Chapter 1
Introduction to Management Accounting
Short Exercises
(5-10 min.) S 1-1
FA 1. Helps investors make investment decisions
MA 2. Provides detailed reports on parts of the company
MA 3. Helps in planning and controlling operations
MA 4. Reports can influence employee behavior
FA 5. Reports must follow Generally Accepted Accounting Principles (GAAP)
FA 6. Reports audited annually by independent certified public accountants
(10 min.) S 1-2
e 1. Providing high-quality, reliable products/services for a reasonable price in a timely manner
f 2. Paying taxes in a timely manner
d 3. Providing a safe, productive work environment
a 4. Generating a profit
b 5. Repaying principal plus interest in a timely manner
(10 min.) S 1-3
d 1. A philosophy of delighting customers by providing them with superior products and services. Requires improving quality and eliminating defects and waste.
c 2. Use of the Internet for such business functions as sales and customer service. Enables companies to reach thousands of customers around the world.
a 3. Software systems that integrate all of a company’s worldwide functions, departments, and data into a single system.
b 4. A system in which a company produces just in time to satisfy needs. Suppliers deliver materials just in time to begin production, and finished units are completed just in time for delivery to customers.
(5-10 min.) S 1-4
Hair supplies expense / 700
Building rent expense / 1,400
Utilities / 100
Depreciation on equipment / 60
Total operating expenses / $2,260
Net Operating Income / $2,640
Unit cost of one haircut =
total operating costs ÷ total number of haircuts
$2,260 ÷ 220 haircuts = $10.27 per haircut
(5 min.) S 1-5
Cost of Goods Sold Computation
Cost of goods sold:
Beginning inventory
/ $ 8,200Purchases / $41,000
Freight in / 2,800 / 43,800
Cost of goods available for sale / 52,000
Ending inventory / (5,000)
Cost of goods sold / $47,000
(5-10 min.) S 1-6
Sales / $102,000 / (d) $203,200
Cost of goods sold
Beginning inventory / (a) 11,800 / 31,000
Purchases and freight in / 51,000 / (e) 60,000
Cost of goods available for
sale / (b) 62,800 / 91,000
Ending inventory / 1,800 / 1,800
Cost of goods sold / 61,000 / (f) 89,200
Gross margin / $ 41,000 / $114,000
Selling and administrative
expenses / (c) 30,000 / 83,000
Operating income / $ 11,000 / (g) $ 31,000
a. $11,800 (Cost of goods available for sale, $62,800 [see b. below] minus purchases, $51,000)
b. $62,800 (Cost of goods sold, $61,000, plus ending inventory, $1,800)
c. $30,000 (Gross margin, $41,000, minus operating income, $11,000)
(continued) S 1-6
d. $203,200 (Gross margin, $114,000, plus cost of goods sold, $89,200 [see f. below])
e. $60,000 (Cost of goods available for sale, $91,000, minus beginning inventory, $31,000)
f. $89,200 (Cost of goods available for sale, $91,000, minus ending inventory, $1,800)
g. $31,000 (Gross margin, $114,000, minus selling and administrative expenses, $83,000)
Suggested approach: Solve in the following order: (b), (a), and (c). Then (e), (f), (d), and (g).
(5 min.) S 1-7
S, Mer, Man / 2. The CEO’s salary
Mer, Man / 3. Cost of goods sold
S, Mer, Man / 4. Building rent expense
S, Mer, Man / 5. Customer service expense
(5 min.) S 1-8
Computation of Direct Materials Used
Direct materials used:
Beginning materials inventory
/ $ 4,200Purchases of direct materials / $6,700
Freight-in / 100 / 6,800
Available for use / 11,000
Ending materials inventory / (1,600)
Direct materials used / $ 9,400
(5-10 min.) S 1-9
4 / b. Wages of warehouse workers
1 / c. Paper
5 / d. Depreciation on equipment
4 / e. Manufacturing plant manager’s salary
5 / f. Property taxes on manufacturing plant
3 / g. Glue for envelopes
(5-10 min.) S 1-10
Reqs. 1 and 2
List of manufacturing overhead items and amounts:Glue for frames / $ 400
Plant depreciation expense / 6,500
Plant foreman’s salary / 3,000
Plant janitor’s wages / 1,100
Oil for manufacturing equipment / 150
Sun Pro Company
Total Manufacturing Overhead Computation
Manufacturing overhead:
Glue for frames / $ 400
Plant depreciation expense
/ 6,500Plant foreman’s salary / 3,000
Plant janitor’s wages / 1,100
Oil for manufacturing equipment / 150
Total manufacturing overhead / $11,150
Items excluded and why:
(1) glue for frames (it is not cost-effective to trace the low-cost
glue to individual glasses), (2) depreciation on company cars (marketing expense), (3) interest expense (financing expense), (4) company president’s salary (administrative expense), and (5) lenses (direct materials)
(5 min.) S 1-11
Schedule of Cost of Goods Manufactured
Year Ended December 31, 2010
Beginning work in process inventory / $ 6,000
Add: Direct materials used / 15,000
Direct labor / 7,000
Manufacturing overhead / 18,000
Total manufacturing costs incurred
during year / 40,000
Total manufacturing costs to
account for / 46,000
Less: Ending work in process inventory / (3,000)
Cost of goods manufactured / $43,000
(5-10 min.) S 1-12
a. Period cost
b. Inventoriable product cost*
c. Inventoriable product cost
d. Period cost
e. Inventoriable product cost
f. Period cost
g. Inventoriable product cost
h. Inventoriable product cost
i. Period cost
*Since the software is for tracking inventory, the cost would be
associated with production. It would therefore likely be
classified as part of manufacturing overhead, an inventoriable
cost. However, some companies might consider the software
an administrative cost, which would be a period cost.
(5 min.) S 1-13
a. Providing earnings information to your brother before it is publicly announced violates the confidentiality standard.
b. Stealing from your employer is a violation of the integrity standard.
c. Skipping continuing education sessions could violate the requirement to maintain professional competence. If your company paid for you to attend the conference, skipping the sessions also violates the integrity standard.
d. Failing to read the specifications of the software package before purchasing it violates the competence standard.
e. Failing to provide job description information to management because you fear it may be used to cut a position in your department violates the credibility standard.
Exercises
(5 min.) E 1-14
a. Companies must follow GAAP in their financial accounting systems.
b. Financial accounting develops reports for external parties, such as creditors and shareholders.
c. When managers compare the company’s actual results to the plan, they are performing the controlling role of management.
d. Managers are decision makers inside a company.
e. Financial accounting provides information on a company’s past performance.
f. Management accounting systems are not restricted by GAAP, but are chosen by comparing the costs versus the benefits of the system.
g. Choosing goals and the means to achieve them is the planning function of management.
(5 min.) E 1-15
a. Just-in-time(JIT)manufacturingis a management philosophy that focuses on producing products as needed by the customer.
b. The goal of total quality management (TQM) is to please customers by providing them with superior products and services by eliminating defects and waste.
c. Enterprise Resource Planning (ERP) can integrate all of a company’s worldwide functions, departments, and data.
d. Firms adopt e-commerce to conduct business on the Internet.
(5-10 min.) E 1-16
Income Statement
Month of November
Revenue from grooming / $15,600
Wages / $ 4,300
Grooming supplies expense / 1,700
Building rent expense / 1,400
Utilities / 260
Depreciation on equipment / 180
Total operating expenses / $ 7,810
Net Operating Income / $ 7,790
Unit cost to groom one dog =
Total operating expenses ÷ total number of dogs groomed
$7,810 ÷ 690 dogs = $11.32 per dog
(5-10 min.) E 1-17
Income Statement
Quarter Ended March 31, 2011
Revenue from grooming / $46,300 / 100%
Wages / $16,700
Grooming supplies expense / 4,000
Building rent expense / 2,500
Utilities / 1,100
Depreciation on furniture and equipment / 300
Total operating expenses / $24,600 / 53%
Net Operating Income / $21,700 / 47%
b. Unit cost to groom one dog =
Total operating expenses ÷ total number of dogs groomed
$24,600 ÷ 2,700 dogs = $9.11 per dog
(15 min.) E1-18
Req. 1
Gonzales Brush CompanyIncome Statement
Year Ended December 31, 2011
Sales revenue / $128,500 / 100%
Cost of goods sold:
Beginning inventory / $ 7,400
Purchases / 62,800
Cost of goods available for sale / 70,200
Ending inventory / 6,000
Cost of goods sold / 64,200 / 50%
Gross profit / 64,300 / 50%
Selling and administrative
expenses / 45,400 / 35%
Operating Income / $ 18,900 / 15%
Req. 2
Unit cost of one hair brush =
total cost of goods sold ÷ total number of brushes sold
$64,200 ÷ 5,700 = $11.26 per brush
(15-20 min.) E 1-19
Beginning work in
process inventory / (a) 10,700 / $ 40,000 / $2,100
Direct materials used / $14,900 / $ 35,000 / (g) $3,600
Direct labor / 10,100 / 20,100 / 1,100
Manufacturing overhead: / (b) 20,700 / 10,700 / 900
Total manufacturing
costs incurred during
year / 45,700 / (d) 65,800 / (h) 5,600
Total manufacturing
costs to account for / $56,400 / (e) 105,800 / $7,700
Less: Ending work in
process inventory / (c) (4,500) / (25,700) / (2,800)
Costs of goods
manufactured / $51,900 / (f) $80,100 / (i) $4,900
(a) / Total manufacturing costs to account for / $ 56,400
− Total manufacturing costs incurred during year / (45,700)
= Beginning work in process inventory / $10,700
(b) / Total manufacturing costs incurred during year / $ 45,700
− Direct materials used / (14,900)
− Direct labor / (10,100)
= Manufacturing overhead / $ 20,700
(c) / Total manufacturing costs to account for / $ 56,400
− Cost of goods manufactured / (51,900)
= Ending work in process inventory / $ 4,500
(continued) E 1-19
Direct labor / 20,100
Manufacturing overhead / 10,700
Total manufacturing costs incurred during
year / $ 65,800
(e) / Beginning work in process inventory / $ 40,000
Total manufacturing costs incurred during
year (from (d) above) / 65,800
Total manufacturing costs to account for / $105,800
(f) / Total manufacturing costs to account for
(from (e) above) / $105,800
− Ending work in process inventory / (25,700)
= Cost of goods manufactured / $ 80,100
(g) / Total manufacturing costs incurred during
year (from (h) below) / $ 5,600
− Direct labor / (1,100)
− Manufacturing overhead / (900)
= Direct materials used / $ 3,600
(h) / Total manufacturing costs to account for / $ 7,700
− Beginning work in process inventory / (2,100)
= Total manufacturing costs incurred during
year / $ 5,600
(i) / Total manufacturing costs to account for / $ 7,700
− Ending work in process inventory / (2,800)
= Cost of goods manufactured / $ 4,900
(15-20 min.) E 1-20
Req. 1
Clarkson Corp.Schedule of Cost of Goods Manufactured
Year Ended December 31, 2012
Beginning work in process inventory / $105,000
Add: Direct materials used:
Beginning materials inventory / $ 55,000
Purchases of materials / 150,000
Available for use / 205,000
Ending materials inventory / (25,000)
Direct materials used / $180,000
Direct labor / 127,000
Manufacturing overhead:
Indirect labor / $ 33,000
Insurance on plant / 28,000
Depreciation—plant
building and equipment / 18,000
Repairs and maintenance—plant / 7,000 / 86,000
Total manufacturing costs
incurred during the year / 393,000
Total manufacturing costs to
account for / 498,000
Less: Ending work in process
inventory / (61,000)
Cost of goods manufactured / $437,000
Req. 2
Unit product cost / = / Cost of goods manufactured ÷ totalunits produced
= / $437,000 ÷ 3,200 lamps = $136.56 per lamp
(15-20 min.) E 1-21
inventory / $ 43,000
Add: Direct materials used:
Beginning inventory / $21,000
Purchases of materials / 72,000
Available for use / 93,000
Ending inventory / (31,000)
Direct materials used / $62,000
Direct labor / 89,000
Manufacturing overhead / 46,000
Total manufacturing costs
incurred during the year / 197,000
Total manufacturing costs to
account for / 240,000
Less: Ending work in process
inventory / (29,000)
Cost of goods manufactured / 211,000
Add: Beginning finished goods
inventory / 15,000
Cost of goods available for sale / 226,000
Less: Ending finished goods
inventory / 26,000
Cost of goods sold / $200,000
(15 min.) E 1-22
Req. 1
Although the amount is not large now, the repeated nature of the thefts means that they add up over time. Also, the repeated nature of the thefts increases the severity of Cory Loftus’ unethical behavior. A new employee who has engaged in repeated thefts is unlikely to become a valued and trusted employee. This type of behavior is unethical.
As controller, Mary Gonzales probably hired Cory, and she is also responsible for the lack of controls that permitted a new employee to commit this theft. However, this is no excuse for Cory’s unethical behavior. The controller should think carefully whether it is in her or the company’s interest to keep Cory. This incident also reflects poorly on Mary’s competence. She needs to learn from the experience and supervise the next bookkeeper more carefully.
Req. 2
The new information makes Mary’s decision more complex. Being new, she may want to discuss the situation with the company president. Even if the bookkeeper believed he was just “borrowing” the money, his behavior still is unethical. It will probably be difficult to confirm whether or not Cory did in fact repay money he had taken in the past. Another possibility is that Cory repaid the amounts and the previous controller turned a blind eye. Unless Mary can obtain additional clarifying information, one alternative would be to indicate to Cory that this behavior will not be tolerated in the future and to establish better controls and closer supervision.
Students’ responses will vary.
Problems
Group A
(15 min.) P 1-23A