Chapter 14 Managerial Accounting

CHAPTER 14Managerial AccountingASSIGNMENT CLASSIFICATION TABLEStudy ObjectivesQuestionsBriefExercisesDo It!ExercisesAProblemsBProblems*1.Explain the distinguishingfeatures of managerialaccounting.1, 2, 3111*2.Identify the three broadfunctions of management.4, 5, 6,7, 82, 31*

3.Define the three classesof manufacturing costs.11, 124, 5, 722, 3, 4,5, 61A, 2A1B, 2B*4.Distinguish betweenproduct and period costs.13623, 4, 5,7, 131A, 2A1B, 2B*5.Explain the differencebetween a merchandisingand a manufacturingincome statement.9, 148, 12, 13,14, 15, 173A, 4A, 5A3B, 4B, 5B*6.Indicate how cost ofgoods manufacturedis determined.

15, 16,17, 188, 10, 1138, 9, 10, 11,12, 13, 14,15, 16, 173A, 4A, 5A3B, 4B, 5B*7.Explain the differencebetween a merchandisingand a manufacturingbalance sheet.10,19,20, 21914, 15,16, 173A, 4A3B, 4B*8.Identify trends in managerialaccounting.22, 23, 2425, 26418*9.Prepare a worksheet andclosing entries for amanufacturing company.27, 28, 291219

6A*Note:AllasteriskedQuestions, Exercises, and Problems relate to material contained in the appendix tothechapter.

14-2Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLEProblemNumberDescriptionDifficultyLevelTimeAllotted (min.)1AClassify manufacturing costs into different categories andcompute the unit cost.Simple20–㌰(休)慳獩慮慣畲楮潳瑳漠摩敲敮捡瑥敳湤

捯浰畴桥畮捯灬(日)–㌰㍁湤捡瑥桥獳畮摩敲敮捯獴猬慮ⰀⰁⰂⰃⰄⰅⰆⰇⰈⰉⰊⰋⰌⰍⰎⰏⰐⰑⰒⰓⰔⰕⰖⰗⰘⰙⰚⰛⰜⰝⰞⰟⰠⰡⰢⰣⰤⰥⰦⰧⰨⰩⰪⰫⰬⰭⰮⰰⰱⰲⰳⰴⰵⰶⰷⰸⰹⰺⰻⰼⰽⰾⰿⱀⱁⱂⱃⱄⱅⱆⱇⱈⱉⱊⱋⱌⱍⱎⱏⱐⱑⱒⱓⱔⱕⱖⱗⱘⱙⱚⱛⱜⱝⱞ慮湣獴敭敮慮搠愠灡慬扡慮捥獨整潤敲慴㌰–㐰㑁数慲攠捯潯猠慮慣畲敤獣桥摵愠灡慬湣攠慴敮慮搠灡慬扡慮捥ͿԤԥԦԧԨԩԪԫԬԭԮԯՠֈ֍֎֏ࢪࢩࢨࢧࢦࢥࢤࢣࢢࢡࢠࡪࡩࡨࡧࡦࡥࡤࡣࡢࡡࡠ࡞࡛࡚࡙ࡘࡗࡖࡕࡔࡓࡒࡑࡐࡏࡎࡍࡌࡋࡊࡉࡈࡇࡆࡅࡄࡃࡂࡁࡀ࠾࠽࠼࠻࠺࠹࠸࠷࠶࠵࠴࠳࠲࠱࠰࠭ࠬࠫࠪࠩࠨࠧࠦࠥࠤࠣࠢࠡࠠࠟࠞࠝࠜࠛࠚ࠙࠘ࠗࠖࠕࠔࠓࠒࠑࠐࠏࠎࠍࠌࠋࠊࠉࠈࠇࠆࠅࠄࠃࠂࠁࠀ߿߾߽ٟؠׯ

潤敲瑥㌰–㐰㕁数慲攠捯潯猠慮慣畲敤獣桥摵慮搠愠捯牲散湣攠獴敭敮潤敲慴㌰–

㐰⨶潭灬整攠潲獨数慲愠捯杯潤猠慮慣畲敤獣桥摵慮湣獴敭敮慮搠愠扡慮捥ͿԤԥԦԧԨԩԪԫԬԭԮԯՠֈ֍֎֏ࢪࢩࢨࢧࢦࢥࢤࢣࢢࢡࢠࡪࡩࡨࡧࡦࡥࡤࡣࡢࡡࡠ࡞࡛࡚࡙ࡘࡗࡖࡕࡔࡓࡒࡑࡐࡏࡎࡍࡌࡋࡊࡉࡈࡇࡆࡅࡄࡃࡂࡁࡀ࠾࠽࠼࠻࠺࠹࠸࠷࠶࠵࠴࠳࠲࠱࠰࠭ࠬࠫࠪࠩࠨࠧࠦࠥࠤࠣࠢࠡࠠࠟࠞࠝࠜࠛࠚ࠙࠘ࠗࠖࠕࠔࠓࠒࠑࠐࠏࠎࠍࠌࠋࠊࠉࠈࠇࠆࠅࠄࠃࠂࠁࠀ߿߾߽ٟؠׯ 傜瘒灑慮搠灯桥捬潳湧敮敳潭灬數㐰–㔰ᄇ慳獩慮慣畲楮潳瑳漠摩敲敮捡瑥敳湤捯浰畴桥畮捯灬

(日)–㌰(自)慳獩慮慣畲楮潳瑳漠摩敲敮捡瑥敳湤捯浰畴桥畮捯汥(日)–㌰㍂湤捡瑥桥獳畮摩敲敮捯獴猬慮ⰀⰁⰂⰃⰄⰅⰆⰇⰈⰉⰊⰋⰌⰍⰎⰏⰐⰑⰒⰓⰔⰕⰖⰗⰘⰙⰚⰛⰜⰝⰞⰟⰠⰡⰢⰣⰤⰥⰦⰧⰨⰩⰪⰫⰬⰭⰮⰰⰱⰲⰳⰴⰵⰶⰷⰸⰹⰺⰻⰼⰽⰾⰿⱀⱁⱂⱃⱄⱅⱆⱇⱈⱉⱊⱋⱌⱍⱎⱏⱐⱑⱒⱓⱔⱕⱖⱗⱘⱙⱚⱛⱜⱝⱞ慮湣獴敭敮慮搠愠灡慬扡慮捥獨整

潤敲慴㌰–㐰㑂数慲攠捯潯猠慮慣畲敤獣桥摵愠灡慬湣攠慴敮慮搠灡慬扡慮捥ͿԤԥԦԧԨԩԪԫԬԭԮԯՠֈ֍֎֏ࢪࢩࢨࢧࢦࢥࢤࢣࢢࢡࢠࡪࡩࡨࡧࡦࡥࡤࡣࡢࡡࡠ࡞࡛࡚࡙ࡘࡗࡖࡕࡔࡓࡒࡑࡐࡏࡎࡍࡌࡋࡊࡉࡈࡇࡆࡅࡄࡃࡂࡁࡀ࠾࠽࠼࠻࠺࠹࠸࠷࠶࠵࠴࠳࠲࠱࠰࠭ࠬࠫࠪࠩࠨࠧࠦࠥࠤࠣࠢࠡࠠࠟࠞࠝࠜࠛࠚ࠙࠘ࠗࠖࠕࠔࠓࠒࠑࠐࠏࠎࠍࠌࠋࠊࠉࠈࠇࠆࠅࠄࠃࠂࠁࠀ߿߾߽ٟؠׯ

潤敲慴㌰–㐰㕂数慲攠捯潯猠慮慣畲敤獣桥摵慮搠愠捯牲散湣攠獴敭敮潤敲慴㌰–㐰

For Instructor Use Only)

ANSWERS TO QUESTIONS1.(a)Disagree. Managerial accounting is a field of accounting that provides economic and financialinformation for managers and other internal users.(b)Joeis incorrect. Managerial accounting applies to all types of businesses—service, merchandising,and manufacturing.2.(a)Financial accounting is concerned primarily with external users such as stockholders, creditors,and regulators. In contrast, managerial accounting is concerned primarily with internal users suchas officers and managers.(b)Financial statements are the end product of financial accounting. The statements arepreparedquarterly and annually. In managerial accounting, internal reports may be prepared as frequentlyas needed

.(c)The purpose of financial accounting is to providegeneral-purpose information for all users.The purpose of managerial accounting is to provide special-purpose information forspecificdecisions.3.Differences in the content of the reports are as follows:FinancialManagerialPertains to business as a whole and is highlyaggregated.Limited to double-entry accounting and costdata.Generally accepted accounting principles.

Pertains tosubunits of the business andmay be very detailed.Extends beyond double-entry accountingsystem to any relevant data.Standard is relevance to decisions.In financial accounting, financial statements are verified annually through an independent auditby certified public accountants. There are no independent audits of internal reports issued bymanagerial accountants.4.Budgets are prepared by companies to provide future direction. Because the budget is also usedas an evaluation tool, some managers try to game the budgeting process by underestimatingtheir divisionʼs predicted performance so that it will be easier tomeet their performance targets.On the other hand, if the budget is set at unattainable levels, managers sometimes take unethicalactions to meet targets to receive higher compensation or in some cases to keep their jobs.5.Linda should know that the ma

nagement of an organization performs three broad functions:(1)Planningrequires management to look ahead and to establish objectives.(2)Directinginvolves coordinating the diverse activities and human resources of a company toproduce a smooth-running operation.(3)Controllingis the process of keeping the companyʼs activities on track.6.Disagree. Decision making is not a separate management function. Rather, decision making involvesthe exercise of good judgment in performing the three management functions explained in theanswer to question five above.7.Employees with line positions are directly involved in the companyʼs primary revenue generatingoperating activities. Examples would include plant managers and supervisors, and the vice presidentof operations. In contrast, employees with staff positions are not directly involved inrevenue-generating operating activities, but rather serve in a support capacity to line employees. Examplesin

clude employees in finance, legal, and human resources.

Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)14-5Questions Chapter 14(Continued)8.CEOs and CFOs must now certify that financial statements give a fair presentation of the companyʼsoperating results and its financial condition and that the company maintains an adequate systemof internal controls. In addition, the composition of theboard of directors and audit committees receivesmore scrutiny, and penalties for misconduct have increased.9.The differences between income statements are in the computation of the cost of goods sold asfollows:Manufacturingcompany:Beginning finished goods inventory plus cost of goods manufactured minusending finished goods inventory = cost of goods sold.Merchandisingcompany:Beginning merchandise inventory plus cost of goods purchased minus en

dingmerchandise inventory = cost of goods sold.10.The difference in balance sheets pertains to the presentation of inventories in the current assetsection. In a merchandising company, only merchandise inventory is shown. In a manufacturingcompany, three inventory accounts are shown: finished goods, work in process, and raw materials.11.Manufacturing costs are classified as either direct materials, direct labor, or manufacturing overhead.12.No, Mel is not correct. The distinction between direct and indirect materials is based on two criteria:(1) physical association and (2) the convenience of making the physical association. Materials whichcannot be easily associated with the finished product are considered indirect materials.13.Product costs, or inventoriable costs, are costs that are a necessary and integral part of producing

the finished product. Period costs are costs that are identified with a specific time period ratherthan with a salable product. These costs relate to nonmanufacturing costs and therefore are notinventoriable costs.14.A merchandising company has beginning merchandise inventory, cost of goods purchased, andending merchandise inventory. A manufacturing company has beginning finished goods inventory,cost of goods manufactured, and ending finished goods inventory.15.(a)X = total cost of work in process.(b)X = cost of goods manufactured.16.Raw materials inventory, beginning.......................................................................$12,000Raw materials purchases.......................................................................................170,000

Total raw materials available for use......................................................................182,000Raw materials inventory, ending............................................................................(15,000)Direct materials used....................................................................................$167,00017.Direct materials used.............................................................................................$240,000Direct labor used....................................................................................................220,000Total manufacturing overhead...............................................................................180,000Total manufacturing costs................................................................

.............$640,00018.(a)Total cost of work in process ($26,000 + $640,000)......................................$666,000(b)Cost of goods manufactured ($666,000–$32,000)......................................$634,00019.The order of listing is finished goods inventory, work in process inventory, and raw materials inventory.

14-6Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)Questions Chapter 14(Continued)20.The products differ in how each are consumed by the customer. Services are consumed

immediately; the product is not put into inventory. Meals at a restaurant are the best examplewhere they are consumed immediately by the customer. There could be a long lead time beforethe product is consumed in a manufacturing environment.21.Yes, product costing techniques apply equally well to manufacturers and service companies. Eachneeds to keep track of the cost of services in order to know whether it is generating a profit. Thetechniques shown in this chapter, toaccumulate manufacturing costs to determine manufacturinginventory, are equally useful for determining the cost of services.22.The value chain refers to all activities associated with providing a product or service. For a manufac-turer, these includeresearch and development, product design, acquisition of raw materials, production,sales and marketing, delivery, customer relations, and subsequent service.23.An enterprise resource planning (ERP) system is an integrated software system that providesacomprehensive, centralized resource for information. Its primary benefits are that it replaces themany individual systems typically used for receivables, payables, inventory, human resources,etc. Also, it can be used to get information from, and provide information to, the companyʼs customersand suppliers.

24.In a just-in-time inventory system the company has no extra inventory stored. Consequently, ifsome units that are produced are defective, the company will not have enough units to deliver tocustomers.25.The balanced scorecard is called “balanced” because it strives to not over emphasize any oneperformance measure, but rather uses both financial and non-financial measures to evaluate allaspects of a companyʼs operations in an integratedfashion.26.Activity-based costing is an approach used to allocate overhead based on each productʼs relativeuse of activitiesin making the product. Activity-based costing is beneficial because it results inmore accurate product costing andin more careful scrutiny of all activities in the value chain.*27.

The accounting cycle for a manufacturing company is the same as for a merchandising companywhen a periodic inventory system is used.*28.The account balances carried into the cost of goods manufactured columns are beginning andending work in process and raw materials inventories, raw materials purchases, direct labor,indirect labor, factory repairs, factory utilities, factory depreciation, and factory insurance.*29.(a)The closing entry forthe two inventories is:Dec. 31Work in Process Inventory.....................................................XXRaw Materials Inventory.........................................................XXManufacturing Summary................................................XX(b)

The closing entry for manufacturing summary is:Dec. 31Income Summary...................................................................XXManufacturing Summary................................................XX

Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)14-7

SOLUTIONS TOBRIEF EXERCISESBRIEF EXERCISE 14-1Financial AccountingManagerial Accounting

Primary usersExternal usersInternal usersTypes of reportsFinancial statementsInternal reportsFrequency of reportsQuarterly and annuallyAs frequently as neededPurpose of reportsGeneral-purposeSpecial-purpose informationfor specific decisionsContent of reportsGenerally accepted

accounting principlesRelevance to decisionsVerification processAnnual audit bycertifiedpublic accountantNo independent auditsBRIEF EXERCISE 14-2One implication of SOX was to clarify top managementʼs responsibility forthe companyʼs financial statements. CEOs and CFOs must now certify thatfinancial statements give a fair presentation of the companyʼs operatingresults and its financial condition. In addition, top managers must certifythat the company maintains an adequate system of internal controls tosafeguard the companyʼs assets and ensure accurate financial reports. Also,

more attention is now paid to the composition of the companyʼs board ofdirectors. In particular, the audit committee of the board of directors mustbe comprised entirely of independent members (that is, non-employees) andmust contain at least one financial expert. Finally, to increase the likelihoodof compliance with these and other new rules, the penalties for misconductwere substantially increased.BRIEF EXERCISE 14-3(a)1.Planning.(b)2.Directing.(c)3.Controlling.


BRIEF EXERCISE 14-4(a)DMFrames and tires used in manufacturing bicycles.(b)DLWages paid to production workers.(c)MOInsurance on factory equipment and machinery.(d)MODepreciation on factory equipment.BRIEF EXERCISE 14-

6(a)Product.(b)Period.(c)Period.(d)Period.(e)Product.(f)Product.BRIEF EXERCISE 14-7Product CostsDirectMaterialsDirectLaborFactory

Overhead(a)(b)(c)(d)XXXXCopyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)14-9BRIEF EXERCISE 14-8(a)Direct materials used...........................................................$180,000Direct labor

................................

................................

............209,000Total manufacturing overhead.............................................208,000Total manufacturing costs...........................................$597,000(b)Beginning work in process..................................................$25,000Total manufacturing costs...................................................597,000Total cost of work in process.......................................$622,000BRIEF EXERCISE 14

-9RUIZ COMPANYBalance SheetDecember 31, 2012Current assetsCash...................................................................$ 62,000Accounts receivable.........................................200,000InventoriesFinished goods..........................................$91,000Work in process........................................87,000Raw materials............................................73,000

251,000Prepaid expenses.............................................38,000Total current assets..........................$551,000BRIEF EXERCISE 14-10DirectMaterials UsedDirectLabor UsedFactoryOverheadTotalManufacturingCosts(1)(2)(3)

$81,000$144,000$151,00014-10Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)

BRIEF EXERCISE 14-11TotalManufacturingCostsWork inProcess(January 1)Work inProcess(December 31)Cost of Goods

Manufactured(1)(2)(3)$151,000$123,000$158,000$189,000*BRIEF EXERCISE 14-12AccountWorksheet ColumnFinished Goods InventoryWork in Process InventoryRaw Materials PurchasesDirect LaborIncome statement (DR)Cost of goods manufactured (DR)Cost of goods manufac

tured (DR)Cost of goods manufactured (DR)SOLUTIONS FOR DO IT! REVIEW EXERCISESDO IT! 14-11.False2.False3.False4.True5.True6.TrueDO IT! 14-2Period costs:AdvertisingSalaries of sales representatives

Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)14-11DO IT! 14-2 (Continued)Product costs:Blank CDs (DM)Depreciation of CD image burner (MO)Salary of factory manager (MO)Factory supplies used (MO)Paper inserts for CD cases (DM)CD plastic cases (DM)Salaries of factory maintenance employees (MO)Salaries of employees who burn music onto CDs (DL)DO IT! 14-3FISHEL MANUFACTURING COMPANYCost of Goods Manufactured ScheduleFor the Month Ended April 30Work in process, April 1

................................$ 5,000Direct materials..............................................Raw materials, April 1...............................$ 10,000Raw materials purchases..........................98,000Total raw materials available for use........108,000Less: Raw materials, April 30..................14,000Direct materials used................................$ 94,000Direct labor.....................................................80,000Manufacturing overhead................................180,000Total manufacturing cos

ts............................354,000Total cost of work in process........................$359,000Less: Work in process, April 30...................3,500Cost of goods manufactured........................$355,500DO IT! 14-41.f2.a3.c4.d5.e6.

b14-12Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)

SOLUTIONS TO EXERCISESEXERCISE 14-1EXERCISE 14-2


EXERCISE 14-5

1.2.(c)(c)3.4.(a)(c)5.6.(b)*(d)7.8.(a)(b)9.10.(c)(c)*or sometimes (c), depending on the circumstances.EXERCISE 14-61.(b)2.(c)

3.(a)4.(c)5.(c)6.(c)7.(c)8.(c)9.(c)10.(c)EXERCISE14-7

(b)CLARKSON MANUFACTURING COMPANY(Partial) Income StatementFor the Year Ended June 30, 2012Sales revenuesSales...........................................................$534,000Less:Sales discounts...............................4,200Net sales.....................................................$529,800Cost of goods soldFinished goods inventory,July 1, 2011.............................................96,000Cost of goods manufactured.....................386,910Cost of goods available for sale...............

482,910Less: Finished goods inventory,June30, 2012.................................75,900Cost of goods sold.............................407,010Gross profit................................................$122,790(c)CLARKSON MANUFACTURING COMPANY(Partial) Balance SheetJune 30, 2012AssetsCurrent assetsCash............................................................$32,000Accounts receivable..................................

27,000InventoriesFinished goods...................................$75,900Work in process..................................18,600Raw materials.....................................39,600134,100Total current assets....................$193,10014-30Copyright © 2011 John Wiley & Sons, Inc.Kimmel,Accounting,4/e,Solutions Manual(For Instructor Use Only)

PROBLEM 14

-5A(a)PHILLIPS COMPANYCost of Goods Manufactured ScheduleFor the Month Ended October 31, 2012Work in process, October 1..............$16,000Direct materialsRaw materials inventory,October 1................................$18,000Raw materialspurchases...............................264,000Total raw materials availablefor use.....................................282,000Less:Raw materials inventory,

October 31.......................29,000Directmaterials used.................$253,000Direct labor.........................................190,000Manufacturing overheadFactory facility rent....................60,000Depreciation on factoryequipment...............................31,000Indirect labor..............................28,000Factory utilities*.........................9,000Factory insurance**....................4,800

Total manufacturingoverhead..........................132,800Total manufacturing costs................575,800Total cost of work in process...........591,800Less: Work in process, October 31.....14,000Cost of goods manufactured............$577,800**$12,000 X 75% = $9,000**$8,000 X 60%= $4,800


BYP 14-5 (Continued)I have also modified the form of the income statement to recognize thedis-tinction between product costs (cost of goods sold) and period costs (operatingexpenses) as required by generally accepted accountingprinciples.Thanks for letting me help. If I can be of further assistance, donʼt hesitate

to call. I hope you find a replacement for your controller soon.Sincerely,


BYP 14-7ALL ABOUT YOU ACTIVITYStudent responses will vary. We have provided some basic examples thatmay represent common responses.(a)Individuals must often make purchase decisions which involve choosingbetween an item that has a more expensive initial purchase price, butis expected to either last longer, or provides some form of cost savings.

The question that the individual faces is whether the cost savings oradditional benefit justifies the additional initial cost. For example, moreexpensive dishwashers and refrigerators also tend to be more energyefficient. The labels on these appliances provide information regardingthe energy savings which can be used to make a break-evenevaluation.(b)In order to increase control over their financial situation and reducethe probability of financial hardship all people should prepare personalbudgets. Preparation of a personal budget requires the individual to planforthe future andto prioritize expenditures.(c)

Companies employ the balanced scorecard as a mechanism to ensurethat their financial goals are consistent with their efforts. Use of thebalanced scorecard requires clear articulation of goals, priorities, andstrategies.By employing these same techniques in their everyday life indi-viduals can be better assured that they will expend effort on those thingsthat reallymatter to them, rather than wasting efforts on less importantdistractions.(d)Capital budgeting involves financial evaluation of long-term assets. Compa-nies routinely make capital budgeting decisions, but so doindividuals.

The purchase of a home or car is a decision that has implicationsfor yourfinances for many subsequent years. Buying a house or car is averypersonal decision, influenced by many personal, nonfinancial, preferences.However, these decisions should also be subjected to a financialevaluation using capital budgeting techniques to ensure that the choicemakes good economic sense.

Chapter 14 Managerial Accounting

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