Managerial accounting 11th ed solutions garrison norren

Chapter 1
Managerial Accounting and the Business
Environment
Solutions to Questions
1-1
Managerial accounting is concerned with
providing information to managers for use within
the organization. Financial accounting is concerned with providing information to stockholders,
creditors, and others outside of the organization.

from making one product to making another allows the company to respond more quickly to customers. Finally, smaller batches make it easier to
spot manufacturing problems before they result in
a large number of defective units.

1-2
Essentially, managers carry out three major activities in an organization: planning, directing
and motivating, and controlling. All three activities
involve decision making.

1-7
The main benefits of a successful JIT system are reductions in: (1) funds tied up in inventories; (2) space requirements; (3) throughput
time; and (4) defects.

1-3
The Planning and Control Cycle involves
formulating plans, implementing plans, measuring
performance, and evaluating differences between
planned and actual performance.

1-8
TQM generally approaches improvement

in a series of small steps that are planned and implemented by teams of front-line workers. Process
Reengineering involves completely redesigning
business processes from the ground up—often
with the use of outside consultants.

1-4
A line position is directly related to the
achievement of the basic objectives of the organization. A staff position is not directly related to the
achievement of those objectives; rather, it is supportive, providing services and assistance to other
parts of the organization.

1-9
If Process Reengineering is successful,
fewer workers are needed. If management responds by laying off workers, morale will almost
certain suffer.

1-5
In contrast to financial accounting, managerial accounting: (1) focuses on the needs of the
manager; (2) places more emphasis on the future;
(3) emphasizes relevance and flexibility, rather
than precision; (4) emphasizes the segments of an
organization; (5) is not governed by GAAP; and
(6) is not mandatory.

1-10 Some benefits from improvement efforts
come from cost reductions, but the primary benefit is often an increase in capacity. At non-constraints, increases in capacity just add to the already-existing excess capacity. Therefore, improvement efforts should ordinarily focus on the
constraint.

1-6
A number of benefits accrue from reduced

setup time. First, reduced setup time allows a
company to produce in smaller batches, which in
turn reduces the level of inventories. Second, reduced setup time allows a company to spend more
time producing goods and less time getting ready
to produce. Third, the ability to rapidly change

1-11 If people generally did not act ethically in
business, no one would trust anyone else and
people would be reluctant to enter into business
transactions. The result would be less funds raised
in capital markets, fewer goods and services available for sale, lower quality, and higher prices.

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Solutions Manual, Chapter 1

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Exercise 1-1 (10 minutes)
1. Line
2. Directing and motivating
3. Budgets
4. Planning
5. Staff
6. Decentralization
7. Precision; Nonmonetary data
8. Managerial accounting; Financial accounting
9. Feedback
10. Controller
11. Performance report

12. Chief Financial Officer

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Managerial Accounting, 11th Edition


Exercise 1-2 (10 minutes)
1. Total quality management; Process reengineering
2. Just-In-Time
3. Nonconstraint
4. Benchmarking
5. Setup
6. Constraint
7. Non-value-added activities
8. Business process

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3


Exercise 1-3 (15 minutes)
If cashiers routinely shortchanged customers whenever the opportunity
presented itself, most of us would be careful to count our change before
leaving the counter. Imagine what effect this would have on the line at
your favorite fast-food restaurant. How would you like to wait in line while
each and every customer laboriously counts out his or her change? Additionally, if you can’t trust the cashiers to give honest change, can you trust

the cooks to take the time to follow health precautions such as washing
their hands? If you can’t trust anyone at the restaurant would you even
want to eat out?
Generally, when we buy goods and services in the free market, we assume
we are buying from people who have a certain level of ethical standards. If
we could not trust people to maintain those standards, we would be reluctant to buy. The net result of widespread dishonesty would be a shrunken
economy with a lower growth rate and fewer goods and services for sale at
a lower overall level of quality.

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Managerial Accounting, 11th Edition


Problem 1-4 (30 minutes)
1. See the organization chart on the following page.
2. Line positions include the university president, academic vice-president,
the deans of the four colleges, and the dean of the law school. In addition, the department heads (as well as the faculty) are in line positions.
The reason is that their positions are directly related to the basic purpose of the university, which is education. (Line positions are shaded on
the organization chart.)
All other positions on the organization chart are staff positions. The
reason is that these positions are indirectly related to the educational
process, and exist only to provide service or support to the line positions.
3. All positions would have need for accounting information of some type.
For example, the manager of central purchasing would need to know
the level of current inventories and budgeted allowances in various areas before doing any purchasing; the vice-president for admissions and
records would need to know the status of scholarship funds as students
are admitted to the university; the dean of the business college would
need to know his/her budget allowances in various areas, as well as information on cost per student credit hour; and so forth.

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Problem 1-4 (continued)
1. Organization chart:
President

Vice
President,
Auxiliary
Services

Manager,
Central
Purchasing

Vice
President,
Admissions &
Records

Manager,
University
Press

Dean,

Business

(Departments)

Academic
Vice
President

Manager,
University
Bookstore

Dean,
Humanities

(Departments)

Vice
President,
Financial
Services
(Controller)

Manager,
Computer
Services

Dean,
Fine Arts

(Departments)

Vice
President,
Physical
Plant

Manager,
Accounting
& Finance

Dean,
Engineering &
Quantitative
Methods

Manager,
Grounds &
Custodial
Services

Manager,
Plant &
Maintenance

Dean,
Law School

(Departments)

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Managerial Accounting, 11th Edition


Problem 1-5 (20 minutes)
1. Failure to report the obsolete nature of the inventory would violate the
Standards of Ethical Conduct as follows:
Competence
• Perform duties in accordance with relevant technical standards.
• Prepare complete reports using reliable information.
• By failing to write down the value of the obsolete inventory, Perlman
would not be preparing a complete report using reliable information.
In addition, generally accepted accounting principles (GAAP) require
the write-down of obsolete inventory.
Integrity
• Avoid conflicts of interest.
• Refrain from activities that prejudice the ability to perform duties
ethically.
• Refrain from subverting the legitimate goals of the organization.
• Refrain from discrediting the profession.
Members of the management team, of which Perlman is a part, are responsible for both operations and recording the results of operations.
Since the team will benefit from a bonus, increasing earnings by ignoring the obsolete inventory is clearly a conflict of interest. Perlman would
also be concealing unfavorable information and subverting the goals of
the organization. Furthermore, such behavior is a discredit to the profession.

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Problem 1-5 (continued)
Objectivity
• Communicate information fairly and objectively.
• Disclose all relevant information.
• Hiding the obsolete inventory impairs the objectivity and relevance of
financial statements.
(Unofficial CMA solution)
2. As discussed above, the ethical course of action would be for Perlman to
insist on writing down the obsolete inventory. This would not, however,
be an easy thing to do. Apart from adversely affecting her own compensation, the ethical action may anger her colleagues and make her very
unpopular. Taking the ethical action would require considerable courage
and self-assurance.

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Managerial Accounting, 11th Edition


Problem 1-6 (30 minutes)
1. Line authority is directly related to the achievement of an organization’s
basic objectives. Line managers have formal authority to direct operations.
Staff assists line management in the achievement of an organization’s
basic objectives. Persons with staff authority provide support services.
Staff managers typically have advisory authority because of their particular expertise.
2. Mark Johnson’s responsibility for maintaining the production schedule
involves line authority. Johnson would be directly concerned with meeting the company’s primary objective of producing metal parts.

Johnson’s responsibility to consult with production supervisors is a staff
role because he apparently cannot order changes in those consultations,
only advise. Johnson’s supervision of new alloy testing and his role regarding the use of new alloys in product development is basically a staff
function as well. He has limited authority regarding the use of new alloys because his authority applies only to product development and not
to production.
3. Mark Johnson may experience several conflicts because he has been
given both line and staff authority.
First, Johnson may initially find it difficult to communicate with the production supervisors because he operates out of a staff position.
Second, a conflict could easily develop if the supervisors lacked a clear
understanding of Johnson’s responsibilities and authorities. The supervisors could resent apparent staff interference and refuse to discuss their
problems with Johnson, making the meetings fruitless. The supervisors
working on the new contract may fail to perceive Johnson’s line authority and refuse to follow his orders.
Third, Johnson might have difficulty in understanding the nature of his
position and job. Johnson might also find it difficult to distinguish between his staff capacity and line capacity. For instance, Johnson might
have difficulty in remaining objective if any production problems develop
in the alloys he tested.
(Unofficial CMA Solution, adapted)
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9


Problem 1-7 (20 minutes)
1. If all automotive service shops routinely tried to sell parts and services
to customers that they didn’t really need, most customers would eventually figure this out. They would then be reluctant to accept the word
of the service representative that a particular problem needs to be corrected—even when a real problem exists. Either the work would not be
done, or customers would learn to diagnose and repair problems themselves, or customers would hire an independent expert to verify that the
work is really needed. All three of these alternatives impose costs and
hassles on customers.

2. As argued above, if customers could not trust their service representatives, they would be reluctant to follow the service representative’s advice. They would be inclined not to authorize work even when it is really
necessary. And, more customers would learn to do automotive repairs
and maintenance themselves. Moreover, customers would be unwilling
to pay as much for work that is done since customers would have reason to believe that the work may be unnecessary. These two effects
would reduce demand for automotive repair services. The reduced demand would reduce employment in the industry and would lead to lower
overall profits.

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Managerial Accounting, 11th Edition


Problem 1-8 (30 minutes)
1. No, Charlie would not be justified in ignoring the situation. First, the
Standards of Ethical Conduct for Management Accountants states that
the management accountant must “Avoid actual or apparent conflicts of
interest and advise all appropriate parties of any potential conflict.” If
J.B. insists on continuing the relationship with A-1, Charlie has a responsibility to advise both the corporate counsel and WIW’s Board of Directors.
Second, as the company’s controller, Charlie has a responsibility to ensure that the JIT approach is properly implemented. From the data
given in the problem, it does not appear that A-1 Warehouse Sales is
the best or most dependable supplier available. Orders are late and not
complete, and there is no way to ensure proper quality since nearly all
orders are shipped directly from the manufacturer. The present arrangement with A-1 negates most of the benefits that can accrue
from JIT.
Charlie’s first step should be to verify the accuracy of his information.
He states that A-1’s markup is 30%, but he does not indicate how he
obtained this figure. Also, the adverse financial impact on WIW is dependent in part on the price it would have to pay directly to the manufacturers as compared to the price being paid to A-1. That is, can WIW
purchase directly from the manufacturers for the same price as given to
jobbers, who handle huge volumes of goods? If not, then the adverse

financial impact of buying through A-1 may, in fact, be very small, since
WIW may have to pay about the same price either way.
Charlie’s second step should be to discuss the potential legal ramifications on a confidential basis with WIW’s corporate counsel. Before meeting with the corporate counsel, Charlie may wish to discretely determine
if Tony, the purchasing agent, and J.B., the president, worked together
in their prior employment. (Remember that both have been with WIW
for five years.) Armed with the information obtained from the discussion
with counsel, Charlie should review the situation again with J.B., explaining more directly his concerns about the apparent conflict of interest and ask that the Board of Directors approve the continued use of A1 as a supplier.

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11


Problem 1-8 (continued)
If J.B. refuses to follow this course of action, Charlie’s only alternative is
to submit a memorandum to the Board of Directors. J.B. should be notified of this action in advance. The memorandum should present only the
facts. If the Board approves the continued relationship with A-1, Charlie
may possibly conclude that his concerns about an apparent conflict of
interest do not represent an actual conflict. This presumes that legal
counsel has advised the Board that the arrangement with A-1 does not
violate any laws and that the company has made adequate disclosures
in its public filings. Only Charlie can make the decision as to whether or
not he can continue at WIW under these circumstances.

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Managerial Accounting, 11th Edition

Group Exercise 1-9
Students’ answers will depend on the specific experiences they had while
working.

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13


Chapter 2
Cost Terms, Concepts, and Classifications

Solutions to Questions
2-1
The three major elements of product
costs in a manufacturing company are direct
materials, direct labor, and manufacturing overhead.
2-2
a. Direct materials are an integral part of a
finished product and their costs can be conveniently traced to it.
b. Indirect materials are generally small
items of material such as glue and nails. They
may be an integral part of a finished product but
their costs can be traced to the product only at
great cost or inconvenience. Indirect materials
are ordinarily classified as manufacturing overhead.
c. Direct labor includes those labor costs
that can be easily traced to particular products.

Direct labor is also called “touch labor.”
d. Indirect labor includes the labor costs of
janitors, supervisors, materials handlers, and
other factory workers that cannot be conveniently traced to particular products. These labor
costs are incurred to support production, but the
workers involved do not directly work on the
product.
e. Manufacturing overhead includes all
manufacturing costs except direct materials and
direct labor.
2-3
A product cost is any cost involved in
purchasing or manufacturing goods. In the case
of manufactured goods, these costs consist of
direct materials, direct labor, and manufacturing
overhead. A period cost is a cost that is taken
directly to the income statement as an expense
in the period in which it is incurred.
2-4
The income statement of a manufacturing company differs from the income statement
of a merchandising company in the cost of

goods sold section. The merchandising company
sells finished goods that it has purchased from a
supplier. These goods are listed as “Purchases”
in the cost of goods sold section. Since the
manufacturing company produces its goods
rather than buying them from a supplier, it lists
“Cost of Goods Manufactured” in place of “Purchases.” Also, the manufacturing company identifies its inventory in this section as “Finished
Goods Inventory,” rather than as “Merchandise

Inventory.”
2-5
The schedule of cost of goods manufactured lists the manufacturing costs that have
been incurred during the period. These costs are
organized under the three major categories of
direct materials, direct labor, and manufacturing
overhead. The total costs incurred are adjusted
for any change in the Work in Process inventory
to determine the cost of goods manufactured
(i.e. finished) during the period.
The schedule of cost of goods manufactured ties into the income statement through
the Cost of Goods Sold section. The cost of
goods manufactured is added to the beginning
Finished Goods inventory to determine the
goods available for sale. In effect, the cost of
goods manufactured takes the place of the
“Purchases” account in a merchandising firm.
2-6
A manufacturing company has three
inventory accounts: Raw Materials, Work in
Process, and Finished Goods. A merchandising
company generally identifies its inventory account simply as Merchandise Inventory.
2-7
Since product costs accompany units of
product into inventory, they are sometimes
called inventoriable costs. The flow is from direct materials, direct labor, and manufacturing
overhead to Work in Process. As goods are com-

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Solutions Manual, Chapter 2

15


pleted, their cost is removed from Work in Process and transferred to Finished Goods. As goods
are sold, their cost is removed from Finished
Goods and transferred to Cost of Goods Sold.
Cost of Goods Sold is an expense on the income
statement.
2-8
Yes, costs such as salaries and depreciation can end up as assets on the balance
sheet if these are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, if some units
are still in inventory, such costs may be part of
either Work in Process inventory or Finished
Goods inventory at the end of a period.
2-9
Cost behavior refers to how a cost will
react or respond to changes in the level of activity.
2-10 No. A variable cost is a cost that varies,
in total, in direct proportion to changes in the
level of activity. A variable cost is constant per
unit of product. A fixed cost is fixed in total, but
will vary inversely on an average per-unit basis
with changes in the level of activity.
2-11 When fixed costs are involved, the average cost of a unit of product will depend on
the number of units being manufactured. As
production increases, the average cost per unit
will fall as the fixed cost is spread over more
units. Conversely, as production declines, the
average cost per unit will rise as the fixed cost is

spread over fewer units.
2-12 Manufacturing overhead is an indirect
cost since these costs cannot be easily and conveniently traced to particular units of products.
2-13 A differential cost is a cost that differs
between alternatives in a decision. An opportunity cost is the potential benefit that is given up
when one alternative is selected over another. A
sunk cost is a cost that has already been incurred and cannot be altered by any decision
taken now or in the future.
2-14 No; differential costs can be either variable or fixed. For example, the alternatives
might consist of purchasing one machine rather
than another to make a product. The difference
in the fixed costs of purchasing the two machines would be a differential cost.

2-15
Direct labor cost
(34 hours × $15 per hour) ............. $510
Manufacturing overhead cost
(6 hours × $15 per hour) ............... 90
Total wages earned ........................... $600
2-16
Direct labor cost
(45 hours × $14 per hour) ............. $630
Manufacturing overhead cost
(5 hours × $7 per hour) ................. 35
Total wages earned ........................... $665
2-17 Costs associated with the quality of conformance can be broken down into prevention
costs, appraisal costs, internal failure costs, and
external failure costs. Prevention costs are incurred in an effort to keep defects from occurring. Appraisal costs are incurred to detect defects before they can create further problems.
Internal and external failure costs are incurred
as a result of producing defective units.

2-18 Total quality costs are usually minimized
by increasing prevention and appraisal costs in
order to reduce internal and external failure
costs. Total quality costs usually decrease as
prevention and appraisal costs increase.
2-19 Shifting the focus to prevention and
away from appraisal is usually the most effective
way to reduce total quality costs. It is usually
more effective to prevent defects than to attempt to fix them after they have occurred.
2-20 First, a quality cost report helps managers see the financial consequences of defects.
Second, the report may help managers identify
the most important areas for improvement.
Third, the report helps managers see whether
quality costs are appropriately distributed
among prevention, appraisal, internal failure,
and external failure costs.
2-21 Most accounting systems do not track
and accumulate the costs of quality. It is particularly difficult to get a feel for the magnitude
of quality costs since they are incurred in many
departments throughout the organization.

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Managerial Accounting, 11th Edition


Exercise 2-1 (15 minutes)
1. The cost of a hard-drive installed in a computer: direct materials cost.
2. The cost of advertising in the Puget Sound Computer User newspaper:

marketing and selling cost.
3. The wages of employees who assemble computers from components:
direct labor cost.
4. Sales commissions paid to the company’s salespeople: marketing and
selling cost.
5. The wages of the assembly shop’s supervisor: manufacturing overhead
cost.
6. The wages of the company’s accountant: administrative cost.
7. Depreciation on equipment used to test assembled computers before release to customers: manufacturing overhead cost.
8. Rent on the facility in the industrial park: a combination of manufacturing overhead, administrative, and marketing and selling cost. The rent
would most likely be prorated on the basis of the amount of space occupied by manufacturing, administrative, and marketing operations.

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17


Exercise 2-2 (15 minutes)

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

11.
12.
13.
14.
15.

Depreciation on salespersons’ cars ..........................
Rent on equipment used in the factory ....................
Lubricants used for maintenance of machines ..........
Salaries of finished goods warehouse personnel .......
Soap and paper towels used by factory workers at
the end of a shift.................................................
Factory supervisors’ salaries....................................
Heat, water, and power consumed in the factory......
Materials used for boxing products for shipment
overseas (units are not normally boxed)................
Advertising costs....................................................
Workers’ compensation insurance on factory employees...............................................................
Depreciation on chairs and tables in the factory
lunchroom ..........................................................
The wages of the receptionist in the administrative
offices ................................................................
Lease cost of the corporate jet used by the company's executives ................................................
Rent on rooms at a Florida resort for holding the
annual sales conference .......................................
Attractively designed box for packaging the company’s product—breakfast cereal ..........................

Product Period
Cost
Cost

X
X

X

X

X
X
X
X
X
X
X
X
X
X
X

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Managerial Accounting, 11th Edition


Exercise 2-3 (15 minutes)
CyberGames
Income Statement
Sales .......................................................
Cost of goods sold:

Beginning merchandise inventory ............ $ 240,000
Add: Purchases......................................
950,000
Goods available for sale.......................... 1,190,000
Deduct: Ending merchandise inventory ....
170,000
Gross margin ...........................................
Less operating expenses:
Selling expense......................................
210,000
Administrative expense...........................
180,000
Net operating income ...............................

$1,450,000

1,020,000
430,000
390,000
$ 40,000

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19


Exercise 2-4 (15 minutes)
Lompac Products
Schedule of Cost of Goods Manufactured

Direct materials:
Beginning raw materials inventory............. $ 60,000
Add: Purchases of raw materials ............... 690,000
Raw materials available for use ................. 750,000
Deduct: Ending raw materials inventory.....
45,000
Raw materials used in production..............
Direct labor................................................
Manufacturing overhead .............................
Total manufacturing costs ...........................
Add: Beginning work in process inventory ....
Deduct: Ending work in process inventory ....
Cost of goods manufactured........................

$ 705,000
135,000
370,000
1,210,000
120,000
1,330,000
130,000
$1,200,000

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Managerial Accounting, 11th Edition


Exercise 2-5 (15 minutes)

A few of these costs may generate debate. For example, some may argue
that the cost of advertising a Madonna rock concert is a variable cost since
the number of people who come to the rock concert depends on the
amount of advertising. However, one can argue that if the price is within
reason, any Madonna rock concert in New York City will be sold out and
the function of advertising is simply to let people know the event will be
happening. Moreover, while advertising may affect the number of persons
who ultimately buy tickets, the causation is in one direction. If more people
buy tickets, the advertising costs don’t go up.

1. X-ray film used in the radiology lab at Virginia
Mason Hospital in Seattle...............................
2. The costs of advertising a Madonna rock concert in New York City.....................................
3. Rental cost of a McDonald’s restaurant building in Hong Kong ..........................................
4. The electrical costs of running a roller coaster
at Magic Mountain.........................................
5. Property taxes on your local cinema ..................
6. Commissions paid to salespersons at Nordstrom ...........................................................
7. Property insurance on a Coca-Cola bottling
plant ............................................................
8. The costs of synthetic materials used to make
Nike running shoes........................................
9. The costs of shipping Panasonic televisions to
retail stores ..................................................
10. The cost of leasing an ultra-scan diagnostic
machine at the American Hospital in Paris .......

Cost Behavior
Variable
Fixed

X
X
X
X

X

X
X
X
X
X

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21


Exercise 2-6 (15 minutes)

1.
2.
3.
4.
5.
6.
7.
8.

Cost

The wages of pediatric
nurses
Prescription drugs
Heating the hospital
The salary of the head
of pediatrics
The salary of the head
of pediatrics
Hospital chaplain’s salary
Lab tests by outside
contractor
Lab tests by outside
contractor

Costing object

The pediatric department
A particular patient
The pediatric department
The pediatric department
A particular pediatric
patient
A particular patient
A particular patient
A particular department

Direct
Cost

Indirect
Cost

X
X
X
X
X
X
X
X

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Managerial Accounting, 11th Edition


Exercise 2-7 (15 minutes)

Item

1. Cost of the old X-ray machine........
2. The salary of the head of the
Radiology Department................
3. The salary of the head of the
Pediatrics Department ................
4. Cost of the new color laser
printer.......................................

5. Rent on the space occupied by
Radiology ..................................
6. The cost of maintaining the old
machine ....................................
7. Benefits from a new DNA analyzer .........................................
8. Cost of electricity to run the Xray machines .............................

Differential
Cost

Opportunity
Cost

Sunk
Cost
X

X

X
X
X

Note: The costs of the salaries of the head of the Radiology Department
and Pediatrics Department and the rent on the space occupied by Radiology are neither differential costs, nor opportunity costs, nor sunk costs.
These are costs that do not differ between the alternatives and are therefore irrelevant in the decision, but they are not sunk costs since they occur
in the future.

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Solutions Manual, Chapter 2

23


Exercise 2-8 (15 minutes)
1. No. It appears that the overtime spent completing the job was simply a
matter of how the job happened to be scheduled. Under these circumstances, an overtime premium probably should not be charged to a customer whose job happens to fall at the end of the day’s schedule.
2. Direct labor cost: 9 hours × $14 per hour ............ $126
General overhead cost: 1 hour × $7 per hour.......
7
Total labor cost.................................................. $133
3. A charge for an overtime premium might be justified if the customer requested a “rush” order that caused the overtime.

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Managerial Accounting, 11th Edition


Exercise 2-9 (15 minutes)
1.

a.
b.
c.
d.
e.
f.
g.
h.

i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.

Product testing ....................
Product recalls.....................
Rework labor and overhead ..
Quality circles......................
Downtime caused by defects ................................
Cost of field servicing...........
Inspection of goods .............
Quality engineering..............
Warranty repairs..................
Statistical process control .....
Net cost of scrap .................
Depreciation of test equipment ................................
Returns and allowances
arising from poor quality....
Disposal of defective products .................................
Technical support to suppliers ...................................
Systems development ..........
Warranty replacements ........

Field testing at customer
site ..................................
Product design ....................

Internal External
Prevention Appraisal Failure Failure
Cost
Cost
Cost
Cost
X

X

X

X
X

X

X

X
X

X

X
X

X
X

X
X

X

X
X

2. Prevention costs and appraisal costs are incurred in an effort to keep
poor quality of conformance from occurring. Internal and external failure
costs are incurred because poor quality of conformance has occurred.

© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
Solutions Manual, Chapter 2

25


Exercise 2-10 (30 minutes)
1.
Mason Company
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning.................. $ 7,000
Add: Purchases of raw materials ...................... 118,000
Raw materials available for use........................ 125,000
Deduct: Raw materials inventory, ending..........

15,000
Raw materials used in production.....................
$110,000
Direct labor.......................................................
70,000
Manufacturing overhead:
Indirect labor .................................................
30,000
Maintenance, factory equipment ......................
6,000
Insurance, factory equipment ..........................
800
Rent, factory facilities......................................
20,000
Supplies .........................................................
4,200
Depreciation, factory equipment ......................
19,000
Total overhead costs .........................................
80,000
Total manufacturing costs..................................
260,000
Add: Work in process, beginning ........................
10,000
270,000
Deduct: Work in process, ending ........................
5,000
Cost of goods manufactured ..............................
$265,000
2. The cost of goods sold section of Mason Company’s income statement:

Finished goods inventory, beginning ............
Add: Cost of goods manufactured................
Goods available for sale ..............................
Deduct: Finished goods inventory, ending ....
Cost of goods sold......................................

$ 20,000
265,000
285,000
35,000
$250,000

© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
26

Managerial Accounting, 11th Edition