CHAPTER 16 (FIN MAN); CHAPTER 1 (MAN) MANAGERIAL ... Content... · 1. Financial accounting and...

1. Financial accounting and managerial accounting are different in several ways. Financial accounting information is reported in statements that are useful to persons or groups outside of a company. These statements objectively report the results of past operations for fixed periods oftime and the financial condition of the business under generally accepted accounting principles. Managerial accounting information uses both subjective and objective information to meet the specific needs of management. This non-GAAP information can be reported periodically or as needed by management and can be reported for the entire entity or for segments of the organization.This information includes (i) historical data, which provide objective measures of past operations,and (ii) estimated data, which provide subjective estimates about future decisions.

2. a. A line department is directly involved in the basic objectives of the organization, while a staff department provides service, assistance, or advice to line departments or other staff departments.

b. (1) Sales Department(2) Personnel Department

3. Direct materials cost

4. Prime costs are the combination of direct materials and direct labor costs, while conversion costs are the combination of direct labor costs and factory overhead costs.

5. Product costs are composed of three elements of manufacturing costs: direct materials cost, direct labor cost, and factory overhead cost. These costs are treated as assets until the product is sold. Product costs are sometimes referred to as inventoriable costs. Period costs are costs that are used in generating revenue during the current period. They are recognized as expenses on the current period’s income statement.

6. The three inventory accounts for a manufacturing business are as follows:

a. Finished goods, representing goods in the state in which they are to be sold.

b. Work in process, representing goods in the process of manufacture.

c. Materials, representing goods in the state in which they were acquired.

7. Finished goods, work in process, and materials

8. The cost of finished goods and the cost of work in process included the following:

a. Direct materials—the costs of materials that enter directly into the finished product.

b. Direct labor—the wages of factory workers who convert materials into a finished product.

c. Factory overhead—the remaining costs, other than direct materials and direct labor, of operating a factory.

9. Cost of goods sold

10. A merchandising business purchases merchandise (products) in a finished state for resale to customers. The cost of product sold is called cost of merchandise sold. A manufacturer makes the product it sells using direct materials, direct labor, and factory overhead. The cost of the product sold is generally called cost of goods sold.

CHAPTER 16 (FIN MAN); CHAPTER 1 (MAN)MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES

DISCUSSION QUESTIONS

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PE 16–1A (FIN MAN); PE 1–1A (MAN)Controlling (a)Planning (c)Decision making (b)

PE 16–1B (FIN MAN); PE 1–1B (MAN)Planning (a)Directing (c)Controlling (b)

PE 16–2A (FIN MAN); PE 1–2A (MAN)a. DLb. FOc. DMd. FO

PE 16–2B (FIN MAN); PE 1–2B (MAN)a. DM (or FO if the cost is immaterially small)b. DLc. FOd. DM

PE 16–3A (FIN MAN); PE 1–3A (MAN)a. Bb. Cc. Pd. C

PE 16–3B (FIN MAN); PE 1–3B (MAN)a. Pb. Bc. C (or P if significant)d. C

PRACTICE EXERCISES


PE 16–4A (FIN MAN); PE 1–4A (MAN)a. Product costb. Product costc. Period costd. Period cost

PE 16–4B (FIN MAN); PE 1–4B (MAN)a. Period costb. Product costc. Product costd. Period cost

PE 16–5A (FIN MAN); PE 1–5A (MAN)a. Work in process inventory, January 1…………………………… $ 70,000

Cost of direct materials used in production……………………… $16,800Direct labor……………………………………………………………… 43,400Factory overhead……………………………………………………… 28,000Total manufacturing costs incurred during January…………… 88,200Total manufacturing costs…………………………………………… $158,200Less work in process inventory, January 31……………………… 74,200Cost of goods manufactured………………………………………… $ 84,000

b. Finished goods inventory, January 1……………………………… $ 29,400Cost of goods manufactured………………………………………… 84,000Cost of finished goods available for sale………………………… $113,400Less finished goods inventory, January 31……………………… 33,600Cost of goods sold…………………………………………………… $ 79,800

PE 16–5B (FIN MAN); PE 1–5B (MAN)a. Work in process inventory, July 1………………………………… $ 32,800

Cost of direct materials used in production……………………… $67,200Direct labor……………………………………………………………… 88,000Factory overhead……………………………………………………… 44,800Total manufacturing costs incurred during July………………… 200,000Total manufacturing costs…………………………………………… $232,800Less work in process inventory, July 31………………………… 29,600Cost of goods manufactured………………………………………… $203,200

b. Finished goods inventory, July 1…………………………………… $ 37,600Cost of goods manufactured………………………………………… 203,200Cost of finished goods available for sale………………………… $240,800Less finished goods inventory, July 31…………………………… 27,200Cost of goods sold…………………………………………………… $213,600


Ex. 16–1 (FIN MAN); Ex. 1–1 (MAN)a. Direct materials cost e. Direct labor costb. Factory overhead cost f. Direct materials costc. Factory overhead cost g. Direct materials costd. Direct materials cost h. Factory overhead cost

Ex. 16–2 (FIN MAN); Ex. 1–2 (MAN)a. Factory overhead cost f. Direct materials costb. Direct labor cost g. Factory overhead costc. Factory overhead cost h. Direct labor costd. Direct materials cost i. Direct materials coste. Factory overhead cost j. Factory overhead cost

Ex. 16–3 (FIN MAN); Ex. 1–3 (MAN)a, c, e, g, h

Ex. 16–4 (FIN MAN); Ex. 1–4 (MAN)a. Period cost j. Period costb. Product cost k. Period costc. Period cost l. Product costd. Period cost m. Product coste. Period cost n. Period costf. Product cost o. Product costg. Product cost p. Product costh. Product cost q. Product costi. Period cost

Ex. 16–5 (FIN MAN); Ex. 1–5 (MAN)a. improve e. conversionb. decreases f. costsc. period g. cost objectd. work in process inventory

EXERCISES


Ex. 16–6 (FIN MAN); Ex. 1–6 (MAN)a. product e. materials inventoryb. operational f. indirectc. improving g. plant depreciationd. prime

Ex. 16–7 (FIN MAN); Ex. 1–7 (MAN)a. direct g. indirectb. indirect h. indirectc. indirect i. directd. indirect j. indirecte. indirect k. directf. direct l. indirect

Ex. 16–8 (FIN MAN); Ex. 1–8 (MAN)1. The maintenance salaries and indirect materials should be included as factory

overhead.

2. The factory overhead incorrectly includes the following items: sales salaries, promotional expenses, corporate office insurance and property taxes, and corporate office depreciation. These items should not be included as factory overhead. The corrected report is as follows:

Cost of direct materials used in production $ 612,500Direct labor 531,250Factory overhead:

Maintenance salaries $ 93,750Indirect materials 62,500Supervisor salaries 575,000Heat, light, and power 156,250Insurance and property taxes—plant 168,750Depreciation—plant and equipment 137,500 1,193,750

Total $2,337,500

FARRAR INC.Manufacturing Costs

For the Quarter Ended June 30, 2014


Ex. 16–9 (FIN MAN); Ex. 1–9 (MAN)

a.

Revenues $450,000Cost of goods sold 280,000Gross profit $170,000Operating expenses:

Selling expenses $65,400Administrative expenses 54,600

Total operating expenses 120,000Net income $ 50,000

b. Inventory balances on January 31, 2014:

Materials ($95,200 – $67,200)…………………………………………………………$28,000Work in Process ($67,200 + $128,800 + $151,200 – $303,800)………………… $43,400Finished Goods ($303,800 – $280,000)…………………………………………… $23,800

Ex. 16–10 (FIN MAN); Ex. 1–10 (MAN)

Current assets:Cash $ 89,600Accounts receivable 84,000Inventories:

Finished goods $ 32,200Work in process 126,000Materials 70,000 228,200

Supplies 57,040Prepaid insurance 22,000

Total current assets $480,840

BERENTE COMPANYBalance Sheet

December 31, 2014

CHATERJEE MANUFACTURING COMPANYIncome Statement

For the Month Ended January 31, 2014


Ex. 16–11 (FIN MAN); Ex. 1–11 (MAN)Materials inventory, April 1, 2014……………………………………………………… $ 310,000Add materials purchased during April………………………………………………… 920,000Cost of materials available for use…………………………………………………… $1,230,000Less materials inventory, April 30, 2014……………………………………………… 280,000

Cost of direct materials used in production……………………………………… $ 950,000

Ex. 16–12 (FIN MAN); Ex. 1–12 (MAN)a. $153,600 ($19,200 + $134,400)b. $124,800 ($153,600 – $28,800)c. $208,800 ($252,000 – $43,200)d. $194,400 ($252,000 – $57,600)e. $8,400 ($58,800 – $50,400)f. $7,200 ($58,800 – $51,600)

Ex. 16–13 (FIN MAN); Ex. 1–13 (MAN)Work in process inventory, January 1, 2014………………………… $135,000Add manufacturing costs incurred during January:

Cost of direct materials used in production…………………… $325,000Direct labor…………………………………………………………… 280,000Factory overhead…………………………………………………… 195,000Total manufacturing costs incurred……………………………… 800,000

Total manufacturing costs……………………………………………… $935,000Less work in process inventory, January 31, 2014………………… 142,000Cost of goods manufactured………………………………………… $793,000

Ex. 16–14 (FIN MAN); Ex. 1–14 (MAN)a. $334,800 ($52,800 + $282,000)b. $272,400 ($334,800 – $62,400)c. $183,600 ($223,200 – $39,600)d. $170,400 ($223,200 – $52,800)e. $36,800 ($360,000 – $323,200)f. $17,600 ($360,000 – $342,400)


Ex. 16–15 (FIN MAN); Ex. 1–15 (MAN)

a.

Work in process inventory, May 1, 2014 $ 142,800Direct materials:

Materials inventory, May 1, 2014 $210,000Purchases 403,200Cost of materials available for use $613,200Less materials inventory, May 31, 2014 184,800Cost of direct materials used in

production $428,400Direct labor 378,000Factory overhead:

Indirect labor $ 40,320Machinery depreciation 24,000Heat, light, and power 8,400Supplies 6,720Property taxes 5,880Miscellaneous cost 10,920

Total factory overhead 96,240Total manufacturing costs incurred during May 902,640Total manufacturing costs $1,045,440Less work in process inventory, May 31, 2014 159,600Cost of goods manufactured $ 885,840

b. Finished goods inventory, May 1, 2014………………………………………… $109,200Cost of goods manufactured……………………………………………………… 885,840Cost of finished goods available for sale………………………………………… $995,040Less finished goods inventory, May 31, 2014…………………………………… 126,000Cost of goods sold…………………………………………………………………… $869,040

TIWANA MANUFACTURING COMPANYStatement of Cost of Goods Manufactured

For the Month Ended May 31, 2014


Ex. 16–16 (FIN MAN); Ex. 1–16 (MAN)a. Finished goods inventory, July 1, 2014…………………………… $ 81,000

Cost of goods manufactured………………………………………… 360,000Cost of finished goods available for sale………………………… $441,000Less finished goods inventory, July 31, 2014…………………… 75,000Cost of goods sold……………………………………………………… $366,000

b. Sales……………………………………………………………………… $729,000Cost of goods sold……………………………………………………… 366,000Gross profit……………………………………………………………… $363,000

c. Gross profit……………………………………………………………… $363,000Operating expenses:

Selling expenses…………………………………………………… $114,750Administrative expenses………………………………………… 60,750

Total operating expenses……………………………………… 175,500Net income……………………………………………………………… $187,500

Ex. 16–17 (FIN MAN); Ex. 1–17 (MAN)a. Sales……………………………………………………………………… $792,000

Less gross profit………………………………………………………… 462,000Cost of goods sold……………………………………………………… $330,000

b. Cost of goods manufactured………………………………………… $396,000Less cost of goods sold……………………………………………… 330,000Finished goods inventory…………………………………………… $ 66,000

c. Purchased materials…………………………………………………… $244,200Less materials inventory……………………………………………… 33,000Direct materials cost…………………………………………………… $211,200

d. Total manufacturing costs…………………………………………… $455,400Less: Direct materials……………………………………………… $211,200

Factory overhead costs (indirect laborand factory depreciation)*………………………………… 198,000 409,200

Direct labor cost………………………………………………………… $ 46,200

* $171,600 + $26,400

e. Total manufacturing costs…………………………………………… $455,400Less cost of goods manufactured…………………………………… 396,000Work in process inventory…………………………………………… $ 59,400


Prob. 16–1A (FIN MAN); Prob. 1–1A (MAN)

Direct Direct FactoryMaterials Labor Overhead Selling Administrative

Cost Cost Cost Cost Expense Expense

a Xb Xc Xd Xe Xf Xg Xh Xi Xj Xk Xl X

m Xn Xo Xp Xq Xr Xs Xt Xu Xv Xw Xx Xy Xz X

PROBLEMS

Product Costs Period Costs






m Xn Xo Xp Xq Xr Xs Xt Xu Xv Xw Xx X



Prob. 16–3A (FIN MAN); Prob. 1–3A (MAN)1. The most logical definition for the final cost object would be the patient. The

reason is that the cost can be accumulated at the patient level for billing and insurance reimbursement purposes.

2. Cost Direct Indirect


m Xn Xo Xp Xq Xr Xs Xt Xu X


Prob. 16–4A (FIN MAN); Prob. 1–4A (MAN)1. Prius Company

a. $240,680 ($712,800 + $280,280 – $752,400)b. $2,138,400 ($752,400 + $1,058,400 + $327,600)c. $2,224,800 ($2,138,400 + $540,000 – $453,600)d. $2,203,200 ($475,200 + $2,224,800 – $496,800)e. $1,936,800 ($4,140,000 – $2,203,200)f. $1,396,800 ($1,936,800 – $540,000)

Volt Companya. $339,000 ($177,000 + $342,000 – $180,000)b. $516,000 ($1,035,000 – $339,000 – $180,000)c. $453,000 ($1,477,500 – $1,024,500)d. $177,000 ($1,024,500 + $204,000 – $1,051,500)e. $624,000 ($1,675,500 – $1,051,500)f. $240,000 ($624,000 – $384,000)

2.

Work in process inventory, December 1, 2014 $ 442,500Direct materials:

Materials inventory, December 1, 2014 $177,000Purchases 342,000Cost of materials available for use $519,000Less materials inventory, December 31, 2014 180,000

Cost of direct materials used in production $339,000Direct labor 516,000Factory overhead 180,000Total manufacturing costs incurred during December 1,035,000Total manufacturing costs $1,477,500Less work in process inventory, December 31, 2014 453,000Cost of goods manufactured $1,024,500

VOLT COMPANYStatement of Cost of Goods ManufacturedFor the Month Ended December 31, 2014


Prob. 16–4A (FIN MAN); Prob. 1–4A (MAN) (Concluded)

3.

Sales $1,675,500Cost of goods sold:

Finished goods inventory, December 1, 2014 $ 204,000Cost of goods manufactured 1,024,500Cost of finished goods available for sale $1,228,500Less finished goods inventory, December 31, 2014 177,000

Cost of goods sold 1,051,500Gross profit $ 624,000Operating expenses 240,000Net income $ 384,000

VOLT COMPANYIncome Statement

For the Month Ended December 31, 2014



1.

Work in process inventory, January 1, 2014 $ 526,500Direct materials:

Materials inventory, January 1, 2014 $292,500Purchases 549,900Cost of materials available for use $842,400Less materials inventory, December 31, 2014 364,000

Cost of direct materials used in production $478,400

Direct labor 559,000Factory overhead:

Indirect labor $ 65,620Depreciation expense—factory equipment 46,800Heat, light, and power—factory 18,720Property taxes—factory 15,210Rent expense—factory 25,740Supplies—factory 12,870Miscellaneous cost—factory 7,956

Total factory overhead 192,916Total manufacturing costs incurred during

the year 1,230,316Total manufacturing costs $1,756,816Less work in process inventory,

December 31, 2014 494,000Cost of goods manufactured $1,262,816

THE LUCILLE CORPORATIONStatement of Cost of Goods Manufactured

For the Year Ended December 31, 2014


Prob. 16–5A (FIN MAN); Prob. 1–5A (MAN) (Concluded)

2.


Finished goods inventory, January 1, 2014 $ 507,000Cost of goods manufactured 1,262,816Cost of finished goods available for sale $1,769,816Less finished goods inventory,

December 31, 2014 480,000Cost of goods sold 1,289,816

Gross profit $1,284,184Operating expenses:

Administrative expenses:Office salaries expense $191,750Depreciation expense—office

equipment 35,100Property taxes—office building 31,590 $ 258,440

Selling expenses:Advertising expense $247,000Sales salaries expense 315,900 562,900

Total operating expenses 821,340Net income $ 462,844

THE LUCILLE CORPORATIONIncome Statement



Prob. 16–1B (FIN MAN); Prob. 1–1B (MAN)




m Xn Xo Xp Xq Xr Xs Xt Xu Xv Xw Xx Xy X*z X

*Item y might also be classified as direct material cost if the cost is significant, since itcan be directly traced to the end product.







m Xn Xo Xp Xq Xr Xs Xt Xu Xv Xw Xx X



Prob. 16–3B (FIN MAN); Prob. 1–3B (MAN)1. The most logical definition for the final cost object would be a hotel guest. Guests

consume services such as a meal, a night’s stay in a hotel room, room service, a telephone call, etc.

2. Cost Direct Indirect


m Xn Xo Xp Xq Xr Xs Xt Xu Xv Xw X


Prob. 16–4B (FIN MAN); Prob. 1–4B (MAN)1. On Company

a. $30,800 ($282,800 + $65,800 – $317,800)b. $854,000 ($317,800 + $387,800 + $148,400)c. $800,800 ($854,000 + $119,000 – $172,200)d. $827,400 ($224,000 + $800,800 – $197,400)e. $299,600 ($1,127,000 – $827,400)f. $182,000 ($299,600 – $117,600)

Off Companya. $581,560 ($685,720* + $91,140 – $195,300)b. $685,720 ($1,519,000 – $256,060 – $577,220)c. $195,300 ($1,727,320 – $1,532,020)d. $256,060 ($1,532,020 + $269,080 – $1,545,040)e. $399,280 ($1,944,320 – $1,545,040)f. $234,360 ($399,280 – $164,920)

* Note: The student must calculate part (b) prior to calculating part (a), sincethe solution to part (b) is needed as an input to part (a).

2.

Work in process inventory, December 1, 2014 $119,000Direct materials:

Materials inventory, December 1, 2014 $ 65,800Purchases 282,800Cost of materials available for use $348,600Less materials inventory, December 31, 2014 30,800

Cost of direct materials used in production $317,800Direct labor 387,800Factory overhead 148,400Total manufacturing costs incurred during

December 854,000Total manufacturing costs $973,000Less work in process inventory, December 31, 2014 172,200Cost of goods manufactured $800,800

ON COMPANYStatement of Cost of Goods ManufacturedFor the Month Ended December 31, 2014


Prob. 16–4B (FIN MAN); Prob. 1–4B (MAN) (Concluded)

3.


Finished goods inventory, December 1, 2014 $ 224,000Cost of goods manufactured 800,800Cost of finished goods available for sale $1,024,800Less finished goods inventory, December 31, 2014 197,400

Cost of goods sold 827,400Gross profit $ 299,600Operating expenses 117,600Net income $ 182,000

ON COMPANYIncome Statement

For the Month Ended December 31, 2014



1.

Work in process inventory, January 1, 2014 $109,200Direct materials:

Materials inventory, January 1, 2014 $ 77,350Purchases 123,500Cost of materials available for use $200,850Less materials inventory, December 31, 2014 95,550

Cost of direct materials used in production $105,300Direct labor 186,550Factory overhead:

Indirect labor $ 23,660Depreciation expense—factory equipment 14,560Heat, light, and power—factory 5,850Property taxes—factory 4,095Rent expense—factory 6,825Supplies—factory 3,250Miscellaneous cost—factory 4,420

Total factory overhead 62,660Total manufacturing costs incurred during the year 354,510Total manufacturing costs $463,710Less work in process inventory, December 31, 2014 96,200Cost of goods manufactured $367,510

SHANIKA COMPANYStatement of Cost of Goods Manufactured



Prob. 16–5B (FIN MAN); Prob. 1–5B (MAN) (Concluded)

2.

Sales $864,500Cost of goods sold:

Finished goods inventory, January 1, 2014 $113,750Cost of goods manufactured 367,510Cost of finished goods available for sale $481,260Less finished goods inventory,

December 31, 2014 100,100Cost of goods sold 381,160

Gross profit $483,340Operating expenses:

Administrative expenses:Office salaries expense $ 77,350Depreciation expense—office equipment 22,750Property taxes—headquarters building 13,650 $113,750

Selling expenses:Advertising expense $ 68,250Sales salaries expense 136,500 204,750

Total operating expenses 318,500Net income $164,840

SHANIKA COMPANYIncome Statement



CP 16–1 (FIN MAN); CP 1–1 (MAN)Although Fred may appear to have technically complied with company policy, hiscomputation of the cost of lumber is unethical. Fred has created an apparent conflict-of-interest situation. Thus, although it is appropriate for Fred to take advantage of H. Jeckel’s policy of allowing employees to purchase materials atcost, he should have had someone else (such as his supervisor) determine theamount that he owed for the lumber. Clearly, selecting the lowest price has openedthe door for criticism.

CP 16–2 (FIN MAN); CP 1–2 (MAN)The objectives of managerial accounting and financial accounting are different; therefore, the vice president’s statement is very incomplete. In one sense, the statement may be true at only very high levels in the organization. For example, the division manager may be evaluated on the basis of financial accounting profit. Thus, the divisional manager would be evaluated by central management in nearly the same way that central management is evaluated by shareholders.

Lower in the organization, the financial concerns of the stockholder begin to diverge significantly from the day-to-day operating decision needs of the manager.As such, the statement becomes very inaccurate the closer one gets to the actual operations. Operational performance measures will focus on cost, quality, delivery time, equipment availability, inventory levels, scrap, waste, and efficiency. This listis much broader and more detailed than the financial statement numbers providedto the stockholders.

The stockholders’ interest in profit is related to increasing shareholder value.Managers must increase long-term shareholder value by engaging in strategies that enhance people, product, and processes in the delivery of value to customers. These strategies can be measured by both financial and nonfinancial means. Therefore, it is not surprising to see a much broader set of objective and subjective measures used internally in the organization to guide strategy and operations.

CASES & PROJECTS


CP 16–3 (FIN MAN); CP 1–3 (MAN)1. The vice president of the Information Systems Division can use managerial

accounting information in a number of different ways. For example, the vice president might use these data to determine resources that will be required based on a projection of amount and type of work required for the next period. Managerial accounting information also would be used to determine whether the bank should lease additional processing capacity or purchase a new central processing unit. Additionally, managerial accounting information alsocould be used to achieve better control over information systems activities by evaluating the costs of ongoing operations, based on the demand for information services.

2. The hospital administrator can use managerial accounting information in a number of different ways. One way is for cost planning and control. The administrator could use managerial information to keep costs commensurate with services provided and to plan for staffing and nursing levels. This information can be used to determine the cost of various services, and thereby in making decisions with respect to the amount of service that is appropriate in each particular case. The administrator can also use managerial accounting information to determine if the hospital’s costs are being covered by fixed payments from Medicare, Medicaid, or insurance. If not, the administrator needsto know the source of the cost overruns. Does the hospital allow too many procedures? Require longer bed days? Have resources that are underutilized(e.g., a cancer wing with three patients)?

3. The CEO of the food company will use managerial accounting information to support the control of the three divisions. Each of the three divisions will be subject to a number of financial goals. The CEO also needs to support strategic decision making. In this regard, the CEO needs managerial accounting information on the profitability of various product families, profitability of different regions, and profitability of various customer segments. This information can guide the CEO in allocating future effort and resources.

4. The copy shop manager needs fairly simple managerial accounting information.At the most basic level, the copy shop manager needs to know the costs of performing various copy tasks, such as one-sided copying, two-sided copying, collating, binding, etc. These activities will have some direct costs, such as paper, and some indirect costs, such as copy machine time. The manager will need to estimate the impact of both of these costs in order to price the various copy jobs to the public. Managerial accounting information will include the cost details necessary to price the various copy shop services at a level to cover equipment costs, lease expenses, and profit.


CP 16–4 (FIN MAN); CP 1–4 (MAN)1. Obie’s bill has a number of points that should be considered. Some of the

points, with the appropriate argument, are identified below.

a. The trip back to the shop resulted in an $80 labor charge. Obie should argue that the whole hour should not be billed. The hour is the result of stocking out of a circuit board on the truck. The circuit board should have been with the repair person. There was a board for the previous customer. However, since only one was stocked, the repair person had to go back to the shop. The trip back to the shop was nonproductive time that should not have been directly charged to Obie but should be part of Geek Chic’s overhead cost to all customers. In other words, Obie should not be responsible for this mistake.

b. The overtime premium should not have been charged to Obie. What if Obie was the first appointment in the morning? If so, then there would be no overtime premium. It was only random misfortune that Obie was the last client of the day and therefore received the overtime premium. Add to this the fact that the overtime would not have been necessary without the trip back to the shop, and the conclusion is that Obie should not be directly charged for overtime. The overtime premium should be part of Geek Chic’s overhead charged to all clients equally. Obie should be charged the overtime only if the decision for overtime was caused by or required by Obie.

Thus, the labor portion of the bill should only be $70 + $60 + $60 = $190.

There are other parts of the bill that should not be in dispute.

● The materials storage and handling charge is a normal charge ofmaintaining a parts inventory for the benefit of clients that need parts.

● The fringe benefits and overhead added to the hourly rate are both reasonable. The fringe benefit attaches directly to the direct labor. Fringe benefits are just another form of compensation. The overhead must be covered by all customers. Therefore, including overhead in the hourly rate is the most logical method of covering these costs.

● The additional charge for the first hour is also reasonable. The first hourcharge covers the costs of transit, which are directly attributable to making a home visit. Obie requires a home visit, so Obie should be responsible for the costs of making the visit. If Obie brought the computer to the shop, this cost would not be incurred.


CP 16–4 (FIN MAN); CP 1–4 (MAN) (Concluded)Direct Direct

2. Cost Materials Labor OverheadCircuit board………………………………… XStorage and handling……………………… XStraight-time labor…………………………… XFringe benefits*……………………………… XOverhead……………………………………… XVehicle depreciation and fuel……………… XOvertime premium…………………………… X

*Could be considered overhead.

CP 16–5 (FIN MAN); CP 1–5 (MAN)1. The High Times manager will use managerial accounting information

to accumulate the costs associated with different menu items. The costs, both direct and indirect, will help in determining the pricing strategy.

2. The plant manager is going to use cost information on scrap and rework to identify the amount of waste occurring in the plant. This measure of waste is fairly common in fabrication-type facilities. The measures can guide the plant manager to locations or products where significant waste is occurring. The plant manager can use the scrap and rework measures to guide operational improvement toward the location that is experiencing the greatest level of scrap or rework. The measures can also monitor improvement in rework and control the number of network hours charged by floor personnel.

3. The cost of ending inventory must be determined as financial statements are prepared. The division controller will likely require inventory valuation at the close of every month, in order to have a good understanding of the month-by-month earnings of the division. The division controller will provide the ending inventory information by using managerial accounting informationin determining the cost of products. To determine the appropriate cost, theproduct cost is multiplied by the units left in inventory.

4. The Maintenance Department manager needs to be able to plan the resources to be used by his department. The planning process involves identifying the required resources to fulfill the department’s objective. For example, the Maintenance Department manager may know the repair histories of various machines. These histories can be used to forecast the repairs anticipated during the next year. The manager may also know that a new process will be brought online during the next year. New processes are frequently troublesome, so the manager will need to budget additional resources to accommodate introduction of the new technology.


CP 16–6 (FIN MAN); CP 1–6 (MAN)Note to Instructors: Consider having the teams compete for the most examples.Have half the class do the pizza restaurant and the other the copy shop, and compare results.

Some examples that may be offered by the students are the following:

Copy and Graphics ShopDirect Direct Selling

Cost Materials Labor Overhead Expenses

Paper………………………………………… XGraphic designer wages………………… XManager salary……………………………… XLease cost of copy machine……………… XCoupon costs……………………………… XAdvertising………………………………… XPackaging (bags and boxes)…………… XInk…………………………………………… XRepair costs………………………………… XProperty taxes……………………………… XStore depreciation………………………… XCashier salary……………………………… XBuilding heat and A/C……………………… XCopy machine operator wages………… XComputer depreciation…………………… XBrochures…………………………………… X


CP 16–6 (FIN MAN); CP 1–6 (MAN) (Concluded)Pizza Restaurant

Direct Direct SellingCost Materials Labor Overhead Expenses

Ingredients……………………………………… XCook wages……………………………………… XManager salary………………………………… XDepreciation on equipment

and fixtures…………………………………… XCoupon costs…………………………………… XAdvertising……………………………………… XTo-go boxes……………………………………… XDisposable plates, utensils, cups…………… XNondisposable plates, utensils, cups……… XRepair costs……………………………………… XProperty taxes…………………………………… XStore depreciation……………………………… XCashier salary…………………………………… XBeverages………………………………………… XBuilding heat and A/C………………………… XSalad ingredients……………………………… XDelivery person wages………………………… XPower costs for ovens………………………… X

In service businesses, such as those above, the distinction between direct laborand overhead will not always be clear.


CHAPTER 16 (FIN MAN); CHAPTER 1 (MAN) MANAGERIAL ... Content... · 1. Financial accounting and...

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