Managerial accounting garrison edition 13 Chap 002

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

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    Chapter 2

    Managerial ccounting and Cost Concepts !olutioto Questions

    2-" Managers carry out three majoractivities in an organization: planning, directingand motivating, and controlling. Planninginvolves establishing a basic strategy, selectinga course of action, and specifying how the

    action will be implemented. Directing andmotivating involves mobilizing people to carryout plans and run routine operations. Controllinginvolves ensuring that the plan is actuallycarried out and is appropriately modified ascircumstances change.

    2-2 he planning and control cycle involvesformulating plans, implementing plans,measuring performance, and evaluatingdifferences between planned and actualperformance.

    2-# !n contrast to financial accounting,managerial accounting: "#$ focuses on theneeds of managers rather than outsiders% "&$emphasizes decisions affecting the future ratherthan the financial conse'uences of past actions%"($ emphasizes relevance rather than objectivityand verifiability% ")$ emphasizes timelinessrather than precision% "*$ emphasizes thesegments of an organization rather thansummary data concerning the entireorganization% "+$ is not governed by --P% and"$ is not mandatory.

    2-$ he three major elements of productcosts in a manufacturing company are directmaterials, direct labor, and manufacturingoverhead.

    2-%

    a. Direct materials are an integral part of afinished product and their costs can beconveniently traced to it.

    b. !ndirect materials are generally smallitems of material such as glue and nails. heymay be an integral part of a finished product buttheir costs can be traced to the product only atgreat cost or inconvenience.

    c. Direct labor consists of labor costs thatcan be easily traced to particular products.Direct labor is also called /touch labor.0

    d. !ndirect labor consists of the labor costsof janitors, supervisors, materials handlers, andother factory wor1ers that cannot beconveniently traced to particular products.hese labor costs are incurred to supportproduction, but the wor1ers involved do notdirectly wor1 on the product.

    e. Manufacturing overhead includes allmanufacturing costs e2cept direct materials anddirect labor. Conse'uently, manufacturing

    overhead includes indirect materials and indirectlabor as well as other manufacturing costs.

    2-& - product cost is any cost involved inpurchasing or manufacturing goods. !n the caseof manufactured goods, these costs consist ofdirect materials, direct labor, and manufacturingoverhead. - period cost is a cost that is ta1endirectly to the income statement as an e2pensein the period in which it is incurred.

    2-' he income statement of amanufacturing company differs from the income

    statement of a merchandising company in thecost of goods sold section. - merchandisingcompany sells finished goods that it haspurchased from a supplier. hese goods arelisted as /purchases0 in the cost of goods soldsection. 3ecause a manufacturing companyproduces its goods rather than buying themfrom a supplier, it lists /cost of goodsmanufactured0 in place of /purchases.0 -lso, the

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    8olutions Manual, Chapter & #9

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    manufacturing company identifies its inventoryin this section as inished oods inventory,rather than as Merchandise !nventory.

    2-( he schedule of cost of goodsmanufactured lists the manufacturing costs that

    have been incurred during the period. hesecosts are organized under the three categoriesof direct materials, direct labor, andmanufacturing overhead. he total costsincurred are adjusted for any change in the;or1 in Process inventory to determine the costof goods manufactured "i.e. finished$ during theperiod.

    he schedule of cost of goodsmanufactured ties into the income statementthrough the cost of goods sold section. he costof goods manufactured is added to thebeginning inished oods inventory to

    determine the goods available for sale. !n effect,the cost of goods manufactured ta1es the placeof the Purchases account in a merchandisingfirm.

    2-) - manufacturing company usually hasthree inventory accounts:

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-""#7 minutes$

    #. Directing and motivating

    &. 3udgets

    (. Planning). Precision% imeliness

    *. Managerial accounting% inancial accounting

    +. Managerial accounting

    inancial accounting% Managerial accounting

    A. eedbac1

    9. Controller

    #7. Performance report

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    8olutions Manual, Chapter &

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-2"#7 minutes$

    #. he cost of a hard drive installed in a computer: direct materials.

    &. he cost of advertising in the Puget Sound Computer Usernewspaper:

    selling.

    (. he wages of employees who assemble computers from components:direct labor.

    ). 8ales commissions paid to the companyBs salespeople: selling.

    *. he wages of the assembly shopBs supervisor: manufacturing overhead.

    +. he wages of the companyBs accountant: administrative.

    . Depreciation on e'uipment used to test assembled computers beforerelease to customers: manufacturing overhead.

    A.

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    +,ercise 2-#"#* minutes$

    ProductCost

    PeriodCost

    #. Depreciation on salespersonsB cars..........................

    &.

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    +,ercise 2-$"#* minutes$

    Cyberames!ncome 8tatement

    8ales........................................................ F#,)*7,777Cost of goods sold:

    3eginning merchandise inventory.......... F &)7,777-dd: Purchases..................................... 9*7,777oods available for sale........................ #,#97,777Deduct: @nding merchandise inventory. #7,777 #,7&7,777

    ross margin............................................ )(7,7778elling and administrative e2penses:

    8elling e2pense..................................... ,777

    -dministrative e2pense.......................... #A7,777 (97,777?et operating income............................... F )7,777

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    &) Managerial -ccounting, #(th @dition

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-%"#* minutes$

    ompac Products8chedule of Cost of oods Manufactured

    Direct materials:3eginning raw materials inventory............ F +7,777-dd: Purchases of raw materials.............. +97,777

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    +,ercise 2-& "#* minutes$

    - few of these costs may generate debate. or e2ample, some may arguethat the cost of advertising a roc1 concert is a variable cost because thenumber of people who come to the roc1 concert depends on the amount of

    advertising. 6owever, one can argue that if the price is within reason, anyroc1 concert in ?ew >or1 City will be sold out and the function of advertisingis simply to let people 1now the event will be happening. Moreover, whileadvertising may affect the number of persons who ultimately buy tic1ets, thecausation is in one direction. !f more people buy tic1ets, the advertisingcosts donBt go up.

    Cost Behavior

    Cost (Measure of Activity) Variabl

    e

    i!ed

    #.he cost of 5ray film used in the radiology lab atGirginia Mason 6ospital in 8eattle "?umber of 5raysta1en$.........................................................................

    &.he cost of advertising a roc1 concert in ?ew >or1 City"?umber of roc1 concert tic1ets sold$.........................

    (.he cost of renting retail space for a McDonaldBsrestaurant in 6ong Hong "otal sales at therestaurant$..................................................................

    ).he electrical cost of running a roller coaster at Magic

    Mountain "?umber of times the roller coaster is run$. . *.Property ta2es paid by your local cinema theater

    "?umber of tic1ets sold$.............................................. +.he cost of sales commissions paid to salespersons at

    a ?ordstrom store "otal sales at the store$................ .Property insurance on a Coca Cola bottling plant

    "?umber of cases of bottles produced$....................... A.he costs of synthetic materials used to ma1e a

    particular model of running shoe "?umber of shoes

    of that model produced$.............................................. 9.he costs of shipping Panasonic televisions to retail

    stores "?umber of televisions sold$............................. #7.he cost of leasing an ultra5scan diagnostic machine

    at the -merican 6ospital in Paris "?umber of patientsscanned with the machine$.........................................

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    &+ Managerial -ccounting, #(th @dition

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-' "#* minutes$

    Cost Cost "b#ect $irectCost

    %ndirectCost

    #. he wages of pediatricnurses

    he pediatricdepartment

    &. Prescription drugs - particular patient (. 6eating the hospital he pediatric

    department ). he salary of the head

    of pediatricshe pediatric

    department *. he salary of the head

    of pediatrics- particular pediatric

    patient +. 6ospital chaplainBs

    salary

    - particular patient

    . ab tests by outsidecontractor

    - particular patient

    A. ab tests by outsidecontractor

    - particular department

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & &

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    +,ercise 2-("#* minutes$

    %tem$ifferential

    Cost"pportunity

    CostSun&Cost

    #. Cost of the old 5ray machine.....

    &. he salary of the head of the

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    +,ercise 2-)"#* minutes$

    #. Product cost% variable cost&. Conversion cost(. Ipportunity cost

    ). Prime cost*. 8un1 cost+. Period cost% variable cost. Product cost% period cost% fi2ed costA. Product cost9. Period cost

    #7. i2ed cost% product cost% conversion cost

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    8olutions Manual, Chapter & &9

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-"*"#* minutes$

    Selling andCost Behavior Administrative Product

    Cost %tem Variable i!ed Cost Cost

    #. 6amburger buns at a;endyBs outlet..........

    &. -dvertising by a dentaloffice........................

    (. -pples processed andcanned by Del Monte

    ). 8hipping cannedapples from a DelMonte plant to

    customers................ *. !nsurance on a 3ausch

    J omb factoryproducing contactlenses.......................

    +. !nsurance on !3MBscorporatehead'uarters............

    . 8alary of a supervisoroverseeingproduction of printersat 6ewlett5Pac1ard...

    A. Commissions paid to@ncyclopedia3ritannicasalespersons............

    9. Depreciation of factorylunchroom facilitiesat a eneral @lectric

    plant......................... #7. 8teering wheels

    installed in 3M;s.. ..

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    (7 Managerial -ccounting, #(th @dition

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-"""(7 minutes$

    #.Mason Company

    8chedule of Cost of oods Manufactured

    Direct materials:3eginning raw materials inventory..................... F ,777

    -dd: Purchases of raw materials....................... ##A,777

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    +,ercise 2-"2"(7 minutes$

    #. a.3atteries purchased............................................................. A,7773atteries drawn from inventory............................................ ,+773atteries remaining in inventory........................................... )77

    Cost per battery................................................................... K F#7Cost in

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    roblem 2-"#"(7 minutes$

    ?ote to the !nstructor: here may be some e2ceptions to the answers below. he purpose of this problemis to get the student to start thin&ingabout cost behavior and cost purposes% try to avoid lengthydiscussions about how a particular cost is classified.

    Variable

    or Selling Administrative

    Manufacturing

    (Product) CostCost %tem i!ed Cost Cost $irect %ndirect#. Property ta2es, factory................................... &. 3o2es used for pac1aging detergent

    produced by the company........................... G (. 8alespersonsB commissions.......................... G ). 8upervisorBs salary, factory............................ *. Depreciation, e2ecutive autos....................... +. ;ages of wor1ers assembling computers..... G . !nsurance, finished goods warehouses.......... A. ubricants for production e'uipment............. G 9. -dvertising costs...........................................

    #7. Microchips used in producing calculators...... G ##. 8hipping costs on merchandise sold............. G #&. Magazine subscriptions, factory lunchroom... #(. hread in a garment factory.......................... G #). 3illing costs................................................... G N#*. @2ecutive life insurance.................................

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & ((

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    roblem 2-"#"continued$

    Variableor Selling Administrative

    Manufacturing(Product) Cost

    Cost %tem i!ed Cost Cost $irect %ndirect#+. !n1 used in te2tboo1 production..................... G #. ringe benefits, assembly5line wor1ers.......... G NN

    #A. >arn used in sweater production................... G #9. ;ages of receptionist, e2ecutive offices.......

    N Could be administrative cost.NN Could be indirect cost.

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    () Managerial -ccounting, #(th @dition

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-"$"(7 minutes$

    Product CostPeriod(Selling

    'ame of the CostVariable Cost

    i!ed

    Cost$irect

    Materials$irectabor

    Manufacturing"verhead

    andAdmin)

    Cost

    "pportunityCost

    Sun&Cost

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    roblem 2-"%"(7 minutes$

    Cost Behavior *o Units of Product

    Cost %tem Variable i!ed $irect %ndirect #. @lectricity to run production e'uipment........................ &.

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    roblem 2-"&")* minutes$

    #.8wift Company

    8chedule of Cost of oods Manufactured

    or the Month @nded -ugust (#

    Direct materials:

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-"&"continued$

    (. !n preparing the income statement for -ugust, 8am failed to distinguishbetween product costs and period costs, and he also failed to recognizethe changes in inventories between the beginning and end of the month.

    Ince these errors have been corrected, the financial condition of thecompany loo1s much better and selling the company may not beadvisable.

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    (A Managerial -ccounting, #(th @dition

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    roblem 2-"'"#* minutes$

    #. he controller is correct that the salary cost should be classified as aselling "mar1eting$ cost. he duties described in the problem havenothing to do with manufacturing a product, but rather deal with moving

    finished unitsfrom the factory to distribution warehouses. 8elling costsinclude all costs necessary to secure customer orders and to get thefinished product into the hands of customers. Coordination of shipmentsof finished units from the factory to distribution warehouses falls in thiscategory.

    &. ?o, the president is not correct. he reported net operating income forthe year will differ depending on how the salary cost is classified. !f thesalary cost is classified as a selling e2pense all of it will appear on the

    income statement as a period cost. 6owever, if the salary cost isclassified as a manufacturing "product$ cost, it will be added to ;or1 inProcess inventory along with other manufacturing costs for the period. othe e2tent that goods are still in process at the end of the period, part ofthe salary cost will remain with these goods in the ;or1 in Processinventory account. Inly that portion of the salary cost that has beenassigned to finished units will leave the ;or1 in Process inventoryaccount and be transferred into the inished oods inventory account. !nli1e manner, to the e2tent that goods are unsold at the end of the period,part of the salary cost will remain with these goods in the inished oods

    inventory account. Inly the portion of the salary that has been assignedto finished units that are sold during the period will appear on the incomestatement as an e2pense "part of Cost of oods 8old$ for the period. heremainder of the salary costs will be on the balance sheet as part ofinventories.

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & (9

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    roblem 2-"(")* minutes$

    #.Meriwell Company

    8chedule of Cost of oods Manufactured

    Direct materials:

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    roblem 2-"("continued$

    (. Direct materials: F#&A,777 #7,777 units Q F#&.A7 per unit.i2ed manufacturing overhead: F97,777 #7,777 units Q F9.77 per unit.

    ). Direct materials:Rnit cost: F#&.A7 "unchanged$otal cost: #*,777 units K F#&.A7 per unit Q F#9&,777.

    i2ed manufacturing overhead:Rnit cost: F97,777 #*,777 units Q F+.77 per unit.otal cost: F97,777 "unchanged$

    *. Rnit cost for fi2ed manufacturing overhead dropped from F9.77 to F+.77,because of the increase in production between the two years. 3ecause

    fi2ed costs do not change in total as the activity level changes, they willdecrease on a unit basis as the activity level rises.

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & )#

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-") ")* minutes$

    #.

    Cost BehaviorSelling or

    Administrative Product CostCost %tem Variable i!ed Cost $irect %ndirect

    actory labor, direct..................... F##A,777 F##A,777

    -dvertising................................... F*7,777 F*7,777actory supervision...................... )7,777 F)7,777Property ta2es, factory building.... (,*77 (,*778ales commissions...................... A7,777 A7,777!nsurance, factory........................ &,*77 &,*77Depreciation, administrative

    office e'uipment........................ ),777 ),777ease cost, factory e'uipment..... #&,777 #&,777!ndirect materials, factory............. +,777 +,777Depreciation, factory building....... #7,777 #7,777-dministrative office supplies....... (,777 (,777-dministrative office salaries... .... +7,777 +7,777Direct materials used................... 9),777 9),777Rtilities, factory............................ &7,777 &7,777otal costs................................... F(,777 F#A&,777 F#9,777 F&,777 F9),777

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    )& Managerial -ccounting, #(th @dition

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-")"continued$

    &.Direct..................................................... F&,777!ndirect................................................... 9),777

    otal....................................................... F(7+,777F(7+,777 &,777 sets Q F#*( per set

    (. he average product cost per set would increase if the production drops.his is because the fi2ed costs would be spread over fewer units,causing the average cost per unit to rise.

    ). a. >es, the president may e2pect a minimum price of F#*(, which is theaverage cost to manufacture one set. 6e might e2pect a price even

    higher than this to cover a portion of the administrative costs as well.he brother5in5law probably is thin1ing of cost as including only directmaterials, or, at most, direct materials and direct labor. Directmaterials alone would be only F) per set, and direct materials anddirect labor would be only F#7+.

    b. he term is opportunity cost. he full, regular price of a set might beappropriate here, because the company is operating at full capacity,and this is the amount that must be given up "benefit forgone$ to sell aset to the brother5in5law.

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & )(

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-2* "(7 minutes$

    #.

    Product CostPeriod(Selling

    'ame of the Cost

    Variable

    Cost

    i!ed

    Cost

    $irectMaterial

    s

    $irect

    abor

    Manuf+"verhea

    d

    andAdmin)

    Cost

    "pportunity

    Cost

    Sun&

    Cost8taciEs current salary, F(,A77per month.............................

    3uilding rent, F*77 per month. Clay and glaze, F& per pot....... ;ages of production wor1ers,

    FA per pot............................. -dvertising, F+77 per month.. . 8ales commission, F) per pot.

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    roblem 2-2* "continued$

    &. he F*77 cost of incorporating the business is not a differential cost.@ven though the cost was incurred to start the business, it is a sun1 cost.;hether 8taci produces pottery or stays in her present job, she will have

    incurred this cost.

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & )*

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-2" "+7 minutes$

    #. 8uperior Company8chedule of Cost of oods Manufactured

    or the >ear @nded December (#

    Direct materials:

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    roblem 2-2" continued

    ). he average cost per unit for manufacturing overhead dropped fromF+.* to F*.)7 because of the increase in production between the twoyears. 3ecause fi2ed costs do not change in total as the activity level

    changes, the average cost per unit will decrease as the activity levelrises.

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & )

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-22"(7 minutes$

    #. - cost that is classified as a period cost will be recognized on the incomestatement as an e2pense in the current period. - cost that is classified asa product cost will be recognized on the income statement as an e2pense

    "i.e., cost of goods sold$ only when the associated units of product aresold. !f some units are unsold at the end of the period, the costs of thoseunsold units are treated as assets. herefore, by reclassifying periodcosts as product costs, the company is able to carry some costs forwardin inventories that would have been treated as current e2penses.

    &. he discussion below is divided into two parts=allantBs actions topostpone e2penditures and the actions to reclassify period costs asproduct costs.

    he decision to postpone e2penditures is 'uestionable. !t is one thing topostpone e2penditures due to a cash bind% it is 'uite another to postponee2penditures in order to hit a profit target. Postponing these e2pendituresmay have the effect of ultimately increasing future costs and reducingfuture profits. !f orders to the companyBs suppliers are changed, it maydisrupt the suppliersB operations. he additional costs may be passed onto allantBs company and may create ill will and a feeling of mistrust.Postponing maintenance on e'uipment is particularly 'uestionable. heresult may be brea1downs, inefficient andSor unsafe operations, and a

    shortened life for the machinery.!nterestingly, in a survey of +)9 managers reported in Management

    Accounting, only #& stated that it is unethical to defer e2penses andthereby manipulate 'uarterly earnings. he proportion who felt it wasunethical increased to &) when it involved annual earnings. -nother)# said that deferring e2penses is a 'uestionable practice when itinvolved 'uarterly reports and (* said this when annual reports wereinvolved. inally, ) said that it is completely ethical to manipulate'uarterly reports in this way and )# gave the green light for annualreports. "8ee ;illiam O. 3runs, Or. and Henneth -. Merchant, /heDangerous Morality of Managing @arnings,0 Management Accounting,

    -ugust #997, pp. &&5&*$

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    )A Managerial -ccounting, #(th @dition

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-22"continued$

    allantBs decision to reclassify period costs is not ethical=assuming thatthere is no intention of disclosing in the financial reports thisreclassification. 8uch a reclassification would be a violation of the

    principle of consistency in financial reporting and is a clear attempt tomislead readers of the financial reports. -lthough some may argue thatthe overall effect of allantBs action will be a /wash0=that is, profitsgained in this period will simply be ta1en from the ne2t period=the trendof earnings will be affected. 6opefully, the auditors would discover anysuch attempt to manipulate annual earnings and would refuse to issue anun'ualified opinion due to the lac1 of consistency. 6owever, recentaccounting scandals may lead to some s1epticism about how forcefulauditors have been in enforcing tight accounting standards.

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & )9

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-2$ "+7 minutes$

    #.Gisic Corporation

    8chedule of Cost of oods Manufactured

    Direct materials:

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    roblem 2-2$ "continued$

    (. Gisic Corporation!ncome 8tatement

    8ales.............................................................. F#,(77,777Cost of goods sold:inished goods inventory, beginning............ F 7

    -dd: Cost of goods manufactured............... A7,777oods available for sale.............................. A7,777inished goods inventory, ending................ 97,777 A7,777

    ross margin.................................................. *&7,7778elling and administrative e2penses.............. (A7,777?et operating income..................................... F #)7,777

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & *#

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-2% ")* minutes$

    Case , Case - Case . Case /Direct materials......................................... F ),*77 F +,777 F *,777 F (,777Direct labor............................................... 9,777 N (,777 ,777 ),777Manufacturing overhead........................... *,777 ),777 A,777 N 9,777otal manufacturing costs......................... #A,*77 #(,777 N &7,777 #+,777 N

    3eginning wor1 in process inventory......... &,*77 &,777 N (,777 ),*77 N@nding wor1 in process inventory.............. "(,777 $N "#,777$ "),777$ "(,777$Cost of goods manufactured..................... F#A,777 F#),777 F#9,777 N F#,*77

    8ales......................................................... F(7,777 F,777 F(+,777 F)7,7773eginning finished goods inventory........... #,777 &,*77 (,*77 N &,777Cost of goods manufactured..................... #A,777 #),777 #9,777 N #,*77oods available for sale........................... #9,777 N #+,*77 N &&,*77 N #9,*77 N@nding finished goods inventory............... "&,777 $N "#,*77 $ "),777 $ "(,*77 $Cost of goods sold.................................... #,777 #*,777 N #A,*77 #+,777 Nross margin............................................ #(,777 +,777 N #,*77 &),777 N8elling and administrative e2penses......... "9,777 $N "(,*77 $ "#&,*77$N "#*,777$ N?et operating income................................ F ),777 F &,*77 N F *,777 F 9,777N Missing data in the problem.

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    *& Managerial -ccounting, #(th @dition

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    Case 2-2&"+7 minutes$

    he following cost items are needed before a schedule of cost of goodsmanufactured can be prepared:

    Materials used in production:Prime cost...................................................... F)#7,777ess direct labor cost..................................... #A7,777Direct materials cost...................................... F&(7,777

    Manufacturing overhead cost:

    Direct labor cost F#A7,777Q

    Percentage of conversion cost (7N

    Q F+77,777 total conversion cost

    N#77 L 7 Q (7.

    Conversion cost............................................. F+77,777ess direct labor cost.................................... #A7,777Manufacturing overhead cost........................ F)&7,777

    Cost of goods manufactured:

    oods available for sale................................ FA#7,777ess finished goods inventory, beginning... ... )*,777

    Cost of goods manufactured.......................... F+*,777

    he easiest way to proceed from this point is to place all 1nown amounts ina partially completed schedule of cost of goods manufactured and a partiallycompleted income statement. hen fill in the missing amounts by analysis ofthe available data.

    4 he Mcraw56ill Companies, !nc., &7#7. -ll rights reserved.

    8olutions Manual, Chapter & *(

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    Case 2-2& "continued$

    Direct materials:

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    Case 2-2'"+7 minutes$

    #. ?o distinction has been made between period e2penses and productcosts on the income statement filed by the companyBs accountant.Product costs "e.g., direct materials, direct labor, and manufacturing

    overhead$ should be assigned to inventory accounts and flow through tothe income statement as cost of goods sold only when finished productsare sold. 3ecause there were ending inventories, some of the productcosts should appear on the balance sheet as assets rather than on theincome statement as e2penses.

    &. 8olar echnology, !nc.8chedule of Cost of oods Manufactured

    or the Tuarter @nded March (#

    Direct materials:

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    Case 2-2'"continued$

    (. 3efore an income statement can be prepared, the cost of the A,777batteries in the ending finished goods inventory must be determined.

    -ltogether, the company produced )7,777 batteries during the 'uarter%

    thus, the production cost per battery was:

    Cost of goods manufactured FA7,777Q Q F#9.*7 per unit

    3atteries produced during the 'uarter )7,777 units

    3ecause A,777 batteries ")7,777 L (&,777 Q A,777$ were in the finishedgoods inventory at the end of the 'uarter, the total cost of this inventorywas:

    A,777 units K F#9.*7 per unit Q F#*+,777.

    ;ith this and other data from the case, the companyBs income statementfor the 'uarter can be prepared as follows:

    8olar echnology, !nc.!ncome 8tatement

    or the Tuarter @nded March (#

    8ales "(&,777 batteries$............................... F9+7,777Cost of goods sold:

    inished goods inventory, beginning......... F 7

    -dd: Cost of goods manufactured ............ A7,777oods available for sale............................ A7,777Deduct: inished goods inventory, ending. #*+,777 +&),777

    ross margin............................................... ((+,7778elling and administrative e2penses............ &97,777?et operating income................................... F )+,777

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    Case 2-2'"continued$

    ). ?o, the insurance company probably does not owe 8olar echnologyF&&+,777. he 1ey 'uestion is how /cost0 was defined in the insurancecontract. !t is most li1ely that the insurance contract limits reimbursement

    for losses to those costs that would normally be considered product costs=in other words, direct materials, direct labor, and manufacturingoverhead. he F&&+,777 is overstated because it includes elements ofselling and administrative e2penses as well as product costs. heF&&+,777 also does not recognize that some costs incurred during theperiod are in the ending

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    0esearch and pplication 2-2(

    #. Dell succeeds because of its operational e2cellence customer valueproposition. Page # of the #75H "under the heading 3usiness 8trategy$lists the 1ey tenets of DellBs business strategy. he first three tenets focus

    on operational e2cellence. he first tenet discusses the direct businessmodel, which /eliminates wholesale and retail dealers that addunnecessary time and cost or diminish DellBs understanding of customere2pectations.0 he second tenet is DellBs build5to5order manufacturingprocess that /enables Dell to turn over inventory every four days onaverage, and reduce inventory levels.0 he third tenet is /DellBs relentlessfocus on reducing its costs UwhichV allows it to consistently providecustomers with superior value.0 -lso, the first bullet point on Page A ofthe #75H says /DellBs success is based on its ability to profitably offer itsproducts at a lower price than its competitors.0

    &. Dell faces numerous business ris1s as described in pages 5#7 of the #75H. 8tudents may mention other ris1s beyond those specifically mentionedin the #75H. 6ere are four ris1s faced by Dell with suggested controlactivities:

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    0esearch and pplication 2-2("continued$

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    0esearch and pplication 2-2("continued$

    software installation, functional testing, and 'uality control.0 Page statesthat Dell has manufacturing facilities in -ustin, e2as, @ldorado do 8ul,3razil, ?ashville and ebanon, ennessee, imeric1, !reland, Penang,

    Malaysia, and iamen, China.

    *. @2amples of direct inventoriable costs include the component parts thatgo into ma1ing DellBs main product families, which include enterprisesystems, client systems, printing and imaging systems, software, andperipherals. he /touch0 laborers that wor1 in each of the aforementionedplants would also be a direct inventoriable cost. @2amples of indirectinventoriable costs include the costs to sustain the manufacturing plantsthat cannot be conveniently traced to specific products. he utility bills,insurance premiums, plant management salaries, and e'uipment5related

    costs, etc. that are incurred to sustain plant operations would all beindirect inventoriable costs.

    he gross margin "in dollars$ has steadily increased and the grossmargin as a percent of sales has remained fairly steady for two reasons.irst, the cost of goods sold consists largely of variable costs "e.g., directmaterials and direct labor costs$. -s sales grow, these variable costsincrease in total, but as a percentage of sales, they remain fairly stableover time.

    8ome students may as1 about the fi2ed overhead costs that are incurred

    to run the plants. 8preading fi2ed overhead costs over a higher volume ofsales would increase the gross margin percentage. 6owever, the fi2edoverhead costs are relatively small in relation to the dollar value of rawmaterials that flows through DellBs plants each year.

    8econd, pages &&5&( mention that Dell plans to reduce product costs infour areas: manufacturing costs, warranty costs, design costs, andoverhead costs. he company says that its /general practice is toaggressively pass on declines in costs to its customers in order to addcustomer value while increasing global mar1et share.0 !n other words,

    rather than holding price constant when costs decline, thereby increasingthe gross margin percentage, the company lowers prices. Rsingterminology that will be defined in Chapter #&, Dell grows profits byincreasing turnover while holding margin reasonably constant.

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    0esearch and pplication 2-2("continued$

    +. he inventory balance on Oanuary &A, &77* is F)*9 million. -s discussedon Page & of the #75H, the balance is low because of DellBs build5to5order"lean$ manufacturing process that enables the company to /turn over

    inventory every four days on average, and reduce inventory levels.0;hen units are built to order rather than built to stoc1, it not only reducesfinished goods inventory, it reduces wor15in5process inventory becauselarge batches of partially completed goods do not accumulate in front ofwor1stations or in temporary storage areas. !t also reduces raw materialsinventory because suppliers provide just5in5time delivery of the 'uantitiesneeded to satisfy customer orders.

    -s stated on page &, this offers Dell a competitive advantage because itallows the company to /rapidly introduce the latest relevant technology

    more 'uic1ly than companies with slow5moving, indirect distributionchannels, and to rapidly pass on component cost savings directly tocustomers.0

    he negative cash conversion cycle is a good sign for Dell. -lthough thisterm is not defined in the chapter, students can ascertain from page & ofthe #75H that it is computed as follows: days sales outstanding W days ofsupply in inventory L days in accounts payable. -s stated on pages &+5&, the negative cash conversion cycle means that Dell is /collectingamounts due from customers before paying vendors, thus allowing thecompany to generate annual cash flows from operating activities that

    typically e2ceed net income.0

    . -s shown on page &(, DellBs two main categories of operating e2pensesare selling, general, and administrative "F),&9A million$ and research,development, and engineering "F)+( million$. Page )& e2plains thatDellBs selling, general, and administrative e2penses /include items suchas sales commissions, mar1eting and advertising costs, and contractorservices.0 !t also mentions that advertising costs totaled F*+ million infiscal &77*. eneral and administrative costs include /inance, egal,6uman

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    0esearch and pplication 2-2("continued$

    or financial reporting purposes, costs are classified as either productcosts or period costs. Product costs include those costs involved withma1ing or ac'uiring the product. Period costs include all costs that are

    not product costs. he e2penses mentioned in the paragraph above arenot involved with ma1ing the product so they are e2pensed as incurred.;hen the focus changes from e2ternal reporting to internal decisionma1ing, the need to comply with --P disappears. 8o for e2ample, onpage )& it says /

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    ppendi, 21urther Classification of abor Costs

    +,ercise 2-" "#7 minutes$

    Direct labor "() hours K F#* per hour$.............. F*#7Manufacturing overhead

    "idle time: + hours K F#* per hour$............... 97otal wages earned.......................................... F+77

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-2 "#7 minutes$

    Direct labor ")* hours K F#) per hour$.............. F+(7Manufacturing overhead

    "overtime: * hours K F per hour$................. (*

    otal wages earned.......................................... F++*

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-#"#* minutes$

    #. ?o. !t appears that the overtime spent completing the job was simply amatter of how the job happened to be scheduled. Rnder thesecircumstances, an overtime premium probably should not be charged to

    a customer whose job happens to fall at the end of the dayBs schedule.

    &. Direct labor "9 hours K F#) per hour$.................... F#&+eneral overhead "# hour K F per hour$.............. otal cost.............................................................. F#((

    (. - charge for an overtime premium might be justified if the customerre'uested a /rush0 order that caused the overtime.

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2-$ "#* minutes$

    #. Direct labor "(# hours K F#) per hour$......... F)()Manufacturing overhead

    "idle time: 9 hours K F#) per hour$............ #&+

    otal cost..................................................... F*+7

    &. Direct labor ")A hours K F#) per hour$......... F+&Manufacturing overhead

    "overtime: A hours K F per hour$.............. *+otal cost..................................................... F&A

    (. - company could treat the cost of fringe benefits relating to direct laborwor1ers as part of manufacturing overhead. his approach spreads the

    cost of such fringe benefits uniformly over all units of output.-lternatively, the company could treat the cost of fringe benefits relatingto direct labor wor1ers as additional direct labor cost. his latter approachcharges the costs of fringe benefits to specific jobs rather than to all unitsof output.

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-%"(7 minutes$

    #. otal wages for the wee1:

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2-%"continued$

    ). -llocation of wages and fringe benefits:Direct labor:

    ;age cost ")A hours K F&7 per hour$..................... F9+7

    ringe benefits ")A hours K F+ per hour$................. &AA F#,&)AManufacturing overhead:

    "!dle time: & hours K F&7 per hour$.......................... )7"Ivertime: #7 hours K F#7 per hour$....................... #77"ringe benefits: & hours K F+ per hour$.................. #& #*&

    otal wages and fringe benefits................................. F#,)77

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    ppendi, 2BCost of Quality

    +,ercise 2B-""#7 minutes$

    #. Tuality of conformance

    &. Tuality costs

    (. Tuality circles

    ). Prevention costs, appraisal costs

    *. !nternal failure costs, e2ternal failure costs+. @2ternal failure costs

    . -ppraisal costs

    A. Prevention costs

    9. !nternal failure costs

    #7. @2ternal failure costs

    ##. Prevention costs, appraisal costs

    #&. Tuality cost report

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    +,ercise 2B-2"#* minutes$

    #.

    Prevention

    Cost

    Appraisal

    Cost

    %nternalailure

    Cost

    1!ternalailure

    Costa. Product testing..................... b. Product recalls..................... c.

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2B-#"+7 minutes$

    #. lore2 CompanyTuality Cost

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2B-#"continued$&.

    F7

    F&,777

    F),777

    F+,777

    FA,777

    F#7,777

    F#&,777

    F#),777

    ast >ear his >ear

    QualityCosts.inthousands/

    @2ternal ailure

    !nternal ailure

    -ppraisal

    Prevention

    7

    &

    )

    +

    A

    #7

    #&

    #)

    #+

    #A

    ast >ear his >ear

    QualityCostsasa-ercenta

    geof!ales

    @2ternal ailure

    !nternal ailure

    -ppraisal

    Prevention

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2B-#"continued$

    (. he overall impact of the companyBs increased emphasis on 'uality overthe past year has been positive in that total 'uality costs have decreasedfrom #+ of sales to #(.+ of sales. Despite this improvement, the

    company still has a poor distribution of 'uality costs. he bul1 of the'uality costs in both years is traceable to internal and e2ternal failure,rather than to prevention and appraisal. -lthough the distribution of thesecosts is poor, the trend this year is toward more prevention and appraisalas the company has given more emphasis on 'uality.

    Probably due to the increased spending on prevention and appraisalactivities during the past year, internal failure costs have increased byone half, going from F&.) million to F(.+ million. he reason internalfailure costs have gone up is that, through increased appraisal activity,

    defects are being caught and corrected before products are shipped tocustomers. hus, the company is incurring more cost for scrap, rewor1,and so forth, but it is saving huge amounts in field servicing, warrantyrepairs, and product recalls. @2ternal failure costs have fallen sharply,decreasing from F+.9 million last year to just F&. million this year.

    !f the company continues its emphasis on prevention and appraisal=andparticularly on prevention=its total 'uality costs should continue todecrease in future years. -lthough internal failure costs are increasing forthe moment, these costs should decrease in time as better 'uality is

    designed into products. -ppraisal costs should also decrease as theneed for inspection, testing, and so forth decreases as a result of betterengineering and tighter process control.

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  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2B-$"+7 minutes$

    #. -n analysis of the companyBs 'uality cost report is presented below:

    ast 2ear *his 2ear

    Amount Percent3 Amount Percent3Prevention costs:Machine maintenance. F7 #. #7.) F #&7 &.* &7.(raining suppliers....... 7 7.7 7.7 #7 7.& #.Tuality circles.............

    ................................. 7 7.7 7.7 &7 7.) (.)otal prevention costs.. . 7 #. #7.) #*7 (.# &*.)

    -ppraisal costs:!ncoming inspection.... &7 7.* (.7 )7 7.A +.Ainal testing................ A7 #.9 ##.9 97 #.9 #*.(

    otal appraisal costs...... #77 &.) #).9 #(7 &. &&.7

    !nternal failure costs:

  • 5/25/2018 Managerial accounting garrison edition 13 Chap 002

    roblem 2B-$"continued$

    rom the above analysis it would appear that Mercury, !nc.Bs program hasbeen successful.

    otal 'uality costs have declined from #+.7 to #&.( as apercentage of total production cost. !n dollar amount, total 'ualitycosts went from F+7,777 last year to F*97,777 this year.

    @2ternal failure costs, those costs signaling customer dissatisfaction,have declined from 9.A of total production costs to &.(. hesedeclines in warranty repairs and customer returns should result inincreased sales in the future.

    -ppraisal costs have increased from &.) to &. of total productioncost.

    !nternal failure costs have increased from &.# to ).& of productioncosts. his increase has probably resulted from the increase inappraisal activities. Defective units are now being spotted morefre'uently before they are shipped to customers.

    Prevention costs have increased from #. of total production cost to(.# and from #7.) of total 'uality costs to &*.). he FA7,777increase is more than offset by decreases in other 'uality costs.

    &. he initial effect of emphasizing prevention and appraisal was to reduce

    e2ternal failure costs and increase internal failure costs. he increase inappraisal activities resulted in catching more defective units before theywere shipped to customers. -s a conse'uence, rewor1 and scrap costsincreased. !n the future, an increased emphasis on prevention shouldresult in a decrease in internal failure costs. -nd as defect rates arereduced, resources devoted to appraisal can be reduced.

    (. o measure the cost of not implementing the 'uality program,management could assume that sales and mar1et share would continue

    to decline and then calculate the lost profit. Ir, management mightassume that the company will have to cut its prices to hang on to itsmar1et share. he impact on profits of lowering prices could beestimated.

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