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Chapter 2
Managerial ccounting and Cost Concepts !olutions
to Questions
2-" Managers carry out three major
activities in an organization: planning, directing
and motivating, and controlling. Planning
involves establishing a basic strategy, selecting
a course of action, and specifying how the
action will be implemented. Directing and
motivating involves mobilizing people to carry
out plans and run routine operations. Controlling
involves ensuring that the plan is actually
carried out and is appropriately modified as
circumstances change.
2-2 he planning and control cycle involves
formulating plans, implementing plans,
measuring performance, and evaluating
differences between planned and actual
performance.
2-# !n contrast to financial accounting,
managerial accounting: "#$ focuses on the
needs of managers rather than outsiders% "&$
emphasizes decisions affecting the future rather
than the financial conse'uences of past actions%
"($ emphasizes relevance rather than objectivity
and verifiability% ")$ emphasizes timeliness
rather than precision% "*$ emphasizes the
segments of an organization rather than
summary data concerning the entire
organization% "+$ is not governed by ,--P% and
".$ is not mandatory.
2-$ he three major elements of product
costs in a manufacturing company are direct
materials, direct labor, and manufacturing
overhead.
2-%
a. Direct materials are an integral part of a
finished product and their costs can be
conveniently traced to it.
b. !ndirect materials are generally small
items of material such as glue and nails. hey
may be an integral part of a finished product but
their costs can be traced to the product only at
great cost or inconvenience.
c. Direct labor consists of labor costs that
can be easily traced to particular products.
Direct labor is also called /touch labor.0
d. !ndirect labor consists of the labor costs
of janitors, supervisors, materials handlers, and
other factory wor1ers that cannot be
conveniently traced to particular products.
hese labor costs are incurred to support
production, but the wor1ers involved do not
directly wor1 on the product.
e. Manufacturing overhead includes all
manufacturing costs e2cept direct materials and
direct labor. Conse'uently, manufacturing
overhead includes indirect materials and indirect
labor as well as other manufacturing costs.
2-& - product cost is any cost involved in
purchasing or manufacturing goods. !n the case
of manufactured goods, these costs consist of
direct materials, direct labor, and manufacturing
overhead. - period cost is a cost that is ta1en
directly to the income statement as an e2pense
in the period in which it is incurred.
2-' he income statement of a
manufacturing company differs from the income
statement of a merchandising company in the
cost of goods sold section. - merchandising
company sells finished goods that it has
purchased from a supplier. hese goods are
listed as /purchases0 in the cost of goods sold
section. 3ecause a manufacturing company
produces its goods rather than buying them
from a supplier, it lists /cost of goods
manufactured0 in place of /purchases.0 -lso, the
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8olutions Manual, Chapter & #9
manufacturing company identifies its inventory
in this section as :inished ,oods inventory,
rather than as Merchandise !nventory.
2-( he schedule of cost of goods
manufactured lists the manufacturing costs that
have been incurred during the period. hese
costs are organized under the three categories
of direct materials, direct labor, and
manufacturing overhead. he total costs
incurred are adjusted for any change in the
;or1 in Process inventory to determine the cost
of goods manufactured "i.e. finished$ during the
period.
he schedule of cost of goods
manufactured ties into the income statement
through the cost of goods sold section. he cost
of goods manufactured is added to the
beginning :inished ,oods inventory to
determine the goods available for sale. !n effect,
the cost of goods manufactured ta1es the place
of the Purchases account in a merchandising
firm.
2-) - manufacturing company usually has
three inventory accounts: <aw Materials, ;or1
in Process, and :inished ,oods. -
merchandising company may have a single
inventory account=Merchandise !nventory.
2-"* Product costs are assigned to units as
they are processed and hence are included in
inventories. he flow is from direct materials,
direct labor, and manufacturing overhead to
;or1 in Process inventory. -s goods are
completed, their cost is removed from ;or1 in
Process inventory and transferred to :inished
,oods inventory. -s goods are sold, their cost is
removed from :inished ,oods inventory and
transferred to Cost of ,oods 8old. Cost of
,oods 8old is an e2pense on the income
statement.
2-"" >es, costs such as salaries and
depreciation can end up as part of assets on the
balance sheet if they are manufacturing costs.
Manufacturing costs are inventoried until the
associated finished goods are sold. hus, if
some units are still in inventory, such costs may
be part of either ;or1 in Process inventory or
:inished ,oods inventory at the end of the
period.
2-"2 ?o. - variable cost is a cost that varies,
in total, in direct proportion to changes in the
level of activity. he variable cost per unit is
constant. - fi2ed cost is fi2ed in total, but the
average cost per unit changes with the level of
activity.
2-"# - differential cost is a cost that differs
between alternatives in a decision. -n
opportunity cost is the potential benefit that is
given up when one alternative is selected over
another. - sun1 cost is a cost that has already
been incurred and cannot be altered by any
decision ta1en now or in the future.
2-"$ ?o, differential costs can be either
variable or fi2ed. :or e2ample, the alternatives
might consist of purchasing one machine rather
than another to ma1e a product. he difference
between the fi2ed costs of purchasing the two
machines is a differential cost.
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&7 Managerial -ccounting, #(th @dition
+,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 & &#
+,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 User newspaper:
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 before
release to customers: manufacturing overhead.
A. <ent on the facility in the industrial par1: a combination of manufacturing
overhead, selling, and administrative. he rent would most li1ely be
prorated on the basis of the amount of space occupied by manufacturing,
selling, and administrative operations.
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&& Managerial -ccounting, #(th @dition
+,ercise 2-# "#* minutes$
Product
Cost
Period
Cost
#. Depreciation on salespersonsB cars.......................... C
&. <ent on e'uipment used in the factory..................... C
(. Dubricants used for machine maintenance............... C
). 8alaries of personnel who wor1 in the finished
goods warehouse................................................... C
*. 8oap and paper towels used by factory wor1ers at
the end of a shift.................................................... C
+. :actory supervisorsB salaries..................................... C
.. 6eat, water, and power consumed in the factory...... C
A. Materials used for bo2ing products for shipment
overseas "units are not normally bo2ed$................ C
9. -dvertising costs...................................................... C
#7. ;or1ersB compensation insurance for factory
employees............................................................. C
##. Depreciation on chairs and tables in the factory
lunchroom.............................................................. C
#&. he wages of the receptionist in the administrative
offices.................................................................... C
#(. Cost of leasing the corporate jet used by the
companyEs e2ecutives............................................ C
#). he cost of renting rooms at a :lorida resort for the
annual sales conference........................................ C
#*. he cost of pac1aging the companyBs product.......... C
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8olutions Manual, Chapter & &(
+,ercise 2-$ "#* minutes$
Cyber,ames
!ncome 8tatement
8ales........................................................ F#,)*7,777
Cost of goods sold:
3eginning merchandise inventory.......... F &)7,777
-dd: Purchases..................................... 9*7,777
,oods available for sale........................ #,#97,777
Deduct: @nding merchandise inventory. #.7,777 #,7&7,777
,ross margin............................................ )(7,777
8elling and administrative e2penses:
8elling e2pense..................................... &#7,777
-dministrative e2pense.......................... #A7,777 (97,777
?et operating income............................... F )7,777
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&) Managerial -ccounting, #(th @dition
+,ercise 2-% "#* minutes$
Dompac Products
8chedule of Cost of ,oods Manufactured
Direct materials:
3eginning raw materials inventory............ F +7,777
-dd: Purchases of raw materials.............. +97,777
<aw materials available for use............... .*7,777
Deduct: @nding raw materials inventory... )*,777
<aw materials used in production............ F .7*,777
Direct labor................................................. #(*,777
Manufacturing overhead............................. (.7,777
otal manufacturing costs........................... #,&#7,777
-dd: 3eginning wor1 in process inventory. . #&7,777
#,((7,777
Deduct: @nding wor1 in process inventory. . #(7,77 7
Cost of goods manufactured....................... F#,&77,777
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8olutions Manual, Chapter & &*
+,ercise 2-& "#* minutes$
- few of these costs may generate debate. :or e2ample, some may argue
that the cost of advertising a roc1 concert is a variable cost because the
number 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, any
roc1 concert in ?ew >or1 City will be sold out and the function of advertising
is simply to let people 1now the event will be happening. Moreover, while
advertising may affect the number of persons who ultimately buy tic1ets, the
causation is in one direction. !f more people buy tic1ets, the advertising
costs donBt go up.
Cost Behavior
Cost (Measure of Activity) Variabl
e
i!ed
#.he cost of C5ray film used in the radiology lab at
Girginia Mason 6ospital in 8eattle "?umber of C5rays
ta1en$......................................................................... C
&.he cost of advertising a roc1 concert in ?ew >or1 City
"?umber of roc1 concert tic1ets sold$......................... C
(.he cost of renting retail space for a McDonaldBs
restaurant in 6ong Hong "otal sales at the
restaurant$.................................................................. C
).he electrical cost of running a roller coaster at Magic
Mountain "?umber of times the roller coaster is run$. . C
*.Property ta2es paid by your local cinema theater
"?umber of tic1ets sold$.............................................. C
+.he cost of sales commissions paid to salespersons at
a ?ordstrom store "otal sales at the store$................ C
..Property insurance on a Coca Cola bottling plant
"?umber of cases of bottles produced$....................... C
A.he costs of synthetic materials used to ma1e a
particular model of running shoe "?umber of shoes
of that model produced$.............................................. C
9.he costs of shipping Panasonic televisions to retail
stores "?umber of televisions sold$............................. C
#7.he cost of leasing an ultra5scan diagnostic machine
at the -merican 6ospital in Paris "?umber of patients
scanned with the machine$......................................... C
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&+ Managerial -ccounting, #(th @dition
+,ercise 2-' "#* minutes$
Cost Cost "b#ect
$irect
Cost
%ndirect
Cost
#. he wages of pediatric
nurses
he pediatric
department C
&. Prescription drugs - particular patient C
(. 6eating the hospital he pediatric
department C
). he salary of the head
of pediatrics
he pediatric
department C
*. he salary of the head
of pediatrics
- particular pediatric
patient C
+. 6ospital chaplainBs
salary
- particular patient
C
.. Dab tests by outside
contractor
- particular patient
C
A. Dab tests by outside
contractor
- particular department
C
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8olutions Manual, Chapter & &.
+,ercise 2-( "#* minutes$
%tem
$ifferential
Cost
"pportunity
Cost
Sun&
Cost
#. Cost of the old C5ray machine..... C
&. he salary of the head of the
<adiology Department..............
(. he salary of the head of the
Pediatrics Department..............
). Cost of the new color laser
printer....................................... C
*. <ent on the space occupied by
<adiology.................................
+. he cost of maintaining the old
machine.................................... C
.. 3enefits from a new D?-
analyzer.................................... C
A. Cost of electricity to run the C5ray
machines.................................. C
?ote: he costs of the salaries of the head of the <adiology Department and
Pediatrics Department and the rent on the space occupied by <adiology are
neither differential costs, nor opportunity costs, nor sun1 costs. hese costs
do not differ between the alternatives and therefore are irrelevant in the
decision, but they are not sun1 costs because they occur in the future.
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&A Managerial -ccounting, #(th @dition
+,ercise 2-) "#* minutes$
#. Product cost% variable cost
&. Conversion cost
(. Ipportunity cost
). Prime cost
*. 8un1 cost
+. Period cost% variable cost
.. Product cost% period cost% fi2ed cost
A. Product cost
9. Period cost
#7. :i2ed cost% product cost% conversion cost
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8olutions Manual, Chapter & &9
+,ercise 2-"* "#* minutes$
Selling and
Cost Behavior Administrative Product
Cost %tem Variable i!ed Cost Cost
#. 6amburger buns at a
;endyBs outlet.......... C C
&. -dvertising by a dental
office........................ C C
(. -pples processed and
canned by Del Monte C C
). 8hipping canned
apples from a Del
Monte plant to
customers................ C C
*. !nsurance on a 3ausch
J Domb factory
producing contact
lenses....................... C C
+. !nsurance on !3MBs
corporate
head'uarters............ C C
.. 8alary of a supervisor
overseeing
production of printers
at 6ewlett5Pac1ard... C C
A. Commissions paid to
@ncyclopedia
3ritannica
salespersons............ C C
9. Depreciation of factory
lunchroom facilities
at a ,eneral @lectric
plant......................... C C
#7. 8teering wheels
installed in 3M;s. . . . C C
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(7 Managerial -ccounting, #(th @dition
+,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
<aw materials available for use........................ #&*,777
Deduct: @nding raw materials inventory............ #*,777
<aw materials used in production..................... F##7,777
Direct labor.......................................................... .7,777
Manufacturing overhead...................................... A7,777
otal manufacturing costs.................................... &+7,777
-dd: 3eginning wor1 in process inventory............ #7,777
&.7,777
Deduct: @nding wor1 in process inventory........... *,777
Cost of goods manufactured................................ F&+*,777
&. he cost of goods sold section of Mason CompanyBs income statement:
3eginning finished goods inventory.............. F &7,777
-dd: Cost of goods manufactured................ &+*,777
,oods available for sale............................... &A*,777
Deduct: @nding finished goods inventory...... (*,777
Cost of goods sold........................................ F&*7,777
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8olutions Manual, Chapter & (#
+,ercise 2-"2 "(7 minutes$
#. a. 3atteries purchased............................................................. A,777
3atteries drawn from inventory............................................ .,+77
3atteries remaining in inventory........................................... )77
Cost per battery................................................................... K F#7
Cost in <aw Materials !nventory at -pril (7.......................... F),777
b. 3atteries used in production ".,+77 L #77$.......................... .,*77
Motorcycles completed and transferred to :inished ,oods
"97M K .,*77$................................................................... +,.*7
Motorcycles still in ;or1 in Process at -pril (7.................... .*7
Cost per battery................................................................... K F#7
Cost in ;or1 in Process !nventory at -pril (7...................... F.,*77
c. Motorcycles completed and transferred to :inished ,oods
"see above$....................................................................... +,.*7
Motorcycles sold during the month
".7M K +,.*7$................................................................... ),.&*
Motorcycles still in :inished ,oods at -pril (7..................... &,7&*
Cost per battery................................................................... K F#7
Cost in :inished ,oods !nventory at -pril (7....................... F&7,&*7
d. Motorcycles sold during the month "above$.......................... ),.&*
Cost per battery................................................................... K F#7
Cost in Cost of ,oods 8old at -pril (7................................. F).,&*7
e. 3atteries used in salespersonsB motorcycles....................... #77
Cost per battery................................................................... K F#7
Cost in 8elling @2pense at -pril (7...................................... F #,777
&. <aw Materials !nventory=balance sheet
;or1 in Process !nventory=balance sheet
:inished ,oods !nventory=balance sheet
Cost of ,oods 8old=income statement
8elling @2pense=income statement
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(& Managerial -ccounting, #(th @dition
-roblem 2-"# "(7 minutes$
?ote to the !nstructor: here may be some e2ceptions to the answers below. he purpose of this problem
is to get the student to start thin&ing about cost behavior and cost purposes% try to avoid lengthy
discussions about how a particular cost is classified.
Variable
or Selling Administrative
Manufacturing
(Product) Cost
Cost %tem i!ed Cost Cost $irect %ndirect
#. Property ta2es, factory................................... : C
&. 3o2es used for pac1aging detergent
produced by the company........................... G C
(. 8alespersonsB commissions.......................... G C
). 8upervisorBs salary, factory............................ : C
*. Depreciation, e2ecutive autos....................... : C
+. ;ages of wor1ers assembling computers..... G C
.. !nsurance, finished goods warehouses.......... : C
A. Dubricants for production e'uipment............. G C
9. -dvertising costs........................................... : C
#7. Microchips used in producing calculators...... G C
##. 8hipping costs on merchandise sold............. G C
#&. Magazine subscriptions, factory lunchroom... : C
#(. hread in a garment factory.......................... G C
#). 3illing costs................................................... G CN
#*. @2ecutive life insurance................................. : C
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8olutions Manual, Chapter & ((
-roblem 2-"# "continued$
Variable
or Selling Administrative
Manufacturing
(Product) Cost
Cost %tem i!ed Cost Cost $irect %ndirect
#+. !n1 used in te2tboo1 production..................... G C
#.. :ringe benefits, assembly5line wor1ers.......... G CNN
#A. >arn used in sweater production................... G C
#9. ;ages of receptionist, e2ecutive offices....... : C
N Could be administrative cost.
NN Could be indirect cost.
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() Managerial -ccounting, #(th @dition
-roblem 2-"$ "(7 minutes$
Product Cost
Period
(Selling
'ame of the Cost
Variabl
e Cost
i!e
d
Cost
$irect
Materials
$irect
(abor
Manu)
facturing
"verhead
and
Admin)
Cost
"ppor)
tunity
Cost
Sun&
Cost
<ental revenue forgone, F(7,777
per year....................................... C
Direct materials cost, FA7 per unit.. C C
<ental cost of warehouse, F*77
per month.................................... C C
<ental cost of e'uipment, F),777
per month.................................... C C
Direct labor cost, F+7 per unit........ C C
Depreciation of the anne2 space,
FA,777 per year........................... C C C
-dvertising cost, F*7,777 per year. C C
8upervisorEs salary, F#,*77 per
month.......................................... C C
@lectricity for machines, F#.&7 per
unit.............................................. C C
8hipping cost, F9 per unit............... C C
<eturn earned on investments,
F(,777 per year........................... C
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8olutions Manual, Chapter & (*
-roblem 2-"% "(7 minutes$
Cost Behavior *o Units of Product
Cost %tem Variable i!ed $irect %ndirect
#. @lectricity to run production e'uipment........................ C C
&. <ent on a factory building............................................ C C
(. Cloth used to ma1e drapes.......................................... C C
). Production superintendentBs salary.............................. C C
*. ;ages of laborers assembling a product..................... C C
+. Depreciation of air purification e'uipment used to
ma1e furniture........................................................... C C
.. Oanitorial salaries......................................................... C C
A. Peaches used in canning fruit...................................... C C
9. Dubricants for production e'uipment............................ C C
#7. 8ugar used in soft drin1 production.............................. C C
##. Property ta2es on the factory....................................... C C
#&. ;ages of wor1ers painting a product........................... C C
#(. Depreciation on cafeteria e'uipment........................... C C
#). !nsurance on a building used in producing helicopters. C C
#*. Cost of rotor blades used in producing helicopters...... C C
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(+ Managerial -ccounting, #(th @dition
-roblem 2-"& ")* minutes$
#.
8wift Company
8chedule of Cost of ,oods Manufactured
:or the Month @nded -ugust (#
Direct materials:
<aw materials inventory, -ugust #.................. F A,777
-dd: Purchases of raw materials..................... #+*,777
<aw materials available for use...................... #.(,777
Deduct: <aw materials inventory, -ugust (#... #(,777
<aw materials used in production................... F#+7,777
Direct labor........................................................ .7,777
Manufacturing overhead.................................... A*,777
otal manufacturing costs.................................. (#*,777
-dd: ;or1 in process inventory, -ugust #......... #+,777
((#,777
Deduct: ;or1 in process inventory, -ugust (#. . &#,777
Cost of goods manufactured.............................. F(#7,777
&.
8wift Company
!ncome 8tatement
:or the Month @nded -ugust (#
8ales.................................................................. F)*7,777
Cost of goods sold:
:inished goods inventory, -ugust #................. F )7,777
-dd: Cost of goods manufactured................... (#7,777
,oods available for sale.................................. (*7,777
Deduct: :inished goods inventory, -ugust (#. +7,777 &97,777
,ross margin..................................................... #+7,777
8elling and administrative e2penses.................. #)&,777
?et operating income......................................... F #A,777
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8olutions Manual, Chapter & (.
-roblem 2-"& "continued$
(. !n preparing the income statement for -ugust, 8am failed to distinguish
between product costs and period costs, and he also failed to recognize
the changes in inventories between the beginning and end of the month.
Ince these errors have been corrected, the financial condition of the
company loo1s much better and selling the company may not be
advisable.
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(A Managerial -ccounting, #(th @dition
-roblem 2-"' "#* minutes$
#. he controller is correct that the salary cost should be classified as a
selling "mar1eting$ cost. he duties described in the problem have
nothing to do with manufacturing a product, but rather deal with moving
finished units from the factory to distribution warehouses. 8elling costs
include all costs necessary to secure customer orders and to get the
finished product into the hands of customers. Coordination of shipments
of finished units from the factory to distribution warehouses falls in this
category.
&. ?o, the president is not correct. he reported net operating income for
the year will differ depending on how the salary cost is classified. !f the
salary 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 is
classified as a manufacturing "product$ cost, it will be added to ;or1 in
Process inventory along with other manufacturing costs for the period. o
the e2tent that goods are still in process at the end of the period, part of
the salary cost will remain with these goods in the ;or1 in Process
inventory account. Inly that portion of the salary cost that has been
assigned to finished units will leave the ;or1 in Process inventory
account and be transferred into the :inished ,oods inventory account. !n
li1e 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 assigned
to finished units that are sold during the period will appear on the income
statement as an e2pense "part of Cost of ,oods 8old$ for the period. he
remainder of the salary costs will be on the balance sheet as part of
inventories.
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8olutions Manual, Chapter & (9
-roblem 2-"( ")* minutes$
#.
Meriwell Company
8chedule of Cost of ,oods Manufactured
Direct materials:
<aw materials inventory, beginning.............. F 9,777
-dd: Purchases of raw materials.................. #&*,777
<aw materials available for use.................... #(),777
Deduct: <aw materials inventory, ending...... +,777
<aw materials used in production................. F#&A,777
Direct labor...................................................... .7,777
Manufacturing overhead.................................. #7*,777
otal manufacturing costs............................... (7(,777
-dd: ;or1 in process inventory, beginning..... #.,77 7
(&7,777
Deduct: ;or1 in process inventory, ending..... (7,777
Cost of goods manufactured........................... F&97,777
&.
Meriwell Company
!ncome 8tatement
8ales............................................................... F*77,777
Cost of goods sold:
:inished goods inventory, beginning............ F &7,777
-dd: Cost of goods manufactured................ &97,777
,oods available for sale............................... (#7,777
Deduct: :inished goods inventory, ending.... )7,777 &.7,777
,ross margin................................................... &(7,777
8elling and administrative e2penses:
8elling e2penses.......................................... A7,777
-dministrative e2penses............................... ##7,777 #97,777
?et operating income...................................... F )7,777
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)7 Managerial -ccounting, #(th @dition
-roblem 2-"( "continued$
(. Direct materials: F#&A,777 P #7,777 units Q F#&.A7 per unit.
:i2ed manufacturing overhead: F97,777 P #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 P #*,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 will
decrease on a unit basis as the activity level rises.
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8olutions Manual, Chapter & )#
-roblem 2-") ")* minutes$
#.
Cost Behavior
Selling or
Administrative Product Cost
Cost %tem Variable i!ed Cost $irect %ndirect
:actory labor, direct..................... F##A,777 F##A,777
-dvertising................................... F*7,777 F*7,777
:actory supervision...................... )7,777 F)7,777
Property ta2es, factory building.... (,*77 (,*77
8ales commissions...................... A7,777 A7,777
!nsurance, factory........................ &,*77 &,*77
Depreciation, administrative
office e'uipment........................ ),777 ),777
Dease cost, factory e'uipment..... #&,777 #&,777
!ndirect materials, factory............. +,777 +,777
Depreciation, factory building....... #7,777 #7,777
-dministrative office supplies....... (,777 (,777
-dministrative office salaries....... +7,777 +7,777
Direct materials used................... 9),777 9),777
Rtilities, factory............................ &7,777 &7,777
otal costs................................... F(&#,777 F#A&,777 F#9.,777 F&#&,777 F9),777
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
)& Managerial -ccounting, #(th @dition
-roblem 2-") "continued$
&.
Direct..................................................... F&#&,777
!ndirect................................................... 9),777
otal....................................................... F(7+,777
F(7+,777 P &,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 the
average 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 direct
materials, or, at most, direct materials and direct labor. Direct
materials alone would be only F). per set, and direct materials and
direct labor would be only F#7+.
b. he term is opportunity cost. he full, regular price of a set might be
appropriate here, because the company is operating at full capacity,
and this is the amount that must be given up "benefit forgone$ to sell a
set to the brother5in5law.
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8olutions Manual, Chapter & )(
-roblem 2-2* "(7 minutes$
#.
Product Cost
Period
(Selling
'ame of the Cost
Variable
Cost
i!ed
Cost
$irect
Material
s
$irect
(abor
Manuf+
"verhea
d
and
Admin)
Cost
"ppor)
tunity
Cost
Sun&
Cost
8taciEs current salary, F(,A77
per month............................. C C
3uilding rent, F*77 per month. C C
Clay and glaze, F& per pot....... C C
;ages of production wor1ers,
FA per pot............................. C C
-dvertising, F+77 per month. . . C C
8ales commission, F) per pot. C C
<ent of production e'uipment,
F(77 per month.................... C C
Degal and filing fees, F*77...... C C C
<ent of sales office, F&*7 per
month................................... C C
Phone for ta1ing orders, F)7
per month............................. C C
!nterest lost on savings
account, F#,&77 per year.... C C
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)) Managerial -ccounting, #(th @dition
-roblem 2-2* "continued$
&. 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.
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8olutions Manual, Chapter & )*
-roblem 2-2" "+7 minutes$
#. 8uperior Company
8chedule of Cost of ,oods Manufactured
:or the >ear @nded December (#
Direct materials:
<aw materials inventory, beginning "given$. . F )7,777
-dd: Purchases of raw materials "given$...... &97,777
<aw materials available for use.................... ((7,777
Deduct: <aw materials inventory, ending
"given$.......................................................
#7,777
<aw materials used in production................ F(&7,777
Direct labor...................................................... 9(,777 N
Manufacturing overhead "given$...................... &.7,777
otal manufacturing costs "given$................... +A(,777
-dd: ;or1 in process inventory, beginning..... )&,777 N
.&*,777
Deduct: ;or1 in process inventory, ending
"given$..........................................................
(*,777
Cost of goods manufactured........................... F+97,777
he cost of goods sold section of the income statement follows:
:inished goods inventory, beginning "given$... F *7,777
-dd: Cost of goods manufactured.................. +97,777 N
,oods available for sale "given$..................... .)7,777
Deduct: :inished goods inventory, ending...... A7,777 N
Cost of goods sold "given$.............................. F++7,777
N hese items must be computed by wor1ing bac1wards up through the
statements.
&. Direct materials: F(&7,777 P )7,777 units Q FA.77 per unit.
Manufacturing overhead: F&.7,777 P )7,777 units Q F+..* per unit.
(. Direct materials: FA.77 per unit.
Manufacturing overhead: F&.7,777 P *7,777 units Q F*.)7 per unit.
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
)+ Managerial -ccounting, #(th @dition
-roblem 2-2" .continued/
). he average cost per unit for manufacturing overhead dropped from
F+..* to F*.)7 because of the increase in production between the two
years. 3ecause fi2ed costs do not change in total as the activity level
changes, the average cost per unit will decrease as the activity level
rises.
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8olutions Manual, Chapter & ).
-roblem 2-22 "(7 minutes$
#. - cost that is classified as a period cost will be recognized on the income
statement as an e2pense in the current period. - cost that is classified as
a 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 are
sold. !f some units are unsold at the end of the period, the costs of those
unsold units are treated as assets. herefore, by reclassifying period
costs as product costs, the company is able to carry some costs forward
in inventories that would have been treated as current e2penses.
&. he discussion below is divided into two parts=,allantBs actions to
postpone e2penditures and the actions to reclassify period costs as
product costs.
he decision to postpone e2penditures is 'uestionable. !t is one thing to
postpone e2penditures due to a cash bind% it is 'uite another to postpone
e2penditures in order to hit a profit target. Postponing these e2penditures
may have the effect of ultimately increasing future costs and reducing
future profits. !f orders to the companyBs suppliers are changed, it may
disrupt the suppliersB operations. he additional costs may be passed on
to ,allantBs company and may create ill will and a feeling of mistrust.
Postponing maintenance on e'uipment is particularly 'uestionable. he
result 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 #&M stated that it is unethical to defer e2penses and
thereby manipulate 'uarterly earnings. he proportion who felt it was
unethical increased to &)M when it involved annual earnings. -nother
)#M said that deferring e2penses is a 'uestionable practice when it
involved 'uarterly reports and (*M said this when annual reports were
involved. :inally, ).M said that it is completely ethical to manipulate
'uarterly reports in this way and )#M gave the green light for annual
reports. "8ee ;illiam O. 3runs, Or. and Henneth -. Merchant, /he
Dangerous Morality of Managing @arnings,0 Management Accounting,
-ugust #997, pp. &&5&*$
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)A Managerial -ccounting, #(th @dition
-roblem 2-22 "continued$
,allantBs decision to reclassify period costs is not ethical=assuming that
there is no intention of disclosing in the financial reports this
reclassification. 8uch a reclassification would be a violation of the
principle of consistency in financial reporting and is a clear attempt to
mislead readers of the financial reports. -lthough some may argue that
the overall effect of ,allantBs action will be a /wash0=that is, profits
gained in this period will simply be ta1en from the ne2t period=the trend
of earnings will be affected. 6opefully, the auditors would discover any
such attempt to manipulate annual earnings and would refuse to issue an
un'ualified opinion due to the lac1 of consistency. 6owever, recent
accounting scandals may lead to some s1epticism about how forceful
auditors have been in enforcing tight accounting standards.
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8olutions Manual, Chapter & )9
-roblem 2-2$ "+7 minutes$
#.
Gisic Corporation
8chedule of Cost of ,oods Manufactured
Direct materials:
<aw materials inventory, beginning........................ F &7,777
-dd: Purchases of raw materials............................ )A7,777
<aw materials available for use.............................. *77,777
Deduct: <aw materials inventory, ending................ (7,777
<aw materials used in production........................... F).7,777
Direct labor................................................................ 97,777
Manufacturing overhead............................................ (77,777
otal manufacturing costs......................................... A+7,777
-dd: ;or1 in process inventory, beginning............... *7,777
9#7,777
Deduct: ;or1 in process inventory, ending............... )7,777
Cost of goods manufactured..................................... FA.7,777
&. a. o compute the number of units in the finished goods inventory at the
end of the year, we must first compute the number of units sold during
the year.
otal sales F#,(77,777
Q Q &+,777 units sold
Rnit selling price F*7 per unit sold
Rnits in the finished goods inventory, beginning...... 7
Rnits produced during the year................................ &9,777
Rnits available for sale............................................ &9,777
Rnits sold during the year "above$ .......................... &+,777
Rnits in the finished goods inventory, ending.......... (,777
b. he average production cost per unit during the year is:
g Cost of oods manufactured FA.7,777
Q Q F(7 per unit
?umber of units produced &9,777 units
hus, the cost of the units in the finished goods inventory at the end of
the year is: (,777 units K F(7 per unit Q F97,777.
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*7 Managerial -ccounting, #(th @dition
-roblem 2-2$ "continued$
(. Gisic Corporation
!ncome 8tatement
8ales.............................................................. F#,(77,777
Cost of goods sold:
:inished goods inventory, beginning............ F 7
-dd: Cost of goods manufactured............... A.7,777
,oods available for sale.............................. A.7,777
:inished goods inventory, ending................ 97,777 .A7,777
,ross margin.................................................. *&7,777
8elling and administrative e2penses.............. (A7,777
?et operating income..................................... F #)7,777
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8olutions Manual, Chapter & *#
-roblem 2-2% ")* minutes$
Case , Case - Case . Case /
Direct materials......................................... F ),*77 F +,777 F *,777 F (,777
Direct labor............................................... 9,777 N (,777 .,777 ),777
Manufacturing overhead........................... *,777 ),777 A,777 N 9,777
otal 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)7,777
3eginning finished goods inventory........... #,777 &,*77 (,*77 N &,777
Cost of goods manufactured..................... #A,777 #),777 #9,777 N #.,*77
,oods 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 N
,ross margin............................................ #(,777 +,777 N #.,*77 &),777 N
8elling and administrative e2penses......... "9,777 $N "(,*77 $ "#&,*77$N "#*,777$ N
?et operating income................................ F ),777 F &,*77 N F *,777 F 9,777
N Missing data in the problem.
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*& Managerial -ccounting, #(th @dition
Case 2-2& "+7 minutes$
he following cost items are needed before a schedule of cost of goods
manufactured can be prepared:
Materials used in production:
Prime cost...................................................... F)#7,777
Dess direct labor cost..................................... #A7,777
Direct materials cost...................................... F&(7,777
Manufacturing overhead cost:
Direct labor cost F#A7,777
Q
Percentage of conversion cost (7MN
Q F+77,777 total conversion cost
N#77M L .7M Q (7M.
Conversion cost............................................. F+77,777
Dess direct labor cost.................................... #A7,777
Manufacturing overhead cost........................ F)&7,777
Cost of goods manufactured:
,oods available for sale................................ FA#7,777
Dess 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 in
a partially completed schedule of cost of goods manufactured and a partially
completed income statement. hen fill in the missing amounts by analysis of
the available data.
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8olutions Manual, Chapter & *(
Case 2-2& "continued$
Direct materials:
<aw materials inventory, beginning.......................... F #A,777
-dd: Purchases of raw materials.............................. &97,777
<aw materials available for use................................ (7A,777
Deduct: <aw materials inventory, ending.................. -
<aw materials used in production "see above$......... &(7,777
Direct labor cost........................................................... #A7,777
Manufacturing overhead cost "see above$................... )&7,777
otal manufacturing costs........................................... A(7,777
-dd: ;or1 in process inventory, beginning.................. +*,777
A9*,777
Deduct: ;or1 in process inventory, ending................. 3
Cost of goods manufactured "see above$.................... F.+*,777
herefore, /-0 "<aw materials inventory, ending$ is F.A,777% and /30
";or1 in process inventory, ending$ is F#(7,777.
8ales................................................................... F#,&77,777
Cost of goods sold:
:inished goods inventory, beginning................. F )*,777
-dd: Cost of goods manufactured "see above$. .+*,777
,oods available for sale................................... A#7,777
Deduct: :inished goods inventory, ending........ C .&7,777
,ross margin....................................................... F )A7,777
NF#,&77,777 K "#77M L )7M$ Q F.&7,777.
herefore, /C0 ":inished goods inventory, ending$ is F97,777. he
procedure outlined above is just one way in which the solution to the case
can be approached. 8ome may wish to start at the bottom of the income
statement "with gross margin$ and wor1 upwards from that point. -lso,
the solution can be obtained by use of 5accounts.
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*) Managerial -ccounting, #(th @dition
Case 2-2' "+7 minutes$
#. ?o distinction has been made between period e2penses and product
costs 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 to
the income statement as cost of goods sold only when finished products
are sold. 3ecause there were ending inventories, some of the product
costs should appear on the balance sheet as assets rather than on the
income statement as e2penses.
&. 8olar echnology, !nc.
8chedule of Cost of ,oods Manufactured
:or the Tuarter @nded March (#
Direct materials:
<aw materials inventory, beginning................ F 7
-dd: Purchases of raw materials.................... (+7,777
<aw materials available for use..................... (+7,777
Deduct: <aw materials inventory, ending....... #7,777
<aw materials used in production.................. F(*7,777
Direct labor....................................................... .7,777
Manufacturing overhead................................... )#7,777
otal manufacturing costs................................. A(7,777
-dd: ;or1 in process inventory, beginning....... 7
A(7,777
Deduct: ;or1 in process inventory, ending....... *7,777
Cost of goods manufactured............................. F.A7,777
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8olutions Manual, Chapter & **
Case 2-2' "continued$
(. 3efore an income statement can be prepared, the cost of the A,777
batteries 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 F.A7,777
Q QF#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 finished
goods inventory at the end of the 'uarter, the total cost of this inventory
was:
A,777 units K F#9.*7 per unit Q F#*+,777.
;ith this and other data from the case, the companyBs income statement
for the 'uarter can be prepared as follows:
8olar echnology, !nc.
!ncome 8tatement
:or the Tuarter @nded March (#
8ales "(&,777 batteries$............................... F9+7,777
Cost of goods sold:
:inished goods inventory, beginning......... F 7
-dd: Cost of goods manufactured ............ .A7,777
,oods available for sale............................ .A7,777
Deduct: :inished goods inventory, ending. #*+,777 +&),777
,ross margin............................................... ((+,777
8elling and administrative e2penses............ &97,777
?et operating income................................... F )+,777
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*+ Managerial -ccounting, #(th @dition
Case 2-2' "continued$
). ?o, the insurance company probably does not owe 8olar echnology
F&&+,777. he 1ey 'uestion is how /cost0 was defined in the insurance
contract. !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 manufacturing
overhead. he F&&+,777 is overstated because it includes elements of
selling and administrative e2penses as well as product costs. he
F&&+,777 also does not recognize that some costs incurred during the
period are in the ending <aw Materials and ;or1 in Process inventory
accounts, as e2plained in part "#$ above. he insurance companyBs
liability is probably just F#*+,777, which is the amount of cost associated
with the ending :inished ,oods inventory as shown in part "($ above.
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
8olutions Manual, Chapter & *.
0esearch and pplication 2-2(
#. Dell succeeds because of its operational e2cellence customer value
proposition. 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 business
model, which /eliminates wholesale and retail dealers that add
unnecessary time and cost or diminish DellBs understanding of customer
e2pectations.0 he second tenet is DellBs build5to5order manufacturing
process that /enables Dell to turn over inventory every four days on
average, and reduce inventory levels.0 he third tenet is /DellBs relentless
focus on reducing its costs UwhichV allows it to consistently provide
customers with superior value.0 -lso, the first bullet point on Page A of
the #75H says /DellBs success is based on its ability to profitably offer its
products at a lower price than its competitors.0
&. Dell faces numerous business ris1s as described in pages .5#7 of the #75
H. 8tudents may mention other ris1s beyond those specifically mentioned
in the #75H. 6ere are four ris1s faced by Dell with suggested control
activities:
<is1: Profits may fall short if DellBs product, customer, and geographic
mi2 is substantially different than anticipated. Control activities:
Maintain a budgeting program that forecasts sales by product line,
customer segment, and geographic region. ;hile the budget is not
going to be perfectly accurate, a reasonably accurate forecast would
help Dell manage investor e2pectations.
<is1: Disruptions in component availability from suppliers could
reduce DellBs ability to meet customer orders. his is of particular
concern for Dell because its lean production practices result in
minimal inventory levels and because Dell relies on several single5
sourced suppliers. Control activities: Develop a plan with single5
sourced suppliers to ensure that they can produce the necessary
components at more than one plant location and to ensure that each
location has more than one means of delivering the parts to DellBs
assembly facilities.
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*A Managerial -ccounting, #(th @dition
0esearch and pplication 2-2( "continued$
<is1: !nfrastructure failures "e.g., computer viruses, intentional
disruptions of ! systems and website outages$ may threaten DellBs
ability to boo1 or process orders, manufacture products, or ship
products in a timely manner. Control activities: !nstall controls such as
physical security, data storage bac1up sites, firewalls and passwords
that protect technology assets.
<is1: Dosing government contracts could adversely affect the
companyBs revenues. Control activities: Develop a formal review
process, supervised by legal counsel, to ensure that Dell complies
with governmental regulations.
(. Pages ()5(* of DellBs :orm #75H contain the audit report issued by
PricewaterhouseCoopers "P;C$. he audit report ma1es reference to
the role of the Public Company -ccounting Iversight 3oard "PC-I3$
that was created by the 8arbanes5I2ley -ct of &77& "8IC$. he audit
report also contains two opinions dealing with internal control. he first
opinion relates to managementBs assessment of its internal controls. he
second opinion relates to the auditorBs assessment of the effectiveness of
DellBs internal controls. hese two opinions were re'uired by 8IC at the
time of this #75H filing. Page *9 includes managementBs report on internal
control over financial reporting. his report includes a reference to 8IC.
:inally, pages .+5.A contain signed certifications from the C@I "Hevin
<ollins$ and the C:I "Oames 8chneider$. 8IC re'uires the C@I and
C:I to certify that the #75H and its accompanying financial statements
do not contain any untrue statements and are fairly stated in all material
respects.
). 3ased solely on the inventories number on the balance sheet, students
cannot determine the answer to this 'uestion. :urthermore, given that
DellBs total amount of inventories is so small, the company does not
report the brea1 down of its inventories between raw materials, wor15in5
process, and finished goods. ?onetheless, students should be able to
readily ascertain that Dell is a manufacturer. Page & of the #75H says
/Dell designs, develops, manufactures, mar1ets, sells, and supports a
wide range of products that are customized to customer re'uirements.0
Page * states /DellBs manufacturing process consists of assembly,
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
8olutions Manual, Chapter & *9
0esearch and pplication 2-2( "continued$
software installation, functional testing, and 'uality control.0 Page . states
that Dell has manufacturing facilities in -ustin, e2as, @ldorado do 8ul,
3razil, ?ashville and Debanon, ennessee, Dimeric1, !reland, Penang,
Malaysia, and Ciamen, China.
*. @2amples of direct inventoriable costs include the component parts that
go into ma1ing DellBs main product families, which include enterprise
systems, client systems, printing and imaging systems, software, and
peripherals. he /touch0 laborers that wor1 in each of the aforementioned
plants would also be a direct inventoriable cost. @2amples of indirect
inventoriable costs include the costs to sustain the manufacturing plants
that 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 be
indirect inventoriable costs.
he gross margin "in dollars$ has steadily increased and the gross
margin 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., direct
materials and direct labor costs$. -s sales grow, these variable costs
increase in total, but as a percentage of sales, they remain fairly stable
over time.
8ome students may as1 about the fi2ed overhead costs that are incurred
to run the plants. 8preading fi2ed overhead costs over a higher volume of
sales would increase the gross margin percentage. 6owever, the fi2ed
overhead costs are relatively small in relation to the dollar value of raw
materials that flows through DellBs plants each year.
8econd, pages &&5&( mention that Dell plans to reduce product costs in
four areas: manufacturing costs, warranty costs, design costs, and
overhead costs. he company says that its /general practice is to
aggressively pass on declines in costs to its customers in order to add
customer value while increasing global mar1et share.0 !n other words,
rather than holding price constant when costs decline, thereby increasing
the gross margin percentage, the company lowers prices. Rsing
terminology that will be defined in Chapter #&, Dell grows profits by
increasing turnover while holding margin reasonably constant.
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+7 Managerial -ccounting, #(th @dition
0esearch and pplication 2-2( "continued$
+. he inventory balance on Oanuary &A, &77* is F)*9 million. -s discussed
on 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 reduces
finished goods inventory, it reduces wor15in5process inventory because
large batches of partially completed goods do not accumulate in front of
wor1stations or in temporary storage areas. !t also reduces raw materials
inventory because suppliers provide just5in5time delivery of the 'uantities
needed to satisfy customer orders.
-s stated on page &, this offers Dell a competitive advantage because it
allows the company to /rapidly introduce the latest relevant technology
more 'uic1ly than companies with slow5moving, indirect distribution
channels, and to rapidly pass on component cost savings directly to
customers.0
he negative cash conversion cycle is a good sign for Dell. -lthough this
term is not defined in the chapter, students can ascertain from page &. of
the #75H that it is computed as follows: days sales outstanding W days of
supply in inventory L days in accounts payable. -s stated on pages &+5
&., the negative cash conversion cycle means that Dell is /collecting
amounts due from customers before paying vendors, thus allowing the
company to generate annual cash flows from operating activities that
typically e2ceed net income.0
.. -s shown on page &(, DellBs two main categories of operating e2penses
are selling, general, and administrative "F),&9A million$ and research,
development, and engineering "F)+( million$. Page )& e2plains that
DellBs selling, general, and administrative e2penses /include items such
as sales commissions, mar1eting and advertising costs, and contractor
services.0 !t also mentions that advertising costs totaled F*.+ million in
fiscal &77*. ,eneral and administrative costs include /:inance, Degal,
6uman <esources and information technology support.0 DellBs website
development costs are included in <esearch, Development, and
@ngineering costs along with payroll, infrastructure, and administrative
costs related directly to research and development.
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
8olutions Manual, Chapter & +#
0esearch and pplication 2-2( "continued$
:or financial reporting purposes, costs are classified as either product
costs or period costs. Product costs include those costs involved with
ma1ing or ac'uiring the product. Period costs include all costs that are
not product costs. he e2penses mentioned in the paragraph above are
not involved with ma1ing the product so they are e2pensed as incurred.
;hen the focus changes from e2ternal reporting to internal decision
ma1ing, the need to comply with ,--P disappears. 8o for e2ample, on
page )& it says /<esearch, development, and engineering costs are
e2pensed as incurred, in accordance with 8:-8 ?o. &, Accounting for
0esearch and $evelopment Costs.0 6owever, for internal reporting
purposes it may be entirely appropriate to assign some research and
development costs to particular products.
A. 6ere are four e2amples of cost objects for Dell including one direct and
one indirect cost for each cost object.
- product line, such as a particular type of server. - direct cost would
be the cost of raw material component parts and an indirect cost
would be factory utility costs.
- particular product family, such as enterprise systems, which
according to page & includes servers, storage, wor1stations, and
networ1ing products. - direct cost would be the component parts used
to ma1e these products and an indirect cost would be factory
insurance costs that are assigned to these products.
- particular geographic region, such as -sia Pacific5Oapan, which is
mentioned on page **. - direct cost would be the salary of ;illiam
-melio, 8enior Gice5President, -sia Pacific5Oapan "see page ##$ and
an indirect cost would be the salary of Martin O. ,arvin, 8enior Gice
President, ;orldwide Procurement and ,lobal Customer @2perience
"see page ##$, given that he oversees worldwide procurement
operations.
- particular customer segment, such as the government segment as
mentioned on page ). - direct cost would be a sales representative
who is dedicated to serving the government segment and an indirect
cost would be research and development costs that are e2pended on
products purchased by more than one customer segment.
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+& Managerial -ccounting, #(th @dition
ppendi, 2
1urther Classification of 2abor Costs
+,ercise 2-" "#7 minutes$
Direct labor "() hours K F#* per hour$.............. F*#7
Manufacturing overhead
"idle time: + hours K F#* per hour$............... 97
otal wages earned.......................................... F+77
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8olutions Manual, -ppendi2 &- +(
+,ercise 2-2 "#7 minutes$
Direct labor ")* hours K F#) per hour$.............. F+(7
Manufacturing overhead
"overtime: * hours K F. per hour$................. (*
otal wages earned.......................................... F++*
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
+) Managerial -ccounting, #(th @dition
+,ercise 2-# "#* minutes$
#. ?o. !t appears that the overtime spent completing the job was simply a
matter of how the job happened to be scheduled. Rnder these
circumstances, 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 customer
re'uested a /rush0 order that caused the overtime.
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
8olutions Manual, -ppendi2 &- +*
+,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 labor
wor1ers 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 relating
to direct labor wor1ers as additional direct labor cost. his latter approach
charges the costs of fringe benefits to specific jobs rather than to all units
of output.
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
++ Managerial -ccounting, #(th @dition
-roblem 2-% "(7 minutes$
#. otal wages for the wee1:
<egular time ")7 hours K F&7 per hour$..................... FA77
Ivertime "+ hours K F(7 per hour$............................. #A7
otal wages.................................................................. F9A7
-llocation of total wages:
Direct labor ")+ hours K F&7 per hour$....................... F9&7
Manufacturing overhead
"Ivertime: + hours K F#7 per hour$......................... +7
otal wages.................................................................. F9A7
&. otal wages for the wee1:
<egular time ")7 hours K F&7 per hour$..................... F A77
Ivertime "A hours K F(7 per hour$............................. &)7
otal wages............................................................... F#,7)7
-llocation of total wages:
Direct labor ")* hours K F&7 per hour$....................... F 977
Manufacturing overhead:
"!dle time: ( hours K F&7 per hour$.......................... F+7
"Ivertime: A hours K F#7 per hour$......................... A7 #)7
otal wages............................................................... F#,7)7
(. otal wages and fringe benefits for the wee1:
<egular time ")7 hours K F&7 per hour$..................... F A77
Ivertime "#7 hours K F(7 per hour$........................... (77
:ringe benefits "*7 hours K F+ per hour$.................... (77
otal wages and fringe benefits................................. F#,)77
-llocation of wages and fringe benefits:
Direct labor ")A hours K F&7 per hour$....................... F 9+7
Manufacturing overhead:
"!dle time: & hours K F&7 per hour$.......................... F )7
"Ivertime: #7 hours K F#7 per hour$....................... #77
":ringe benefits: *7 hours K F+ per hour$................ (77 ))7
otal wages and fringe benefits................................. F#,)77
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
8olutions Manual, -ppendi2 &- +.
-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#,&)A
Manufacturing 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$.................. #& #*&
otal wages and fringe benefits................................. F#,)77
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
+A Managerial -ccounting, #(th @dition
ppendi, 2B
Cost of Quality
+,ercise 2B-" "#7 minutes$
#. 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
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
8olutions Manual, -ppendi2 &3 +9
+,ercise 2B-2 "#* minutes$
#.
Prevention
Cost
Appraisal
Cost
%nternal
ailure
Cost
1!ternal
ailure
Cost
a. Product testing..................... C
b. Product recalls..................... C
c. <ewor1 labor and overhead. C
d. Tuality circles....................... C
e. Downtime caused by
defects.............................. C
f. Cost of field servicing........... C
g. !nspection of goods.............. C
h. Tuality engineering.............. C
i. ;arranty repairs.................. C
j. 8tatistical process control.... C
1. ?et cost of scrap.................. C
l. Depreciation of test
e'uipment......................... C
m. <eturns and allowances
arising from poor 'uality.... C
n. Disposal of defective
products............................ C
o. echnical support to
suppliers............................ C
p. 8ystems development.......... C
'. ;arranty replacements........ C
r. :ield testing at customer
site.................................... C
s. Product design..................... C
&. Prevention costs and appraisal costs are incurred in an effort to 1eep
poor 'uality of conformance from occurring. !nternal and e2ternal failure
costs are incurred because poor 'uality of conformance has occurred.
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
.7 Managerial -ccounting, #(th @dition
-roblem 2B-# "+7 minutes$
#. :lore2 Company
Tuality Cost <eport
(ast 2ear *his 2ear
Amount
(in
thousands)
Percent
of
Sales
Amount
(in
thousands)
Percent
of Sales
Prevention costs:
Tuality engineering.......... F )&7 7.*+ F *.7 7..+
8ystems development..... )A7 7.+) .*7 #.77
8tatistical process control 7 7.77 #A7 7.&)
otal prevention costs........ 977 #.&7 #,*77 &.77
-ppraisal costs
!nspection........................ .*7 #.77 977 #.&7
Product testing................ A#7 #.7A #,&77 #.+7
8upplies used in testing. . (7 7.7) +7 7.7A
Depreciation of testing
e'uipment..................... &#7 7.&A &)7 7.(&
otal appraisal costs....... #,A77 &.)7 &,)77 (.&7
!nternal failure costs:
?et cost of scrap............. +(7 7.A) #,#&* #.*7
<ewor1 labor................... #,7*7 #.)7 #,*77 &.77
Disposal of defective
products........................ .&7 7.9+ 9.* #.(7
otal internal failure costs. . &,)77 (.&7 (,+77 ).A7
@2ternal failure costs:
Cost of field servicing...... #,&77 #.+7 977 #.&7
;arranty repairs.............. (,+77 ).A7 #,7*7 #.)7
Product recalls................ &,#77 &.A7 .*7 #.77
otal e2ternal failure costs. +,977 9.&7 &,.77 (.+7
otal 'uality cost................ F#&,777 #+.77 F#7,&77 #(.+7
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
8olutions Manual, -ppendi2 &3 .#
-roblem 2B-# "continued$
&.
F7
F&,777
F),777
F+,777
FA,777
F#7,777
F#&,777
F#),777
Dast >ear his >ear
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@2ternal :ailure
!nternal :ailure
-ppraisal
Prevention
7M
&M
)M
+M
AM
#7M
#&M
#)M
#+M
#AM
Dast >ear his >ear
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@2ternal :ailure
!nternal :ailure
-ppraisal
Prevention
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
.& Managerial -ccounting, #(th @dition
-roblem 2B-# "continued$
(. he overall impact of the companyBs increased emphasis on 'uality over
the past year has been positive in that total 'uality costs have decreased
from #+M of sales to #(.+M 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 these
costs is poor, the trend this year is toward more prevention and appraisal
as the company has given more emphasis on 'uality.
Probably due to the increased spending on prevention and appraisal
activities during the past year, internal failure costs have increased by
one half, going from F&.) million to F(.+ million. he reason internal
failure costs have gone up is that, through increased appraisal activity,
defects are being caught and corrected before products are shipped to
customers. hus, the company is incurring more cost for scrap, rewor1,
and so forth, but it is saving huge amounts in field servicing, warranty
repairs, 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=and
particularly on prevention=its total 'uality costs should continue to
decrease in future years. -lthough internal failure costs are increasing for
the moment, these costs should decrease in time as better 'uality is
designed into products. -ppraisal costs should also decrease as the
need for inspection, testing, and so forth decreases as a result of better
engineering and tighter process control.
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8olutions Manual, -ppendi2 &3 .(
-roblem 2B-$ "+7 minutes$
#. -n analysis of the companyBs 'uality cost report is presented below:
(ast 2ear *his 2ear
Amount Percent3 Amount Percent3
Prevention costs:
Machine maintenance. F.7 #.. #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 +.A
:inal testing................ A7 #.9 ##.9 97 #.9 #*.(
otal appraisal costs...... #77 &.) #).9 #(7 &.. &&.7
!nternal failure costs:
<ewor1....................... *7 #.& ..* #(7 &.. &&.7
8crap.......................... )7 #.7 +.7 .7 #.* ##.9
otal internal failure
costs........................... 97 &.# #(.) &77 ).& ((.9
@2ternal failure costs:
;arranty repairs......... 97 &.# #(.) (7 7.+ *.#
Customer returns........ (&7 ..+ )..A A7 #.. #(.+
otal e2ternal failure
costs........................... )#7 9.A +#.& ##7 &.( #A.+
otal 'uality cost............ F+.7 #+.7 #77.7 F *97 #&.( #77.7
otal production cost..... F),&77 F),A77
N Percentage figures may not add down due to rounding.
4 he Mc,raw56ill Companies, !nc., &7#7. -ll rights reserved.
.) Managerial -ccounting, #(th @dition
-roblem 2B-$ "continued$
:rom the above analysis it would appear that Mercury, !nc.Bs program has
been successful.
otal 'uality costs have declined from #+.7M to #&.(M as a
percentage of total production cost. !n dollar amount, total 'uality
costs 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.AM of total production costs to &.(M. hese
declines in warranty repairs and customer returns should result in
increased sales in the future.
-ppraisal costs have increased from &.)M to &..M of total production
cost.
!nternal failure costs have increased from &.#M to ).&M of production
costs. his increase has probably resulted from the increase in
appraisal activities. Defective units are now being spotted more
fre'uently before they are shipped to customers.
Prevention costs have increased from #..M of total production cost to
(.#M and from #7.)M of total 'uality costs to &*.)M. he FA7,777
increase 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 in
appraisal activities resulted in catching more defective units before they
were shipped to customers. -s a conse'uence, rewor1 and scrap costs
increased. !n the future, an increased emphasis on prevention should
result in a decrease in internal failure costs. -nd as defect rates are
reduced, 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 might
assume that the company will have to cut its prices to hang on to its
mar1et share. he impact on profits of lowering prices could be
estimated.
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8olutions Manual, -ppendi2 &3 .*

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