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This document contains summaries of key concepts from Chapter 2 of a managerial accounting textbook. It discusses:
1) The three major activities of managers in organizations: planning, directing/motivating, and controlling.
2) The planning and control cycle which involves formulating plans, implementing plans, measuring performance, and evaluating differences between planned and actual performance.
3) The key differences between managerial accounting and financial accounting, which include a focus on internal decision making rather than external reporting.
This document contains summaries of key concepts from Chapter 2 of a managerial accounting textbook. It discusses:
1) The three major activities of managers in organizations: planning, directing/motivating, and controlling.
2) The planning and control cycle which involves formulating plans, implementing plans, measuring performance, and evaluating differences between planned and actual performance.
3) The key differences between managerial accounting and financial accounting, which include a focus on internal decision making rather than external reporting.
This document contains summaries of key concepts from Chapter 2 of a managerial accounting textbook. It discusses:
1) The three major activities of managers in organizations: planning, directing/motivating, and controlling.
2) The planning and control cycle which involves formulating plans, implementing plans, measuring performance, and evaluating differences between planned and actual performance.
3) The key differences between managerial accounting and financial accounting, which include a focus on internal decision making rather than external reporting.
Solutions to Questions 2-1 Managers carry out three major activities in an organization: planning, directing and motivating, and controlling. Planning involves establishing a basic strategy, selecting a course of action, and specifying how the action will be implemented. Directing and motivating involves mobilizing people to carry out plans and run routine operations. Controlling involves ensuring that the plan is actually carried out and is appropriately modied as circumstances change. 2-2 !he planning and control cycle involves formulating plans, implementing plans, measuring performance, and evaluating di"erences between planned and actual performance. 2-3 #n contrast to nancial accounting, managerial accounting: $%& focuses on the needs of managers rather than outsiders' $(& emphasizes decisions a"ecting the future rather than the nancial conse)uences of past actions' $*& emphasizes relevance rather than objectivity and veriability' $+& emphasizes timeliness rather than precision' $,& emphasizes the segments of an organization rather than summary data concerning the entire organization' $-& is not governed by .//P' and $0& is not mandatory. 2-4 !he three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead. 2-5 a. Direct materials are an integral part of a nished product and their costs can be conveniently traced to it. b. #ndirect materials are generally small items of material such as glue and nails. !hey may be an integral part of a nished product but their costs can be traced to the product only at great cost or inconvenience. c. Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called 1touch labor.2 d. #ndirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory wor3ers that cannot be conveniently traced to particular products. !hese labor costs are incurred to support production, but the wor3ers involved do not directly wor3 on the product. e. Manufacturing overhead includes all manufacturing costs e4cept direct materials and direct labor. Conse)uently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs. 2-6 / product cost is any cost involved in purchasing or manufacturing goods. #n the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. / period cost is a cost that is ta3en directly to the income statement as an e4pense in the period in which it is incurred. 2-7 !he income statement of a manufacturing company di"ers from the income statement of a merchandising company in the cost of goods sold 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( %: section. / merchandising company sells nished goods that it has purchased from a supplier. !hese goods are listed as 1purchases2 in the cost of goods sold section. ;ecause a manufacturing company produces its goods rather than buying them from a supplier, it lists 1cost of goods manufactured2 in place of 1purchases.2 /lso, the manufacturing company identies its inventory in this section as <inished .oods inventory, rather than as Merchandise #nventory. 2- !he schedule of cost of goods manufactured lists the manufacturing costs that have been incurred during the period. !hese costs are organized under the three categories of direct materials, direct labor, and manufacturing overhead. !he total costs incurred are adjusted for any change in the =or3 in Process inventory to determine the cost of goods manufactured $i.e. nished& during the period. !he schedule of cost of goods manufactured ties into the income statement through the cost of goods sold section. !he cost of goods manufactured is added to the beginning <inished .oods inventory to determine the goods available for sale. #n e"ect, the cost of goods manufactured ta3es the place of the Purchases account in a merchandising rm. 2-! / manufacturing company usually has three inventory accounts: >aw Materials, =or3 in Process, and <inished .oods. / merchandising company may have a single inventory account? Merchandise #nventory. 2-1" Product costs are assigned to units as they are processed and hence are included in inventories. !he @ow is from direct materials, direct labor, and manufacturing overhead to =or3 in Process inventory. /s goods are completed, their cost is removed from =or3 in Process inventory and transferred to <inished .oods inventory. /s goods are sold, their cost is removed from <inished .oods inventory and transferred to Cost of .oods 9old. Cost of .oods 9old is an e4pense on the income statement. 2-11 Aes, costs such as salaries and depreciation can end up as part of assets on the balance sheet if they are manufacturing costs. Manufacturing costs are inventoried until the associated nished goods are sold. !hus, if some units are still in inventory, such costs may be part of either =or3 in Process inventory or <inished .oods inventory at the end of the period. 2-12 Bo. / variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. !he variable cost per unit is constant. / 4ed cost is 4ed in total, but the average cost per unit changes with the level of activity. 2-13 / di"erential cost is a cost that di"ers between alternatives in a decision. /n opportunity cost is the potential benet that is given up when one alternative is selected over another. / sun3 cost is a cost that has already been incurred and cannot be altered by any decision ta3en now or in the future. 2-14 Bo, di"erential costs can be either variable or 4ed. <or e4ample, the alternatives might consist of purchasing one machine rather than another to ma3e a product. !he di"erence between the 4ed costs of purchasing the two machines is a di"erential cost. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. (8 Managerial /ccounting, %*th Cdition #$ercise 2-1 $%8 minutes& %. Directing and motivating (. ;udgets *. Planning +. Precision' !imeliness ,. Managerial accounting' <inancial accounting -. Managerial accounting 0 <inancial accounting' Managerial accounting D. <eedbac3 :. Controller %8. Performance report 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( (% #$ercise 2-2 $%8 minutes& %. !he cost of a hard drive installed in a computer: direct materials. (. !he cost of advertising in the Puget Sound Computer User newspaper: selling. *. !he wages of employees who assemble computers from components: direct labor. +. 9ales commissions paid to the companyEs salespeople: selling. ,. !he wages of the assembly shopEs supervisor: manufacturing overhead. -. !he wages of the companyEs accountant: administrative. 0. Depreciation on e)uipment used to test assembled computers before release to customers: manufacturing overhead. D. >ent on the facility in the industrial par3: a combination of manufacturing overhead, selling, and administrative. !he rent would most li3ely be prorated on the basis of the amount of space occupied by manufacturing, selling, and administrative operations. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. (( Managerial /ccounting, %*th Cdition #$ercise 2-3 $%, minutes& Produc t Cost Perio d Cost %. Depreciation on salespersonsE cars................ F (. >ent on e)uipment used in the factory........... F *. Gubricants used for machine maintenance..... F +. 9alaries of personnel who wor3 in the nished goods warehouse............................ F ,. 9oap and paper towels used by factory wor3ers at the end of a shift......................... F -. <actory supervisorsE salaries........................... F 0. 7eat, water, and power consumed in the factory......................................................... F D. Materials used for bo4ing products for shipment overseas $units are not normally bo4ed&......................................................... F :. /dvertising costs............................................ F %8. =or3ersE compensation insurance for factory employees................................................... F %%. Depreciation on chairs and tables in the factory lunchroom........................................ F %(. !he wages of the receptionist in the administrative oHces................................... F %*. Cost of leasing the corporate jet used by the companyIs e4ecutives.................................. F %+. !he cost of renting rooms at a <lorida resort for the annual sales conference................... F %,. !he cost of pac3aging the companyEs product F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( (* #$ercise 2-4 $%, minutes& Cyber.ames #ncome 9tatement 9ales................................................. J%,+,8,88 8 Cost of goods sold: ;eginning merchandise inventory... J (+8,88 8 /dd: Purchases............................... :,8,888 .oods available for sale.................. %,%:8,888 Deduct: Cnding merchandise inventory...................................... %08,888 %,8(8,88 8 .ross margin..................................... +*8,888 9elling and administrative e4penses: 9elling e4pense............................... (%8,888 /dministrative e4pense................... %D8,888 *:8,88 8 Bet operating income........................ J +8,88 8 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. (+ Managerial /ccounting, %*th Cdition #$ercise 2-5 $%, minutes& Gompac Products 9chedule of Cost of .oods Manufactured Direct materials: ;eginning raw materials inventory.... J -8,88 8 /dd: Purchases of raw materials....... -:8,88 8 >aw materials available for use........ 0,8,888 Deduct: Cnding raw materials inventory........................................ +,,88 8 >aw materials used in production..... J 08,,88 8 Direct labor......................................... %*,,888 Manufacturing overhead..................... *08,88 8 !otal manufacturing costs.................... %,(%8,888 /dd: ;eginning wor3 in process inventory.......................................... %(8,88 8 %,**8,888 Deduct: Cnding wor3 in process inventory.......................................... %*8,88 8 Cost of goods manufactured................ J%,(88,88 8 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( (, #$ercise 2-6 $%, minutes& / few of these costs may generate debate. <or e4ample, some may argue that the cost of advertising a roc3 concert is a variable cost because the number of people who come to the roc3 concert depends on the amount of advertising. 7owever, one can argue that if the price is within reason, any roc3 concert in Bew Aor3 City will be sold out and the function of advertising is simply to let people 3now the event will be happening. Moreover, while advertising may a"ect the number of persons who ultimately buy tic3ets, the causation is in one direction. #f more people buy tic3ets, the advertising costs donEt go up. Cost Behavior Cost (Measure of Activity) Variabl e i!e d %.!he cost of F6ray lm used in the radiology lab at Kirginia Mason 7ospital in 9eattle $Bumber of F6rays ta3en&................................................. F (.!he cost of advertising a roc3 concert in Bew Aor3 City $Bumber of roc3 concert tic3ets sold&. F *.!he cost of renting retail space for a McDonaldEs restaurant in 7ong Long $!otal sales at the restaurant&........................................................ F +.!he electrical cost of running a roller coaster at Magic Mountain $Bumber of times the roller coaster is run&................................................... F ,.Property ta4es paid by your local cinema theater $Bumber of tic3ets sold&....................... F -.!he cost of sales commissions paid to salespersons at a Bordstrom store $!otal sales at the store&...................................................... F 0.Property insurance on a Coca Cola bottling plant $Bumber of cases of bottles produced&..... F D.!he costs of synthetic materials used to ma3e a particular model of running shoe $Bumber of shoes of that model produced&.......................... F :.!he costs of shipping Panasonic televisions to retail stores $Bumber of televisions sold&.......... F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. (- Managerial /ccounting, %*th Cdition %8.!he cost of leasing an ultra6scan diagnostic machine at the /merican 7ospital in Paris $Bumber of patients scanned with the machine&.......................................................... F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( (0 #$ercise 2-7 $%, minutes& Cost Cost "b#ect $irect Cost %ndirec t Cost % . !he wages of pediatric nurses !he pediatric department F ( . Prescription drugs / particular patient F * . 7eating the hospital !he pediatric department F + . !he salary of the head of pediatrics !he pediatric department F , . !he salary of the head of pediatrics / particular pediatric patient F - . 7ospital chaplainEs salary / particular patient F 0 . Gab tests by outside contractor / particular patient F D . Gab tests by outside contractor / particular department F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. (D Managerial /ccounting, %*th Cdition #$ercise 2- $%, minutes& %tem $i&erenti al Cost "pportunit y Cost Sun' Cost % . Cost of the old F6ray machine............................. F ( . !he salary of the head of the >adiology Department........ * . !he salary of the head of the Pediatrics Department........ + . Cost of the new color laser printer................................ F , . >ent on the space occupied by >adiology....................... - . !he cost of maintaining the old machine........................ F 0 . ;enets from a new DB/ analyzer............................. F D . Cost of electricity to run the F6ray machines................... F Bote: !he costs of the salaries of the head of the >adiology Department and Pediatrics Department and the rent on the space occupied by >adiology are neither di"erential costs, nor opportunity costs, nor sun3 costs. !hese costs do not di"er between the alternatives and therefore are irrelevant in the decision, but they are not sun3 costs because they occur in the future. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( (: #$ercise 2-! $%, minutes& %. Product cost' variable cost (. Conversion cost *. Mpportunity cost +. Prime cost ,. 9un3 cost -. Period cost' variable cost 0. Product cost' period cost' 4ed cost D. Product cost :. Period cost %8 . <i4ed cost' product cost' conversion cost 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. *8 Managerial /ccounting, %*th Cdition #$ercise 2-1" $%, minutes& Selling and Cost Behavior Administrati ve Produc t Cost %tem Variable i!ed Cost Cost %. 7amburger buns at a =endyEs outlet. . F F (. /dvertising by a dental oHce......... F F *. /pples processed and canned by Del Monte................... F F +. 9hipping canned apples from a Del Monte plant to customers............ F F ,. #nsurance on a ;ausch N Gomb factory producing contact lenses...... F F -. #nsurance on #;MEs corporate head)uarters........ F F 0. 9alary of a supervisor overseeing production of printers at 7ewlett6Pac3ard. . . F F D. Commissions paid to Cncyclopedia ;ritannica salespersons........ F F :. Depreciation of factory lunchroom facilities at a .eneral Clectric plant..................... F F %8. 9teering wheels F F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( *% installed in ;M=s. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. *( Managerial /ccounting, %*th Cdition #$ercise 2-11 $*8 minutes& %. Mason Company 9chedule of Cost of .oods Manufactured Direct materials: ;eginning raw materials inventory........... J 0,888 /dd: Purchases of raw materials.............. %%D,888 >aw materials available for use............... %(,,888 Deduct: Cnding raw materials inventory. . %,,888 >aw materials used in production............ J%%8,88 8 Direct labor................................................ 08,888 Manufacturing overhead............................ D8,888 !otal manufacturing costs........................... (-8,888 /dd: ;eginning wor3 in process inventory. . %8,888 (08,888 Deduct: Cnding wor3 in process inventory. . ,,888 Cost of goods manufactured....................... J(-,,88 8 (. !he cost of goods sold section of Mason CompanyEs income statement: ;eginning nished goods inventory...... J(8,888 /dd: Cost of goods manufactured......... (-,,888 .oods available for sale....................... (D,,888 Deduct: Cnding nished goods inventory........................................... *,,888 Cost of goods sold................................ J(,8,88 8 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( ** #$ercise 2-12 $*8 minutes& %. a.;atteries purchased................................................. D,888 ;atteries drawn from inventory................................ 0,-88 ;atteries remaining in inventory.............................. +88 Cost per battery....................................................... P J%8 Cost in >aw Materials #nventory at /pril *8.............. J+,888 b.;atteries used in production $0,-88 Q %88&............... 0,,88 Motorcycles completed and transferred to <inished .oods $:8R P 0,,88&............................................ -,0,8 Motorcycles still in =or3 in Process at /pril *8......... 0,8 Cost per battery....................................................... P J%8 Cost in =or3 in Process #nventory at /pril *8........... J0,,88 c.Motorcycles completed and transferred to <inished .oods $see above&................................................. -,0,8 Motorcycles sold during the month $08R P -,0,8&....................................................... +,0(, Motorcycles still in <inished .oods at /pril *8.......... (,8(, Cost per battery....................................................... P J%8 Cost in <inished .oods #nventory at /pril *8............ J(8,(,8 d.Motorcycles sold during the month $above&............. +,0(, Cost per battery....................................................... P J%8 Cost in Cost of .oods 9old at /pril *8...................... J+0,(,8 e.;atteries used in salespersonsE motorcycles............ %88 Cost per battery....................................................... P J%8 Cost in 9elling C4pense at /pril *8........................... J %,888 (. >aw Materials #nventory?balance sheet =or3 in Process #nventory?balance sheet <inished .oods #nventory?balance sheet Cost of .oods 9old?income statement 9elling C4pense?income statement 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. *+ Managerial /ccounting, %*th Cdition %roble& 2-13 $*8 minutes& Bote to the #nstructor: !here may be some e4ceptions to the answers below. !he purpose of this problem is to get the student to start thin'ing about cost behavior and cost purposes' try to avoid lengthy discussions about how a particular cost is classied. Variable or Selling Administrativ e Manufacturin g (Product) Cost Cost %tem i!ed Cost Cost $irec t %ndirect %. Property ta4es, factory.......................... < F (. ;o4es used for pac3aging detergent produced by the company.................. K F *. 9alespersonsE commissions................... K F +. 9upervisorEs salary, factory................... < F ,. Depreciation, e4ecutive autos............... < F -. =ages of wor3ers assembling computers.......................................... K F 0. #nsurance, nished goods warehouses. . < F D. Gubricants for production e)uipment..... K F :. /dvertising costs................................... < F %8. Microchips used in producing calculators.......................................... K F %%. 9hipping costs on merchandise sold...... K F %(. Magazine subscriptions, factory lunchroom.......................................... < F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( *, %*. !hread in a garment factory.................. K F %+. ;illing costs........................................... K FS %,. C4ecutive life insurance........................ < F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. *- Managerial /ccounting, %*th Cdition %roble& 2-13 $continued& Variable or Selling Administrativ e Manufacturin g (Product) Cost Cost %tem i!ed Cost Cost $irec t %ndirect %-. #n3 used in te4tboo3 production............ K F %0. <ringe benets, assembly6line wor3ers. . K FSS %D. Aarn used in sweater production............ K F %:. =ages of receptionist, e4ecutive oHces................................................. < F S Could be administrative cost. SS Could be indirect cost. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( *0 %roble& 2-14 $*8 minutes& Product Cost Period (Sellin g (ame of the Cost Variabl e Cost i!e d Cost $irect Material s $irec t )abor Manu* facturing "verhea d and Admin ) Cost "ppor * tunity Cost Sun ' Cost >ental revenue forgone, J*8,888 per year................... F Direct materials cost, JD8 per unit........................................ F F >ental cost of warehouse, J,88 per month..................... F F >ental cost of e)uipment, J+,888 per month.................. F F Direct labor cost, J-8 per unit. . F F Depreciation of the anne4 space, JD,888 per year.......... F F F /dvertising cost, J,8,888 per year....................................... F F 9upervisorIs salary, J%,,88 per month.............................. F F Clectricity for machines, J%.(8 per unit.................................. F F 9hipping cost, J: per unit......... F F >eturn earned on F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. *D Managerial /ccounting, %*th Cdition investments, J*,888 per year....................................... 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( *: %roble& 2-15 $*8 minutes& Cost Behavior +o Units of Product Cost %tem Variable i!ed $irect %ndirect %. Clectricity to run production e)uipment............ F F (. >ent on a factory building................................. F F *. Cloth used to ma3e drapes............................... F F +. Production superintendentEs salary................... F F ,. =ages of laborers assembling a product........... F F -. Depreciation of air purication e)uipment used to ma3e furniture............................................ F F 0. Tanitorial salaries............................................... F F D. Peaches used in canning fruit........................... F F :. Gubricants for production e)uipment................. F F %8. 9ugar used in soft drin3 production................... F F %%. Property ta4es on the factory............................ F F %(. =ages of wor3ers painting a product................. F F %*. Depreciation on cafeteria e)uipment................ F F %+. #nsurance on a building used in producing helicopters...................................................... F F %,. Cost of rotor blades used in producing helicopters...................................................... F F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. +8 Managerial /ccounting, %*th Cdition %roble& 2-16 $+, minutes& %. 9wift Company 9chedule of Cost of .oods Manufactured <or the Month Cnded /ugust *% Direct materials: >aw materials inventory, /ugust %......... J D,88 8 /dd: Purchases of raw materials............. %-,,88 8 >aw materials available for use.............. %0*,888 Deduct: >aw materials inventory, /ugust *%............................................. %*,88 8 >aw materials used in production........... J%-8,888 Direct labor............................................... 08,888 Manufacturing overhead........................... D,,888 !otal manufacturing costs......................... *%,,888 /dd: =or3 in process inventory, /ugust %. %-,888 **%,888 Deduct: =or3 in process inventory, /ugust *%............................................... (%,888 Cost of goods manufactured..................... J*%8,888 (. 9wift Company #ncome 9tatement <or the Month Cnded /ugust *% 9ales......................................................... J+,8,88 8 Cost of goods sold: <inished goods inventory, /ugust %........ J +8,888 /dd: Cost of goods manufactured........... *%8,88 8 .oods available for sale.......................... *,8,888 Deduct: <inished goods inventory, /ugust *%............................................. -8,88 8 (:8,888 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( +% .ross margin............................................. %-8,888 9elling and administrative e4penses......... %+(,888 Bet operating income............................... J %D,888 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. +( Managerial /ccounting, %*th Cdition %roble& 2-16 $continued& *. #n preparing the income statement for /ugust, 9am failed to distinguish between product costs and period costs, and he also failed to recognize the changes in inventories between the beginning and end of the month. Mnce these errors have been corrected, the nancial condition of the company loo3s much better and selling the company may not be advisable. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( +* %roble& 2-17 $%, minutes& %. !he controller is correct that the salary cost should be classied as a selling $mar3eting& cost. !he duties described in the problem have nothing to do with manufacturing a product, but rather deal with moving ,nished units from the factory to distribution warehouses. 9elling costs include all costs necessary to secure customer orders and to get the nished product into the hands of customers. Coordination of shipments of nished units from the factory to distribution warehouses falls in this category. (. Bo, the president is not correct. !he reported net operating income for the year will di"er depending on how the salary cost is classied. #f the salary cost is classied as a selling e4pense all of it will appear on the income statement as a period cost. 7owever, if the salary cost is classied as a manufacturing $product& cost, it will be added to =or3 in Process inventory along with other manufacturing costs for the period. !o the e4tent that goods are still in process at the end of the period, part of the salary cost will remain with these goods in the =or3 in Process inventory account. Mnly that portion of the salary cost that has been assigned to nished units will leave the =or3 in Process inventory account and be transferred into the <inished .oods inventory account. #n li3e manner, to the e4tent that goods are unsold at the end of the period, part of the salary cost will remain with these goods in the <inished .oods inventory account. Mnly the portion of the salary that has been assigned to nished units that are sold during the period will appear on the income statement as an e4pense $part of Cost of .oods 9old& for the period. !he remainder of the salary costs will be on the balance sheet as part of inventories. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. ++ Managerial /ccounting, %*th Cdition %roble& 2-1 $+, minutes& %. Meriwell Company 9chedule of Cost of .oods Manufactured Direct materials: >aw materials inventory, beginning..... J :,888 /dd: Purchases of raw materials.......... %(,,888 >aw materials available for use........... %*+,888 Deduct: >aw materials inventory, ending............................................... -,888 >aw materials used in production........ J%(D,88 8 Direct labor............................................ 08,888 Manufacturing overhead........................ %8,,888 !otal manufacturing costs....................... *8*,888 /dd: =or3 in process inventory, beginning............................................. %0,888 *(8,888 Deduct: =or3 in process inventory, ending................................................. *8,888 Cost of goods manufactured................... J(:8,88 8 (. Meriwell Company #ncome 9tatement 9ales...................................................... J,88,888 Cost of goods sold: <inished goods inventory, beginning.... J(8,888 /dd: Cost of goods manufactured........ (:8,888 .oods available for sale....................... *%8,888 Deduct: <inished goods inventory, ending............................................... +8,888 (08,888 .ross margin.......................................... (*8,888 9elling and administrative e4penses: 9elling e4penses.................................. D8,888 /dministrative e4penses...................... %%8,888 %:8,888 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( +, Bet operating income............................. J+8,888 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. +- Managerial /ccounting, %*th Cdition %roble& 2-1 $continued& *. Direct materials: J%(D,888 U %8,888 units V J%(.D8 per unit. <i4ed manufacturing overhead: J:8,888 U %8,888 units V J:.88 per unit. +. Direct materials: Wnit cost: J%(.D8 $unchanged& !otal cost: %,,888 units P J%(.D8 per unit V J%:(,888. <i4ed manufacturing overhead: Wnit cost: J:8,888 U %,,888 units V J-.88 per unit. !otal cost: J:8,888 $unchanged& ,. Wnit cost for 4ed manufacturing overhead dropped from J:.88 to J-.88, because of the increase in production between the two years. ;ecause 4ed costs do not change in total as the activity level changes, they will decrease on a unit basis as the activity level rises. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( +0 %roble& 2-1! $+, minutes& %. Cost Behavior Selling or Administrati ve Product Cost Cost %tem Variabl e i!ed Cost $irect %ndirec t <actory labor, direct............... J%%D,88 8 J%%D,88 8 /dvertising............................ J,8,888 J,8,888 <actory supervision................ +8,888 J+8,88 8 Property ta4es, factory building............................... *,,88 *,,88 9ales commissions................ D8,888 D8,888 #nsurance, factory................. (,,88 (,,88 Depreciation, administrative oHce e)uipment................. +,888 +,888 Gease cost, factory e)uipment.......................... %(,888 %(,888 #ndirect materials, factory..... -,888 -,888 Depreciation, factory building............................... %8,888 %8,888 /dministrative oHce supplies *,888 *,888 /dministrative oHce salaries. -8,888 -8,888 Direct materials used............ :+,888 :+,888 Wtilities, factory..................... (8,88 8 (8,88 8 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. +D Managerial /ccounting, %*th Cdition !otal costs............................. J*(%,88 8 J%D(,88 8 J%:0,888 J(%(,88 8 J:+,88 8 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( +: %roble& 2-1! $continued& (. Direct............................................. J(%(,88 8 #ndirect........................................... :+,88 8 !otal............................................... J*8-,88 8 J*8-,888 U (,888 sets V J%,* per set *. !he average product cost per set would increase if the production drops. !his is because the 4ed costs would be spread over fewer units, causing the average cost per unit to rise. +. a. Aes, the president may e4pect a minimum price of J%,*, which is the average cost to manufacture one set. 7e might e4pect a price even higher than this to cover a portion of the administrative costs as well. !he brother6in6law probably is thin3ing of cost as including only direct materials, or, at most, direct materials and direct labor. Direct materials alone would be only J+0 per set, and direct materials and direct labor would be only J%8-. b. !he term is opportunity cost. !he full, regular price of a set might be appropriate here, because the company is operating at full capacity, and this is the amount that must be given up $benet forgone& to sell a set to the brother6in6 law. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. ,8 Managerial /ccounting, %*th Cdition %roble& 2-2" $*8 minutes& %. Product Cost Period (Sellin g (ame of the Cost Variabl e Cost i!e d Cost $irect Materia ls $irec t )abo r Manuf- "verhe ad and Admin ) Cost "ppor * tunity Cost Sun ' Cost 9taciIs current salary, J*,D88 per month............ F F ;uilding rent, J,88 per month.............................. F F Clay and glaze, J( per pot.. F F =ages of production wor3ers, JD per pot.......... F F /dvertising, J-88 per month.............................. F F 9ales commission, J+ per pot................................... F F >ent of production e)uipment, J*88 per month.............................. F F Gegal and ling fees, J,88.. F F F >ent of sales oHce, J(,8 per month........................ F F Phone for ta3ing orders, F F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. ,% Managerial /ccounting, %*th Cdition J+8 per month................. #nterest lost on savings account, J%,(88 per year................................. F F 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. ,( Managerial /ccounting, %*th Cdition %roble& 2-2" $continued& (. !he J,88 cost of incorporating the business is not a di"erential cost. Cven though the cost was incurred to start the business, it is a sun3 cost. =hether 9taci produces pottery or stays in her present job, she will have incurred this cost. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( ,* %roble& 2-21 $-8 minutes& %. 9uperior Company 9chedule of Cost of .oods Manufactured <or the Aear Cnded December *% Direct materials: >aw materials inventory, beginning $given&.............................................. J+8,888 /dd: Purchases of raw materials $given&.............................................. (:8,888 >aw materials available for use........... **8,888 Deduct: >aw materials inventory, ending $given&................................... %8,888 >aw materials used in production........ J*(8,88 8 Direct labor............................................ :*,888 S Manufacturing overhead $given&............ (08,888 !otal manufacturing costs $given&.......... -D*,888 /dd: =or3 in process inventory, beginning............................................ +(,888 S 0(,,888 Deduct: =or3 in process inventory, ending $given&..................................... *,,888 Cost of goods manufactured.................. J-:8,88 8 !he cost of goods sold section of the income statement follows: <inished goods inventory, beginning $given&................................................. J,8,888 /dd: Cost of goods manufactured.......... -:8,888 S .oods available for sale $given&............. 0+8,888 Deduct: <inished goods inventory, ending................................................. D8,888 S Cost of goods sold $given&...................... J--8,88 8 S !hese items must be computed by wor3ing bac3wards up through the statements. (. Direct materials: J*(8,888 U +8,888 units V JD.88 per unit. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. ,+ Managerial /ccounting, %*th Cdition Manufacturing overhead: J(08,888 U +8,888 units V J-.0, per unit. *. Direct materials: JD.88 per unit. Manufacturing overhead: J(08,888 U ,8,888 units V J,.+8 per unit. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( ,, %roble& 2-21 'continued( +. !he average cost per unit for manufacturing overhead dropped from J-.0, to J,.+8 because of the increase in production between the two years. ;ecause 4ed costs do not change in total as the activity level changes, the average cost per unit will decrease as the activity level rises. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. ,- Managerial /ccounting, %*th Cdition %roble& 2-22 $*8 minutes& %. / cost that is classied as a period cost will be recognized on the income statement as an e4pense in the current period. / cost that is classied as a product cost will be recognized on the income statement as an e4pense $i.e., cost of goods sold& only when the associated units of product are sold. #f some units are unsold at the end of the period, the costs of those unsold units are treated as assets. !herefore, by reclassifying period costs as product costs, the company is able to carry some costs forward in inventories that would have been treated as current e4penses. (. !he discussion below is divided into two parts?.allantEs actions to postpone e4penditures and the actions to reclassify period costs as product costs. !he decision to postpone e4penditures is )uestionable. #t is one thing to postpone e4penditures due to a cash bind' it is )uite another to postpone e4penditures in order to hit a prot target. Postponing these e4penditures may have the e"ect of ultimately increasing future costs and reducing future prots. #f orders to the companyEs suppliers are changed, it may disrupt the suppliersE operations. !he additional costs may be passed on to .allantEs company and may create ill will and a feeling of mistrust. Postponing maintenance on e)uipment is particularly )uestionable. !he result may be brea3downs, ineHcient andXor unsafe operations, and a shortened life for the machinery. #nterestingly, in a survey of -+: managers reported in Management Accounting, only %(R stated that it is unethical to defer e4penses and thereby manipulate )uarterly earnings. !he proportion who felt it was unethical increased to (+R when it involved annual earnings. /nother +%R said that deferring e4penses is a )uestionable practice when it involved )uarterly reports and *,R said this when annual reports were involved. <inally, +0R said that it is completely ethical to manipulate )uarterly reports in this way and +%R gave the green light for annual reports. $9ee =illiam T. ;runs, Tr. and Lenneth /. Merchant, 1!he Dangerous Morality of Managing Carnings,2 Management Accounting, /ugust %::8, pp. ((6(,& 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( ,0 %roble& 2-22 $continued& .allantEs decision to reclassify period costs is not ethical? assuming that there is no intention of disclosing in the nancial reports this reclassication. 9uch a reclassication would be a violation of the principle of consistency in nancial reporting and is a clear attempt to mislead readers of the nancial reports. /lthough some may argue that the overall e"ect of .allantEs action will be a 1wash2?that is, prots gained in this period will simply be ta3en from the ne4t period?the trend of earnings will be a"ected. 7opefully, the auditors would discover any such attempt to manipulate annual earnings and would refuse to issue an un)ualied opinion due to the lac3 of consistency. 7owever, recent accounting scandals may lead to some s3epticism about how forceful auditors have been in enforcing tight accounting standards. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. ,D Managerial /ccounting, %*th Cdition %roble& 2-24 $-8 minutes& %. Kisic Corporation 9chedule of Cost of .oods Manufactured Direct materials: >aw materials inventory, beginning.............. J (8,888 /dd: Purchases of raw materials................... +D8,888 >aw materials available for use.................... ,88,888 Deduct: >aw materials inventory, ending..... *8,888 >aw materials used in production................. J+08,88 8 Direct labor..................................................... :8,888 Manufacturing overhead................................. *88,888 !otal manufacturing costs............................... D-8,888 /dd: =or3 in process inventory, beginning...... ,8,888 :%8,888 Deduct: =or3 in process inventory, ending..... +8,888 Cost of goods manufactured........................... JD08,88 8 (. a. !o compute the number of units in the nished goods inventory at the end of the year, we must rst compute the number of units sold during the year. !otal sales J%,*88,888 V V (-,888 units sold Wnit selling price J,8 per unit sold Wnits in the nished goods inventory, beginning.................................................... 8 Wnits produced during the year..................... (:,888 Wnits available for sale.................................. (:,888 Wnits sold during the year $above& ................ (-,888 Wnits in the nished goods inventory, ending *,888 b. !he average production cost per unit during the year is: g Cost of oods manufactured JD08,888 V V J*8 per unit Bumber of units produced (:,888 units 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( ,: !hus, the cost of the units in the nished goods inventory at the end of the year is: *,888 units P J*8 per unit V J:8,888. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. -8 Managerial /ccounting, %*th Cdition %roble& 2-24 $continued& *. Kisic Corporation #ncome 9tatement 9ales...................................................... J%,*88,888 Cost of goods sold: <inished goods inventory, beginning.... J 8 /dd: Cost of goods manufactured........ D08,888 .oods available for sale....................... D08,888 <inished goods inventory, ending......... :8,888 0D8,888 .ross margin.......................................... ,(8,888 9elling and administrative e4penses...... *D8,888 Bet operating income............................. J%+8,888 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( -% %roble& 2-25 $+, minutes& Case . Case / Case 0 Case 1 Direct materials................................. J+,,88 J-,888 J,,888 J*,888 Direct labor....................................... :,888 S *,888 0,888 +,888 Manufacturing overhead................... ,,888 +,888 D,888 S :,888 !otal manufacturing costs.................. %D,,88 %*,888 S (8,888 %-,888 S ;eginning wor3 in process inventory. (,,88 (,888 S *,888 +,,88 S Cnding wor3 in process inventory...... $*,888&S $%,888& $+,888& $*,888& Cost of goods manufactured.............. J%D,888 J%+,88 8 J%:,88 8 S J%0,,8 8 9ales................................................. J*8,888 J(%,88 8 J*-,88 8 J+8,88 8 ;eginning nished goods inventory... %,888 (,,88 *,,88 S (,888 Cost of goods manufactured.............. %D,888 %+,888 %:,888 S %0,,88 .oods available for sale.................... %:,888 S %-,,88 S ((,,88 S %:,,88 S Cnding nished goods inventory........ $(,888&S $%,,88& $+,888& $*,,88& Cost of goods sold............................. %0,888 %,,888 S %D,,88 %-,888 S .ross margin..................................... %*,888 -,888 S %0,,88 (+,888 S 9elling and administrative e4penses. $:,888&S $*,,88& $%(,,88&S $%,,888& S Bet operating income........................ J+,888 J(,,88 S J,,888 J:,888 S Missing data in the problem. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. -( Managerial /ccounting, %*th Cdition Case 2-26 $-8 minutes& !he following cost items are needed before a schedule of cost of goods manufactured can be prepared: Materials used in production: Prime cost............................................. J+%8,88 8 Gess direct labor cost............................ %D8,888 Direct materials cost............................. J(*8,88 8 Manufacturing overhead cost: Direct labor cost J%D8,888 V Percentage of conversion cost *8RS V J-88,888 total conversion cost S%88R Q 08R V *8R. Conversion cost.................................... J-88,888 Gess direct labor cost............................ %D8,888 Manufacturing overhead cost................ J+(8,888 Cost of goods manufactured: .oods available for sale........................ JD%8,888 Gess nished goods inventory, beginning........................................... +,,888 Cost of goods manufactured................. J0-,,888 !he easiest way to proceed from this point is to place all 3nown amounts in a partially completed schedule of cost of goods manufactured and a partially completed income statement. !hen ll in the missing amounts by analysis of the available data. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( -* Case 2-26 $continued& Direct materials: >aw materials inventory, beginning................ J %D,888 /dd: Purchases of raw materials..................... (:8,88 8 >aw materials available for use...................... *8D,888 Deduct: >aw materials inventory, ending........ / >aw materials used in production $see above&.......................................................... (*8,888 Direct labor cost................................................ %D8,88 8 Manufacturing overhead cost $see above&......... +(8,88 8 !otal manufacturing costs.................................. D*8,888 /dd: =or3 in process inventory, beginning........ -,,88 8 D:,,888 Deduct: =or3 in process inventory, ending........ ; Cost of goods manufactured $see above&.......... J0-,,88 8 !herefore, 1/2 $>aw materials inventory, ending& is J0D,888' and 1;2 $=or3 in process inventory, ending& is J%*8,888. 9ales.......................................................... J%,(88,88 8 Cost of goods sold: <inished goods inventory, beginning........ J +,,888 /dd: Cost of goods manufactured $see above&................................................... 0-,,888 .oods available for sale........................... D%8,888 Deduct: <inished goods inventory, ending................................................... C 0(8,88 8 .ross margin.............................................. J +D8,88 8 SJ%,(88,888 P $%88R Q +8R& V J0(8,888. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. -+ Managerial /ccounting, %*th Cdition !herefore, 1C2 $<inished goods inventory, ending& is J:8,888. !he procedure outlined above is just one way in which the solution to the case can be approached. 9ome may wish to start at the bottom of the income statement $with gross margin& and wor3 upwards from that point. /lso, the solution can be obtained by use of !6accounts. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( -, Case 2-27 $-8 minutes& %. Bo distinction has been made between period e4penses and product costs on the income statement led by the companyEs accountant. Product costs $e.g., direct materials, direct labor, and manufacturing overhead& should be assigned to inventory accounts and @ow through to the income statement as cost of goods sold only when nished products are sold. ;ecause there were ending inventories, some of the product costs should appear on the balance sheet as assets rather than on the income statement as e4penses. (. 9olar !echnology, #nc. 9chedule of Cost of .oods Manufactured <or the Yuarter Cnded March *% Direct materials: >aw materials inventory, beginning....... J 8 /dd: Purchases of raw materials............ *-8,888 >aw materials available for use............. *-8,888 Deduct: >aw materials inventory, ending................................................. %8,888 >aw materials used in production.......... J*,8,888 Direct labor.............................................. 08,888 Manufacturing overhead.......................... +%8,888 !otal manufacturing costs........................ D*8,888 /dd: =or3 in process inventory, beginning.............................................. 8 D*8,888 Deduct: =or3 in process inventory, ending................................................... ,8,888 Cost of goods manufactured.................... J0D8,888 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. -- Managerial /ccounting, %*th Cdition Case 2-27 $continued& *. ;efore an income statement can be prepared, the cost of the D,888 batteries in the ending nished goods inventory must be determined. /ltogether, the company produced +8,888 batteries during the )uarter' thus, the production cost per battery was: Cost of goods manufactured J0D8,888 V VJ%:.,8 per unit ;atteries produced during the )uarter +8,888 units ;ecause D,888 batteries $+8,888 Q *(,888 V D,888& were in the nished goods inventory at the end of the )uarter, the total cost of this inventory was: D,888 units P J%:.,8 per unit V J%,-,888. =ith this and other data from the case, the companyEs income statement for the )uarter can be prepared as follows: 9olar !echnology, #nc. #ncome 9tatement <or the Yuarter Cnded March *% 9ales $*(,888 batteries&....................... J:-8,88 8 Cost of goods sold: <inished goods inventory, beginning. . J 8 /dd: Cost of goods manufactured ...... 0D8,88 8 .oods available for sale..................... 0D8,888 Deduct: <inished goods inventory, ending............................................. %,-,88 8 -(+,888 .ross margin........................................ **-,888 9elling and administrative e4penses..... (:8,888 Bet operating income........................... J+-,888 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( -0 Case 2-27 $continued& +. Bo, the insurance company probably does not owe 9olar !echnology J((-,888. !he 3ey )uestion is how 1cost2 was dened in the insurance contract. #t is most li3ely that the insurance contract limits reimbursement for losses to those costs that would normally be considered product costs?in other words, direct materials, direct labor, and manufacturing overhead. !he J((-,888 is overstated because it includes elements of selling and administrative e4penses as well as product costs. !he J((-,888 also does not recognize that some costs incurred during the period are in the ending >aw Materials and =or3 in Process inventory accounts, as e4plained in part $%& above. !he insurance companyEs liability is probably just J%,-,888, which is the amount of cost associated with the ending <inished .oods inventory as shown in part $*& above. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. -D Managerial /ccounting, %*th Cdition )esearch and Application 2-2 %. Dell succeeds because of its operational e4cellence customer value proposition. Page % of the %86L $under the heading ;usiness 9trategy& lists the 3ey tenets of DellEs business strategy. !he rst three tenets focus on operational e4cellence. !he rst tenet discusses the direct business model, which 1eliminates wholesale and retail dealers that add unnecessary time and cost or diminish DellEs understanding of customer e4pectations.2 !he second tenet is DellEs build6to6order manufacturing process that 1enables Dell to turn over inventory every four days on average, and reduce inventory levels.2 !he third tenet is 1DellEs relentless focus on reducing its costs Zwhich[ allows it to consistently provide customers with superior value.2 /lso, the rst bullet point on Page D of the %86L says 1DellEs success is based on its ability to protably o"er its products at a lower price than its competitors.2 (. Dell faces numerous business ris3s as described in pages 06%8 of the %86L. 9tudents may mention other ris3s beyond those specically mentioned in the %86L. 7ere are four ris3s faced by Dell with suggested control activities: >is3: Prots may fall short if DellEs product, customer, and geographic mi4 is substantially di"erent than anticipated. Control activities: Maintain a budgeting program that forecasts sales by product line, customer segment, and geographic region. =hile the budget is not going to be perfectly accurate, a reasonably accurate forecast would help Dell manage investor e4pectations. >is3: Disruptions in component availability from suppliers could reduce DellEs ability to meet customer orders. !his is of particular concern for Dell because its lean production practices result in minimal inventory levels and because Dell relies on several single6sourced suppliers. Control activities: Develop a plan with single6sourced suppliers to ensure that they can produce the necessary components at more than one plant location and to ensure that each location has more than one means of delivering the parts to DellEs assembly facilities. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( -: )esearch and Application 2-2 $continued& >is3: #nfrastructure failures $e.g., computer viruses, intentional disruptions of #! systems and website outages& may threaten DellEs ability to boo3 or process orders, manufacture products, or ship products in a timely manner. Control activities: #nstall controls such as physical security, data storage bac3up sites, rewalls and passwords that protect technology assets. >is3: Gosing government contracts could adversely a"ect the companyEs revenues. Control activities: Develop a formal review process, supervised by legal counsel, to ensure that Dell complies with governmental regulations. *. Pages *+6*, of DellEs <orm %86L contain the audit report issued by PricewaterhouseCoopers $P=C&. !he audit report ma3es reference to the role of the Public Company /ccounting Mversight ;oard $PC/M;& that was created by the 9arbanes6 M4ley /ct of (88( $9MF&. !he audit report also contains two opinions dealing with internal control. !he rst opinion relates to managementEs assessment of its internal controls. !he second opinion relates to the auditorEs assessment of the e"ectiveness of DellEs internal controls. !hese two opinions were re)uired by 9MF at the time of this %86L ling. Page ,: includes managementEs report on internal control over nancial reporting. !his report includes a reference to 9MF. <inally, pages 0-60D contain signed certications from the CCM $Levin >ollins& and the C<M $Tames 9chneider&. 9MF re)uires the CCM and C<M to certify that the %86L and its accompanying nancial statements do not contain any untrue statements and are fairly stated in all material respects. +. ;ased solely on the inventories number on the balance sheet, students cannot determine the answer to this )uestion. <urthermore, given that DellEs total amount of inventories is so small, the company does not report the brea3 down of its inventories between raw materials, wor36in6process, and nished goods. Bonetheless, students should be able to readily ascertain that Dell is a manufacturer. Page ( of the %86L says 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 08 Managerial /ccounting, %*th Cdition 1Dell designs, develops, manufactures, mar3ets, sells, and supports a wide range of products that are customized to customer re)uirements.2 Page , states 1DellEs manufacturing process consists of assembly, 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( 0% )esearch and Application 2-2 $continued& software installation, functional testing, and )uality control.2 Page 0 states that Dell has manufacturing facilities in /ustin, !e4as, Cldorado do 9ul, ;razil, Bashville and Gebanon, !ennessee, Gimeric3, #reland, Penang, Malaysia, and Fiamen, China. ,. C4amples of direct inventoriable costs include the component parts that go into ma3ing DellEs main product families, which include enterprise systems, client systems, printing and imaging systems, software, and peripherals. !he 1touch2 laborers that wor3 in each of the aforementioned plants would also be a direct inventoriable cost. C4amples of indirect inventoriable costs include the costs to sustain the manufacturing plants that cannot be conveniently traced to specic products. !he utility bills, insurance premiums, plant management salaries, and e)uipment6related costs, etc. that are incurred to sustain plant operations would all be indirect inventoriable costs. !he gross margin $in dollars& has steadily increased and the gross margin as a percent of sales has remained fairly steady for two reasons. <irst, the cost of goods sold consists largely of variable costs $e.g., direct materials and direct labor costs&. /s sales grow, these variable costs increase in total, but as a percentage of sales, they remain fairly stable over time. 9ome students may as3 about the 4ed overhead costs that are incurred to run the plants. 9preading 4ed overhead costs over a higher volume of sales would increase the gross margin percentage. 7owever, the 4ed overhead costs are relatively small in relation to the dollar value of raw materials that @ows through DellEs plants each year. 9econd, pages ((6(* mention that Dell plans to reduce product costs in four areas: manufacturing costs, warranty costs, design costs, and overhead costs. !he company says that its 1general practice is to aggressively pass on declines in costs to its customers in order to add customer value while increasing global mar3et share.2 #n other words, rather than holding price 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 0( Managerial /ccounting, %*th Cdition constant when costs decline, thereby increasing the gross margin percentage, the company lowers prices. Wsing terminology that will be dened in Chapter %(, Dell grows prots by increasing turnover while holding margin reasonably constant. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( 0* )esearch and Application 2-2 $continued& -. !he inventory balance on Tanuary (D, (88, is J+,: million. /s discussed on Page ( of the %86L, the balance is low because of DellEs build6to6order $lean& manufacturing process that enables the company to 1turn over inventory every four days on average, and reduce inventory levels.2 =hen units are built to order rather than built to stoc3, it not only reduces nished goods inventory, it reduces wor36in6process inventory because large batches of partially completed goods do not accumulate in front of wor3stations or in temporary storage areas. #t also reduces raw materials inventory because suppliers provide just6 in6time delivery of the )uantities needed to satisfy customer orders. /s stated on page (, this o"ers Dell a competitive advantage because it allows the company to 1rapidly introduce the latest relevant technology more )uic3ly than companies with slow6 moving, indirect distribution channels, and to rapidly pass on component cost savings directly to customers.2 !he negative cash conversion cycle is a good sign for Dell. /lthough this term is not dened in the chapter, students can ascertain from page (0 of the %86L that it is computed as follows: days sales outstanding \ days of supply in inventory Q days in accounts payable. /s stated on pages (-6(0, the negative cash conversion cycle means that Dell is 1collecting amounts due from customers before paying vendors, thus allowing the company to generate annual cash @ows from operating activities that typically e4ceed net income.2 0. /s shown on page (*, DellEs two main categories of operating e4penses are selling, general, and administrative $J+,(:D million& and research, development, and engineering $J+-* million&. Page +( e4plains that DellEs selling, general, and administrative e4penses 1include items such as sales commissions, mar3eting and advertising costs, and contractor services.2 #t also mentions that advertising costs totaled J,0- million in scal (88,. .eneral and administrative costs include 1<inance, Gegal, 7uman >esources and information technology support.2 DellEs website development costs are included in 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 0+ Managerial /ccounting, %*th Cdition >esearch, Development, and Cngineering costs along with payroll, infrastructure, and administrative costs related directly to research and development. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( 0, )esearch and Application 2-2 $continued& <or nancial reporting purposes, costs are classied as either product costs or period costs. Product costs include those costs involved with ma3ing or ac)uiring the product. Period costs include all costs that are not product costs. !he e4penses mentioned in the paragraph above are not involved with ma3ing the product so they are e4pensed as incurred. =hen the focus changes from e4ternal reporting to internal decision ma3ing, the need to comply with .//P disappears. 9o for e4ample, on page +( it says 1>esearch, development, and engineering costs are e4pensed as incurred, in accordance with 9</9 Bo. (, Accounting for 2esearch and $evelopment Costs.2 7owever, for internal reporting purposes it may be entirely appropriate to assign some research and development costs to particular products. D. 7ere are four e4amples of cost objects for Dell including one direct and one indirect cost for each cost object. / product line, such as a particular type of server. / direct cost would be the cost of raw material component parts and an indirect cost would be factory utility costs. / particular product family, such as enterprise systems, which according to page ( includes servers, storage, wor3stations, and networ3ing products. / direct cost would be the component parts used to ma3e these products and an indirect cost would be factory insurance costs that are assigned to these products. / particular geographic region, such as /sia Pacic6Tapan, which is mentioned on page ,,. / direct cost would be the salary of =illiam /melio, 9enior Kice6President, /sia Pacic6 Tapan $see page %%& and an indirect cost would be the salary of Martin T. .arvin, 9enior Kice President, =orldwide Procurement and .lobal Customer C4perience $see page %%&, given that he oversees worldwide procurement operations. / particular customer segment, such as the government segment as mentioned on page +. / direct cost would be a sales representative who is dedicated to serving the government segment and an indirect cost would be research 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 0- Managerial /ccounting, %*th Cdition and development costs that are e4pended on products purchased by more than one customer segment. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, Chapter ( 00 Appendi$ 2A *urther Classi+cation o, -abor Costs #$ercise 2A-1 $%8 minutes& Direct labor $*+ hours P J%, per hour&.... J,%8 Manufacturing overhead $idle time: - hours P J%, per hour&..... :8 !otal wages earned................................. J-88 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 0D Managerial /ccounting, %*th Cdition #$ercise 2A-2 $%8 minutes& Direct labor $+, hours P J%+ per hour&.... J-*8 Manufacturing overhead $overtime: , hours P J0 per hour&....... *, !otal wages earned................................. J--, 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, /ppendi4 (/ 0: #$ercise 2A-3 $%, minutes& %. Bo. #t appears that the overtime spent completing the job was simply a matter of how the job happened to be scheduled. Wnder these circumstances, an overtime premium probably should not be charged to a customer whose job happens to fall at the end of the dayEs schedule. (. Direct labor $: hours P J%+ per hour&.......... J%(- .eneral overhead $% hour P J0 per hour&. . . 0 !otal cost..................................................... J%** *. / charge for an overtime premium might be justied if the customer re)uested a 1rush2 order that caused the overtime. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. D8 Managerial /ccounting, %*th Cdition #$ercise 2A-4 $%, minutes& %. Direct labor $*% hours P J%+ per hour& J+*+ Manufacturing overhead $idle time: : hours P J%+ per hour&... %(- !otal cost............................................. J,-8 (. Direct labor $+D hours P J%+ per hour& J-0( Manufacturing overhead $overtime: D hours P J0 per hour&.... ,- !otal cost............................................. J0(D *. / company could treat the cost of fringe benets relating to direct labor wor3ers as part of manufacturing overhead. !his approach spreads the cost of such fringe benets uniformly over all units of output. /lternatively, the company could treat the cost of fringe benets relating to direct labor wor3ers as additional direct labor cost. !his latter approach charges the costs of fringe benets to specic jobs rather than to all units of output. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, /ppendi4 (/ D% %roble& 2A-5 $*8 minutes& %. !otal wages for the wee3: >egular time $+8 hours P J(8 per hour&.......... JD88 Mvertime $- hours P J*8 per hour&.................. %D8 !otal wages........................................................ J:D8 /llocation of total wages: Direct labor $+- hours P J(8 per hour&............ J:(8 Manufacturing overhead $Mvertime: - hours P J%8 per hour&.............. -8 !otal wages........................................................ J:D8 (. !otal wages for the wee3: >egular time $+8 hours P J(8 per hour&.......... J D88 Mvertime $D hours P J*8 per hour&.................. (+8 !otal wages...................................................... J%,8+8 /llocation of total wages: Direct labor $+, hours P J(8 per hour&............ J :88 Manufacturing overhead: $#dle time: * hours P J(8 per hour&............... J-8 $Mvertime: D hours P J%8 per hour&.............. D8 %+8 !otal wages...................................................... J%,8+8 *. !otal wages and fringe benets for the wee3: >egular time $+8 hours P J(8 per hour&.......... J D88 Mvertime $%8 hours P J*8 per hour&................ *88 <ringe benets $,8 hours P J- per hour&......... *88 !otal wages and fringe benets........................ J%,+88 /llocation of wages and fringe benets: Direct labor $+D hours P J(8 per hour&............ J :-8 Manufacturing overhead: $#dle time: ( hours P J(8 per hour&............... J +8 $Mvertime: %8 hours P J%8 per hour&............ %88 $<ringe benets: ,8 hours P J- per hour&...... *88 ++8 !otal wages and fringe benets........................ J%,+88 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. D( Managerial /ccounting, %*th Cdition %roble& 2A-5 $continued& +. /llocation of wages and fringe benets: Direct labor: =age cost $+D hours P J(8 per hour&............ J:-8 <ringe benets $+D hours P J- per hour&....... (DD J%,(+D Manufacturing overhead: $#dle time: ( hours P J(8 per hour&............... +8 $Mvertime: %8 hours P J%8 per hour&............ %88 $<ringe benets: ( hours P J- per hour&........ %( %,( !otal wages and fringe benets........................ J%,+88 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, /ppendi4 (/ D* Appendi$ 2. Cost o, Qualit/ #$ercise 2.-1 $%8 minutes& %. Yuality of conformance (. Yuality costs *. Yuality circles +. Prevention costs, appraisal costs ,. #nternal failure costs, e4ternal failure costs -. C4ternal failure costs 0. /ppraisal costs D. Prevention costs :. #nternal failure costs %8. C4ternal failure costs %%. Prevention costs, appraisal costs %(. Yuality cost report 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. D+ Managerial /ccounting, %*th Cdition #$ercise 2.-2 $%, minutes& %. Preventio n Cost Appraisa l Cost %nternal ailure Cost 3!ternal ailure Cost a. Product testing................ F b. Product recalls................ F c. >ewor3 labor and overhead...................... F d. Yuality circles................. F e. Downtime caused by defects......................... F f. Cost of eld servicing...... F g. #nspection of goods......... F h. Yuality engineering........ F i. =arranty repairs............. F j. 9tatistical process control.......................... F 3. Bet cost of scrap............. F l. Depreciation of test e)uipment.................... F m. >eturns and allowances arising from poor )uality.......................... F n. Disposal of defective products....................... F o. !echnical support to suppliers....................... F p. 9ystems development..... F ). =arranty replacements... F r. <ield testing at customer site............................... F s. Product design................. F (. Prevention costs and appraisal costs are incurred in an e"ort to 3eep poor )uality of conformance from occurring. #nternal and e4ternal failure costs are incurred because poor )uality of conformance has occurred. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, /ppendi4 (; D, %roble& 2.-3 $-8 minutes& %. <lore4 Company Yuality Cost >eport )ast 4ear +his 4ear Amount (in thousand s) Percen t of Sales Amount (in thousand s) Percent of Sales Prevention costs: Yuality engineering..... J +(8 8.,- J ,08 8.0- 9ystems development. +D8 8.-+ 0,8 %.88 9tatistical process control....................... 8 8.88 %D8 8.(+ !otal prevention costs..... :88 %.(8 %,,88 (.88 /ppraisal costs #nspection.................... 0,8 %.88 :88 %.(8 Product testing............. D%8 %.8D %,(88 %.-8 9upplies used in testing....................... *8 8.8+ -8 8.8D Depreciation of testing e)uipment..... (%8 8.(D (+8 8.*( !otal appraisal costs..... %,D88 (.+8 (,+88 *.(8 #nternal failure costs: Bet cost of scrap.......... -*8 8.D+ %,%(, %.,8 >ewor3 labor................ %,8,8 %.+8 %,,88 (.88 Disposal of defective products.................... 0(8 8.:- :0, %.*8 !otal internal failure costs............................ (,+88 *.(8 *,-88 +.D8 C4ternal failure costs: Cost of eld servicing... %,(88 %.-8 :88 %.(8 =arranty repairs.......... *,-88 +.D8 %,8,8 %.+8 Product recalls............. (,%88 (.D8 0,8 %.88 !otal e4ternal failure costs............................ -,:88 :.(8 (,088 *.-8 !otal )uality cost............ J%(,888 %-.88 J%8,(88 %*.-8 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. D- Managerial /ccounting, %*th Cdition %roble& 2.-3 $continued& (. $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 Last Year This Year Q u a l i t y
C o s t s
( i n
t h o u s a n d s ) External Failure Internal Failure Appraisal Prevention 0 2 4 6 8 10 12 14 16 18 Last Year This Year Q u a l i t y
C o s t s
a s
a
P e r c e n t a g e
o f
S a l e s External Failure Internal Failure Appraisal Prevention 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, /ppendi4 (; D0 %roble& 2.-3 $continued& *. !he overall impact of the companyEs increased emphasis on )uality over the past year has been positive in that total )uality costs have decreased from %-R of sales to %*.-R of sales. Despite this improvement, the company still has a poor distribution of )uality costs. !he bul3 of the )uality costs in both years is traceable to internal and e4ternal failure, rather than to prevention and appraisal. /lthough the distribution of these costs is poor, the trend this year is toward more prevention and appraisal as the company has given more emphasis on )uality. Probably due to the increased spending on prevention and appraisal activities during the past year, internal failure costs have increased by one half, going from J(.+ million to J*.- million. !he reason internal failure costs have gone up is that, through increased appraisal activity, defects are being caught and corrected before products are shipped to customers. !hus, the company is incurring more cost for scrap, rewor3, and so forth, but it is saving huge amounts in eld servicing, warranty repairs, and product recalls. C4ternal failure costs have fallen sharply, decreasing from J-.: million last year to just J(.0 million this year. #f the company continues its emphasis on prevention and appraisal?and particularly on prevention?its total )uality costs should continue to decrease in future years. /lthough internal failure costs are increasing for the moment, these costs should decrease in time as better )uality is designed into products. /ppraisal costs should also decrease as the need for inspection, testing, and so forth decreases as a result of better engineering and tighter process control. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. DD Managerial /ccounting, %*th Cdition %roble& 2.-4 $-8 minutes& %. /n analysis of the companyEs )uality cost report is presented below: )ast 4ear +his 4ear Amoun t Percent5 Amoun t Percent5 Prevention costs: Machine maintenance......... J08 %.0 %8.+ J %(8 (., (8.* !raining suppliers..... 8 8.8 8.8 %8 8.( %.0 Yuality circles.......... 8 8.8 8.8 (8 8.+ *.+ !otal prevention costs........................ 08 %.0 %8.+ %,8 *.% (,.+ /ppraisal costs: #ncoming inspection.............. (8 8., *.8 +8 8.D -.D <inal testing............. D8 %.: %%.: :8 %.: %,.* !otal appraisal costs. . . %88 (.+ %+.: %*8 (.0 ((.8 #nternal failure costs: >ewor3..................... ,8 %.( 0., %*8 (.0 ((.8 9crap....................... +8 %.8 -.8 08 %., %%.: !otal internal failure costs........................ :8 (.% %*.+ (88 +.( **.: C4ternal failure costs: =arranty repairs...... :8 (.% %*.+ *8 8.- ,.% Customer returns..... *(8 0.- +0.D D8 %.0 %*.- !otal e4ternal failure costs........................ +%8 :.D -%.( %%8 (.* %D.- !otal )uality cost........ J-08 %-. 8 %88. 8 J ,:8 %(. * %88. 8 !otal production cost. . J+,(8 8 J+,D8 8 S Percentage gures may not add down due to rounding. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, /ppendi4 (; D: %roble& 2.-4 $continued& <rom the above analysis it would appear that Mercury, #nc.Es program has been successful. !otal )uality costs have declined from %-.8R to %(.*R as a percentage of total production cost. #n dollar amount, total )uality costs went from J-08,888 last year to J,:8,888 this year. C4ternal failure costs, those costs signaling customer dissatisfaction, have declined from :.DR of total production costs to (.*R. !hese declines in warranty repairs and customer returns should result in increased sales in the future. /ppraisal costs have increased from (.+R to (.0R of total production cost. #nternal failure costs have increased from (.%R to +.(R of production costs. !his increase has probably resulted from the increase in appraisal activities. Defective units are now being spotted more fre)uently before they are shipped to customers. Prevention costs have increased from %.0R of total production cost to *.%R and from %8.+R of total )uality costs to (,.+R. !he JD8,888 increase is more than o"set by decreases in other )uality costs. (. !he initial e"ect of emphasizing prevention and appraisal was to reduce e4ternal failure costs and increase internal failure costs. !he increase in appraisal activities resulted in catching more defective units before they were shipped to customers. /s a conse)uence, rewor3 and scrap costs increased. #n the future, an increased emphasis on prevention should result in a decrease in internal failure costs. /nd as defect rates are reduced, resources devoted to appraisal can be reduced. *. !o measure the cost of not implementing the )uality program, management could assume that sales and mar3et share would continue to decline and then calculate the lost prot. Mr, management might assume that the company will have to cut 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. :8 Managerial /ccounting, %*th Cdition its prices to hang on to its mar3et share. !he impact on prots of lowering prices could be estimated. 5 !he Mc.raw67ill Companies, #nc., (8%8. /ll rights reserved. 9olutions Manual, /ppendi4 (; :%