Solutions manual mangerial accounting 8e by hansen

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CHAPTER 1
INTRODUCTION: THE ROLE, HISTORY, AND
DIRECTION OF MANAGEMENT ACCOUNTING
QUESTIONS FOR WRITING AND DISCUSSION
1. A management accounting information system is an information system that produces
outputs using inputs and processes needed
to satisfy specific managerial objectives.

8. Continuous improvement means searching
for ways of increasing overall efficiency and
productivity of activities by reducing waste,
increasing quality, and reducing costs.

2. The inputs of a management accounting
information system are economic events.
The processes transform the inputs into outputs and are such things as collecting, measuring, storing, analyzing, reporting, and
managing. Typical outputs include special
reports, product costs, customer costs, performance reports, budgets, and personal
communication.

9. Employee empowerment is allowing operational workers to plan, control, and make
decisions without explicit authorization from
middle- and higher-level managers.

3. The three objectives of a management accounting information system are as follows:
To provide information for costing out services, products, and other objects of interest
to management; to provide information for
planning, controlling, evaluation, and continuous improvement; and to provide information for decision making.

4. All organizations — manufacturing, merchandising, and services — must have a
good management accounting information
system. Management accounting concepts
and procedures are not restricted to any one
type of organization.
5. The users of management accounting information are managers and workers within
the organization. Anyone internal to an organization is a potential user of management accounting information.
6. Management accounting information is used
to cost out objects (for example, services
and products) and to aid in planning, controlling, evaluation, continuous improvement,
and decision making.
7. Both financial and nonfinancial information
should be provided by the management accounting information system. Nonfinancial
information provides insights useful for controlling operations — it is easily used by operational workers. Financial information is
critical for evaluating the success of operational control.

1

10.

Operational workers must be informed so
that they can evaluate and monitor the effectiveness of their decisions.

11.

Planning establishes performance standards, feedback compares actual performance with planned performance, and controlling uses feedback to evaluate deviations
from plans.

12.

Performance reports are formal reports that
compare actual data with planned data or
benchmarks and thus provide signals to
managers that allow them to take corrective
actions.

13.

Management accounting differs from financial accounting in the following major ways:
(1) internally focused, (2) no mandated
rules, (3) financial and nonfinancial; subjective information possible, (4) emphasis on
the future, (5) internal evaluation and decisions based on very detailed information, (6)
broad, multidisciplinary.

14.

The requirement to prepare reports for external users created a demand for a particular accounting information system. This system was geared to produce inventory costs.
Aggregate average cost information apparently was sufficient for most internal decisions. Thus, management accounting became an extension of the financial
accounting system. This outcome was probably due to a favorable cost-benefit tradeoff.
The incremental cost of producing


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more accurate product costs was not offset
by the incremental benefits of improved decision making. However, significant changes
in the competitive environment have increased the cost of making bad decisions,
thus increasing the benefits of more accurate information. Also, information technology has decreased the cost of processing data. These two events have led to a demand
for an improved management accounting information system.
15.

16.

17.

18.

19.

Activity-based management is an important
approach that focuses management’s attention on activities with the objective of improving the value received by the customer and
the profit achieved by providing this value. It
is important because it is the heart of the
contemporary management accounting system, offering increased accuracy in product
costing (through the use of activity-based
costing) and the ability to evaluate and control activities (through process value analysis).
Customer value is the difference between
customer realization (what a customer receives) and customer sacrifice (what a customer gives up). Focusing on customer value forces managers to consider the entire
set of value-chain activities, including what
happens after a product is sold. This creates
a demand for a broader set of information
than that found in a traditional system.
The internal value chain is the set of activities required to design, develop, produce,
market, distribute, and service a product (the
product can be a service). To increase customer value, managers must assess the effect each activity in the chain has on customer value, keeping those that add value
and eliminating those that do not.
Industrial value chain is the linked set of
value-creating activities from raw materials
through the end-use customer. Understanding the industrial value chain is important
because it enables a manager to identify the

important internal and external linkages and
use these linkages to create a competitive
advantage.
Supply chain management is concerned
with managing material flows starting with
suppliers and upstream suppliers, moving to
production, and finishing with the distribution
of finished goods to customers and down-

2

stream customers. Supply chain management focuses on the entire industrial value
chain because potential benefits may be
reaped by understanding upstream suppliers
and downstream customers.
20. E-business is any business transaction or
information exchange that is executed using
information and communication technology.
Management accountants provide information for e-business settings, e.g., the cost of
processing an electronic transaction versus
the cost of a paper transaction.
21. Managing the value chain requires a crossfunctional perspective. Because of the interrelationships that exist in the value chain, a
decision can affect many different functions.
Information must be gathered and reported
so that these effects can be assessed and
decision making improved.
22. Decreasing the time required to perform
activities may increase quality and decrease
costs. The management accounting system
should be able to document the relationship

between time reductions and such things as
quality and cost both on a projected or
before-the-fact basis and on an after-the-fact
basis. This enhances planning, controlling,
and decision making.
23. A line position has direct responsibility for
carrying out the basic missions of an organization. A staff position has indirect responsibility for the basic missions and provides a
supportive role for line activities.
24. Yes. For most organizations, the controller
should be a member of the top management
staff. The controller is the financial expert of
an organization and can provide critical advice and insights.
25. The controller is responsible for both internal
and external accounting. These responsibilities usually include diverse activities such as
taxes, SEC reports, cost accounting, budgeting, internal auditing, financial accounting, and systems accounting.
26.

Ethical behavior is concerned with making
right choices and usually involves sacrificing
individual self-interest for the well-being of
others. It is possible to teach ethical behavior in virtually any course. By being introduced to ethical dilemmas in management
accounting, students can be made aware of


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needs. The CPA has a public-accounting
orientation, and the CIA has an internalauditing orientation. Only the CMA specifically addresses the professional requirements of a management accountant.

the behavior that is expected in the business

world and, in particular, for management accountants.
27.

28.

Yes. There is some evidence that ethical
behavior actually is good business. In other
words, the market and consumers appreciate ethical behavior and are willing to reward those who adopt it. In addition, a company with higher ethical standards would
experience less exposure to manipulation of
financial data for gain.
Yes. As management accountants become
more informed about what behavior is acceptable and what is not, we should expect
a favorable response. This response can be
reinforced by the IMA imposing sanctions for
serious violations of the code.

29. The three forms of certification are the CMA,
the CPA, and the CIA. Although each certification can be valuable for management accountants, the CMA is tailored to fit their

3

30. The Sarbanes-Oxley Act (SOX) established
stronger government control and regulation
of publicly-traded companies in the United
States. Major sections of SOX include: establishment of the Public Company Accounting Oversight Board, enhanced auditor independence,
tightened
regulation
of
corporate governance, control over management, and management/auditor assessment of the firm’s internal controls. SOX also
requires public companies to state whether

or not the top corporate officers are bound to
the company code of ethics.
.


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EXERCISES
1–1
1. Inputs: a, d, f, j
2. Processes: b, g, m

3. Outputs: c, i, l
4. System objectives: e, h, k, n

1–2
a.
b.
c.
d.
e.
f.
g.

Management
Financial
Management
Financial
Financial
Management

Management

h.
i.
j.
k.
l.
m.
n.

Management
Financial
Management
Management
Financial
Financial
Management

7.
8.
9.
10.
11.

j
c
b
e
d

1–3
1. b
2. c
3. f

1–4
1. e
2. b
3. c

1–5
1.
2.
3.
4.
5.
6.

k
g
a
f
i
h

4


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1–6
Penny is staff. She is in a support role—she prepares reports and helps explain
and interpret them. Her role is to help the line managers more effectively carry
out their responsibilities.
Karol is line. She is responsible for selling product. A basic objective for the existence of a manufacturing firm is to sell product. Karol has direct responsibility for
a basic objective and therefore holds a line position.
Porter is staff. He is in a support role to production. He does not make the products himself. Instead, he ensures that the appropriate production equipment is in
place for manufacturing.
Joe is a line manager. He has direct responsibility for producing a garden hose.
Clearly, one of the basic objectives for the existence of a manufacturing firm is to
make a product. Thus, Joe has direct responsibility for a basic objective and
therefore holds a line position.

1–7
A manager has a responsibility to the company as well as society. If he/she lays
off the employees, he/she ignores both of these responsibilities. In effect, the
manager would be pursuing his/her self-interest at the expense of the company
and the salespeople. While pursuit of self-interest is not necessarily unethical, it
can be if it harms others. In this case, the manager’s action could result in lower
profits for the company because sales may decrease and unnecessary training
costs will be incurred when the positions are refilled the following year. Similarly,
it is unjust to penalize productive employees simply to earn a bonus. The right
choice is to retain the three salespeople. Although the manager is not a management accountant, he/she is violating the ethical standard that requires the refusal
of “any gift or favor (bonus) that would influence or appear to influence their actions.”
The reward system, in part, encouraged this behavior. Apparently, the manager is
paid a bonus if profits exceed 10 percent of planned profits. By basing reward on
a short-run measure such as profits, the manager has the incentive to manipulate
earnings in the short run. One way of manipulating annual earnings is to reduce
discretionary expenditures.

This type of behavior can be discouraged by expanding the performance
mea-sures to include long-run factors like market share, productivity, and
personnel development. The accounting system can also be used to track
trends (e.g., training costs over time). Moreover, managers can be required
to provide extensive justification for significant changes in discretionary
expenses.

5


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1–8
a. By the time most students graduate from high school, they have not had
much exposure to business. Therefore, they do not have full knowledge
of acceptable behavior for the business environment. Students may not
know that certain practices are unethical because they may not be familiar with the behavioral norms associated with these practices. Once
students begin to learn business practices, they begin to see what ethical dilemmas can arise in a business context. They then are able to apply the moral training they have had to deal with the situations. Furthermore, evidence exists that ethical reasoning can be changed for the
better. Thus, instruction in ethics can be a vital part of a student’s education.
b. Sacrificing self-interest is a choice that each person must make. Others may
be influenced by those individuals who behave ethically. Individuals committed to ethical behavior produce societies committed to ethical behavior (not
vice versa).
c. While this sounds noble, many would disagree that managers are first seeking to serve others and accept personal financial rewards as a by-product of a
good job. Pursuit of self-interest and personal financial well-being is not necessarily unethical. It is only when this pursuit is done at the expense of the
collective good that the behavior becomes questionable.
d. It is often true that unethical firms and individuals suffer financially. In the
long run, there is some evidence that ethical behavior pays off. It is doubtful,
however, that every unethical firm or individual is wiped out financially. There
are too many notable exceptions (for example, the selling of drugs by organized crime).

1-9
No, it is not ethical for Steve to demand a kickback from Dave. Dave should not
agree to this. This brief situation actually happened to Dave, a friend of the author. The author advised Dave not to accept the deal. Dave then checked with his
lawyer, who bluntly told him the deal was illegal. Dave did not accept.

1–10
a.
b.
c.
d.

e.
f.
g.
h.

CPA
CIA
CMA
CPA

6

CPA
CMA
CMA, CPA, CIA
CMA, CPA, CIA


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PROBLEMS
1–11
1.

Excellence teams and minicompanies both have the objective of involving
production line personnel more fully in the management process so that the
company can take advantage of the direct contact and knowledge that operating workers have about production and their work environment. This will
hopefully translate into continuous improvement of operating performance.
The objectives seem to be realized. Duffy has increased profits and reduced
costs, attributing much of the change to the contributions of the excellence
teams. The same is true for the minicompanies—much of the success in
quality improvements appears to be grounded in this organizational change.

2.

Employee empowerment is a key element of continuous improvement. Operating workers have tremendous skills, knowledge, and firsthand contact with
the operating environment, all of which can be exploited to discover new and
more efficient ways of producing. As employees are allowed more input, their
self-esteem grows and their commitment to the company increases. Morale
also increases, making for a more pleasant and productive environment.
There are potential disadvantages. Too much latitude in employee empowerment might sidetrack employees to the point where they begin to attack personalities; discuss and argue about wage and hour considerations (or other
grievances); or try to become involved in hiring, firing, and disciplinary matters. Many of these matters are best left centralized, and some skillful management is needed to ensure that operating employees are primarily involved
in improving efficiency.

3.

Management accounting information should be used to inform empowered
employees so that they can identify problems and monitor and evaluate the
effects of decisions they make. This information will only be valuable if it is

delivered on a timely basis.

4.

Quality culture means that the employees of the organization have an internal
commitment to producing high-quality products and services. A learning organization means that the employees are always seeking new and better ways
of doing things—they have a commitment to continuous improvement.

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1–12
A. Decision making; Role: Information about the cost of performing the various
tests.
B. Planning and controlling; Role: Feedback about the actual defective rate versus the planned rate.
C. Planning; Role: Pro forma income statement and cash budget.
D. Decision making; Role: Projection of future cash flows and analysis of the effects on unit cost and cycle time.
E. Planning; Role: Providing unit prices and costs so that a cost-volume-profit
analysis can be done.
F. Decision making; Role: Identifying avoidable costs.

1–13
1.

The total product is the product and its features (processing speed, disk
drives, software packages, and so on), the service, the operating and maintenance requirements, and the delivery speed.

2.

One company is emphasizing low costs, and the other is attempting to differentiate its PC by offering faster delivery and higher-quality service.

3.

The Confiar’s service component and its delivery time appear to be better
than Drantex’s. Thus, the realization of these features appears to outweigh
the additional sacrifice (the additional operating and maintenance cost) associated with the Confiar PC. The implications for management accounting are
straightforward. The management accounting information system should collect and report information about customer realization and sacrifice. Much of
this information is external to the firm but clearly needed by management.

4.

Better quality and shorter delivery time increase customer realization, while
lowering the price decreases customer sacrifice. In total, customer value has
increased and presumably this should make the Drantex PC much more competitive. This example illustrates how quality, time, and costs are essential
competitive weapons. It also illustrates how critical it is that the management
accounting system collect and report data concerning these three dimensions.

8


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1–14
Planning. The management accountant gains an understanding of the impact on
the organization of planned transactions (i.e., analyzing strengths and weaknesses) and economic events, both strategic and tactical, and sets obtainable
goals for the organization. The development of budgets is an example of planning.
Controlling. The management accountant ensures the integrity of financial information, monitors performance against budgets and goals, and provides information internally for decision making. Comparing actual performance against budgeted performance and taking corrective action where necessary is an example of
controlling. Internal auditing is another example.

Evaluating Performance. The management accountant judges and analyzes the
implications of various past and expected events and then chooses the optimum
course of action. The management accountant also translates data and communicates the conclusions. Graphical analysis (such as trend, bar charts, or regression) and reports comparing actual costs with budgeted costs are examples of
evaluating performance.
Ensuring Accountability of Resources. The management accountant implements
a reporting system closely aligned to organizational goals that contributes to the
measurement of the effective use of resources and safeguarding of assets. Internal
reporting such as comparison of actual to budget is an example of accountability.
External Reporting. The management accountant prepares reports in accordance
with generally accepted accounting principles and then disseminates this information to shareholders, creditors, and regulatory and tax agencies. An annual report or a credit application are examples of external reporting. (CMA adapted)

1–15
The changes that are being proposed violate the following ethical standards:
Competence. Top management’s request of Roger Deerling to account for the
company’s information in a manner that is not in accordance with generally accepted accounting principles is in violation of the standard to “perform professional duties in accordance with relevant laws, regulations, and technical standards.”

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1–15

Concluded

Confidentiality. Top management has violated the ethical standard to “refrain
from using confidential information for unethical or illegal advantage” (personal
job security).
Integrity. Top management clearly is in violation of the standard “to avoid apparent conflicts of interest” and to “advise all parties (other shareholders) of any potential conflicts.”
Credibility. Top management’s restriction and distortion of Alert’s financial information violates the standard to “communicate information fairly and objectively.”

By telling Deerling to restrict the disclosure of the changes, top management is
clearly in violation of the standard to “communicate information fairly and objectively.”
To resolve the ethical dilemma, Roger Deerling should first determine if the company has an established policy in place. If so, he should follow the prescribed
policies in resolving the ethical conflict. If there is no policy, then the specific
steps are as follows:
•

To discuss the issue with his immediate supervisor, unless the supervisor is
involved, in which case, he should continue to the next management level.
Roger may need to discuss the issue with the Audit Committee of the
Board of Directors, or owners. Any contact with levels above his immediate
supervisor should be initiated with the supervisor’s knowledge, as long as
the supervisor is not involved. As long as Roger does not believe a law was
broken, he should not communicate the problem to outside authorities.

•

To clarify relevant concepts by confidential discussion with an objective advisor or an IMA Ethics Counselor to obtain possible courses of action.

•

“Consult (his) own attorney as to legal obligations and rights concerning the
ethical conflict.”
(CMA adapted)

10


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1–16
By discussing the possible sale of Webson’s common stock with members of the
troubleshooting team, Maureen Hughes has violated the following standards of
ethical conduct:
Competence. Hughes has an obligation to perform her duties in accordance with
relevant laws and regulations. By discussing the information she overheard,
Hughes may have violated laws regulating the use of inside information. (CMA
adapted)
Confidentiality. Hughes has disclosed confidential information acquired in the
course of her work that she has not been authorized to share with peers and others within the organization. In addition, she has not informed subordinates of the
confidential nature of the information nor has she attempted to prevent the further distribution of this information.
Integrity. By discussing this information, Hughes has engaged in an activity that
would discredit her profession and prejudice her ability to carry out her duties
ethically.
Credibility. Hughes has violated the requirement to communicate all information
fairly and objectively.

11


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1–17
John Brogan’s behavior is unethical for the following reasons:
1. Competence
•

Brogan is undermining the preparation of complete and clear reports.

2. Confidentiality

•
•

Brogan is disclosing confidential information to someone outside the
company (Sara Wiley).
Brogan appears to be using confidential information for unethical advantage (i.e., brother-in-law’s personal objectives).

3. Integrity
•

By curtailing customer complaints, Brogan has failed to:
• avoid a conflict of interest.
• refrain from engaging in conduct that might prejudice the carrying
out of his duties.

4. Objectivity
•

Brogan did not:
• communicate information fairly and objectively.
• disclose fully all relevant information.
(CMA adapted)
1-18
Answers will vary.

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CHAPTER 2
BASIC MANAGEMENT ACCOUNTING CONCEPTS
QUESTIONS FOR WRITING AND DISCUSSION
1. Product costing accuracy means assigning
the cost of the resources consumed by a
cost object to that cost object.
2. A cost object is any item for which costs are
measured and assigned, including such
things as products, plants, projects, departments, and activities.
3. An activity is a basic unit of work performed
within an organization. Examples include
material handling, inspection, purchasing,
billing, and maintenance.
4. A direct cost is a cost that can be traced to a
cost object. An indirect cost is a cost that
cannot be traced to cost objects.
5. Traceability is the ability to assign a cost
directly to a cost object in an economically
feasible way using a causal relationship.
Tracing is the assignment of costs to cost
objects using either an observable measure
of the cost object’s resource consumption or
factors that allegedly capture the causal relationship.

causal relationship and, therefore, is more
reliable.
9. Driver tracing is the use of drivers to trace
costs to cost objects. Often, this means that
costs are first traced to activities using resource drivers and then to cost objects using
activity drivers.

10.

A tangible product is a good that is made by
converting raw materials through the use of
labor and capital inputs.

11.

A service is a task or activity performed for a
customer or an activity performed by a customer using an organization’s products or
facilities.

12.

Services differ from tangible products on
four important dimensions: intangibility, perishability, inseparability, and heterogeneity.
Intangibility means that buyers of services
cannot see, feel, taste, or hear a service before it is bought. Perishability means that
services cannot be stored. Inseparability
means that producers of services and buyers of services must be in direct contact (not
true for tangible products). Heterogeneity
means that there is a greater chance of variation in the performance of services than in
the production of products.

13.

Three examples of product cost definitions
are value-chain, operating, and traditional
definitions. The value-chain definition includes cost assignments for all value-chain
activities. Operating product costs include all

costs except for research and development.
Traditional product costs include only production costs. Different costs are needed
because they serve different managerial objectives.

14.

The three cost elements that determine the
cost of making a product are direct materials, direct labor, and overhead.

15.

The income statement for a service firm
does not need a supporting cost of goods
manufactured schedule. Because services
cannot be stored, the cost of services pro-

6. Allocation is the assignment of indirect costs
to cost objects based on convenience or assumed linkages.
7. Drivers are factors that cause changes in
resource usage, activity usage, costs, and
revenues. Resource drivers measure the
demands placed on resources by activities
and are used to assign the cost of resources
to activities. Example: time used to assign
the cost of supervision to individual activities. Activity drivers measure the demands
placed on activities by cost objects and are
used to assign the cost of activities to cost
objects. Example: number of inspection
hours used to assign the cost of inspection
to individual products.

8. Direct tracing is the process of assigning
costs to cost objects based on physically
observable causal relationships. Driver tracing is assigning costs using drivers, which
are causal factors. The driver approach relies on identification of factors that allegedly
capture the causal relationship. Direct tracing relies on physical observation of the

13


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duced equals the cost of services sold (not
necessarily true for a manufacturing firm).
16.

There are six essential differences. Activitybased cost management systems use more
drivers; are tracing intensive instead of allocation intensive; use broad, flexible product
cost definitions; focus on managing activities
instead of managing costs; emphasize systemwide performance over individual unit
performance; and use both nonfinancial and
financial performance measures. Functionalbased cost management systems emphasize only financial measures.

14

17.

For companies that have increased decision
error costs and decreased measurement
costs, a move to an activity-based cost
management system is called for. Factors

that affect the decision to move to an activity-based cost management system include
more powerful and cheaper computing capabilities, increased competition, more focused production by competitors, deregulation, and JIT manufacturing.


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EXERCISES
2–1
a. Driver tracing – the miles driven is an appropriate driver for the cost of
gas, oil, and wear and tear on tires, etc.
b. Direct tracing – the receipt for the lunch will be submitted for reimbursement.
c. Direct tracing – Mandy will have a receipt for the stamps and photocopying services purchased.
d. Allocation – Jed will probably add up the costs for a week or a month
and divide that total by the number of jobs. If the lawns differ significantly
in mowing area, he could divide by the number of hours worked (direct labor hours) and get a cost per labor hour.
2–2
Possible drivers:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Number of statements
Pounds of laundry

Number of sales orders
Number of purchase orders
Number of inspections (also inspection hours)
Assembly hours
Hours of care
Processing hours (number of returns less desirable)
Number of parts (number of purchase orders)
Hours of therapy

2–3
a.
b.
c.
d.
e.
f.
g.
h.
i.

Direct tracing
Allocation
Direct tracing
Direct tracing
Allocation
Allocation
Driver tracing – number of employees
Direct tracing
Direct tracing

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j.
k.
l.
m.

Allocation
Driving tracing – number of phones
Direct tracing
Allocation

2–4
a.
b.
c.
d.
e.
f.
g.
h.

i.
j.
k.
l.
m.

n.
o.

Marketing
Servicing
Designing
Producing
Distributing
Producing
Marketing
Designing and developing

Servicing
Producing
Developing
Designing
Marketing
Distributing
Producing

2–5
a.

Value-chain. The price needs to cover all product costs, including the costs of
developing, selling, and servicing.

b. Traditional. This approach is mandated for external reporting.
c.

Value-chain. Product mix decisions should consider all costs, and the mix

that is the most profitable in the long run should be selected.

d. Operating. The designs should be driven by the effect they have on production, marketing, and servicing costs. Thus, the operating product cost definition is the most relevant.
e.

Traditional. This approach is mandated for external reporting.

f.

Operating. Research and design costs are not relevant for a price decision
involving an existing product. Production, marketing, and servicing costs are
relevant, however.

g. Operating. Any special order should cover its costs which potentially include
production, marketing, and servicing costs.
h. Value-chain. This is a strategic decision that involves activities and costs
throughout the entire value chain.

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2-6
1. The two products that Holmes sells are playhouses and the installation of
playhouses. The playhouse itself is a tangible product, and the installation is a
service.
2. Holmes could assign the costs to production and to installation, but if the installation is a minor part of its business, it probably does not go to the trouble.
3. The opportunity cost of the installation process is the loss of the playhouses
that could have been built by the two workmen who were pulled off the production line.

2-7
Product Cost
Costs
Direct materials
Factory rent
Direct labor
Factory utilities
Supervision in the
factory
Indirect labor in
the factory
Depreciation on
factory equipment
Sales
commissions
Sales salaries
Advertising
Depreciation on
the headquarters
building
Salary of the corporate receptionist
Other administrative costs
Salary of the factory receptionist
Totals

Direct
Materials
$216,000

Direct

Labor

PERIOD COST
Overhead

Selling
Expense

Administrative
Expense

$ 24,000
$120,000
6,300
50,000
30,000
9,000
$ 27,000
65,000
37,000
$ 10,000
30,000
175,000
28,000
$216,000

2. Direct materials
Direct labor
Overhead
Total product cost

$120,000

$216,000
120,000
147,300
$483,300

17

$147,300

$129,000

$215,000


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3. Total period cost = $129,000 + $215,000 = $344,000
4. Unit product cost = $483,300/30,000 = $16.11
2-8
1. Direct materials
Direct labor
Overhead
Total product cost

$560,000
96,000
220,000

$876,000

2. Product cost per unit = Total product cost/Number of units
= $876,000/10,000 = $87.60
3. Direct materials
Direct labor
Total prime cost

$560,000
96,000
$656,000

4. Prime cost per unit = Total prime cost/Number of units
= $656,000/10,000 = $65.60
5. Direct labor
$ 96,000
Overhead
220,000
Total conversion cost $316,000
6. Conversion cost per unit = Total conversion cost/Number of units
= $316,000/10,000 = $31.60
2-9
1. Beginning inventory, January 1
150
Purchases
1,000
Ending inventory, January 31
(614)
Calendars given out
536

2. Cost of calendars given out = 536 × $0.50 = $268
3. Cost of ending inventory = 614 × $0.50 = $307

18


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2–10
1.

Sterling Company
Statement of Cost of Goods Manufactured
For the Month Ended February 28, 20XX
Direct materials:
Beginning inventory .......................................
Add: Purchases ..............................................
Materials available ..........................................
Less: Ending inventory ..................................
Direct materials used ...........................................
Direct labor ...........................................................
Manufacturing overhead .....................................
Total manufacturing costs added.......................
Add: Beginning work in process ........................
Total manufacturing costs ..................................
Less: Ending work in process ............................
Cost of goods manufactured ..............................

2.

$ 73,000
301,800
$ 374,800
56,000
$

318,800
210,400
478,590
$ 1,007,790
80,400
$ 1,088,190
103,000
$ 985,190

Sterling Company
Statement of Cost of Goods Sold
For the Month Ended February 28, 20XX
Beginning finished goods inventory ..................
Add: Cost of goods manufactured .....................

$

Cost of goods available for sale .........................
Less: Ending finished goods inventory .............
Cost of goods sold...............................................

$ 1,047,190
95,240
$ 951,950

19

62,000
985,190


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2–11
1.

Asher, Inc.
Income Statement: Absorption Costing
For the Year Ended December 31, 20XX
Sales (800,000 × $32) ...........................................
$
Less: Cost of goods sold (800,000 × $27) ..........
Gross margin ........................................................
$
Less operating expenses:
Commissions (800,000 × $1.60) ..................... $1,280,000
Administrative expenses ...............................
500,000
Advertising expenses ....................................
90,000
Income before income taxes ...............................
$

25,600,000

21,600,000
4,000,000

1,870,000
2,130,000

Since there are no beginning or ending work-in-process inventories, the unit
cost multiplied by the units produced gives the cost of goods manufactured.
Since there are no beginning or ending finished goods, the cost of goods
sold is the same as the cost of goods manufactured. A supplemental schedule is not necessary.

20


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2–11
2.

Concluded

A cost of goods sold calculation is now necessary (shown as part of the income statement below). There are 850,000 units available for sale, and if the
50,000 units @ $25 in beginning inventory are sold, that leaves 50,000 @ $27
in the ending inventory.
Radwin, Inc.
Income Statement: Absorption Costing
For the Year Ended December 31, 20XX
Sales (800,000 × $32) ...........................................
Less cost of goods sold:
Beginning finished goods(50,000* $25) ........ $ 1,250,000

Cost of goods manufactured(800,000*$27) .. 21,600,000
Cost of goods available for sale ................... $ 22,850,000
Less: Ending finished goods(50,000*$27) ....
1,350,000
Gross margin ........................................................
Less operating expenses:
Commissions (800,000 × $1.60) ..................... $ 1,280,000
Administrative expenses ...............................
500,000
Advertising expenses ....................................
90,000
Income before income taxes ...............................

$25,600,000

21,500,000
$ 4,100,000

1,870,000
$ 2,230,000

A finished goods inventory, with a FIFO assumption, increased income before
income taxes by $100,000. This occurred because 50,000 units from the beginning finished goods inventory were assumed to be sold. These units cost
$2 less than the current units ($25 versus $27), creating the $100,000 increase
in income before income taxes.

21


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2–12
1.

Mellon Company
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2008
(in thousands of dollars)
Direct materials:
Beginning inventory .......................................
Add: Purchases ..............................................
Materials available ..........................................
Less: Ending inventory ..................................
Direct materials used ...........................................
Direct labor ...........................................................
Manufacturing overhead:
Supplies ...........................................................
Insurance .........................................................
Supervision .....................................................
Material handling ............................................
Total overhead costs ......................................
Total current manufacturing costs .....................
Add: Beginning work in process ........................
Total manufacturing costs ..................................
Less: Ending work in process ............................
Cost of goods manufactured ..............................

2.

$ 57,900

52,500
$ 5,300
1,050
9,675
11,000
27,025
$ 137,425
47,500
$ 184,925
42,000
$142,925

Mellon Company
Statement of Cost of Goods Sold
For the Year Ended December 31, 2008
(in thousands of dollars)
Beginning finished goods inventory ..................
Add: Cost of goods manufactured .....................
Cost of goods available for sale .........................
Less: Ending finished goods inventory .............
Cost of goods sold...............................................

3.

$ 10,400
76,000
$ 86,400
28,500

$ 20,055

142,925
$162,980
10,750
$152,230

Prime cost = Direct materials + Direct labor = $57,900 + $52,500 = $110,400
Conversion cost = Direct labor + Overhead = $52,500 + $27,025 = $79,525

22


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2–13
1.

Beginning inventory, materials
Add: Purchases
Less: Ending inventory, materials
Materials used in production

2.

Prime cost = $171,700 + $30,960 = $202,660

3.

Conversion cost = $30,960 + $145,000 = $175,960

4.

Direct materials
Direct labor
Overhead
Cost of services

5.

$ 14,000
175,000
(17,300)
$ 171,700

$ 171,700
30,960
145,000
$347,660
Muffle-Man
Income Statement
For the Month of April

Sales revenues .....................................................
Cost of services sold ...........................................
Gross margin ........................................................
Less operating expenses:
Advertising and selling expense ...................
Franchise fees (3 × $3,000) ............................
Income before income taxes ...............................
6.

$ 410,000
347,660
$ 62,340
$ 25,000
9,000

34,000
$ 28,340

Muffle-Man produces and sells a service (replacing mufflers—a task performed for a customer) that uses mufflers as direct materials. Remington
produces and sells a tangible product (mufflers). Services differ from tangible
products on four dimensions: intangibility, perishability, inseparability, and
heterogeneity. Intangibility means that buyers of services cannot see, feel,
hear, or taste, a service before it is bought. Perishability means that services
cannot be stored for future use by a consumer. Inseparability means that
producers of services and buyers of services must usually be in direct contact for an exchange to take place. Heterogeneity means that there is a greater chance of variation in the performance of services than in the production
of products.

23


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2–14
1.

Unit cost = $3,615,000/3,000,000
= $1.205 per pound
The other value-chain costs would be treated as period costs. Research and
development would be classified as an administrative cost, and marketing,

distribution, and service costs would be classified as selling costs.

2.

Operating unit cost = $4,005,000*/3,000,000
= $1.335 per pound
*$3,615,000 + $300,000 + 0.25($360,000)
This cost includes manufacturing, distribution, packaging, and commissions.
This unit cost is especially important for strategic design and tactical profitability analysis. For example, if design engineers know the operating costs and
why these costs are being incurred, then design activity can focus on reducing these costs.

3.

Value-chain unit cost = $4,455,000*/3,000,000
= $1.485 per pound
*$3,615,000 + $300,000 + 0.25($360,000) + 0.25($1,800,000)
This unit cost is very important for pricing decisions, product mix decisions,
and strategic profitability analysis. For example, a product’s price must cover
all of its attributable costs and not just its manufacturing costs. If a product’s
price cannot do this, then it signals the need to reduce costs or increase prices or perhaps even to quit producing the product.

4.

Only one product is produced in the electrolyte plant. Thus, all costs incurred
within the plant are directly traceable to the product (manufacturing, distribution, and packaging costs). Product sales is the basis for assigning commissions and research and development costs. It is probably a good consumption measure for commissions, but has a dubious relationship with R&D.
Thus, we can classify the commission assignment as driver tracing and the
R&D assignment as allocation. It may be possible to improve the assignment
by assigning the R&D cost based on the time chemical engineers spend on
each product line (try to find a driver that really measures the cause-andeffect relationship). Another possibility is to make the cost directly traceable
by decentralizing the R&D function.

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