 31……………………………… (7,200)
Units sold……………………………………………………………… 93,600
2. Units sold…………………………………………………………………… 93,600
× Unit cost………………………………………………………………… $2,200
Cost of goods sold……………………………………………………
E 2-45
1. Materials inventory, September 1………………………………………… $ 120,000
Materials purchases in September………………………………………… 200,000
Materials inventory, September 30………………………………………… (130,000)
Direct materials used in September…………………………………… $ 190,000
2. Direct materials……………………………………………………………… $190,000
Direct labor…………………………………………………………………… 120,000
Manufacturing overhead…………………………………………………… 325,000
Total manufacturing cost……………………………………………… $635,000
3. Total manufacturing cost…………………………………………………… $635,000
Add: Work in process, September 1……………………………………… 80,000
Less: Work in process, September 30…………………………………… (90,000)
Cost of goods manufactured…………………………………………… $625,000
E 2-46
Cost of goods manufactured*…………………………………………………… $625,000
Finished goods, September 1…………………………………………………… 70,000
Finished goods, September 30………………………………………………… (65,000)
Cost of goods sold…………………………………………………………… $630,000
* See solution to Exercise 2-45.
E 2-47
Direct materials…………………………………………………………………… $180,000
Direct labor………………………………………………………………………… 505,000
Manufacturing overhead………………………………………………………… 110,000
Cost of goods sold…………………………………………………………… $795,000
Note: Because there were no beginning or ending work-in-process or finished
goods inventories, there is no difference here between cost of goods sold and
cost of goods manufactured, so no interim calculations for them are necessary.
$205,920,000
2-17
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-48
1. Sales Revenue = Number of Units Sold × Selling Price
= 280,000 units × $12
= $3,360,000
2.
Sales revenue………………………………………………………………
Cost of goods sold*………………………………………………………
Gross profit…………………………………………………………………
Less:
Selling expense…………………………………………………………
Administrative expense………………………………………………
Operating income…………………………………………………………
* Calculated in E2-47
Direct materials………………………………… $180,000
Direct labor……………………………………… 505,000
Manufacturing overhead……………………… 110,000
Cost of goods sold……………………… $795,000
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.
a Sales revenue: $3,360,000/$3,360,000 = 1.00, or 100%
b Cost of goods sold: $795,000/$3,360,000 = 0.237, or 23.7%
c Gross profit: $2,565,000/$3,360,000 = 0.763, or 76.3%
d Selling expense: $437,000/$3,360,000 = 0.130, or 13.0%
e Administrative expense: $854,000/$3,360,000 = 0.254, or 25.4%
f Operating income: $1,274,000/$3,360,000 = 0.379, or 37.9%
$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
2-18
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
= $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
Thus, in order to find b, we first need to calculate Cost of Goods Manufactured as
follows:
Cost of Goods Manufactured = Cost of Goods Sold – Beginning Finished Goods
Inventory + Ending Finished Goods Inventory
COGM = $169,000 – $8,000 + $7,000
= $168,000
Finally, inserting Cost of Goods Manufactured into the earlier equation:
b = $168,000 – $40,000 – $80,000 – $17,000 + $14,000
= $45,000
c (Direct Materials Beginning Inventory for Year 2) = Direct Materials Ending
Inventory for Year 1 = $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
= $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.
2-19
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CHAPTER 2 Basic Managerial Accounting Concepts
E 2-50 (Concluded)
So, COGM = Direct Materials Used in Production + Direct Labor Used in Production +
MOH Costs Used in Production + Beginning WIP Inventory – Ending WIP Inventory
COGM = $50,000 + $53,000 + $76,000 + $14,000 – $19,000
= $174,000
= $7,000 + $174,000 – $11,000
= $170,000
Therefore, e
2-20
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CHAPTER 2 Basic Managerial Accounting Concepts
P 2-51
1. Direct Direct Manufact.
Materials Labor Overhead
Hamburger meat…………………………… $4,500
Buns, lettuce, pickles, and onions……… 800
Frozen potato strips……………………… 1,250
Wrappers, bags, and condiment
packages………………………………… 600
Other ingredients………………………… 660
Part-time employees’ wages…………… $7,250
John Peterson’s salary…………………… $3,000
Utilities……………………………………… $1,500
Rent………………………………………… 1,800
Depreciation, cooking equipment
and fixtures……………………………… 600
Advertising………………………………… 500
Janitor’s wages…………………………… 520
Janitorial supplies………………………… 150
Accounting fees…………………………… 1,500
Taxes………………………………………… 4,250
Totals…………………………………… $7,810 $7,250 $4,570 $9,250
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.
Direct labor consists of the part-time employees who cook food and fill orders.
Manufacturing overhead consists of all indirect costs associated with the production
process. These are the utilities, rent for the building, depreciation on the equipment
and register, and cost of janitorial fees and supplies.
Selling and administrative expense includes John Peterson’s salary, advertising,
accounting fees, and taxes.
Selling and
Cost Administrative
PROBLEMS
2-21
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CHAPTER 2 Basic Managerial Accounting Concepts
P 2-51 (Concluded)
2.
Sales ($3.50 × 10,000)………………………………………………… $35,000
Less cost of goods sold:
Direct materials…………………………………………………… $7,810
Direct labor………………………………………………………… 7,250
Manufacturing overhead………………………………………… 4,570 19,630
Gross margin…………………………………………………………… $15,370
Less: Selling and administrative expense………………………… 9,250
Net income………………………………………………………… $ 6,120
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,
(3) all building-related expense as well as depreciation on cooking equipment
and fixtures are for production, and
(4) all taxes are administrative expense.
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.)
For this small business, there is little problem with misclassifying Pop’s expenses.
Pop’s Drive-Thru Burger Heaven is not a publicly traded company, and its income
statements do not have to conform to GAAP. Outside use of the statements is
confined to government taxing authorities and a bank (if a loan or line of credit is
necessary). Elena’s accounting works well for those purposes. In addition, and
perhaps more importantly, the analysis of Pop’s results is not likely to change
dramatically based on these assumptions and therefore, the decisions that
Pop’s makes based on these statements would not be affected.
Pop’s Drive-Thru Burger Heaven
Income Statement
For the Month of December
2-22
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-52
1. Cost per Page for Black Ink = $25.50 = $0.03
850 pages
Total Owed to Harry by Mary = $0.03 × 500 pages = $15
Total Owed to Harry by Natalie = $0.03 × 1,000 pages = $30
2. Cost per Sheet for Paper = $2.50 = $0.005
500 sheets
Total Cost for Mary = 500 pages × ($0.03 + $0.005) = $17.50
Total Cost for Natalie = 1,000 pages × ($0.03 + $0.005) = $35
3. Cost per Page for Color Ink = $31 = $0.10
310 pages
Number of Black Ink Pages for Natalie = 1,000 × 0.80 = 800
Number of Color Ink Pages for Natalie = 1,000 × 0.20 = 200
Total Owed to Harry by Natalie = ($0.03 × 800 pages) + ($0.10 × 200) = $44
Total Cost to Natalie = [($0.03 + $0.005) × 800 pages] + [($0.10 + $0.005)
× 200 pages] = $49
P 2-53
1. Direct Materials = $40,000 + $64,000 – $19,800 = $84,200
2. Direct materials used…………………………………………………………… $ 84,200
Direct labor……………………………………………………………………… 43,500
Manufacturing overhead……………………………………………………… 108,750
Total manufacturing cost for July……………………………………… $236,450
Work in process, July 1……………………………………………………… 21,000
Work in process, July 31……………………………………………………… (32,500)
Cost of goods manufactured……………………………………………… $224,950
3. Cost of goods manufactured………………………………………………… $224,950
Finished goods inventory, July 1…………………………………………… 23,200
Finished good inventory, July 31…………………………………………… (22,100)
Cost of goods sold………………………………………………………… $226,050
2-23
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-54
1. Direct materials……………………………… $18
Direct labor…………………………………… 12
Manufacturing overhead…………………… 16
Unit product cost………………………… $46
Total Product Cost = $46 × 200,000 units = $9,200,000
2.
Sales revenue ($60 × 200,000)…………………………………………… $12,000,000
Cost of goods sold………………………………………………………… 9,200,000
Gross margin……………………………………………………………… $ 2,800,000
Less:
Commissions ($2 × 200,000)………………………………………… $ 400,000
Fixed selling expense………………………………………………… 100,000
Administrative expense……………………………………………… 300,000
Operating income………………………………………………………… $ 2,000,000
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
that is lower than the year’s unit product cost of $46. The FIFO assumption says
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
inventory. This can be seen in the following statement of cost of goods sold.
Cost of goods manufactured ($46 × 200,000)………………………… $9,200,000
Beginning finished goods inventory ($40 × 10,000)………………… 400,000
Ending finished goods inventory ($46 × 10,000)…………………… (460,000)
Cost of goods sold…………………………………………………… $9,140,000
Laworld Inc.
Income Statement
For Last Year
2-24
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-54 (Concluded)
Sales revenue ($60 × 200,000)…………………………………………… $12,000,000
Cost of goods sold………………………………………………………… 9,140,000
Gross margin………………………………………………………………… $ 2,860,000
Less:
Commissions ($2 × 200,000)………………………………………… $ 400,000
Fixed selling expense………………………………………………… 100,000
Administrative expense………………………………………………… 300,000
Operating income…………………………………………………………… $ 2,060,000
P 2-55
1. Direct Materials = $3,475 + $15,000 – $9,500 = $8,975
Direct materials used…………………………………… $ 8,975
Direct labor………………………………………………… 10,500
Manufacturing overhead:
Factory supplies……………………………………… $ 675
Factory insurance……………………………………… 350
Factory supervision…………………………………… 2,225
Material handling……………………………………… 3,750 7,000
Total manufacturing cost for May……………………… $ 26,475
Work in process, May 1………………………………… 12,500
Work in process, May 31………………………………… (14,250)
Cost of goods manufactured………………………… $ 24,725
2.
Cost of goods manufactured……………………………………………… $24,725
Finished goods inventory, May 1………………………………………… 6,685
Finished goods inventory, May 31……………………………………… (4,250)
Cost of goods sold……………………………………………………… $27,160
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
2-25
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
2. a. If Linda returns to school, she will need to quit her job. The lost salary is the
opportunity cost of returning to school.
3. b. If Randy were engaged in manufacturing a product, his salary would be a
product cost. Instead, the product has been manufactured. It is in the finished
goods warehouse waiting to be sold. This is a period 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.
9. f. The cost of converting direct materials into finished product is the sum of
direct labor and manufacturing overhead. This is conversion cost.
10. e. The depreciation on the delivery trucks is part of selling cost, the cost of
selling and delivering product.
2-26
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
= $20,000 + $40,000 – $10,000
= $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
= $910,000
2. COGS = Beginning Finished Goods Inventory + COGM – Ending Finished Goods
Inventory
= $300,000 + $910,000 – $280,000
= $930,000
2-27
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-57 (Concluded)
3.
Sales ($2,100 × 700)…………………………………………………………… $1,470,000
Cost of goods sold…………………………………………………………… 930,000
Gross margin……………………………………………………………… $ 540,000
Less:
Selling expense…………………………………………..………………… 60,000
Administrative expense…………………………………………….…… 150,000
Operating income……………………………………………………… $ 330,000
4. The dominant cost is direct labor cost of $800,000. Direct labor is the dominant
cost because Berry’s core business is creating building plans, which is a laborintensive
process requiring expensive, well-trained architects. The materials
used to create building plans are relatively inexpensive.
P 2-58
1.
Direct materials*…………………………………………… $300,000
Direct labor…………………………………………………… 200,000
Manufacturing overhead:
Indirect labor…………………………………………… $40,000
Rent, factory building………………………………… 42,000
Depreciation, factory equipment…………………… 60,000
Utilities, factory………………………………………… 11,900 153,900
Total cost of product……………………………………… $653,900
Beginning work in process……………………………… 13,040
Ending work in process…………………………………… (14,940)
Cost of goods manufactured………………………… $652,000
* Beg. Inventory + Purchases – Ending Inventory = Direct Materials Used
Direct Materials Used = $46,800 + $320,000 – $66,800 = $300,000
Income Statement
Berry Company
Statement of Cost of Goods Manufactured
For Last Year
For Last Year
W. W. Phillips Company
2-28
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-58 (Concluded)
2. Average Cost of One Unit of Product = $652,000 = $163
4,000
3.
Sales ($400 × 3,800*)……………………………….…………… $1,520,000
Cost of goods sold**…………………………………………… 617,900
Gross margin…………………………………………………… $ 902,100
Less:
Selling expense:
Sales supervisor’s salary……………………………… $ 90,000
Commissions…………………………………………… 180,000 270,000
General administration expense………………………… 300,000
Operating income……………………………………… $ 332,100
* Units Sold = 4,000 + 500 – 700 = 3,800
** Cost of Goods Sold = $652,000 + $80,000 – $114,100 = $617,900
P 2-59
1. The Internet payment of $40 is an expense that would appear on the income
statement. This is because the Internet services are used up each month—Luisa
cannot “save” any unused Internet time for the next month.
2. The opportunity cost is the $100 that Luisa would have made if she had been able
to accept the movie role. It is an opportunity cost because it is the cost of the next
best alternative to dog walking.
3. The price is $250 per month per dog. (Note: The price is charged by Luisa to her
clients; it is not her cost.)
Total Revenue for a Month = $250 × 12 dogs = $3,000
W. W. Phillips Company
Income Statement
For Last Year
2-29
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CHAPTER 2 Basic Managerial Accounting Concepts
P 2-60
1. Direct materials:
Magazine (5,000 × $0.40)…………………………………… $2,000
Brochure (10,000 × $0.08)…………………………………… 800 $2,800
Direct labor:
Magazine (5,000/20 × $10)…………………………………… $2,500
Brochure (10,000/100 × $10)………………………………… 1,000 3,500
Manufacturing overhead:
Rent……………………………………………………………. $1,400
Depreciation ($40,000/20,000 × 350*)……………………… 700
Setups…………………………………………………………… 600
Insurance……………………………………………………… 140
Power…………………………………………………………… 350 3,190
Cost of goods manufactured…………………………………… $9,490
* Production is 20 units per printing hour for magazines and 100 units per printing hour for
brochures, yielding monthly machine hours of 350 [(5,000/20) + (10,000/100)]. This is also
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
Total prime costs………………………………………… $4,500
Brochure:
Direct materials……………………………………………… $ 800
Direct labor…………………………………………………… 1,000
Total prime costs………………………………………… $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)…………………………………………… $ 250
Depreciation ($2 × 250)…………………………………… 500
Setups (2/3 × $600)………………………………………… 400
Rent and insurance ($4.40 × 250 DLH)*……………… 1,100 2,250
Total ……………………………………………………… $4,750
2-30
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-60 (Concluded)
Brochures:
Direct labor………………………………………………… $1,000
Manufacturing overhead:
Power ($1 × 100)……………………………………… $100
Depreciation ($2 × 100)……………………………… 200
Setups (1/3 × $600)…………………………………… 200
Rent and insurance ($4.40 × 100 DLH)*…………… 440 940
Total ………………………………………………… $1,940
* Rent and insurance cannot be traced to each product so the costs are assigned using direct
labor hours: $1,540/350 DLH = $4.40 per direct labor hour. The other overhead costs are traced
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
$40,000/20,000 = $2.00 per machine hour for depreciation. Setups are assigned according to the
time required. Since magazines use twice as much time, they receive twice the cost: Letting X =
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
Less cost of goods sold……………………………………… 9,490
Gross margin…………………………………………………… $ 4,010
Less operating expenses:
Selling ……………………………………………………… $ 500 **
Administrative …………………………………………… 1,500 *** 2,000
Operating income……………………………………………… $ 2,010
** Distribution of goods is a selling expense.
*** A case could be made for assigning part of her salary to production. However, since she is
responsible for coordinating and managing all business functions, an administrative classification
is more convincing.
2-31
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
P 2-61
1. The costs of the tent sales are accounted for as selling expense. The tent
sales are designed to sell outdated or remanufactured products. They are
not the main reason that Kicker is in business. In fact, an important
objective is simply to increase awareness of the Kicker brand. As a result,
these related costs are selling expense.
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
large grocery store, would enable Kicker employees to easily load
purchased product into customer cars. Second, the disc jockey could be
dispensed with; instead, music could be played from CDs over the audio
system in the truck. Third, Kicker could spend a year or so raising brand
awareness in the Austin market before attempting another tent sale.
2-32
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 2 Basic Managerial Accounting Concepts
Case 2-62
1.
(DL) Machine operators Sales salaries
(DL) Other direct labor Advertising
(OH) Supervisory salaries
(DM) Pipe
(OH) Tires and fuel
(OH) Depreciation, equipment
(OH) Salaries of mechanics
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
the amount of mechanic time required is also a function of equipment hours and so
the salaries of mechanics can be assigned using equipment hours. Pipe and other
direct labor can be assigned using equipment hours because their usage should
be highly correlated with equipment hours. That is, equipment hours increase
because there is more pipe being laid. As hours increase, so does the pipe usage.
A similar argument can be made for other direct labor. Actually, it is not necessary
to use equipment hours to assign pipe or other direct labor because these two
costs are directly traceable to jobs.
$2,551,640
18,200 hours
= $140.20 per hour
CASES
Production Selling
Traceable Cost per Equipment Hour =
Administrative
Utilities
Rent
CPA fees
Adm. salaries
20-33
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
Corporate codes of conduct emphasize honesty and integrity. Leroy has a
responsibility to act on behalf of his company, and clearly, disclosing
confidential information acquired in the course of his work to a competitor
would be prohibited. In addition, codes of corporate conduct also require
employees to avoid conflicts of interest and to refuse any gift, favor, or
hospitality that would influence employee actions inappropriately.
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
firm. An investigation may reveal the up-front bonus and increase the
suspicion about Leroy’s involvement. There is a real possibility that Leroy
could be implicated. Whether this would lead to any legal difficulties is another
issue. At the very least, some tarnishing of his professional reputation and
personal character is possible. Some risk to Leroy exists. The amount of risk,
though, should not be a factor in Leroy’s decision. What is right should be the
central issue, not the likelihood of getting caught.
2-34
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