FN3140 - Unit 2 - P2-49A

Introduction

to Management Accounting

Solutions Manual

Short Exercises (5-10 min.) S 2-1 S2-1 Indentify type of company from balance sheets (Learning Objective 1)

Solution:

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Short Exercises (5-10 min.) S 2-1 S2-1 Indentify type of company from balance sheets (Learning Objective 1) The current asset sections of the balance sheets of three companies follow. Which company isa service company? Which is a merchandiser? Which is a manufacturer? How can you tell? Solution:

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a b c d e f g h i j k

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(10 min.) S 2-2 S2-2 Identify types of companies and inventories (Learning Objective 1) Fill in the blanks with one of the following terms: manufacturing, service, merchandising,retailer(s), wholesaler(s), raw materials inventory, merchandise inventory, work in processinventory, finished goods inventory, freight-in, the cost of merchandise. Solution:

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(5-10 min.) S 2-3 S2-3 Label value chain functions (Learning Objective 2) List the correct value chain element for each of the six business functions described below. a. Delivery of products and services b. Detailed engineering of products and services and the processes for producing them c. Promotion and advertising of products or services d. Investigating new or improved products or services and the processes for producing them e. Support provided to customers after the sale f. Resources used to make a product or obtain finished merchandise Solution:

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(5-10 min.) S 2-4 S2-4 Classify costs by value chain function (Learning Objective 2) Classify each of Hewlett-Packard’s (HP’s) costs as one of the six business functions in the value chain. a. Depreciation on Roseville, California, plant b. Costs of a customer support center Web site c. Transportation costs to deliver laser printers to retailers such as Best Buy d. Depreciation on research lab e. Cost of a prime-time TV ad featuring the new HP logo Solution:

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(10 min.) S 2-5 S2-5 Classify costs as direct or indirect (Learning Objective 3) Classify the following as direct or indirect costs with respect to a local Blockbuster store(the store is the cost object). In addition, state whether Blockbuster would trace or allocate these costs to the store. Solution:

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

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(5-10 min.) S 2-6 S2-6 Classify inventoriable product costs and period costs (Learning Objective 4) Classify each of Georgia-Pacific’s costs as either inventoriable product costs or period costs. Georgia-Pacific is a manufacturer of paper, lumber, and building material products. Solution:

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S2-7 Classify a manufacturer’s costs (Learning Objective 4) Classify each of the following costs as a period cost or an inventoriable product cost. If youclassify the cost as an inventoriable product cost, further classify it as direct material (DM),direct labor (DL), or manufacturing overhead (MOH). Solution:

COST a. Depreciation on automated production equipment b. Telephone bills relating to customer service call center c. Wages and benefits paid to assembly-line workers in the manufacturing plant d. Repairs and maintenance on factory equipment e. Lease payment on administrative headquarters f. Salaries paid to quality control inspectors in the plant

Period Cost or Inventoriable Product Cost?

g. Property insurance – 40% of building is used for sales and administration; 60% of building is used for manufacturing h. Standard packaging materials used to package individual units of product for sale (e.g ., cereal boxes in which cereal is packaged)

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(5 -10 min.) S 2-7

entoriable product cost. If classify it as direct material

If an Inventoriable Product Cost: Is it DM, DL, or MOH?

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(5 -10 min.) S2-8 S2-8 Classify costs incurred by a dairy processing company (LO 4) Each of the following costs pertains to DairyPlains, a dairy processing company. Classify each of the company’s costs as a period cost or an inventoriable product cost. Further classify inventoriable product costs as direct material (DM), direct labor (DL), or manufacturing overhead (MOH).

Solution:

COST 1. Cost of milk purchased from dairy farmers

Period Cost or Inventoriable Product Cost?

If an Inventoriable Product Cost: Is it DM, DL, or MOH?

2. Lubricants used in running bottling machines 3. Depreciation on refrigerated trucks used to collect raw milk from dairy farms 4. Property tax on dairy processing plant 5. Television advertisements for DairyPlains’ products 6. Gasoline used to operate refrigerated trucks used to deliver finished dairy products to grocery stores 7. Company president’s annual bonus 8. Plastic gallon containers in which milk is packaged 9. Depreciation on marketing department’s computers 10. Wages and salaries paid to machine operators at dairy processing plant 11. Research and Development on improving milk pasteurization process

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5 (min) S2-9 S2-9 Determine total manufacturing overhead (Learning Objective 4) Snap’s manufactures disposable cameras. Suppose the company’s March records includethe items described below. What is Snap’s total manufacturing overhead cost in March? Solution: Snap’s Total Manufacturing Overhead Computation Manufacturing overhead: Glue for camera frames* Plant depreciation expense Plant supervisor’s salary Plant janitor’s salary Oil for manufacturing equipment Total manufacturing overhead

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(5 -10 min.) S2-10 S2-10 Compute Cost of Goods Sold for a merchandiser (LO 5) Given the following information for Circuits Plus, an electronics e-tailer, compute the cost of goods sold. Solution: Circuits Plus Cost of Goods Sold Computation Cost of goods sold: Beginning inventory Purchases Import duties Freight-in Cost of goods available for sale Ending inventory Cost of goods sold

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(5 min) S2-11 S2-11 Prepare a retailer’s income statement (Learning Objective 5) Salon Secrets is a retail chain specializing in salon-quality hair care products. During theyear, Salon Secrets had sales of $38,230,000. The company began the year with$3,270,000 of merchandise inventory and ended the year with $3,920,000 of inventory.During the year, Salon Secrets purchased $23,450,000 of merchandise inventory. The com-pany’s selling, general, and administrative expenses totaled $6,115,000 for the year.Prepare Salon Secrets’ income statement for the year. Solution: Salon Secrets Income Statement Sales revenue Cost of goods sold: Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses Operating income

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(5 min) S2-12 S2-12 Calculate direct materials used (Learning Objective 5) You are a new accounting intern at Sunny’s Bikes. Your boss gives you the following information and asks you to compute the cost of direct materials used (assume that the company’s raw materials inventory contains only direct materials). Solution: Sunny’s Bikes Computation of Direct Materials Used Direct materials used: Beginning raw materials inventory Purchases of direct materials Import duties Freight-in Direct materials available for use Ending raw materials inventory Direct materials used

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(5 min) S2-12

ou the following inforsume that the com-

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(5 min) S2-13 S2-13 Compute Cost of Goods Manufactured (Learning Objective 5) Smith Manufacturing found the following information in its accounting records: $524,000of direct materials used, $223,000 of direct labor, and $742,000 of manufacturing over-head. The Work in Process Inventory account had a beginning balance of $76,000 and anending balance of $85,000. Compute the company’s Cost of Goods Manufactured. Solution: Smith Manufacturing Schedule of Cost of Goods Manufactured Beginning work in process inventory Add: Direct materials used Direct labor Manufacturing overhead Total manufacturing costs incurred during the period Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

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(10 min) S2-14 S2-14 Consider relevant information (Learning Objective 6) You have been offered an entry-level marketing position at two highly respectable firms: onein Los Angeles, California, and one in Sioux Falls, South Dakota. What quantitative andqualitative information might be relevant to your decision? What characteristics about thisinformation make it relevant? Solution:

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(10 min) S2-15 S2-15 Classify costs as fixed or variable (Learning Objective 7) Classify each of the following personal expenses as either fixed or variable. In some cases,your answer may depend on specific circumstances. If so, briefly explain your answer. a. Apartment rental b. Television cable service c. Cost of groceries d. Water and sewer bill e. Cell phone bill f. Health club dues g. Bus fare Solution: a) b) c) d) e) f) g)

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Exercises (Group A) (10 min) E2-16 E2-16A Identify types of companies and their inventories (Learning Objective 1 Complete the following statements with one of the terms listed here. You may use a term more than once, and some terms may not be used at all. Solution: a. b. c. d. e. f. g.

h. i.

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Objective 1

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E2-17A Classify costs along the value chain for a retailer (Learning Objective 2) Suppose Radio Shack incurred the following costs at its Charleston, South Carolina, store:

Requirements 1. Use the following format to classify each cost according to its place in the value chain. 2. Compute the total costs for each value chain category. 3. How much are the total inventoriable product costs?

Solution: Reqs. 1 and 2

Radio Shack Cost Classification R&D

Design

Purchases

Marketing

Research on selling satellite radio service Purchases of merchandise Rearranging store layout Newspaper advertisements Depreciation expense on delivery trucks Payment to consultant for advice on location of new store Freight-in Salespersons’ salaries Customer complaint department Total

Req. 3

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(10-15 min) E2-17A

arning Objective 2)

outh Carolina, store:

n the value chain.

Distribution

Customer Service

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(15 min) E2-18A E2-18A Classify costs along the value chain for a manufacturer (LO 2,3) Suppose the cell phone manufacturer Samsung Electronics provides the following informa-tion for its costs last month (in hundreds of thousands): Solution: Reqs. 1 and 2 Samsung Electronics Cost Classification

R&D

Production Direct Direct Mfg Design Material Labor O'head

Mktg

Salaries of telephone salespeople Depreciation on plant and equipment Exterior case for phone Scientists’ salaries Delivery expense Transmitters Rearrange production process Assembly-line workers’ wages Technical support hotline 1-800 (toll-free) line for customer orders Total costs

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Manufacturing overhead Total inventoriable product cost

Req. 4 The total prime cost is: Direct materials Direct labor

Req. 5 The total conversion cost is: Direct labor Manufacturing overhead

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(15 min) E2-18A

Distribu Cust tion Service

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(5-10 min) E2-19A E2-19A Classify costs as direct or indirect (Learning Objective 3) Classify each of the following costs as a direct cost or an indirect cost assuming the cost object is the Produce Department (fruits and vegetables) of a local grocery store. Solution: Cost

Direct or Indirect cost?

a. Produce manager’s salary b. Cost of the produce c. Store utilities d. Bags and twist ties provided to customers in the produce department for packaging fruits and vegetables. e. Depreciation expense on refrigerated produce display shelves f. Cost of shopping carts and baskets g. Wages of check-out clerks h. Cost of grocery store’s advertisement flyer placed in the weekly newspaper i. Store manager’s salary

j. Cost of equipment used to peel and core pineapples at the store k. Free grocery delivery service provided to senior citizens l. Depreciation on self-check-out machines

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min) E2-19A

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(10 min) E2-20A E2-20A Define cost terms (Learning Objectives 3 & 4) Complete the following statements with one of the terms listed here. You may use a termmore than once, and some terms may not be used at all. Solution: a. b. c. d. e.

f. g. h. i. j. k. l.

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(15-20 min) E2-20A E2-21A Classify and calculate a manufacturer’s costs (Learning Objectives 3 & 4) 1. If the cost object is an airplane, classify each cost as one of the following: direct material (DM), direct labor (DL), indirect labor (IL), indirect materials (IM), other manufacturing overhead (other MOH), or period cost. (Hint: Set up a column for each type of cost.) What is the total for each type of cost? 2. Calculate total manufacturing overhead costs. 3. Calculate total inventoriable product costs. 4. Calculate total prime costs. 5. Calculate total conversion costs. 6. Calculate total period costs.

Solution: Req. 1 DM a. b.

Airplane seats Depreciation on administrative offices

c. d. e.

Assembly workers’ wages Plant utilities Production supervisors’ salaries

f.

Jet engines

g. h. i.

j. k. l. m.

DL

IM

IL

Machine lubricants Depreciation on forklifts Property tax on corporate marketing offices Cost of warranty repairs Factory janitors’ wages Cost of designing new plant layout Machine operators’ health insurance TOTAL

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Total manufacturing overhead costs

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=

IM + IL +

Other MOH

+ MOH

=

Req. 3

Total inventoriable product costs

= =

DM + DL

Req. 4

Total prime costs

=

DM + DL

Req. 5

Total conversion costs

=

DL + MOH

Req. 6

Total period costs

=

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Objectives 3 & 4)

Other MOH

Period

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E2-22A Prepare the current assets section of the balance sheet (LO 5) Requirement 1. Show how this company reports current assets on the balance sheet. Not all data are used. Is this company a service company, a merchandiser, or a manufacturer? How do you know? Solution:

Lords Current Assets Current assets: Cash Accounts receivable Inventories: Raw materials inventory Work in process inventory Finished goods inventory Total inventories Prepaid expenses Total current assets

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(10 min) E2-22A

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(10-15 min) E2-23A E2-23A Prepare a retailer’s income statement (Learning Objective 5) Robbie Roberts is the sole proprietor of Precious Pets, an e-tail business specializing in the sale of high-end pet gifts and accessories. Precious Pets’ sales totaled $987,000 during the most recent year. During the year, the company spent $56,000 on expenses relating to Web site maintenance; $22,000 on marketing; and $25,000 on wrapping, boxing, and shipping the goods to customers. Precious Pets also spent $642,000 on inventory purchases and an additional $21,000 on freight-in charges. The company started the year with $17,000 of inventory on hand and ended the year with $15,000 of inventory. Prepare Precious Pets’income statement for the most recent year. Solution: Precious Pets Income Statement For Last Year Sales revenue Cost of goods sold: Beginning inventory Purchases and freight-in* Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses: Web site expenses Marketing expenses Freight-out expenses Total operating expenses Operating income

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0-15 min) E2-23A

business specializing sales totaled pany spent $56,000 keting; and $25,000 cious Pets also spent freight-in charges. d and ended the year ment for the most

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(5 -10 min) E2-24A E2-24A Compute direct materials used and cost of goods manufactured (Learning Objective 5)

Danielle’s Die-Cuts is preparing its Cost of Goods Manufactured Schedule at year-end.Danielle’s accounting records show the following: The Raw Materials Inventory accounthad a beginning ba of $13,000 and an ending balance of $17,000. During the year, Danielle purchased $58,000 of d materials. Direct labor for the year totaled$123,000, while manufacturing overhead amounted to $152,000. The Work inProcess Inventory account had a beginning balance of $21,000 and an en balanceof $15,000. Compute the Cost of Goods Manufactured for the year. (Hint:The firststep is calculate the direct materials used during the year. Model your answer afterExhibit 2-15.) Solution: Danielle’s Die-Cuts Cost of Goods Manufactured Beginning work in process inventory Add: Direct materials used Beginning raw materials inventory Plus: Purchases of direct materials Direct materials available for use Less: Ending raw materials inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs incurred during the period Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

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10 min) E2-24A

ed (Learning Objective 5)

hedule at year-end.Danielle’s accounthad a beginning balance elle purchased $58,000 of direct uring overhead amounted to alance of $21,000 and an ending e year. (Hint:The firststep is to er afterExhibit 2-15.)

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(15-20 min.) E 2-25A

E2-25A Compute cost of goods manufactured and cost of goods sold (LO 5) Compute the cost of goods manufactured and cost of goods sold for Strike Marine Companyfor the most recent year using the amounts described below. Assume that raw materialsinventory contains only direct materials. Solution: Strike Marine Company Schedule of Cost of Goods Manufactured Beginning work in process inventory Add: Direct materials used: Beginning raw materials inventory Purchases of direct materials Available for use Ending raw materials inventory Direct materials used Direct labor Manufacturing overhead: Indirect labor Insurance on plant Depreciation - plant building and equipment Repairs and maintenance – plant Total manufacturing costs incurred during the year Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

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ke Marine Companyfor aw materialsinventory

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(10-15 min) E2-26A E2-26A Continues E2-25A: Prepare income statement (LO 5) Prepare the income statement for Strike Marine Company in E2-25A for the most recent year. Assume that the company sold 32,000 units of its product at a price of $12 each during the year. Solution: Strike Marine Company Income Statement For Last Year Sales revenue (32,000 × $12) Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured (E 2-25A) Cost of goods available for sale Ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Marketing expenses General and administrative expenses Operating income

Students may simply use the $206,000 cost of goods sold computation from E 2-25A, rather than repeating the details of the computation here.

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0-15 min) E2-26A

E2-25A for the most s product at a price of

mputation from E 2-25A,

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(25 min) E2-27A E2-27A Work backwards to find missing amounts (Learning Objective 5) Smooth Sounds manufactures and sells a new line of MP3 players. Unfortunately, SmoothSounds suffered serious fire damage at its home office. As a result, the accounting recordsfor October were partially destroyed—and completely jumbled. Smooth Sounds has hiredyou to help figure out the missing pieces of the accounting puzzle. Assume that SmoothSounds’ raw materials inventory contains only direct materials. Solution:

a. Revenues Cost of goods sold Gross profit b. Beginning raw materials inventory Purchases of direct materials Available for use Ending raw materials inventory Direct materials used c. To determine ending finished goods inventory, start by computing the cost of goods manufactured: Beginning work in process inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs to account for Ending work in process inventory Cost of goods manufactured

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Beginning finished goods inventory Cost of goods manufactured (from above) Cost of goods available for sale Ending finished goods inventory Cost of goods sold (from part A)

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in) E2-27A

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(15-20 min) E2-28A E2-28A Determine whether information is relevant (Learning Objective 6) Classify each of the following costs as relevant or irrelevant to the decision at hand andbriefly explain your reason. Solution: a. Cost of operating automated production machinery versus the cost of direct labor, when deciding whether to automate production. b. Cost of computers purchased 6 months ago, when deciding whether to upgrade to computers with faster processing speed.

c. Cost of purchasing packaging materials from an outside vendor, when deciding whether to continue manufacturing the packaging materials in-house.

d. The property tax rates in different locales, when deciding where to locate the company’s headquarters.

e. The type of gas (regular or premium) used by delivery vans, when deciding which make and model of van to purchase for the company’s delivery van fleet.

f. Depreciation expense on old manufacturing equipment when deciding whether or not to replace it with newer equipment.

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g. The fair market value of old manufacturing equipment when deciding whether or not to replace it with newer equipment.

h. The interest rate paid on invested funds, when deciding how much inventory to keep on-hand. i. The cost of land purchased 3 years ago, when deciding whether to build on the land now or wait two more years before building.

j. The total amount of the restaurant’s fixed costs, when deciding whether to add additional items to the menu.

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(10 min.) E2-29A E2-29A Describe other cost terms (Learning Objectives 6 & 7) Complete the following statements with one of the terms listed here. You may use a termmore than once, and some terms may not be used at all. Solution:

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(10 min.) E2-30A E2-30A Classify costs as fixed or variable (Learning Objective 7) Classify each of the following costs as fixed or variable: a. Thread used by a garment manufacturer b. Property tax on a manufacturing facility c. Yearly salaries paid to sales staff d. Gasoline used to operate delivery vans e. Annual contract for pest (insect) control f. Boxes used to package breakfast cereal at Kellogg’s Solution: COST a. Thread used by a garment manufacturer b. Property tax on manufacturing facility c. Yearly salaries paid to sales staff

Variable or Fixed

d. Gasoline used to operate delivery vans e. Annual contract for pest (insect) control f. Boxes used to package breakfast cereal at Kellogg’s g. Straight-line depreciation on production equipment h. Cell-phone bills for sales staff- contract billed at $.03 cents per minute i. Wages paid to hourly assembly-line workers in the manufacturing plant j. Monthly lease payment on administrative headquarters k. Commissions paid to the sales staff- -5% of sales revenue l. Credit card transaction fee paid by retailer- $0.20 per transaction plus 2% of the sales amount m. Annual business license fee from city n. Cost of ice cream sold at Baskin-Robbins o. Cost of shampoo used at a hair salon

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(10 min) E2-31A E2-31A Compute total and average costs (Learning Objective 7) Fizzy-Cola spends $1 on direct materials, direct labor, and variable manufacturing overheadfor every unit (12-pack of soda) it produces. Fixed manufacturing overhead costs $5 millionper year. The plant, which is currently operating at only 75% of capacity, produced 20 mil-lion units this year. Management plans to operate closer to full capacity next year, producing25 million units. Management doesn’t anticipate any changes in the prices it pays for mate-rials, labor, and manufacturing overhead.

a)

Requirements: 1. What is the current total product cost (for the 20 million units), including 2. What is the current average product cost per unit? 3. What is the current fixed cost per unit? 4. What is the forecasted total product cost next year (for the 25 million 5. What is the forecasted average product cost next year? 6. What is the forecasted fixed cost per unit? 7. Why does the average product cost decrease as production Solution: Variable costs = = + Fixed costs = Total costs =

b)

÷

=

c)

÷

=

=

= = =

e)

÷

=

f)

÷

=

d)

Variable costs + Fixed costs Total costs

g)

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Exercises (Group B) (10 min) E2-32B E2-32-B Identify types of companies and their inventories (LO 1) Complete the following statements with one of the terms listed here. You may use a term more than once, and some terms may not be used at all. Solution: a. b. c. d. e. f. g. h.

i.

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E2-17A Classify costs along the value chain for a retailer (Learning Objective 2) Suppose Accessory Shack incurred the following costs at its Buffalo NY, store:

Requirements 1. Use the following format to classify each cost according to its place in the value chain. 2. Compute the total costs for each value chain category. 3. How much are the total inventoriable product costs?

Solution: Reqs. 1 and 2

Accessory Shack Cost Classification R&D

Design

Purchases

Marketing

Research on selling satellite radio service Purchases of merchandise Rearranging store layout Newspaper advertisements Depreciation expense on delivery trucks Payment to consultant for advice on location of new store Freight-in Salespersons’ salaries Customer complaint department Total

Req. 3

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(10-15 min) E2-33B

arning Objective 2)

Y, store:

n the value chain.

Distribution

Customer Service

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(15 min) E2-34B E2-34B Classify costs along the value chain for a manufacturer (LO 2,3) Requirements 1. Classify each of these costs according to its place in the value chain. (Hint: You should have at least one cost in each value chain function.) 2. Compute the total costs for each value chain category. 3. How much are the total inventoriable product costs? 4. How much are the total prime costs? 5. How much are the total conversion costs? Solution: Reqs. 1 and 2 Plum Electronics Cost Classification

R&D

Production Direct Direct Mfg Design Material Labor O'head

Mktg

Salaries of telephone salespeople Depreciation on plant and equipment Exterior case for phone Scientists’ salaries Delivery expense Transmitters Rearrange production process Assembly-line workers’ wages Technical support hotline 1-800 (toll-free) line for customer orders Total costs

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Req. 3 Total inventoriable product costs: Direct materials Direct labor Manufacturing overhead Total inventoriable product cost

Req. 4 The total prime cost is: Direct materials Direct labor

Req. 5 The total conversion cost is: Direct labor Manufacturing overhead

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(15 min) E2-34B

Distribu Cust tion Service

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(5-10 min) E2-35B E2-35B Classify costs as direct or indirect (Learning Objective 3) Classify each of the following costs as a direct cost or an indirect cost assuming the cost object is the Garden Department (fruits and vegetables) of a local grocery store. Solution: Cost

Direct or Indirect cost?

a. Garden manager’s salary b. Cost of shopping carts and baskets c. Wages of checkout clerks d. Cost of the merchandise e. Depreciation expense on demonstration water feature f. Cost of hardware store’s advertisement flyer placed in the weekly newspaper g. Depreciation on self-checkout machines h. Bags provided to garden customer for packaging small items i. Store manager’s salary

j. Free garden delivery service provided to senior citizens k. Cost of equipment used to plant and water plants at the store l. Store utilities

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(10 min) E2-36B E2-36B Define cost terms (Learning Objectives 3 & 4) Complete the following statements with one of the terms listed here. You may use a term more than once, and some terms may not be used at all. Solution: a. b. c.

d. e. f. g.

h. i. j. k l.

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E2-37B Classify and calculate a manufacturer’s costs (Learning Objectives 3 & 4) Requirements 1. If the cost object is an airplane, classify each cost as one of the following: direct material (DM), direct labor (DL), indirect labor (IL), indirect materials (IM), other manufacturing overhead (other MOH), or period cost. What is the total for each type of cost? 2. Calculate total manufacturing overhead costs. 3. Calculate total inventoriable product costs. 4. Calculate total prime costs. 5. Calculate total conversion costs. 6. Calculate total period costs.

Solution: Req. 1 DM a. b. c. d. e.

Airplane seats Depreciation on admin offices Assembly workers’ wages Plant utilities Production supervisors’ salaries

f.

Jet engines

g. h. i. j. k. l. m.

IM

IL

Machine lubricants Depreciation on forklifts Property tax on corporate marketing offices Cost of warranty repairs Factory janitors’ wages Cost of designing new plant layout Machine operators’ health insurance TOTAL

Req. 2

Req. 3

DL

=

Total inventoriable product costs

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=

DM + DL + MOH

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$1,470 + 750 + 455 = $2,675

Req. 4

Total prime costs

=

DM + DL $1,470 + 750 = $2,220

Req. 5

Total conversion costs

=

DL + MOH $750 + 455 = $1,205

Req. 6

Total period costs

=

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(15-20 min) E2-37B

bjectives 3 & 4)

wing: direct M), other for each type of

Other MOH

Period

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E2-38B Prepare the current assets section of the balance sheet (LO 5) Consider the following selected amounts and account balances of Lords: Requirement 1. Show how Esquires reports current assets on the balance sheet. Not all data are used. Is Esquires a service merchandiser, or a manufacturer? How do you know? Solution: Esquires Current Assets Current assets: Cash Accounts receivable Inventories: Raw materials inventory Work in process inventory Finished goods inventory Total inventories Prepaid expenses Total current assets

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(10 min) E2-38B

et. Not all data are used. Is

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(10-15 min) E2-39B E2-39B Prepare a retailer’s income statement (Learning Objective 5) Mike Leaver is the sole proprietor of Prestigious Pets, an e-tail business specializing inthe sale of high-end pet gifts and accessories. Prestigious Pets’ sales totaled$1,060,000 during the most recent year. During the year, the company spent $53,000 on expenses relating to Web site maintenance, $33,000 on marketing, and $28,500 on wrapping, boxing, and shipping the goods to customers. Prestigious Pets also spent $643,000 on inventory purchases and an additional $20,500 on freight-in charges.The company started the year with $15,500 of inventory on hand, and ended the year with $12,800 of inventory. Prepare Prestigious Pets’ income statement for the most recent year. Solution: Prestigious Pets Income Statement For Last Year Sales revenue Cost of goods sold: Beginning inventory Purchases and freight-in* Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses: Web site expenses Marketing expenses Freight-out expenses Total operating expenses Operating income

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0-15 min) E2-39B

business specializing s’ sales the company spent 0 on marketing, and mers. Prestigious Pets $20,500 on freight-in y on hand, and ended come statement for the

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(5 -10 min) E2-40B E2-40B Compute direct materials used and cost of goods manufactured (Learning Objective 5)

Lawrence's Die-Cuts is preparing its Cost of Goods Manufactured Schedule at year-end. Lawren accounting records show the following: The Raw Materials Inventory account had a beginning ba of $18,000 and an ending balance of $14,000. During the year, Lawrence purchased $66,000 of direct materials. Direct labor for the year totaled $135,000, while manufacturing overhead amoun to $155,000. The Work in Process Inventory account had a beginning balance of $27,000 and an ending balanceof $21,000. Compute the Cost of Goods Manufactured for the year. (Hint:The firs is to calculate the direct materials used during the year. Model your answer after Exhibit 2-15.) Solution: Lawrence's Die-Cuts Cost of Goods Manufactured Beginning work in process inventory Add: Direct materials used Beginning raw materials inventory Plus: Purchases of direct materials Direct materials available for use Less: Ending raw materials inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs incurred during the period Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

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(5 -10 min) E2-40B

ed (Learning Objective 5)

chedule at year-end. Lawrence's account had a beginning balance ence purchased $66,000 of nufacturing overhead amounted g balance of $27,000 and an ed for the year. (Hint:The first step answer after Exhibit 2-15.)

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(15-20 min.) E 2-41B

E2-41B Compute cost of goods manufactured and cost of goods sold (LO 5) Compute the cost of goods manufactured and cost of goods sold for South Marine Company for the most recent year using the amounts described below. Assume that raw materials inventory contains only direct materials. Solution: South Marine Company Schedule of Cost of Goods Manufactured Beginning work in process inventory Add: Direct materials used: Beginning raw materials inventory Purchases of direct materials Available for use Ending raw materials inventory Direct materials used Direct labor Manufacturing overhead: Indirect labor Insurance on plant Depreciation - plant building and equipment Repairs and maintenance – plant Total manufacturing costs incurred during the year Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured South Marine Company Schedule of Cost of Goods Sold Beginning finished goods inventory Cost of goods manufactured* Cost of goods available for sale Ending finished goods inventory Cost of goods sold *From schedule of cost of goods manufactured.

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uth Marine Company for aw materials inventory

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(10-15 min) E2-42B E2-42B Continues E2-41B: Prepare income statement (LO 5) Prepare the income statement for South Marine Company in E2-25A for the most recent year. Assume that the company sold 37,000 units of its product at a price of $14 each during the year. Solution: South Marine Company Income Statement For Last Year Sales revenue (37,000 × $14) Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured (E 2-41B) Cost of goods available for sale Ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Marketing expenses General and administrative expenses Operating income

Students may simply use the $215,200 cost of goods sold computation from E 2-41B, rather than repeating the details of the computation here.

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0-15 min) E2-42B

E2-25A for the most s product at a price of

mputation from E 2-41B,

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(25 min) E2-43B E2-43B Work backwards to find missing amounts (Learning Objective 5) Great Sounds manufactures and sells a new line of MP3 players. Unfortunately, Great Sounds suffered serious fire damage at its home office. As a result, the accounting records for October were partially destroyed—and completely jumbled. Great Sounds has hired you to help figure out the missing pieces of the accounting puzzle. Assume that Great Sounds’ raw materials inventory contains only direct materials. Solution:

a. Revenues Cost of goods sold Gross profit b. Beginning raw materials inventory Purchases of direct materials Available for use Ending raw materials inventory Direct materials used c. Beginning work in process inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs to account for Ending work in process inventory Cost of goods manufactured

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Beginning finished goods inventory Cost of goods manufactured (from above) Cost of goods available for sale Ending finished goods inventory Cost of goods sold (from part A)

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(15-20 min) E2-44B E2-44B Determine whether information is relevant (Learning Objective 6) Classify each of the following costs as relevant or irrelevant to the decision at hand andbriefly explain your reason. Solution: a. Cost of barcode scanners purchased six months ago when deciding whether to upgrade to scanners that are faster and easier to use. b. The fair market value of an ice cream truck when deciding whether to replace it with a newer ice cream truck.

c. Cost of operating automated production machinery versus the cost of direct labor, when deciding whether to automate production.

d. Cost of purchasing packaging materials from an outside vendor, when deciding whether to continue manufacturing the packaging materials in-house. e. The cost of an expansion site purchased two years ago when deciding whether to sell the site or to expand business to it now.

f. The property tax rates in different locales, when deciding where to locate the company’s headquarters.

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g. The interest rate paid on invested funds, when deciding how much inventory to keep on-hand.

h. The gas mileage of delivery vans, when deciding which make and model of van to purchase for the company’s delivery van i. Depreciation expense on old manufacturing equipment when deciding whether or not to replace it with newer equipment.

j. The total amount of a coffee shop’s fixed costs when deciding whether or not to introduce a new drink line.

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(10 min.) E2-45B E2-45B Describe other cost terms (Learning Objectives 6 & 7) Complete the following statements with one of the terms listed here. You may use a termmore than once, and some terms may not be used at all. Solution: a. b. c. d. e. f. g. h.

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(10 min.) E2-46-B E2-46B Classify costs as fixed or variable (Learning Objective 7) Classify each of the following costs as fixed or variable: Solution: COST a. Credit card transaction fee paid by retailer- $0.20 per transaction plus 2% of the sales amount b. Yearly salaries paid to marketing staff c. Gasoline used to drive company shuttle

Variable or Fixed

d. Syrup used by an ice cream parlor e. Property tax on an electronics factory f. Annual contract for company landscaping g. Boxes used to package computer components at Dell h. Wages paid to hourly retail staff at the company store i. Annual web hosting fee for company website j. Cost of coffee sold at Starbucks k. Monthly lease payment on branch office l. Straight-line depreciation on production equipment m. Rental car fees for company business travelers – contract bills at 25 cents per mile n. Commissions paid to the sales staff- -7% of sales revenue o. Cost of paint used at an auto body shop

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(10 min) E2-47B E2-47B Compute total and average costs (Learning Objective 7) Grand Cola spends $1 on direct materials, direct labor, and variable manufacturing over-head for every unit (12-pack of soda) it produces. Fixed manufacturing overhead costs $6 million per year. The plant, which is currently operating at only 85% of capacity, pro-duced 15 million units this year. Management plans to operate closer to full capacity nextyear, producing 20 million units. Management doesn’t anticipate any changes in the pricesit pays for materials, labor, or manufacturing overhead.

a)

Solution: Variable costs + Fixed costs Total costs

=

= = =

b)

÷

=

c)

÷

=

=

= = =

e)

÷

=

f)

÷

=

d)

Variable costs + Fixed costs Total costs

g)

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Problems (Group A) (45-60 min.) P2-48A P2-48A Classify costs along the value chain (Learning Objectives 2 & 4) ShaZam Cola produces a lemon-lime soda. The production process starts with workers mix-ing the lemon syrup and lime flavors in a secret recipe. The company enhances the com-bined syrup with caffeine. Finally, ShaZam dilutes the mixture with carbonated water.ShaZam Cola incurs the following costs (in thousands):

Requirements 1. Use the following format to classify each of these costs according to its place in the value chain. (Hint:You should have at least one cost in each value chain function.) 2.Compute the total costs for each value chain category. 3.How much are the total inventoriable product costs? 4.Suppose the managers of the R&D and design functions receive year-end bonuses based onmeeting their unit’s target cost reductions. What are they likely to do? How might this affect costs incurred in other elements of the value chain? Solution: Reqs. 1 and 2 ShaZam Cola Value Chain Cost Classification (In thousands) Production Cost Plant utilities

R&D

Design

DM

DL

Mfg

Mktg

Distribution

Cus Serv

equipment Payment for new recipe Salt* Replace products with expired dates Rearranging plant layout Lemon syrup Lime flavoring Production costs of “cents-off” store coupons for customers Delivery-truck drivers’ wages Bottles Sales commissions Plant janitors’ wages Wages of workers who mix syrup Customer hotline Depreciation on delivery trucks Freight-in

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Total costs

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Req. 3 Total inventoriable product costs: Direct materials......................... ..........….. Direct labor................................ ..........….. Manufacturing overhead.....................… .. Total inventoriable product costs.......….

Req. 4

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(15-20 min.) P2-49A P2-49A Prepare income statements (Learning Objective 5)

Part One:In 2009, Hannah Summit opened Hannah’s Pets, a small retail shop selling pet supplies. On December 31, 2009, her accounting records show the following: Requirement: 1.Prepare an income statement for Hannah’s Pets, a merchandiser, for the year ended December 31, 2009. Solution:

Hannah’s Pets Income Statement Year Ended December 31, 2009 Sales revenue Cost of goods sold: Beginning inventory Purchases of merchandise Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses: Utilities expense Rent expense Sales commission expense Operating income Part Two: Req. 1 Best Friends Manufacturing Schedule of Cost of Goods Manufactured Year Ended December 31, 2009 Beginning work in process inventory Add: Direct materials used: Beginning raw materials inventory $13,500 Purchases of direct materials 31,000 Available for use 44,500 Ending raw materials inventory -9,275 Direct materials used Direct labor Manufacturing overhead: Utilities for plant $4,600 Plant janitorial services 1,250 Rent on manufacturing plant 9,000 Manufacturing overhead Total manufacturing costs incurred during the year Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

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$0

$35,225 18,300

14,850 $68,375 $68,375 -720 $67,655

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Req. 2 Best Friends Manufacturing Income Statement Year Ended December 31, 2010 Sales revenue Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured* Cost of goods available for sale Ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Customer service hotline expense Delivery expense Sales salaries expense Operating income

$105,000 $0 67,655 67,655 -5,700 61,955 43,045 1,000 1,500 5,000

7,500 $35,545

Req. 3

(continued) P 2-49A Part Three: Reqs. 1 and 2 Hannah’s Pets Partial Balance Sheet 31-Dec-09 Inventory

Best Friends Manufacturing

Partial Balance Sheet 31-Dec-10 $10,250

RM inventory WIP FG Total Inv

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$9,275 720 5,700 $15,695

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(25-35 min.) P 2-50A P2-50A Fill in missing amounts (Learning Objective 5) Certain item descriptions and amounts are missing from the monthly schedule of cost of goods manufactured below and the income statement of Tretinik Manufacturing. Fill in the missing items.

Solution:

Tretinik Manufacturing Company Schedule of Cost of Goods Manufactured Month Ended June 30, 2009 Beginning work in process inventory Add: Direct materials used: Beginning raw materials inventory Purchases of direct materials Available for use Ending raw materials inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs incurred during the month Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

Tretinik Manufacturing Company Income Statement Month Ended June 30, 2009 Sales revenue Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured* Cost of goods available for sale Ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Marketing expense

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Administrative expense Operating income

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(10 min.) P 2-51A P2-51A Identify relevant information (Learning Objective 6) You receive two job offers in the same big city. The first job is close to your parents’ house,and they have offered to let you live at home for a year so you won’t have to incur expenses for housing, food, or cable TV. This job pays $30,000 per year. The second job is far from your parents’ house, so you’ll have to rent an apartment with parking ($6,000 per year), buy your own food ($2,400 per year), and pay for your own cable TV ($600 per year). This job pays $35,000 per year. You still plan to do laundry at your parents’ house once a week if you live in the city, and you plan to go into the city once a week to visit with friends if you live at home. Thus, the cost of operating your car will be about the same either way. In addition, your parents refuse to pay for your cell phone service ($720 per year), and you can’t function without it. Requirements 1. Based on this information alone, what is the net difference between the two alternatives (salary, net of relevant costs)? 2. What information is irrelevant? Why? 3. What qualitative information is relevant to your decision? 4. Assume that you really want to take Job #2, but you also want to live at home to cut costs. What new quantitative and qualitative information will you need to incorporate into your decision? Solution:

a)

Attributes:

Take Job #1 and live at

Take Job #2 and rent an

Salary Rent Food Cable Salary, net of living expenses

b)

c)

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d)

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(15-20 min.) P 2-52A P2-52A Calculate the total and average costs (Learning Objective 7) The owner of Pizza-House Restaurant is disappointed because the restaurant has been averaging 3,000 pizza sales per month, but the restaurant and wait staff can make and serve 5,000 pizzas per month. The variable cost (for example, ingredients) of each pizza is $2.00. Monthly fixed costs (for example, depreciation, property taxes, business license, andmanager’s salary) are $6,000 per month. The owner wants cost information about differentvolumes so that he can make some operating decisions. Requirements 1.Fill in the following chart to provide the owner with the cost information he wants. Then usethe completed chart to help you answer the remaining questions. Solution:

Req. 1 Monthly pizza volume

2,500

3,000

5,000

Total fixed costs Total variable costs Total costs Fixed cost per pizza Variable cost per pizza Average cost per pizza Sales price per pizza Average profit per pizza Req. 2

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Req. 3

Total Sales Revenue − Total Costs

Total Sales Revenue at the new price and volume

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= Monthly Profit

− Total Costs at the new = New Monthly volume Profit

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Problems (Group B) (45-60 min.) P2-53B P2-53B Classify costs along the value chain (Learning Objectives 2 & 4)

Best Value Cola produces a lemon-lime soda. The production process starts with workersmixing the lemon syrup and lime flavors in a secret recipe. The company enhances the com-bined syrup with caffeine. Finally, Best Value dilutes the mixture with carbonated water.Best Value Cola incurs the following costs (in thousands): Requirements 1. Use the following format to classify each of these costs according to its place in the value chain. (Hint:You should have at least one cost in each value chain function.) 2.Compute the total costs for each value chain category. 3.How much are the total inventoriable product costs? 4.Suppose the managers of the R&D and design functions receive year-end bonuses based onmeeting their unit’s target cost reductions. What are they likely to do? How might this affectcosts incurred in other elements of the value chain? Solution: Reqs. 1 and 2 Best Value Cola Value Chain Cost Classification (In thousands) Production DM Cost Plant utilities Depreciation on plant and equipment Payment for new recipe

R&D

Design Materials

DL

Mfg Overhe Labor ad

Mktg

Distri Cus Serv butio Service n

Salt* Replace products with expired dates Rearranging plant layout Lemon syrup Lime flavoring Production costs of “cents-off” store coupons for customers Delivery-truck drivers’ wages Bottles Sales commissions Plant janitors’ wages Wages of workers who mix syrup Customer hotline Depreciation on delivery trucks Freight-in

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Total costs

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Req. 3 Total inventoriable product costs: Direct materials......... ........................ ..….. Direct labor................ ........................ ..….. Manufacturing overhead........ .............….. Total inventoriable product costs.......….

Req. 4

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(15-20 min.) P2-54B P2-54B Prepare income statements (Learning Objective 5) Part One: In 2009, Lindsay Conway opened Lindsay's Pets, a small retail shop selling pet supplies. On December 31, 2009, her accounting records show the following: Requirement: 1.Prepare an income statement for Lindsay’s Pets, a merchandiser, for the year ended December 31, 2009. Solution:

Lindsey’s Pets Income Statement Year Ended December 31, 2009 Sales revenue Cost of goods sold: Beginning inventory Purchases of merchandise Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses: Utilities expense Rent expense Sales commission expense Operating income

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Part Two: Req. 1 Best Friends Manufacturing Schedule of Cost of Goods Manufactured Year Ended December 31, 2010 Beginning work in process inventory Add: Direct materials used: Beginning raw materials inventory Purchases of direct materials Available for use Ending raw materials inventory Direct materials used Direct labor Manufacturing overhead: Utilities for plant Plant janitorial services Rent on manufacturing plant Total manufacturing costs incurred during the year Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

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Req. 2 Best Friends Manufacturing Income Statement Year Ended December 31, 2010 Sales revenue Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured* Cost of goods available for sale Ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Customer service hotline expense Delivery expense Sales salaries expense Operating income

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Req. 3

Part Three: Reqs. 1 and 2 Lindsey’s Pets Partial Balance Sheet 31-Dec-09 Inventory...........

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Best Friends Manufacturing Partial Balance Sheet 31-Dec-10 Raw materials inventory... Work in process inventory.. Finished goods inventory… Total inventory... .........…….

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(15-20 min.) P2-55B P2-55B Fill in missing amounts (Learning Objective 5 Certain item descriptions and amounts are missing from the monthly schedule of cost of goods manufactured and income statement of Chili Manufacturing Company. Fill in the missing items. Solution: Chili Manufacturing Company Schedule of Cost of Goods Manufactured Month Ended June 30, 2010 Beginning work in process inventory Add: Direct materials used: Beginning raw materials inventory Purchases of direct materials Available for use Ending raw materials inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs incurred during the month Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

Chili Manufacturing Company Income Statement Month Ended June 30, 2010 Sales revenue Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured* Cost of goods available for sale Ending finished goods inventory

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(10-15 min.) P2-56B P2-56B Identify relevant information (Learning Objective 6) You receive two job offers in the same big city. The first job is close to your parents’ house,and they have offered to let you live at home for a year so you won’t have to incur expensesfor housing, food, or cable TV. This job pays $49,000 per year. The second job is far awayfrom your parents’ house, so you’ll have to rent an apartment with parking ($9,000 peryear), buy your own food ($3,500 per year), and pay for your own cable TV ($550 per year).This job pays $54,000 per year. You still plan to do laundry at your parents’ house once aweek if you live in the city and plan to go into the city once a week to visit with friends ifyou live at home. Thus, the cost of operating your car will be about the same either way.Additionally, your parents refuse to pay for your cell phone service ($690 per year), and youcan’t function without it.

Requirements 1. Based on this information alone, what is the net difference between the two alternatives 2. What information is irrelevant? Why? 3. What qualitative information is relevant to your decision? 4. Assume that you really want to take Job #2, but you also want to live at home to cut costs. What new quantitative and qualitative information will you need to incorporate into your decision? Solution:

a

Attributes:

Take Job #1 and live at home

Take Job #2 and rent an apartment

Salary Rent Food Cable Salary, net of living expenses

b

c

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d

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(20-25min.) P2-57B P2-57B Calculate the total and average costs (Learning Objective 7) The owner of Brooklyn Restaurant is disappointed because the restaurant has been averaging 5,000 pizza sales per month but the restaurant and wait staff can make and serve 10,000 pizzas per month. The variable cost (for example, ingredients) of each pizza is$1.20. Monthly fixed costs (for example, depreciation, property taxes, business license,manager’s salary) are $5,000 per month. The owner wants cost information about differen tvolumes so that he can make some operating decisions. Requirements 1.Fill in the chart to provide the owner with the cost information he wants. Then use the completed chart to help you answer the remaining questions. 2.From a cost standpoint, why do companies such as Brooklyn Restaurant want to operate near or at full capacity?

Solution: Req. 1 Monthly pizza volume

2,500

5,000

10,000

Total fixed costs Total variable costs Total costs Fixed cost per pizza Variable cost per pizza Average cost per pizza Sales price per pizza Average profit per pizza

Req. 2

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Req. 3 At the current volume, the restaurant’s monthly profit is $16,500 calculated as follows − Total Total Sales Revenue Costs = Monthly Profit

Total Sales Revenue at the new price and volume

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− Total Costs at the new volume

= New Monthly Profit

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Decision Case C2-58 Determine ending inventory balances (Learning Objective 5) Requirements 1. Exhibit 2-16 resembles the schedule Paul has in mind. Use it to determine the ending inventories of raw materials, work in process, and finished goods. 2. Draft an insurance claim letter for the controller, seeking reimbursement for the flood damage to inventory. PowerBox’s insurance representative is Gary Streer, at Industrial Insurance, 1122 Main Street, Hartford, CT 06268. The policy number is #3454340-23. PowerBox’s address is 5 Research Triangle Way, Raleigh, NC 27698. Solution:

Req. 1

PowerBox Inventory Reconstruction Schedule Raw materials inventory Beginning inventory

+ Purchases

Work in Process Inventory Beginning Inventory + Direct Materials Used

Finished Goods Inventory Beginning inventory + Cost of goods manufactured

+ Direct labor

= Direct Materials available for use

− Ending inventory = Direct Materials used

+ Manufacturing Overhead = Total manufacturing costs to account for − Ending inventory = Cost of goods manufactured

= Cost of goods available for sale

− Ending inventory = Cost of goods Sold

(G) = Amount given in the case.

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Chapter 2: Building Blocks of Management

Solutions Manual

Page 114 of 119

Introduction

to Management Accounting

Chapter 2: Building Blocks of Management

Solutions Manual

Page 115 of 119

Introduction

to Management Accounting

Solutions Manual

Discussion & Analysis

1 Briefly describe a service company, a merchandising company, and a manufacturing company. Give an example of each type of company, but do not use the same examples as given in the chapter.

2 How do service, merchandising, and manufacturing companies differ from each other? How are service, merchandising, and manufacturing companies similar to each other?

3. What is the value chain? What are the six types of business activities found in the value chain? Which type(s) of business activities in the value chain generate costs that go directly to the income statement once incurred? What type(s) of business activities in the value chain generate costs that flow into inventory on the balance sheet?

4. Compare direct costs to indirect costs. Give an example of a cost at a company that could be a direct cost at one level of the organization but would be considered an indirect cost at a different level of that organization. Explain why this same cost could be both direct and indirect (at different levels).

5. What is meant by the term “inventoriable product costs”? What is meant by the term “period costs”? Why does it matter whether a cost is an inventoriable product cost or a period cost?

6. Compare inventoriable product costs to period costs. Using a product of your choice, give examples of inventoriable product costs and period costs. Explain why you categorized your costs as you did.

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Introduction

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7. Describe how the income statement of a merchandising company differs from the income statement of a manufacturing company. Also comment on how the income statement from a merchandising company is similar to the income statement of a manufacturing company.

8. How are the cost of goods manufactured, the cost of goods sold, the income statement, and the balance sheet related for a manufacturing company? What specific items flow from one statement or schedule to the next? Describe the flow of costs between the cost of goods manufactured, the cost of goods sold, the income statement, and the balance sheet for a manufacturing company.

9. What makes a cost relevant or irrelevant when making a decision? Suppose a company is evaluating whether to use its warehouse for storage of its own inventory or whether to rent it out to a local theater group for housing props. Describe what information might be relevant when making that decision.

10. Explain why “differential cost” and “variable cost” do not have the same meaning. Give an example of a situation in which there is a cost that is a differential cost but not a variable cost.

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Application and Analysis 2-1 Costs in the Value Chain at a Real Company and Cost Objects Choose a company with which you are familiar that manufactures a product. In this activity, you will be making reasonable assumptions about the activities involved in the value chain for this product; companies do not typically publish information about their value chain. Basic Discussion Questions 1. Describe the product that is being produced and the company that produces it.

2. Describe the six value chain business activities that this product would pass through from its inception to its ultimate delivery to the customer.

3. List at least three costs that would be incurred in each of the six business activities in the value chain.

4. Classify each cost you identified in the value chain as either being an inventoriable product cost or a period cost. Explain your justification.

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5. A cost object can be anything for which managers want a separate measurement of cost. List three different potential cost objects other than the product itself for the company you have selected.

6. List a direct cost and an indirect cost for each of the three different cost objects in #5. Explain why each cost would be direct or indirect.

CMA-1.

CMA-2.

CMA-3.

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