Horngren financial managerial accounting 4th 2

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976 chapter 16  

> Solution

CHAPTER 16

1.
Cost of Goods Sold  =  Beginning Merchandise Inventory  + Net Purchases  +  Freight In  – Ending Merchandise Inventory
=

$ 20,000        +     $265,000    +    $15,000   –       
$30,000

=

$270,000

Unit Cost per Item = Cost of Goods Sold /  Number of Units Sold
=

$270,000

=

$108 per futon

/      2,500 futons

2. Total period costs include all expenses not included in inventory:
Sales Salaries Expense

$ 50,000

Delivery Expense

18,000

Rent Expense

15,000

Utilities Expense

3,000

Administrative Salaries Expense
Total Period Costs

64,000
$150,000

3. The income statement follows:
JACKSON, INC.
Income Statement
Year Ended December 31, 2015
Sales Revenue

$ 500,000

Cost of Goods Sold:

Merchandise Inventory, January 1

$ 20,000

Net Purchases and Freight In

280,000

Cost of Goods Available for Sale

300,000

Merchandise Inventory, December 31

(30,000)

Cost of Goods Sold

270,000

Gross Profit

230,000

Operating Expenses:
Administrative Salaries Expense

64,000

Sales Salaries Expense

50,000

Delivery Expense

18,000

Rent Expense

15,000

Utilities Expense

3,000

Total Operating Expenses

150,000
$ 80,000

Operating Income
Gross Profit % = Gross Profit / Sales Revenue
= $230,000 / $500,000 = 0.46 = 46%
Profit Margin Ratio = Operating Income / Sales Revenue
= $80,000 / $500,000 = 0.16 = 16%


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     Introduction to Managerial Accounting 977

> Summary Problem 16-2

> Solution
Requirement 1
Product cost: a, c, e, f, h
Period cost: b, d, g
Requirement 2
Cost of goods manufactured:
Beginning Work-in-Process Inventory
  Direct Materials Used
  Direct Labor
  Manufacturing Overhead

$ 5,000
$ 24,000
9,000
17,000

Total Manufacturing Costs Incurred during Period

50,000

Total Manufacturing Costs to Account For

55,000

Ending Work-in-Process Inventory

(4,000)

Cost of Goods Manufactured

$ 51,000

CHAPTER 16

Requirements
1. For a manufacturing company, identify the following as either a product cost or a
period cost:
a. Depreciation on plant equipment
b.Depreciation on salespersons’ automobiles
c. Insurance on plant building
d.Marketing manager’s salary
e. Raw materials
f. Manufacturing overhead
g. Electricity bill for home office
h.Production employee wages
2. Show how to compute cost of goods manufactured. Use the following
amounts: ­direct materials used, $24,000; direct labor, $9,000; manufacturing
­overhead, $17,000; beginning Work-in-Process Inventory, $5,000; and ending
Work-­in-Process Inventory, $4,000.
3. Using the results from Requirement 2, calculate the per unit cost for goods
­manufactured assuming 1,000 units were manufactured.
4. Beginning Finished Goods Inventory had 100 units that had a unit cost of $50
each. Ending Finished Goods Inventory has 200 units left. Calculate cost of goods
sold assuming FIFO inventory costing is used.


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978 chapter 16  

CHAPTER 16

Requirement 3
Cost of Goods Manufactured

/

Total Units Produced

=

Unit Product Cost

$51,000

/

1,000 units

=

$51 per unit

Requirement 4
Beginning Finished Goods Inventory (100 @ $50 per unit)

$ 5,000

Cost of Goods Manufactured

51,000

Cost of Goods Available for Sale

56,000

Ending Finished Goods Inventory (200 @ $51 per unit)
Cost of Goods Sold [(100 @ $50 per unit) + (800 @ $51 per unit)]

(10,200)
$ 45,800

> Key Terms
Budget (p. 956)
A financial plan that managers use to
coordinate a business’s activities.
Controlling (p. 956)
Implementing plans and evaluating the
results of business operations by comparing the actual results to the budget.
Conversion Costs (p. 965)
Direct labor plus manufacturing
­overhead.
Cost/Benefit Analysis (p. 957)
Weighing costs against benefits to help
make decisions.
Cost Object (p. 964)
Anything for which managers want a
separate measurement of cost.
Cost of Goods Manufactured

(p. 967)
The manufacturing costs of the goods
that finished the production process in
a given accounting period.
Direct Cost (p. 964)
Cost that can be easily and cost-­
effectively traced to a cost object.
Direct Labor (DL) (p. 965)
The labor cost of employees who
­convert raw materials into finished
products.

Direct Materials (DM) (p. 965)
Materials that become a physical part of
a finished product and whose costs are
easily traced to the finished product.
Enterprise Resource Planning (ERP)
(p. 959)
Software system that can integrate all
of a company’s functions, departments,
and data into a single system.
Finished Goods Inventory (FG)
(p. 963)
Completed goods that have not yet
been sold.
Indirect Cost (p. 964)
Cost that cannot be easily or costeffectively traced to a cost object.
Indirect Labor (p. 965)
Labor costs for activities that ­support the
production process but either ­cannot be

conveniently traced directly to specific
finished products or are not large enough
to justify tracing to the specific product.
Indirect Materials (p. 965)
Materials used in making a product
but whose costs either cannot be
­conveniently traced directly to specific
finished products or whose costs are
not large enough to justify tracing to
the specific product.

Just-in-Time (JIT) Management
(p. 959)
A cost management system in which
a company produces products 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 the customer.
Management Accountability (p. 957)
The manager’s responsibility to
wisely manage the resources of an
­organization.
Manufacturing Company (p. 962)
A company that uses labor, equipment,
supplies, and facilities to convert raw
materials into finished products.
Manufacturing Overhead (MOH)
(p. 965)
Manufacturing costs that cannot be easily and cost-effectively traced to a cost
object. Includes all manufacturing costs

except direct materials and direct labor.
Merchandising Company (p. 961)
A company that resells products
­previously bought from suppliers.
Period Cost (p. 961)
Operating cost that is expensed in the
accounting period in which it is incurred.


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     Introduction to Managerial Accounting 979
Planning (p. 956)
Choosing goals and deciding how to
achieve them.

Product Cost (p. 962)
The cost of purchasing or making a
product. The cost is recorded as an
asset and then expensed when the
product is sold.
Raw Materials Inventory (RM)
(p. 962)
Materials used to manufacture a
­product.

Value Chain (p. 959)
Includes all activities that add
value to a company’s products and
services.

Stakeholder (p. 957)
An individual or group that has an interest in a ­business, including customers,
creditors, suppliers, and investors.

Work-in-Process Inventory (WIP)
(p. 963)
Goods that have been started in the
manufacturing process but are not yet
complete.

Total Quality Management (TQM)
(p. 959)
A philosophy designed to integrate all
organizational areas in order to ­provide
customers with superior ­products and
services, while meeting organizational
goals throughout the value chain.

> Quick Check
1. Which is not a characteristic of managerial accounting information?

Learning Objective 1

a. Emphasizes the external financial statements
b.Provides detailed information about individual parts of the company
c. Emphasizes relevance
d.Focuses on the future
2. World-class businesses use which of these systems to integrate all of a company’s
worldwide functions, departments, and data into a single system?
a. Cost standards

b.  Enterprise resource planning

c. Just-in-time management
d.  All of the above

3. Today’s business environment is characterized by
a. global competition.
b.  time-based competition.

Learning Objective 1

c. credibility.
d. integrity.

5. Which of the following accounts does a manufacturing company have that a service
company does not have?
a. Advertising Expense
b.Salaries Payable

Learning Objective 1

c. a shift toward a service economy.
d.  Items a, b, and c are correct.

4. A management accountant who avoids conflicts of interest meets the ethical
­standard of
a. confidentiality.
b.competence.

Learning Objective 1

c. Cost of Goods Sold
d. Retained Earnings

Learning Objective 2

CHAPTER 16

Prime Costs (p. 965)
Direct materials plus direct labor.

Service Company (p. 961)
A company that sells services—time,
skills, and/or knowledge—instead of
products.


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980 chapter 16  
Learning Objective 3

6. Dunaway Company reports the following costs for the year:
Direct Materials Used

$ 120,000

Direct Labor Incurred

150,000

CHAPTER 16

Manufacturing Overhead Incurred
Selling and Administrative Expenses

75,000
175,000

How much are Dunaway’s period costs?
a. $120,000
b.$270,000
Learning Objective 3

c. $345,000
d. $175,000

7. Which of the following is a direct cost of manufacturing a sport boat?
a. Salary of an engineer who rearranges plant layout
b.Depreciation on plant and equipment
c. Cost of the boat engine
d.Cost of the customer service hotline

Learning Objective 3

8. Which of the following is not part of manufacturing overhead for producing
a ­computer?
a. Manufacturing plant property taxes
b.Manufacturing plant utilities
c. Depreciation on delivery trucks
d.Insurance on plant and equipment

Questions 9 and 10 use the data that follow.
Suppose a bakery reports this ­information:
Beginning Raw Materials Inventory
Ending Raw Materials Inventory

5,000

Beginning Work-in-Process Inventory

3,000

Ending Work-in-Process Inventory

2,000

Beginning Finished Goods Inventory

4,000

Ending Finished Goods Inventory

6,000

Direct Labor

29,000

Purchases of Raw Materials

102,000

Manufacturing Overhead
Learning Objective 4

20,000

9. What is the cost of direct materials used?
a. $101,000
b.$103,000

Learning Objective 4

$ 6,000

c. $114,000
d. $102,000

10. What is the cost of goods manufactured?
a. $151,000
b.$153,000
Check your answers at the end of the chapter.

c. $150,000
d. $177,000


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     Introduction to Managerial Accounting 981

Assess Your PROGRESS
> Review Questions
2.Explain the difference between planning and controlling.
3.List six differences between financial accounting and managerial accounting.
4.How does managerial accounting assist managers with their responsibilities to the
company’s stakeholders?
5.List the four IMA standards of ethical practice and briefly describe each.
6.Describe a service company and give an example.
7.Describe a merchandising company and give an example.
8.What are product costs?
9.How do period costs differ from product costs?
10. How do manufacturing companies differ from merchandising companies?
11. List the three inventory accounts used by manufacturing companies and describe
each.
12. How does a manufacturing company calculate cost of goods sold? How is this
­different from a merchandising company?
13. Explain the difference between a direct cost and an indirect cost.
14. What are the three product costs for a manufacturing company? Describe each.
15. Give five examples of manufacturing overhead.
16. What are prime costs? Conversion costs?
17. How is cost of goods manufactured calculated?
18. How does a manufacturing company calculate unit product cost?
19. How does a service company calculate unit cost per service?
20. How does a merchandising company calculate unit cost per item?

CHAPTER 16

1.What is the primary purpose of managerial accounting?

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982 chapter 16  

> Short Exercises
Learning Objective 1

S16-1  Comparing managerial accounting and financial accounting

CHAPTER 16

For each of the following, indicate whether the statement relates to managerial
­accounting (MA) or financial accounting (FA):
a. Helps investors make investment decisions.
b. Provides detailed reports on parts of the company.
c. Helps in planning and controlling operations.
d. Reports must follow Generally Accepted Accounting Principles (GAAP).
e. Reports audited annually by independent certified public accountants.
Learning Objective 1

Learning Objective 1

S16-2  Identifying management accountability and the stakeholders
For each of the following management responsibilities, indicate the primary
­stakeholder group to whom management is responsible.­
1. Providing high-quality, reliable products/services
for a reasonable price in a timely manner.

a. Investors

2.  Paying taxes in a timely manner.

c. Suppliers

3.  Providing a safe, productive work environment.

d. Employees

4.  Generating a profit.

e. Customers

5. Repaying principal plus interest in a timely
manner.

f.  Government

b. Creditors

g. Community

S16-3  Matching business trends terminology
Match the term with the correct definition.
1. A philosophy designed to integrate all organizational areas in
order to provide customers with superior products and services
while meeting organizational objectives. Requires improving
quality and eliminating defects and waste.
2. Use of the Internet for business functions such as sales and customer
service. Enables companies to reach customers around the world.
3. Software system that integrates all of a company’s functions,
departments, and data into a single system.

4. A system in which a company produces product just when it is
needed to satisfy needs. Suppliers deliver materials when they are
needed to begin production, and finished units are completed at
the right time for delivery to customers.

a. ERP
b. JIT
c.  E-commerce
d. TQM


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     Introduction to Managerial Accounting 983

S16-4  Identifying ethical standards
The Institute of Management Accountants’ Statement of Ethical Professional
Practice requires managerial accountants to meet standards regarding the following:

Learning Objective 1

• Competence
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• Confidentiality
• Integrity
• Credibility

Consider the following situations. Which standard(s) are violated in each situation?
a. You tell your brother that your company will report earnings significantly above financial
analysts’ estimates.

b. You see others take home office supplies for personal use. As an intern, you do the
same thing, assuming that this is a ”perk.”
c. At a company-paid conference on e-commerce, you skip the afternoon session and go
sightseeing.
d. You failed to read the detailed specifications of a new accounting software package
that you asked your company to purchase. After it is installed, you are surprised that it
is ­incompatible with some of your company’s older accounting software.
e. You do not provide top management with the detailed job descriptions they
­requested because you fear they may use this information to cut a position in your
­department.

S16-5  Computing cost of goods sold, merchandising company
Use the following information for The Tinted View, a retail merchandiser of auto
windshields, to compute the cost of goods sold:
Website Maintenance
Delivery Expense

$ 7,100
900

Freight In

2,900

Purchases

39,000

Ending Merchandise Inventory
Revenues

4,900
57,000

Marketing Expenses

9,900

Beginning Merchandise Inventory

7,900

Learning Objective 2


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984 chapter 16  
Learning Objective 2

S16-6 Computing cost of goods sold and operating income, merchandising
company

CHAPTER 16

Consider the following partially completed income statements for merchandising
companies and compute the missing amounts:
Fit Apparel
Sales

$ 101,000

Cost of Goods Sold:
  Beginning Merchandise Inventory

(d)

$

(a)

29,000

48,000

(e)

(b)

88,000

  Ending Merchandise Inventory

(1,900)

(1,900)

  Cost of Goods Sold

59,000

(f)

Gross Profit

42,000

113,000

(c)

84,000

  Purchases and Freight In
  Cost of Goods Available for Sale

Selling and Administrative Expenses
Operating Income
Learning Objective 3

Jones, Inc.

$ 13,000

(g)

$

S16-7  Distinguishing between direct and indirect costs
Granger Cards is a manufacturer of greeting cards. Classify its costs by matching
the costs to the terms.

1.  Direct materials

a. Artists’ wages

2.  Direct labor

b.  Wages of warehouse workers

3.  Indirect materials

c. Paper

4.  Indirect labor

d. Depreciation on manufacturing equipment

5.  Other manufacturing overhead

e.  Manufacturing plant manager’s salary
f.  Property taxes on manufacturing plant
g. Glue for envelopes

Learning Objective 3

S16-8  Computing manufacturing overhead
Glass Doctor Company manufactures sunglasses. Following is a list of costs the
company incurred during May. Use the list to calculate the total manufacturing
overhead costs for the month.
Glue for frames

$

350

Depreciation on company cars used by sales force

3,000

Plant depreciation

9,000

Interest Expense

1,500

Lenses

50,000

Company president’s salary

24,500

Plant foreman’s salary

5,000

Plant janitor’s wages

1,000

Oil for manufacturing equipment

200


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     Introduction to Managerial Accounting 985

S16-9  Identifying product costs and period costs

Learning Objective 3

Classify each cost of a paper manufacturer as either product cost or period cost:
a. Salaries of scientists studying ways to speed forest growth.
CHAPTER 16

b. Cost of computer software to track WIP Inventory.
c. Cost of electricity at the paper mill.
d. Salaries of the company’s top executives.
e. Cost of chemicals to treat the paper.
f. Cost of TV ads.
g. Depreciation on the manufacturing plant.
h. Cost to purchase wood pulp.
i. Life insurance on the CEO.

S16-10  Computing direct materials used

Learning Objective 4

Piedmont, Inc. has compiled the following data:
Purchases of Raw Materials

$ 6,400

Freight In

200

Property Taxes

900

Ending Inventory of Raw Materials

1,500

Beginning Inventory of Raw Materials

4,000

Assume all materials used are direct materials (none are indirect). Compute the
amount of direct materials used.

S16-11  Computing cost of goods manufactured

Learning Objective 4

Use the following inventory data for All Pro Golf Company to compute the cost

of goods manufactured for the year:
Direct Materials Used
Manufacturing Overhead

$ 10,000
21,000

Work-in-Process Inventory:
 Beginning
 Ending

5,000
3,000

Direct Labor

7,000

Finished Goods Inventory:
 Beginning
 Ending

15,000
13,000


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986 chapter 16  
Learning Objective 4

S16-12  Computing cost of goods sold, manufacturing company
Use the following information to calculate the cost of goods sold for The Ellis
Company for the month of June:

CHAPTER 16

Finished Goods Inventory:
 Beginning
 Ending

$ 26,000
18,000

Cost of Goods Manufactured
Learning Objective 5

156,000

S16-13  Calculating unit cost per service
Duncan and Oates provides hair-cutting services in the local community. In
February, the business cut the hair of 230 clients, earned $5,200 in revenues, and
incurred the following operating costs:
Hair Supplies Expense

$ 805

Building Rent Expense

1,150

Utilities Expense

184

Depreciation Expense—Equipment

46

What was the cost of service to provide one haircut?

> Exercises
Learning Objective 1

E16-14  Comparing managerial accounting and financial accounting
Match the following terms to the appropriate statement. Some terms may be used
more than once and some terms may not be used at all.
Budget

Managerial

Creditors

Managers

Controlling

Planning

Financial

Stockholders

a. Accounting systems that must follow GAAP.
b. External parties for whom financial accounting reports are prepared.
c. The role managers play when they are comparing the company’s actual results
with the planned results.
d. Internal decision makers.
e. Accounting system that provides information on a company’s past performance.
f. Accounting system not restricted by GAAP but chosen by comparing the costs
versus the benefits of the system.
g. The management function that involves choosing goals and the means to
achieve them.


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     Introduction to Managerial Accounting 987

E16-15  Understanding today’s business environment
Match the following terms to the appropriate statement. Some terms may be used
more than once and some terms may not be used at all.
Just-in-time management (JIT)

Enterprise resource planning (ERP)

Total quality management (TQM)

CHAPTER 16

E-commerce

Learning Objective 1

a. A management system that focuses on maintaining lean inventories while producing products as needed by the customer.
b. A philosophy designed to integrate all organizational areas in order to provide customers with superior products and services while meeting organizational o­ bjectives.
c. Integrates all of a company’s functions, departments, and data into a single ­system.
d. Adopted by firms to conduct business on the Internet.

E16-16  Making ethical decisions
Sue Peters is the controller at Vroom, a car dealership. Dale Miller recently has
been hired as bookkeeper. Dale wanted to attend a class in Excel spreadsheets, so
Sue temporarily took over Dale’s duties, including overseeing a fund used for gas
purchases before test drives. Sue found a shortage in the fund and confronted Dale
when he returned to work. Dale admitted that he occasionally uses the fund to pay
for his own gas. Sue estimated the shortage at $450.

Learning Objective 1

Requirements
1. What should Sue Peters do?
2. Would you change your answer if Sue Peters was the one recently hired as
­controller and Dale Miller was a well-liked, longtime employee who indicated
he always eventually repaid the fund?

Use the following data for Exercises E16-17, E16-18, and E16-19.
Selected data for three companies are given below. (All amounts in millions.)
Company A
Cash
Sales Revenue
Finished Goods Inventory
Cost of Goods Sold

Selling Expenses
Equipment

Company B
$ 8
37
6
22
5

Equipment
Accounts Receivable

$ 19
27
8

Administrative Expenses

$ 5

Cash

12

Sales Revenue

35

Service Revenue

40

Selling Expenses

3

Cash

15

Merchandise Inventory

10

Rent Expense

12

Equipment

45

4

Accounts Receivable

15

Accounts Receivable

12

Cost of Goods Solds

20

Cost of Goods Manufactured

25

Work-in-Process Inventory

56

Wages Expense

Company C

Administrative Expenses

4

Raw Materials Inventory

3


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CHAPTER 16

988 chapter 16  
Learning Objective 2

E16-17  Identifying differences between service, merchandising, and
manufacturing companies
Using the above data, determine the company type. Identify each company as a
­service company, merchandising company, or manufacturing company.

Learning Objective 2

E16-18  Identifying differences between service, merchandising, and
manufacturing companies
Using the above data, calculate operating income for each company.

Company B: $9

Learning Objective 2
Company C: $37

Learning Objective 3

E16-19  Identifying differences between service, merchandising, and
manufacturing companies
Using the above data, calculate total current assets for each company.
E16-20  Classifying costs
Wheels, Inc. manufactures wheels for bicycles, tricycles, and scooters. For each cost
given below, determine if the cost is a product cost or a period cost. If the cost is
a product cost, further determine if the cost is direct materials (DM), direct labor

(DL), or manufacturing overhead (MOH) and then determine if the product cost
is a prime cost, conversion cost, or both. If the cost is a period cost, further determine if the cost is a selling expense or administrative expense (Admin). Cost (a) is
answered as a guide.
Cost
a.  Metal used for rims
b.  Sales salaries
c.  Rent on factory
d. Wages of assembly
workers
e. Salary of production
supervisor
f.  D
 epreciation on
office equipment
g.  Salary of CEO
h.  Delivery expense

Product
DM
X

DL

MOH

Prime
X

Period
Conversion

Selling

Admin.


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     Introduction to Managerial Accounting 989

E16-21  Computing cost of goods manufactured
Consider the following partially completed schedules of cost of goods
­manufactured. Compute the missing amounts.
Laura’s Bakery

Rustic Gear

(a)

$ 40,500

$ 2,200

Direct Materials Used

14,200

35,200

(g)

Direct Labor

10,800

20,700

1,400

Beginning Work-in-Process Inventory

$

(b)

10,500

300

Total Manufacturing Costs Incurred during the Year

45,300

(d)

(h)

Total Manufacturing Costs to Account For

55,800

(e)

7,400

Manufacturing Overhead

Ending Work-in-Process Inventory
Cost of Goods Manufactured

(c)
$ 51,200

(25,900)
$

(f)

E16-22  Preparing a schedule of cost of goods manufactured
Knight Corp., a lamp manufacturer, provided the following information for the
year ended December 31, 2014.
Inventories:

Beginning

Ending

Raw Materials

$ 56,000

$ 23,000

Work-in-Process

103,000

63,000

Finished Goods

41,000

48,000

Other information:
Depreciation, plant building and equipment

$ 16,000

Raw materials purchases

159,000

Insurance on plant

22,000

Sales salaries

46,000

Repairs and maintenance—plant
Indirect labor
Direct labor
Administrative expenses

8,000
32,000
122,000
59,000

Requirements
1. Use the information to prepare a schedule of cost of goods manufactured.
2. What is the unit product cost if Knight manufactured 2,160 lamps for the year?

(2,500)
$

(i)

Learning Objective 4
1. COGM: $432,000

CHAPTER 16

Boswell, Inc.

Learning Objective 4

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990 chapter 16  
Learning Objective 4

CHAPTER 16

COGM: $213,000

E16-23  Computing cost of goods manufactured and cost of goods sold
Use the following information for a manufacturer to compute cost of goods
­manufactured and cost of goods sold:
Inventories:

Beginning

Ending

Raw Materials

$ 29,000

$ 32,000

Work-in-Process

44,000

37,000

Finished Goods

19,000

24,000

Other information:
Purchases of materials

Learning Objective 5
1. $9,020

$ 77,000

Direct labor

87,000

Manufacturing overhead

45,000

E16-24  Calculating income and cost per service for a service company
Fido Grooming provides grooming services for pets. In April, the company earned
$16,300 in revenues and incurred the following operating costs to groom 650 dogs:
Wages

$ 3,900

Grooming Supplies Expense

1,625

Building Rent Expense

1,300

Utilities Expense

325

Depreciation Expense—Equipment

130

Requirements
1. What is Fido’s net income for April?
2. What is the cost of service to groom one dog?
Learning Objective 5
2. $12.19

E16-25  Calculating income and cost per unit for a merchandising company
Snyder Brush Company sells standard hair brushes. The following information
summarizes Snyder’s operating activities for 2014:
Selling and Administrative Expenses
Purchases
Sales Revenue
Merchandise Inventory, January 1, 2014
Merchandise Inventory, December 31, 2014

$ 49,680

78,000
138,000
7,500
12,360

Requirements
1. Calculate the operating income for 2014.
2. Snyder sold 6,000 brushes in 2014. Compute the unit cost for one brush.


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     Introduction to Managerial Accounting 991

> Problems Group A
Learning Objective 1
CHAPTER 16

P16-26A  Applying ethical standards, management accountability
Natalia Wallace is the new controller for Smart Software, Inc., which develops and
sells education software. Shortly before the December 31 fiscal year-end, James
Cauvet, the company president, asks Wallace how things look for the year-end
numbers. He is not happy to learn that earnings growth may be below 13% for the
first time in the company’s five-year history. Cauvet explains that financial analysts
have again predicted a 13% earnings growth for the company and that he does not
intend to disappoint them. He suggests that Wallace talk to the assistant ­controller,
who can explain how the previous controller dealt with such situations. The
­assistant controller suggests the following strategies:
a. Persuade suppliers to postpone billing $13,000 in invoices until January 1.
b. Record as sales $115,000 in certain software awaiting sale that is held in a
­public warehouse.

c. Delay the year-end closing a few days into January of the next year, so that some
of the next year’s sales are included in this year’s sales.
d. Reduce the estimated Bad Debts Expense from 5% of Sales Revenue to 3%,
given the company’s continued strong performance.
e. Postpone routine monthly maintenance expenditures from December to January.
Requirements
1. Which of these suggested strategies are inconsistent with IMA standards?
2. How might these inconsistencies affect the company’s stakeholders?
3. What should Wallace do if Cauvet insists that she follow all of these ­suggestions?
P16-27A  Classifying period costs and product costs
Lawlor, Inc. is the manufacturer of lawn care equipment. The company incurs the
following costs while manufacturing weed trimmers:
• Shaft and handle of weed trimmer
• Motor of weed trimmer
• Factory labor for workers assembling weed trimmers
• Nylon thread used by the weed trimmer (not traced to the product)
• Glue to hold the housing together
• Plant janitorial wages
• Depreciation on factory equipment
• Rent on plant
• Sales commissions
• Administrative salaries
• Plant utilities
• Shipping costs to deliver finished weed trimmers to customers
Requirements
1. Describe the difference between period costs and product costs.
2. Classify Lawlor’s costs as period costs or product costs. If the costs are ­product costs,
further classify them as direct materials, direct labor, or manufacturing ­overhead.

Learning Objective 3

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992 chapter 16  
Learning Objectives 2, 4, 5
3. Company B: $216,250

P16-28A  Calculating cost of goods sold for merchandising and manufacturing
companies
Below are data for two companies:

CHAPTER 16

Company A
Beginning balances:
  Merchandise Inventory

$ 10,000

  Finished Goods Inventory
Ending balances:
  Merchandise Inventory

$ 15,500

12,500

  Finished Goods Inventory
Net Purchases

Company B

11,750
156,000

Cost of Goods Manufactured

212,500

Requirements
1. Define the three business types: service, merchandising, and manufacturing.
2. Based on the data given for the two companies, determine the business type of
each one.
3. Calculate the cost of goods sold for each company.
Learning Objectives 2, 5
2. $35.36

P16-29A  Preparing an income statement and calculating unit cost for a service
company
The Windshield People repair chips in car windshields. The company incurred the
following operating costs for the month of February 2014:
Salaries and wages
Windshield repair materials

$ 9,000
4,900

Depreciation on truck

250

Depreciation on building and equipment

800

Supplies used

600

Utilities

2,130

The Windshield People earned $26,000 in revenues for the month of February by
repairing 500 windshields. All costs shown are considered to be directly related to
the repair service.

Requirements
1. Prepare an income statement for the month of February.
2. Compute the per unit cost of repairing one windshield.
3. The manager of The Windshield People must keep unit operating cost below
$50 per windshield in order to get his bonus. Did he meet the goal?


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     Introduction to Managerial Accounting 993

P16-30A  Preparing an income statement and calculating unit cost for a
merchandising company
In 2014, Charlie Snyder opened Charlie’s Pets, a small retail shop selling pet ­supplies.

On December 31, 2014, the accounting records of Charlie’s Pets showed the following:

1. Net income: $14,950
CHAPTER 16

Inventory on December 31, 2014

Learning Objectives 2, 5

$ 10,200

Inventory on January 1, 2014

15,100

Sales Revenue

57,000

Utilities Expense for the shop

3,900

Rent for the shop

4,100

Sales Commissions

2,150

Purchases of Merchandise Inventory

27,000

Requirements
1. Prepare an income statement for Charlie’s Pets for the year ended December
31, 2014.
2. Charlie’s Pets sold 4,250 units. Determine the unit cost of the merchandise sold.
P16-31A  Preparing a schedule of cost of goods manufactured and an income
statement for a manufacturing company
Fido Treats manufactures its own brand of pet chew bones. At the end of December
2014, the accounting records showed the following:
Inventories:

Beginning

Ending

Raw Materials

$ 13,400

$ 9,500

Work-in-Process

0

2,000

Finished Goods

0

5,300

Other information:
Raw materials purchases
Plant janitorial services

$ 33,000
800

Sales salaries

5,000

Delivery costs

1,700

Sales revenue

109,000

Utilities for plant
Rent on plant
Customer service hotline costs
Direct labor

1,600
13,000
1,400
22,000

Requirements
1. Prepare a schedule of cost of goods manufactured for Fido Treats for the year
ended December 31, 2014.
2. Prepare an income statement for Fido Treats for the year ended December 31, 2014.
3. How does the format of the income statement for Fido Treats differ from the
income statement of a merchandiser?
4. Fido Treats manufactured 18,075 units of its product in 2014. Compute the
company’s unit product cost for the year.

Learning Objectives 2, 4
2. Net income: $33,900


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Learning Objectives 2, 4

CHAPTER 16

COGM: $168,000

P16-32A  Preparing a schedule of cost of goods manufactured and an income
statement for a manufacturing company
Certain item descriptions and amounts are missing from the monthly schedule

of cost of goods manufactured and income statement of Tioga Manufacturing
Company. Fill in the blanks with the missing words and replace the Xs with the
correct amounts.
TIOGA MANUFACTURING COMPANY
June 30, 2014
Beginning

$ 22,000

Direct

:

Beginning Raw Materials Inventory

$

X

Purchases of Raw Materials

54,000

Ending Raw Materials Inventory

(23,000)

80,000
Direct

$

X

Direct

X

Manufacturing Overhead

43,000

Total

Costs

175,000

Total

Costs

X

Ending

(29,000)
$

TIOGA MANUFACTURING COMPANY

June 30, 2014
Sales Revenue

$

X

Cost of Goods Sold:
$ 112,000

Beginning

X
Cost of Goods

X

Ending

X

Cost of Goods Sold

217,000

Gross Profit

283,000
Expenses:
94,000

Selling Expenses
Administrative Expenses

X

Total

159,000
Income

$

X

X


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     Introduction to Managerial Accounting 995
Learning Objective 4
3. $25,510,000
CHAPTER 16

P16-33A  Determining flow of costs through a manufacturer’s inventory accounts
Renka Shoe Company makes loafers. During the most recent year, Renka incurred
total manufacturing costs of $26,400,000. Of this amount, $2,100,000 was direct
materials used and $19,800,000 was direct labor. Beginning balances for the year
were Raw Materials Inventory, $600,000; Work-in-Process Inventory, $800,000;
and Finished Goods Inventory, $700,000. At the end of the year, balances were

Raw Materials Inventory, $900,000; Work-in-Process Inventory, $1,400,000; and
Finished Goods Inventory, $990,000.
Requirements
Analyze the inventory accounts to determine:
1. Cost of raw materials purchased during the year.
2. Cost of goods manufactured for the year.
3. Cost of goods sold for the year.

> Problems  Group B
P16-34B  Applying ethical standards, management accountability
Ava Borzi is the new controller for Halo Software, Inc., which develops and sells
education software. Shortly before the December 31 fiscal year-end, Jeremy Busch,
the company president, asks Borzi how things look for the year-end numbers. He
is not happy to learn that earnings growth may be below 9% for the first time in
the company’s five-year history. Busch explains that financial analysts have again
­predicted a 9% earnings growth for the company and that he does not intend
to disappoint them. He suggests that Borzi talk to the assistant controller, who
can ­explain how the previous controller dealt with such situations. The assistant
­controller suggests the following strategies:
a. Persuade suppliers to postpone billing $18,000 in invoices until January 1.
b. Record as sales $120,000 in certain software awaiting sale that is held in a
­public warehouse.
c. Delay the year-end closing a few days into January of the next year, so that some
of the next year’s sales are included in this year’s sales.
d. Reduce the estimated Bad Debts Expense from 3% of Sales Revenue to 2%,
given the company’s continued strong performance.
e. Postpone routine monthly maintenance expenditures from December to January.
Requirements
1. Which of these suggested strategies are inconsistent with IMA standards?
2. How might these inconsistencies affect the company’s stakeholders?

3. What should Borzi do if Busch insists that she follow all of these suggestions?

Learning Objective 1


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996 chapter 16  

CHAPTER 16

Learning Objective 3

P16-35B  Classifying period costs and product costs
Langley, Inc. is the manufacturer of lawn care equipment. The company incurs the
following costs while manufacturing edgers:
• Handle and shaft of edger
• Motor of edger
• Factory labor for workers assembling edgers
• Lubricant used on bearings in the edger (not traced to the product)
• Glue to hold the housing together
• Plant janitorial wages
• Depreciation on factory equipment
• Rent on plant
• Sales commissions
• Administrative salaries
• Plant utilities
• Shipping costs to deliver finished edgers to customers
Requirements
1. Describe the difference between period costs and product costs.
2. Classify Langley’s costs as period costs or product costs. If the costs are product

costs, further classify them as direct materials, direct labor, or manufacturing
overhead.

Learning Objectives 2, 4, 5
3. Company 2: $169,500

P16-36B 
Calculating cost of goods sold for merchandising and manufacturing
companies
Below are data for two companies:
Company 1 Company 2
Beginning balances:
  Merchandise Inventory

$ 8,000

  Finished Goods Inventory
Ending balances:
  Merchandise Inventory

$ 12,250
13,000

  Finished Goods Inventory
Net Purchases
Cost of Goods Manufactured

15,000
165,000
172,250

Requirements
1. Define the three business types: service, merchandising, and manufacturing.
2. Based on the data given for the two companies, determine the business type of
each one.
3. Calculate the cost of goods sold of each company.


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     Introduction to Managerial Accounting 997

P16-37B Preparing an income statement and calculating unit cost for a service
company
Total Glass Company repairs chips in car windshields. The company incurred the
following operating costs for the month of July 2014:

Windshield repair materials
Depreciation on truck
Depreciation on building and equipment
Supplies used
Utilities

2. $102.35
CHAPTER 16

Salaries and wages

Learning Objectives 2, 5

$ 11,000

4,800
550
1,200
300
2,620

Total Glass Company earned $23,000 in revenues for the month of July by
­repairing 200 windshields. All costs shown are considered to be directly related
to the repair service.

Requirements
1. Prepare an income statement for the month of July.
2. Compute the per unit cost of repairing one windshield.
3. The manager of Total Glass Company must keep unit operating cost below $70
per windshield in order to get his bonus. Did he meet the goal?
P16-38B Preparing an income statement and calculating unit cost for a
merchandising company
In 2014, Craig Gonzales opened Craig’s Pets, a small retail shop selling pet
­supplies. On December 31, 2014, the accounting records for Craig’s Pets
showed the following:
Inventory on December 31, 2014

$ 10,100

Inventory on January 1, 2014

15,400

Sales Revenue

58,000

Utilities Expense for the shop

3,300

Rent for the shop

4,500

Sales Commissions

2,850

Purchases of Merchandise Inventory

26,000

Requirements
1. Prepare an income statement for Craig’s Pets for the year ended December 31, 2014.
2. Craig’s Pets sold 3,900 units. Determine the unit cost of the merchandise sold.

Learning Objectives 2, 5
1. Net income: $16,050


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Learning Objectives 2, 4

CHAPTER 16

2. Net income: $38,500

P16-39B 
Preparing a schedule of cost of goods manufactured and an income
statement for a manufacturing company
Organic Bones manufactures its own brand of pet chew bones. At the end of
December 2014, the accounting records showed the following:
Inventories:

Beginning

Raw Materials

$ 13,200

Ending
$

7,000

Work-in-Process

0

4,000

Finished Goods

0

5,800

Other information:
Raw materials purchases
Plant janitorial services

$ 31,000
200

Sales salaries

5,400

Delivery costs

1,400

Sales revenue

110,000

Utilities for plant
Rent on plant
Customer service hotline costs
Direct labor

1,900
11,000

1,200
23,000

Requirements
1. Prepare a schedule of cost of goods manufactured for Organic Bones for the
year ended December 31, 2014.
2. Prepare an income statement for Organic Bones for the year ended
December 31, 2014.
3. How does the format of the income statement for Organic Bones differ from
the income statement of a merchandiser?
4. Organic Bones manufactured 15,400 units of its product in 2014. Compute
the company’s unit product cost for the year.


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     Introduction to Managerial Accounting 999

P16-40B Preparing a schedule of cost of goods manufactured and an income
statement for a manufacturing company
Certain item descriptions and amounts are missing from the monthly schedule
of cost of goods manufactured and income statement of Pinta Manufacturing
Company. Fill in the blanks with the missing words and replace the Xs with the
correct amounts.

Learning Objectives 2, 4
COGM: $186,000
CHAPTER 16

PINTA MANUFACTURING COMPANY
June 30, 2014

$ 25,000

Beginning
Direct

:

Beginning Raw Materials Inventory

$

X

Purchases of Raw Materials

57,000

Ending Raw Materials Inventory

(22,000)

85,000
$

Direct

X
X

Direct

45,000

Manufacturing Overhead
Total

Costs

182,000

Total

Costs

X
(21,000)

Ending
$

PINTA MANUFACTURING COMPANY
June 30, 2014
Sales Revenue

$

X

Cost of Goods Sold:
$ 113,000

Beginning

X
Cost of Goods

X

Ending

X

Cost of Goods Sold

231,000

Gross Profit

209,000
Expenses:

Selling Expenses

93,000

Administrative Expenses

X

Total

154,000
Income

$

X

X


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1000 chapter 16  
Learning Objective 4

CHAPTER 16

3. $22,990,000

P16-41B  Determining the flow of costs through a manufacturer’s inventory
accounts
Aaron Shoe Company makes loafers. During the most recent year, Aaron incurred
total manufacturing costs of $22,900,000. Of this amount, $2,800,000 was direct
materials used and $15,800,000 was direct labor. Beginning balances for the year
were Raw Materials Inventory, $900,000; Work-in-Process Inventory, $1,500,000;
and Finished Goods Inventory, $900,000. At the end of the year, balances were
Raw Materials Inventory, $800,000; Work-in-Process Inventory, $1,500,000; and
Finished Goods Inventory, $810,000.
Requirements
Analyze the inventory accounts to determine:

1. Cost of raw materials purchased during the year.
2. Cost of goods manufactured for the year.
3. Cost of goods sold for the year.

> Continuing Problem
Problem P16-42 is the first problem in a sequence of problems for Davis Consulting, Inc. This
company was also used for the Continuing Problems in the financial ­accounting chapters as the
business evolved from a service company to a merchandising company. However, it is not necessary to complete those problems prior to completing P16-42.

P16-42
Davis Consulting, Inc. is going to manufacture billing software. During its first
month of manufacturing, Davis incurred the following ­manufacturing costs:
Inventories:

Beginning

Ending

Raw Materials

$ 10,800

$ 10,300

Work-in-Process

0

21,000

Finished Goods

0

31,500

Other information:
Raw materials purchases
Plant janitorial services

$ 19,000
700

Sales salaries expense

5,000

Delivery expense

1,700

Sales revenue

750,000

Utilities for plant

10,000

Rent on plant

13,000

Customer service hotline costs

18,000

Direct labor

190,000

Prepare a schedule of cost of goods manufactured for Davis for the month ended
January 31, 2016.