Fill-in-the-Blank Equations. Exercises

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1 Chapter 15 (1) Introduction to Managerial Accounting Study Guide Solutions 1. Merchandise available for sale 2. Cost of merchandise sold Fill-in-the-Blank Equations 3. Cost of goods manufactured during the period 4. Cost of goods sold 5. Occupancy Rate Exercises 1. Determine if each description relates to financial or managerial accounting. a. Reports are prepared according to inquiries made of management. Managerial b. Reports focus on the company as a whole. Financial c. Management uses the report, along with parties outside of the company. Financial 2. A company is looking to increase its gross profit by reducing costs for the upcoming periods. To further investigate, the production manager pulls reports that detail costs in the previous year. After discussions with the purchasing manager, he creates a budget based on assumptions and estimates. Is the manager using managerial or financial accounting? Managerial 1

2 2 Chapter 15 (1) 3. An investor researching profitable companies pulls quarterly reports of various corporations. The reports are prepared according to GAAP with objective information and focus on the business as a whole. Are the reports prepared using managerial or financial accounting? Financial Strategy: Financial accounting is used by outsiders of the business. To create financial statements that are easily comparable among different companies, GAAP is required in the preparation of the statements. Since the outsiders are focused on the profitability and stability, the financial statements focus on the business as a whole. Managerial accounting is used by employees of the company, usually managers to determine where the company could be more efficient and effective in producing income. Since the reports are only reviewed by insiders with an understanding of the company, GAAP is not required. To produce reports with sufficient detail, the reports focus on segments of the business and not as a whole. 4. To fund its expansion in the upcoming year, Deacon Corporation negotiates a $4,000,000 loan with a local bank. The bank requires financial statements to ensure the company s ability to pay interest and repay the principal. Would Deacon Corporation use managerial or financial accounting to create the reports for the bank? Financial 5. During an audit, an agent looks to the company s financial statements to verify that the same accounting practices were used in the tax return for a certain expense. Would the financial statements used by the agent be prepared using managerial or financial accounting? Financial 6. To prepare for an upcoming meeting with the production staff, a manager pulls a report that gives a comparison of the last period s budgeted expenses to the last period s actual expenses. Which type of accounting is the manager using? Managerial Strategy: Internal users of a company use managerial accounting. Financial accounting is used by users outside of the company to ensure an easy comparison among other companies and understanding of the same accounting policies.

3 Introduction to Managerial Accounting 3 7. To which phase of the management process does each activity relate? a. Management compares the actual sales with the budgeted sales for the previous period. Controlling b. After discovering a large amount of rework costs from the use of a cheaper material, the purchasing manager buys a higher quality material. Decision making c. Top management discusses ideas to develop a new product line. Planning 8. Determine to which phase of the management process each activity relates. a. Discussing expenses to potentially reduce in the next period Planning b. Overseeing employees unloading supplies to ensure safe and efficient practices are used Directing c. Identification of the recent increase in manufacturing costs to be from the use of an outdated piece of equipment Improving 9. To which phase of the management process does each activity relate? a. Feedback from customers used to identify weaknesses in the company s shipping policy Improving b. Comparison of the previous period s use of materials to the budgeted amount of materials to use Controlling c. Ensuring workers take the allotted break times with the use of time cards Directing Strategy: During planning, management determines the goals that will set the tone for the other steps in the management process. Directing involves the steps taken to carry out the goals, while controlling determines if the goals have been met. When improving, the management uses the information found when controlling to find ways to become more efficient and effective in carrying out the goals. Each step requires decision making to determine how to carry out the goals.

4 4 Chapter 15 (1) 10. A clothing manufacturer has the costs listed. Determine if each would be considered a direct or indirect cost if the cost object is an individual shirt. a. Cost of fabric Direct b. Salary of clothing designer Indirect c. Cost of buttons Direct 11. During the production of its new broom, a manufacturer incurs each of the following costs. Would each cost be considered a direct or indirect cost if the cost object is an individual broom? a. Electricity in production plant Indirect b. Cost of plastic for handle Direct c. Cost of labor by production employees, billed at an hourly rate Direct 12. Would each of the following costs be considered a direct or indirect cost for an individual lamp of a manufacturer? a. Research and design on the materials used for the line of lamps Indirect b. Cost of fabric for the lamp shade Direct c. Advertising expense for the line of lamps Indirect Strategy: If a cost can be directly associated with and identified with a cost object, it is considered to be a direct cost. However, if the benefit of the cost cannot be traced directly to the cost object, the cost is classified as an indirect cost.

5 Introduction to Managerial Accounting When manufacturing 200 picture frames, Take A Picture spends the following on materials: $1,000 for wood, $10 for glue, $400 for glass, $500 for backing, and $40 for screws. Which of the materials used would be considered direct materials? Wood, glass, and backing 14. In its production facilities for picture frames, Take A Picture pays the following wages: $1,750 to employees who repair production facility equipment, $5,000 paid to employees who cut the glass used in the frames, $2,000 for daily cleaning services of production facility, and $3,000 to employees that sand and stain wood used in the frames. Which of the wages paid would be considered a direct labor cost? $5,000 for employees who cut glass used in frames and $3,000 to employees that sand and stain wood used in the frames 15. When producing tables, a company incurs the following costs: $30 for screws, $6,500 for wood, $80 for wood stain, $5,000 paid to janitors who clean the production facilities, $2,100 paid to employees who saw and prepare wood for production, $1,600 for depreciation on equipment. How much of factory overhead costs would need to be allocated to the tables produced? $6,710; $1,600 + $5,000 + $30 + $80 Strategy: Direct costs are classified as either direct labor or direct materials if they are considered an important part of the finished product and a significant portion of the cost of producing the product. If costs are not directly associated with producing the finished good or must be allocated among many finished goods, the cost is considered to be factory overhead. 16. In its production of shirts, a company incurs the following costs: $15,000 for production workers, $8,000 for fabric, $3,500 for electricity in production facilities, and $300 for buttons. Calculate the following: a. Prime costs $23,300; $8,000 + $15,000 + $300 b. Conversion costs $18,500; $15,000 + $3,500

6 6 Chapter 15 (1) 17. Calculate the prime costs and conversion costs if a company incurs the following to produce wine glasses: $4,000 for molten glass, $15,000 paid to employees who create the glasses, and $2,000 paid to employees who repair equipment used in the production facilities. Prime costs: $19,000; $4,000 + $15,000 Conversion costs: $17,000; $15,000 + $2, When manufacturing pillows, a company incurs the following costs: $6,000 for fabric, $3,000 for feathers, $20 for thread, $12,000 for production employees, and $2,500 for depreciation on production equipment. Determine the following: a. Prime costs $21,000; $6,000 + $3,000 + $12,000 b. Conversion costs $14,500; $12,000 + $2,500 Strategy: Conversion costs include costs that are used to convert the materials into a finished product, including labor for employees who manufacture the goods and overhead for the production facilities. Prime costs are the costs primarily associated with producing the product, such as the materials and labor. Since direct labor is used directly to produce the goods and also convert the materials into finished goods, it is considered both a conversion cost and prime cost. 19. In the introduction of its new purses, Chic Diva incurs the following expenses: $3,000 for direct materials, $1,700 for office supplies, $10,000 for sales salaries, $8,100 for production wages, $1,200 for office depreciation, and $1,700 for production facility utilities. How much does the company incur for product and period costs? Also, distinguish the period costs by either selling or administrative expenses. Product: $12,800; $3,000 + $8,100 + $1,700 Period: $11,700; $1,700 + $10,000 Selling: $10,000 Administrative: $2,900; $1,700 + $1,200

7 Introduction to Managerial Accounting Would each of the following be considered a product or period cost? If it is a period cost, would it be classified as a selling or administrative expense? a. Advertising expenses Period, selling b. Salary of production supervisors Product c. Depreciation for factory equipment Product 21. Would each expense be classified as a product or period cost? If it is a period cost, would it be classified as a selling or administrative expense? a. Rubber made to produce tires Product b. Salaries of sales team Period, selling c. Office supplies expense Period, administrative Strategies: Product costs include direct materials, direct labor, and factory overhead, which are spent in order to make the finished products. Period costs are incurred during a period to generate the income of a period from the finished products. Selling expenses include the costs incurred to sell and deliver the product to a customer. Administrative expenses are incurred to ensure that the company is working efficiently and is managed according to its needs. 22. Which of the following would be found in the financial statements of a manufacturing company? a. Merchandise inventory No b. Cost of goods manufactured Yes c. Direct materials Yes

8 8 Chapter 15 (1) 23. Would each item be found in the financial statements of a manufacturing or merchandising business? Which financial statement would include the line item? a. Cost of finished goods available for sale Manufacturing, income statement b. Raw materials Manufacturing, balance sheet c. Finished goods Manufacturing, balance sheet 24. Determine if the following would be found in the financial statements of a manufacturing or merchandising business. Which financial statement would include the line item? a. Work in process Manufacturing, balance sheet b. Cost of goods sold Manufacturing, income statement c. Cost of merchandise sold Merchandising, income statement Strategy: Since manufacturing businesses are required to purchase the inputs of the goods produced, the balance sheet will include inventories for raw materials, work in process, and finished goods, rather than merchandise inventory as in a merchandising business. The income statement will also include cost of goods manufactured instead of cost of merchandise sold as in a merchandising business. 25. As of January 1, 2015, Tippy Cup Co. had a balance of $15,000 for raw materials inventory. The company s ending balance of raw materials inventory totaled $13,900. Every four months, the company purchases 250 pounds of raw materials at $25 a pound. Calculate the cost of direct materials used for the year. Beginning materials inventory $15,000 Add materials purchased 18,750 Cost of materials available for use $33,750 Less ending materials inventory 13,900 Cost of direct materials used $19,850 Materials purchased: (3 purchases 250 pounds $25/pound)

9 Introduction to Managerial Accounting Tippy Cup Co. also incurred $10,550 for factory overhead and 250 hours of direct labor at $10.30 per hour. Using the cost of direct materials used calculated in Exercise 25, determine the total manufacturing costs incurred for the year. Direct materials used $19,850 Direct labor 2,575 Factory overhead 10,550 Total manufacturing costs incurred $32,975 Direct labor: 250 hours $10.30/hour 27. As of January 1, 2015, Tippy Cup Co. s work in process inventory had a beginning balance of $98,750. The ending balance of work in process inventory totaled $92,350. Using the information calculated in Exercise 26, calculate the cost of goods manufactured for the year. Beginning work in process inventory $ 98,750 Total manufacturing costs incurred 32,975 Total manufacturing costs $131,725 Less ending work in process inventory 92,350 Cost of goods manufactured $ 39, Using the information calculated in Exercises 25-27, prepare a statement of cost of goods manufactured for Tippy Cup Co. Tippy Cup Co. Statement of Cost of Goods Manufactured For the Year Ended December 31, 2015 Work in process inventory, Jan. 1, 2015 $ 98,750 Direct materials: Materials inventory, Jan. 1, 2015 $15,000 Purchases 18,750 Cost of materials available for use $33,750 Less materials inventory, Dec. 31, ,900 Cost of direct materials used $19,850 Direct labor 2,575 Factory overhead 10,550 Total manufacturing costs incurred 32,975 Total manufacturing costs $131,725 Less work in process inventory, Dec. 31, ,350 Cost of goods manufactured $ 39,375

10 10 Chapter 15 (1) 29. So Chic s raw materials inventory had a beginning balance of $22,100 and ending balance of $19,100. During the year, the company purchased 200 pounds of Product X every two months for $15 a pound and 700 feet of Product Y every 6 months for $10 a foot. Calculate the cost of direct materials used for the year. Beginning materials inventory $22,100 Add materials purchased 32,000 Cost of materials available for use $54,100 Less ending materials inventory 19,100 Cost of direct materials used $35,000 Materials purchased: (6 purchases of Product X 200 pounds $15/pound) + (2 purchases of Product Y 700 feet $10/foot) 30. During the year, So Chic incurred $50,000 of overhead, 75% of which should be allocated to the factory. Production employees also worked 2,900 hours at a rate of $9.75 per hour. Using the information calculated in Exercise 29, determine the total manufacturing costs incurred during the year. Direct materials used $ 35,000 Direct labor 28,275 Factory overhead 37,500 Total manufacturing costs incurred $100,775 Direct labor: 2,900 hours $9.75/hour Factory overhead: $50,000 75% allocated to factory 31. So Chic had a beginning balance of $94,800 in its work in process inventory and an ending balance of $91,800. Using the manufacturing costs incurred during the year in Exercise 30, determine the cost of goods manufactured for the year. Beginning work in process inventory $ 94,800 Total manufacturing costs incurred 100,775 Total manufacturing costs $195,575 Less ending work in process inventory 91,800 Cost of goods manufactured $103,775

11 Introduction to Managerial Accounting Use the information from Exercises to prepare So Chic s statement of cost of goods manufactured for the 2015 calendar year-end. So Chic Statement of Cost of Goods Manufactured For the Year Ended December 31, 2015 Work in process inventory, Jan. 1, 2015 $ 94,800 Direct materials: Materials inventory, Jan. 1, 2015 $22,100 Purchases 32,000 Cost of materials available for use $54,100 Less materials inventory, Dec. 31, ,100 Cost of direct materials used $35,000 Direct labor 28,275 Factory overhead 37,500 Total manufacturing costs incurred 100,775 Total manufacturing costs $195,575 Less work in process inventory, Dec. 31, ,800 Cost of goods manufactured $103, Each finished product of Carolina Cup requires two pounds of Product A and five pounds of product B. Throughout the year, the company purchases enough raw materials to produce 500 finished products. Each pound of Product A costs $7, and each pound of Product B costs $8. The beginning and ending balances of raw materials inventory totaled $8,900 and $10,100, respectively. Calculate the cost of direct materials used for the year. Beginning materials inventory $ 8,900 Add materials purchased 27,000 Cost of materials available for use $35,900 Less ending materials inventory 10,100 Cost of direct materials used $25,800 Materials purchased: ((2 pounds Product A $7/pound) + (5 pounds Product B $8/pound))/product 500 products Strategy: When calculating the cost of direct materials used, add the beginning inventory of materials to the materials purchased first. The sum is the total materials available to the company during the period, called cost of materials available for use. The cost of materials available for use less the ending inventory of materials, which weren t used during the period, gives the cost of direct materials used during the time period.

12 12 Chapter 15 (1) 34. Carolina Cup employs five production employees who are paid an hourly wage of $9 per hour. Each employee works 800 hours a year. The company also incurred $42,000 of overhead, half of which should be allocated to the factory. Using the cost of direct materials calculated in Exercise 33, determine the total manufacturing costs for the year. Direct materials used $25,800 Direct labor 36,000 Factory overhead 21,000 Total manufacturing costs incurred $82,800 Direct labor: 5 employees 800 hours/year $9/hour Factory overhead: $42,000 ½ allocated to factory Strategy: Total manufacturing costs include the direct materials used, cost of direct labor, and factory overhead. If total overhead is given for the period, determine the amount to allocate to the production of the goods, since selling and administrative overhead should not be included. 35. Carolina Cup s beginning work in process inventory had a balance of $45,750. The ending work in process inventory was exactly ⅔ of the beginning balance. Using the manufacturing costs incurred calculated in Exercise 34, determine the cost of goods manufactured during the year. Beginning work in process inventory $ 45,750 Total manufacturing costs incurred 82,800 Total manufacturing costs $128,550 Less ending work in process inventory 30,500 Cost of goods manufactured $ 98,050 Strategy: Work in process inventory includes all costs incurred to produce the product. To calculate the cost of goods manufactured, add the beginning inventory of work in process to the manufacturing costs incurred during the period to determine the total manufacturing costs spent to make the products. The total manufacturing costs less the ending inventory of work in process, which are transferred to finished goods inventory and should not be included as a work in process, provides the cost of goods manufactured.

13 Introduction to Managerial Accounting Use the information found in Exercises to prepare Carolina Cup s statement of cost of goods manufactured for the 2015 fiscal year ended September 30. Carolina Cup Statement of Cost of Goods Manufactured For the Year Ended September 30, 2015 Work in process inventory, Jan. 1, 2015 $ 45,750 Direct materials: Materials inventory, Jan. 1, 2015 $ 8,900 Purchases 27,000 Cost of materials available for use $35,900 Less materials inventory, Dec. 31, ,100 Cost of direct materials used $25,800 Direct labor 36,000 Factory overhead 21,000 Total manufacturing costs incurred 82,800 Total manufacturing costs $128,550 Less work in process inventory, Dec. 31, ,500 Cost of goods manufactured $ 98,050 Strategy: The statement of cost of goods manufactured breaks down the inputs to cost of goods manufactured, including direct materials used (which must be calculated), direct labor, and factory overhead. 37. Determine when managerial accounting would be used for each of the following situations. a. Calculating the amount of depreciation of factory equipment to allocate to each product line Yes b. Preparing financial statements for potential new investors to review No c. Finding deficiencies in the production line for a new product No

14 14 Chapter 15 (1) 38. Throughout the year, the accounting department of Cards by Shannon does the following: prepares a budget for the year, determines the selling price of a new product, produces quarterly reports, and prepares its tax return. Which of the activities would require managerial accounting? Preparing a budget for the year and determining the selling price of a new product 39. In its monthly meeting, the management of Beads Inc. discusses the following: identification of an outdated piece of equipment that caused high production costs, the effects of purchasing a new piece of equipment on the budget, and financing of the budget through bank loans and new investors. Which activities discussed during the meeting required or will require managerial accounting? Identification of the outdated piece of equipment causing high production costs and the effects of purchasing the new piece of equipment on the budget Strategy: Managerial accounting is used by management of a business to develop plans or goals and determine if the goals were met or where improvement could be made to better meet the goals. 40. Niagara Hotel is a single hotel with 200 rooms. During the month of July, the hotel had 5,000 guests, each staying for a single night. What is the occupancy rate? Occupancy Rate = Guest Nights/Available Room Nights = 5000 guest nights/(200 rooms x 30 days) = 83.33% The hotel was occupied to 83% of capacity, which would be considered favorable.