Chapter 18

Managerial Accounting Concepts and Principles

QUESTIONS
1. The managerial accountant plays an important role in preparing the information necessary for effective planning and control decisions. One example is the budget, which is a quantitative expression of a companys long-run and short-run plans. The budget is used to compare actual results to planned performance. With this type of information provided by the managerial accountant, management strives to continuously improve a business. 2. Financial Accounting (a) Users and decision makers (b) Purpose of information (c) Flexibility of practice (d) Time dimension Investors, creditors, and other users external to the organization Assist external users in making investment, credit, and other decisions Structured and often controlled by GAAP Historical information with minimum predictions Emphasis on whole organization Managerial Accounting Managers, employees, and decision makers internal to the organization Assist managers in making planning and control decisions Relatively flexible (no GAAP) Many projections and estimates; historical information also presented Emphasis on projects, processes, and subdivision of an organization

(e) Focus of information

3. A customer orientation has led companies to adopt the principles of the lean business model in response to consumer demands. The essence of customer orientation is that all managers and employees should be sensitive to the wants and needs of customers, attempting to develop flexible product designs and production processes that are responsive to changes in customer demands along with minimization of defects. They are increasingly adopting management practices such as total quality management (TQM), just-in-time (JIT) manufacturing, and continuous improvement (CI). 4. Direct materials are raw materials that physically become part of the product and are clearly identified with specific units or batches of product. Indirect materials are
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used in support of the production process but usually do not become a part of the product and/or are not clearly identified with or economically traceable to units or batches of product. Some materials are identified as indirect because they are of insignificant value or it is not cost beneficial to trace them to finished products. 5. Direct labor refers to the efforts of employees who physically convert materials to finished product. Indirect labor refers to the efforts of employees who do not work specifically on converting direct materials into finished products and whose efforts are not clearly associated (or traceable) with specific units or batches of product. 6. Factory overhead is limited to indirect costs that are incurred in the production process. That is, it consists of activities that support the production process, such as indirect material, indirect labor, heat, and related factory utilities. Selling and administrative overhead costs do not pertain to the production process. Instead, selling and administrative overhead are activities involved with selling the product and running the business. Accordingly, selling and administrative overhead costs are expensed as period costs. 7. Direct labor can be either a prime cost or a conversion cost. 8. Direct costs include: costs for flour, sugar, yeast, cocoa, baking powder, toppings, and wages of workers baking the goods. Indirect costs include: cost of supervisors salaries, factory lighting, factory heat, wages of maintenance workers, depreciation of factory equipment, insurance on the factory buildings, and property taxes on the factory buildings. Note: Other answers are possible as these lists are not comprehensive. 9. Management should be evaluated on the basis of controllable costs. This is because these are the costs they can influence. Uncontrollable costs are not under the influence of these managers, and they should not be held accountable for them. 10. Management usually must be able to predict financial performance to be successful. Therefore, understanding how costs behave under different market conditions and production schedules enables them to better predict financial performance and to plan accordingly. 11. Product costs are capitalized because they represent a future value (an asset) to the business. Period costs are expensed because they are consumed in the current period. 12. A manufacturing business produces a product, whereas in a merchandising or service business this is not the case. In making a product, the manufacturing business must control and measure three types of inventories: raw materials, goods in process, and finished goods. A merchandising business, on the other hand, must control and measure only merchandise inventory, and a service firm typically does not control and measure any inventory. 13. To run a successful business, management must make predictions and estimates about what will occur in the future. Thus, managerial accountants must project how the numbers will look under different possibilities.

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14. A manufacturing company would report three types of inventories on its balance sheet: raw materials, goods in process, and finished goods. The finished goods are included on the income statement as part of cost of goods sold. A merchandising company would report only one inventory item (merchandise inventory) on its balance sheet, and would include the merchandise inventory on the income statement as part of cost of goods sold. (Note: The manufacturer would add cost of goods manufactured to the beginning finished goods to determine the goods available for sale. The merchandising firm adds purchases to its beginning merchandise inventory to determine the goods available for sale.) 15. Krispy Kremes Note #4 reports: Raw materials, $6,819; Work in progress, $234; Finished goods, $6,010; Purchased merchandise; $11,157, and Manufacturing supplies, $145- all dollars in thousands. This total amount reconciles with the inventory amount reported on its balance sheet. 16. Manufacturers balance sheets usually include small tools, factory buildings, factory machinery, and patents that are used to produce finished goods. For example, under the Plant Assets category you will often find factory machinery and factory building. A merchandising company would usually not own these assets. 17. Manufacturing a product requires raw materials, which are converted to finished goods. Manufacturing companies maintain raw materials inventory so that they have materials available to produce goods. Any unfinished product is classified as goods in process. Goods in process inventory may be maintained to keep the factory running. Finished goods inventory is maintained to supply to customers when they place orders. (Note: A JIT system attempts to minimize all three types of inventory.) 18. Manufacturing activities of a company are described in the manufacturing statement. This statement summarizes the types and amounts of costs incurred in a companys manufacturing process (or activities) . 19. The three categories of manufacturing costs are: direct materials, direct labor, and factory overhead. 20. Examples of factory overhead costs include: indirect materials, indirect labor, depreciation of the factory equipment and plant, amortization of patents, the cost of small tools used, factory utilities, insurance on the factory and equipment, property taxes on plant and equipment, property taxes on materials and goods in process inventories, and repairs and maintenance on the factory building and equipment. More generally, all costs associated with manufacturing a good that are not classified as direct material or direct labor are included in overhead. 21. Components of Manufacturing Statement Direct material...................................................... Direct labor........................................................... Factory overhead................................................. Computation of cost of goods manufactured.... Examples of each for Harley Leather, chrome, tires Wages of production employees Glue, factory heat, factory lighting Computation (see Exhibit 18.16)

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22.

HARLEY-DAVIDSON, INC Manufacturing Statement For the Year Ended December 31, 2002 The date matches the period of the income statement. The manufacturing statement supports the income statement in computing cost of goods available for sale for the cost of goods sold section.

23. The income statement describes the revenues and expenses for the yearincluded in the calculation of the cost of goods sold is a line item identified as the cost of goods manufactured. This amount is calculated and reported as the bottom line of the manufacturing statement. The manufacturing statement often includes a component line item showing only the total amount of factory overhead cost for the period. When this is done, a table of factory overhead costs explains the details underlying this single item on the manufacturing statement. 24. Definition: Unit contribution margin = Sales price per unit - Variable costs per unit. Unit contribution margin is the per unit dollars available to cover fixed costs, with the remainder being profit. 25. Definition: Contribution margin ratio = Contribution margin / Sales price per unit. The contribution margin ratio tells what percent of each sales dollar is available to cover fixed costs, with the remainder being profit. 26. Contribution margin ratio means that for each sales dollar a specified percent is available to cover fixed costs and contribute to profits. To illustrate, if a company has a 75% contribution margin ratio, then 75% (or 75 ) of each sales dollar is available to cover fixed costs and contribute to profits. 27. Contribution margin ratio can help Krispy Kreme management determine the bakery items that currently are profitable. It also can be used to help predict which bakery items will be most profitable in the future. In addition, if a product has an unacceptably low contribution margin ratio, management can try to find ways to reduce the products variable costs without reducing quality.

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QUICK STUDIES
Quick Study 18-1 (5 minutes) Answer: 2. Quick Study 18-2 (10 minutes) 1. 2. 3. 4. 5. Financial accounting Managerial accounting Financial accounting Managerial accounting Financial accounting

Quick Study 18-3 (10 minutes) 1. 2. 3. 4. B D A C

Quick Study 18-4 (5 minutes) Answer: 2. Quick Study 18-5 (5 minutes) Answer: 3. Quick Study 18-6 (5 minutes) Answer: 1. (a)(b)(c) is the usual sequence, exceptions are possible.

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Quick Study 18-7 (10 minutes) Answer is 3. Cost of goods sold is computed as Beginning finished goods inventory............. Cost of goods manufactured......................... Goods available for sale............................. Ending finished goods inventory.................. Cost of goods sold.......................................... Quick Study 18-8 (5 minutes) Production activities Sales activities Materials activities 2 3 1 $ 700 5,000 5,700 850 $4,850

Quick Study 18-9 (15 minutes) Triton Company Manufacturing Statement For Year Ended December 31, 2005 Direct materials.................................................................................. Direct labor ........................................................................................ Factory overhead costs..................................................................... Total manufacturing costs ............................................................... Add goods in process, December 31, 2004..................................... Total cost of goods in process......................................................... Less goods in process, December 31, 2005.................................... Cost of goods manufactured............................................................

$192,500 65,150 26,000 283,650 159,600 443,250 144,750 $298,50 0

Quick Study 18-10 (10 minutes) Contribution margin $6,000 $4,000 = $2,000

Contribution margin ratio ($6,000 - $4,000) / $6,000 = 0.33 (or 33%)*

*Rounded to the nearest cent.

Interpretation: This result indicates 33 cents of each sales dollar is available to cover fixed costs and contribute to profit.

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Quick Study 18-11 (10 minutes) Finished goods inventory, December 31, 2004..................... Plus cost of goods manufactured.......................................... Cost of goods available for sale............................................. Less finished goods inventory, December 31, 2005............. ................................................................................................... Cost of goods sold.................................................................. $ 321,500 972,345 1,293,845 297,200 $ 996,645

EXERCISES
Exercise 18-1 (10 minutes)
Primary Information Source

Business Decision
Estimate product cost for new line of basketball shoes.... Plan the budget for next quarter....................................... Report financial performance to the board of directors.....

Managerial Financial
X

Measure profitability of all individual stores................... Prepare financial reports according to GAAP................. Determine dividends to pay common stockholders...... Determine location and size for a new plant................... Evaluate a purchasing departments performance........

X X X X X X

X X X X

Exercise 18-2 (10 minutes) 1) Planning is the process of setting goals and making plans to achieve them. 2) Long-term planning usually covers a period of five to ten years. 3) Short-term planning usually covers a period of one year. 4) Controlling is the process of monitoring planning decisions and evaluating the organizations activities and employees.

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Exercise 18-3 (15 minutes)

1. Users and decision makers 2. Purpose of information 3. Flexibility of practice Financial Accounting Investors, creditors and other users external to the organization. Assist external users in making investment, credit, and other decisions. Structured and often controlled by GAAP. Managerial Accounting Managers, employees, and decision makers internal to the organization. Assist managers in making planning and control decisions. Relatively flexible (no GAAP). Available quickly without the need to wait for an audit. Many projections and estimates; historical information also presented. Emphasis on projects, processes, and subdivisions of an organization. Mostly monetary; some nonmonetary information.

4. Timeliness of Often available only after the information audit is complete. 5. Time dimension 6. Focus of information 7. Nature of information Historical information with minimum predictions. Emphasis on whole organization. Monetary information.

Exercise 18-4 (45 minutes)

Note: Answers will vary depending on the customer response card chosen.

General solution: There should be a pattern in linking competitive forces to customer response card. The cards should capture information about each competitive force. If they do not, you may want to ask students to follow up with these particular businesses to ask why they are not trying to capture information pertaining to all competitive forces. Exercise 18-5 (10 minutes) 1. 2. 3. (b) (a), (c), and (d) (a) and (c)

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Exercise 18-6 (20 minutes)

Product Cost Prime Conversion Direct materials used................ X State and federal income taxes . Payroll taxes for production X supervisor.............................. Amortization of patents on X factory machine..................... Accident insurance on factory X X workers* ................................ Wages to assembly workers**.... X X Factory utilities......................... X Small tools used........................ X Bad debts expense.................... DepreciationFactory building X Advertising................................ Office supplies used .................
*

Period Direct Cost Cost X X

Indirect Cost

X X X X X X X X X X X

**

There are certain costs that can be classified as direct for one company and indirect for another. The specific classification depends on the materiality and cost benefit of tracking. For example, some companies track employee benefits for direct and indirect workers. Yet, some manufacturing companies will simply classify all employee benefits as indirect and overhead. Direct labor is a prime and conversion cost because this labor force is in direct contact with the product in the conversion process.

Exercise 18-7 (15 minutes) 1. Five cost classifications are (a) Behavior (c) Controllability (b) Traceability (d) Relevance (e) Function

2. Two purposes of identifying these separate cost classifications (a) Cost classifications provide a standardized framework for using cost accounting information by management. (b) Cost classifications are useful in different types of management analysis. For example, cost accounting is used to evaluate employees, management, divisions, regions, and customer profitability; each has a unique framework for analysis and decision making. In short, different analyses usually require a different role for cost information. Many of these analyses will be expanded upon in Chapters 19-25.

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Exercise 18-8 (20 minutes) 1.

Cost by Behavior Cost by Traceability

Product Cost Leather cover for soccer balls............ Lace to hold the leather together....... Wages of assembly workers............... Taxes on factory.................................. Annual flat fee paid for office security. Coolants for machinery....................... Machinery depreciation.......................

Variable X X X

Fixed

Direct X

Indirect

X X X X X X X X X X

2. Most fixed costs are indirect. Fixed costs normally are resources acquired to support the production process rather than being traceable to individual products or batches of product. However, not all indirect costs are fixed. Some, like indirect materials, are variable.
For example, as production increases, the total cost of the laces consumed in production increases. These laces might be classified as direct materials. But since their value is low compared to the total value of the soccer ball, it is not worth the effort to try and trace the amount that goes into each ball. This is why they are treated as indirect. In addition, the direct costsdirect materials and direct laborare variable. They are identified with specific items or batches of items, and the total cost of the raw materials and labor consumed increases as production increases.

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Exercise 18-9 (20 minutes) Part 1 Company 1, Sun Fresh Foods, is a merchandising firm with only one inventory item, merchandise inventory. Company 2, Roller Blades Mfg., is a manufacturing company with 3 inventory categories (raw materials, goods in process, and finished goods). Part 2 Company 1 Sun Fresh Foods Current Asset Section December 31, 2005 Cash................................................ Accounts receivable...................... Merchandise inventory................. Prepaid expenses.......................... Total current assets...................... Company 2 Roller Blades Mfg. Current Asset Section December 31, 2005 Cash................................................ Accounts receivable...................... Raw materials inventory............... Goods in process inventory......... Finished goods inventory............. Prepaid expenses.......................... Total current assets......................

9,000 64,000 47,000 3,500 $123,500

7,000 77,000 44,000 32,000 52,000 700 $212,700

Discussion: The current asset section for these two companies differs because one is a merchandiser and one is a manufacturer. Sun Fresh Foods purchases items for resale, so it has only one type of inventory. Roller Blades Mfg., on the other hand, must report its inventories at the various stages of completion: Raw materials are items not yet put into the process; Goods in process are started but not complete; and Finished goods are ready for sale.

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Exercise 18-10 (20 minutes) Merchandising Business CENTURY Partial Income Statement For Year Ended December 31, 2005 Cost of goods sold Merchandise inventory, December 31, 2004..................... Merchandise purchases...................................................... Goods available for sale..................................................... Less merchandise inventory, December 31, 2005............ Cost of goods sold.............................................................. Manufacturing Business NEW HOMES Partial Income Statement For Year Ended December 31, 2005 Cost of goods sold Finished goods inventory, December 31, 2004................ Cost of goods manufactured............................................. Goods available for sale.................................................... Less finished goods inventory, December 31, 2005....... Cost of goods sold............................................................. $ 500,000 886,000 1,386,000 144,000 $1,242,000 $ 250,000 460,000 710,000 150,000 $ 560,000

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Exercise 18-11 (30 minutes) Canyon Company 1. COST OF GOODS MANUFACTURED Direct materials Beginning raw materials inventory.............. Raw materials purchases............................. Raw materials available for use................... Less ending raw materials inventory.......... Direct materials used.................................... Direct labor....................................................... Factory overhead Rental cost on factory equipment............... Factory utilities.............................................. Factory supplies used.................................. Indirect labor................................................. RepairsFactory equipment....................... Total factory overhead.................................. Total manufacturing costs.............................. Beginning goods in process inventory.......... Total cost of goods in process....................... Less ending goods in process inventory...... Cost of goods manufactured.......................... 2. COST OF GOODS SOLD Beginning finished goods inventory.............. Cost of goods manufactured.......................... Cost of goods available for sale..................... Less ending finished goods inventory........... Cost of goods sold........................................... $ 14,000 110,680 124,680 19,650 $105,030 $ 18,450 153,860 172,310 15,300 $157,010 $ 9,250 35,000 44,250 7,300 36,950 21,000 29,000 11,000 10,200 3,250 6,780 60,230 118,180 16,500 134,680 24,000 $110,680 $ 11,000 54,000 65,000 9,200 55,800 37,000 24,750 14,000 5,200 9,660 3,500 57,110 149,910 21,950 171,860 18,000 $153,860 Crossings Company

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Exercise 18-12 (25 minutes)

Account Accounts receivable................. Computer supplies used in office........................................ Beginning finished goods inventory.................................. Beginning goods in process inventory.................................. Beginning raw materials inventory.................................. Cash............................................ Depreciation expense Factory building...................... Depreciation expense Factory equipment................. Depreciation expenseOffice building.................................... Depreciation expenseOffice equipment................................ Direct labor................................. Ending finished goods inventory.................................. Ending goods in process inventory.................................. Ending raw materials inventory.................................. Factory maintenance wages.... Computer supplies used in factory...................................... Income taxes.............................. Insurance on factory building.. Rent cost on office building..... Office supplies used................. Property taxes on factory building.................................... Raw materials purchases......... Sales........................................... Balance Income Manufacturing Overhead Sheet Statement Statement Report

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Exercise 18-13 (25 minutes) RANDA COMPANY Manufacturing Statement For Year Ended December 31, 2005 Direct materials Raw materials inventory, December 31, 2004.......... Raw materials purchases .......................................... Raw materials available for use ................................ Less raw materials inventory, December 31, 2005. . Direct materials used ................................................. Direct labor..................................................................... Factory overhead Factory computer supplies used............................... Indirect labor............................................................... RepairsFactory equipment..................................... Rent cost of factory building..................................... Total factory overhead costs .................................... Total manufacturing costs ........................................... Goods in process inventory, December 31, 2004....... Total cost of goods in process .................................... Less goods in process inventory, December 31, 2005.. Cost of goods manufactured........................................ Exercise 18-14 (20 minutes) RANDA COMPANY Income Statement For Year Ended December 31, 2005 Sales................................................................................ $1,252,000 Cost of goods sold Finished goods inventory, December 31, 2004........ $ 64,750 Cost of goods manufactured..................................... 546,390 Cost of goods available for sale................................ 611,140 Less finished goods inventory, December 31, 2005... 69,300 Cost of goods sold..................................................... 541,840 Gross profit.................................................................... 710,160 Operating expenses Advertising expenses................................................. 96,000 General and administrative expenses....................... 131,300 Total operating expenses........................................... 227,300 Operating income.......................................................... $ 482,860 19,840 49,000 7,250 59,000 $ 39,000 177,600 216,600 44,700

$171,900 227,000

135,090 533,990 55,900 589,890 43,500 $546,390

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Exercise 18-15 (15 minutes)

Materials Activity Raw materials purchases $37,500

Beginning raw materials inventory $7,500

Raw materials available for use in production $45,000

Ending raw materials inventory $5,000

Direct materials used in production $40,000 Production Activity Direct labor used in production $78,000 Factory overhead used in production $132,000

Beginning goods in process inventory $22,500

Total goods in process $272,500

Ending goods in process inventory $27,000

Finished goods manufactured $245,500 Sales Activity Beginning finished goods inventory $40,500 Finished goods available for sale $286,000 Ending finished goods inventory $30,000

Finished goods sold $256,000

McGraw-Hill Companies, Inc., 2005 18 Fundamental Accounting Principles, 17th Edition

PROBLEM SET A
Problem 18-1A (20 minutes) The managerial accounting professional must do more than assign value to ending inventory and cost of goods sold. S/he must understand the industry and the current business environment of the company. The managerial accounting professional must be able to estimate the costs and benefits of business plans. This can include, for example, cost/benefit analyses of (1) a JIT manufacturing system and/or (2) a new computer or technology system to better serve the customer. Specifically for the automobile industry, the managerial accountant must estimate the potential revenue of a new vehicle and the costs of production. To properly estimate the revenue and costs of production, the managerial accountant must understand the automobile industry and the competitive forces in the global automobile industry.

Problem 18-2A (60 minutes)

Note: There is more than one solution to this problem. This problem is a useful in class team activity after students have worked on it alone.

Sample solution
Restaurant TQM JIT CI

1. Taco Bell

Courteous employees, Delivery as fast as possible Courteous employees, Delivery as fast as possible

Inventory delivered daily, Make to order Inventory delivered daily, Make in advance

New products, Standardized process New products, Standardized process

2. McDonalds

Students should record how these organizations compete on the same or similar factors.

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Problem 18-3A (45 minutes) Part 1 Cost classification and amounts

Cost by Function Product Period $12,000 60,000 4,500 $45,000 25,000 7,000 100,000 9,000 $10 x units
sold

Cost by Behavior Costs Variable Fixed Plastic for casing$12,000 .............. $12,000 Wages of assembly workers$60,000 60,000 Property taxes on factory$4,500 .... $ 4,500 Accounting staff salaries$45,000. . 45,000 Drum stands (1,000 stands outsourced)$25,000 ......... 25,000 Rent cost of equipment for sales staff$7,000.......................... 7,000 Upper management Salaries$100,000.......................... 100,000 Annual flat fee paid for maintenance service$9,000................................. 9,000 Sales commissions$10 per unit .... $10 x units
sold

Machinery depreciation$10,000.....

10,000

10,000

Part 2
NeatBeat Contribution Margin Income Statement For Year Ended December 31, 2005 Sales ($300 x 1,000)......... $300,000 100% Variable costs Plastic for casing ........... $12,000 Assembly worker wages . 60,000 Drum stands.................. 25,000 Sales commissions....... 10,000 107,000 36% Contribution margin........ $193,000 Contribution margin ratio 64%*
*Contribution margin ratio = Contribution margin ($193,000) / Sales ($300,000).

Part 3

Analysis Component

Contribution margin shows how much of total sales is available to cover fixed costs and contribute to operating income. This is why the title for this statement is Contribution Margin Income Statement. Contribution margin ratio shows management the percent of each sales dollar that is available to cover fixed costs and to contribute to operating income. That is, for each $1 of sales, $0.64 is available both to cover fixed costs and to contribute to operating income.

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Problem 18-4A (30 minutes)

TO: FROM: DATE: SUBJECT:

MEMORANDUM

The memorandum content should include the following points: Product and period costs are different. Product costs are defined as direct material, direct labor, and factory overhead. Moreover, product costs are capitalized and expensed as sold. All other costs, such as administrative and selling expenses, are reported and expensed in the period incurred and are called period costs. Period costs are the types of expenses usually identified as operating expenses. Product costs can be further understood by thinking about what takes place in the production process. Direct material and direct labor are primary components to the production process, thus these costs are labeled prime costs. Direct labor and factory overhead are key resources applied to the conversion of the raw materials to a finished product, so these costs are labeled conversion costs. A merchandising business does not transform a raw material to a finished product. Therefore, a merchandising business does not have to be concerned with prime and conversion costs. Purchases are the only product cost category for a merchandiser.

Problem 18-5A (60 minutes)

Note: There can be more than one right answer to this problem. Students can experience some frustration in completing this assignment. Their reaction is normal and a part of the process in learning how difficult it is to make estimates of opportunity costs.

A good answer to this problem should show estimates for (a) lost revenue from both repeat business and referrals from satisfied customers, and (b) the added costs associated with both re-work and lost production. A good answer would also show that purchasing a higher quality product at a greater cost can save money in the long run. Specifically, the answer should appear similar to the following: (1) From the data available in Decision Maker, the company saves $90,000, computed as 3,000 motorcycles multiplied by $30 per seat ($145 - $115). (2) Estimates must be made of opportunity costs (and revenues): (a) Lost customer revenue from repeat business and referrals (10 lost customers x $3,000 lost contribution margin) = $30,000. (b) Lost production (1% x 250 days x 8 hours x $2,000 per hour) = $40,000. (3) Recommend to buy from Supplier (B) based on the following: The $90,000 out-of-pocket cost savings exceed the total cost of lost contribution margin ($30,000) and lost production ($40,000).
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Problem 18-6A (40 minutes) Part 1 Units and dollar amounts of raw materials inventory in heels Beginning inventory, December 31, 2004 (1,500 units x $5).... Purchases during 2005 (50,000 units x $5)............................... Inventory available for production........................................... Ending inventory, December 31, 2005 ([1,500+50,000-40,000*] units x $5)......................................... Inventory transferred into production.......................................
*Note: 20,000 pairs of boots requires 40,000 heels.

7,500

250,000 257,500 57,500 $200,000

Part 2

Analysis Component Topics of discussion for this memorandum include:

Description (general) of the JIT inventory system and how it operates. Cutting the heel inventory in half would free up $28,750 of working capital (11,500 units x x $5 cost). The funds freed up could be used to reduce debt, train employees, or purchase new equipment. The company would save on insurance, tracking, warehouse space, time, and material handling costs, if inventory is reduced. Additional costs from a JIT system would arise from more frequent ordering, deliveries, and possibly handling.

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Problem 18-7A (40 minutes) Part 1 MERCHANDISING BUSINESS

PINNACLE RETAIL

Partial Income Statement For Year Ended December 31, 2005 Cost of goods sold Merchandise inventory, December 31, 2004......................... Merchandise purchases.......................................................... Goods available for sale......................................................... Less merchandise inventory, December 31, 2005................ Cost of goods sold.................................................................. MANUFACTURING BUSINESS
SLOPE BOARD MFG

$150,000 250,000 400,000 100,000 $300,000

Partial Income Statement For Year Ended December 31, 2005 Cost of goods sold Finished goods inventory, December 31, 2005..................... Cost of goods manufactured.................................................. Goods available for sale......................................................... Less finished goods inventory, December 31, 2005............ Cost of goods sold.................................................................. Part 2
TO: FROM: DATE: SUBJECT:

$300,000 586,000 886,000 200,000 $686,000

MEMORANDUM

The answers will vary but should include: The Merchandise Inventory account on December 31 for Pinnacle and the Finished Goods Inventory account on December 31 for Slope Board are computed and reported on the income statement as part of cost of goods sold. The inventory accounts must also be included in the current asset section of the balance sheet. The Merchandise Inventory account at December 31 for Pinnacle and the Finished Goods Inventory account at December 31 for Slope Board are the inventory accounts. Since Slope Board is a manufacturer, it will also have raw materials and goods in process inventory accounts.

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Problem 18-8A (75 minutes) Part 1 PLAZA COMPANY Manufacturing Statement For Year Ended December 31, 2005 Direct materials Raw materials inventory, December 31, 2004..... Raw materials purchases...................................... Raw materials available for use............................ Less raw materials inventory, December 31, 2005 Direct materials used............................................. Direct labor................................................................ Factory overhead Depreciation expenseFactory equipment........ Factory supervision............................................... Factory supplies used........................................... Factory utilities...................................................... Indirect labor.......................................................... Miscellaneous production costs.......................... Rent expenseFactory building.......................... Maintenance expenseFactory equipment........ Total factory overhead costs................................ Total manufacturing costs....................................... Goods in process inventory, December 31, 2004. . Total cost of goods in process................................ Less goods in process inventory, December 31, 2005............................................................................. Cost of goods manufactured................................... $ 168,850 927,000 1,095,850 184,000 $ 911,850 677,480 35,550 104,600 9,350 35,000 58,875 10,425 78,800 37,400 370,000 1,959,330 17,700 1,977,030 21,380 $1,955,650

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Problem 18-8A (Continued) Part 2 PLAZA COMPANY Income Statement For Year Ended December 31, 2005 Sales......................................................................... Less sales discounts.............................................. Net sales.................................................................. Cost of goods sold Finished goods inventory, December 31, 2004.... $ 169,350 Cost of goods manufactured................................. 1,955,650 Goods available for sale......................................... 2,125,000 Less finished goods inventory, December 31, 2005 . 138,490 Cost of goods sold................................................. Gross profit from sales............................................ Operating expenses Selling expenses Advertising expense............................................. 30,750 Depreciation expenseSelling equipment........ 10,600 Rent expenseSelling space.............................. 28,100 Sales salaries expense......................................... 394,560 Total selling expenses.......................................... General and administrative expenses Depreciation expenseOffice equipment.......... 9,250 Office salaries expense........................................ 65,000 Rent expenseOffice space................................ 24,000 Total general and administrative expenses........ Total operating expenses....................................... Income before state and federal taxes.................... Income taxes expense.............................................. Net income.................................................................

$4,527,000 64,500 4,462,500

1,986,510 2,475,990

464,010

98,250 562,260 1,913,730 235,725 $1,678,005

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Problem 18-8A (Continued) Part 3

Raw Materials Finished Goods

Cost of raw materials used........................................... Cost of finished goods sold.......................................... Beginning inventory...................................................... Ending inventory............................................................ Total beginning plus ending inventory........................ Average inventory (Total / 2)......................................... Inventory turnover (COGS / Average inventory)......... Days sales in inventory [(Ending inv./COGS) x 365]...

$911,850

$1,986,510

$168,850 $ 169,350 184,000 138,490 $352,850 $ 307,840 $176,425 $ 153,920 5.2 73.7 12.9 25.4

Discussion: The inventory turnover ratio for the raw materials inventory is substantially lower than the turnover ratio for finished goods. One reason for the difference could be that source of supply for raw materials is relatively undependable, so that management believes it is necessary to carry a larger inventory to sustain operations through periods when the supply might be interrupted. Another possible reason is that significant volume discounts can be obtained by making larger purchases of the raw materials. It is also possible that management has been carrying too much in the inventory of raw materials, and could reduce the level without harming the companys ability to operate. On the other hand, the turnover ratio for finished goods might be higher because the market for the product is so active that items are sold very quickly after they are available. This implies that the demand for the product is very strong. It is also possible that the finished goods turnover ratio is too high and that the company is risking lost sales by not having enough product on hand. Similar inferences are drawn from the days sales in inventory ratio results. In particular, the company is carrying 73.7 days supply of raw materials inventory. Note that the company carries less than half as many days supply (25.4 days) in its finished goods inventory.

McGraw-Hill Companies, Inc., 2005 26 Fundamental Accounting Principles, 17th Edition

Problem 18-9A (60 minutes)

Instructor note: There is more than one solution to this problem.

Part 1 Some possible suggestions: Add additional departments such as a Flower Shop, Bakery, and Pharmacy. (Another approach may be to increase efficiency such as do-it-yourself check-out scanners, delivery services, etc.) Part 2 Figure Sales CMR*
*

One possible solution using the suggestions from Part 1 Source (from student) (from student) Flower shop $60,000 50% Bakery $15,000 50% Pharmacy $20,000 12.5%

Estimates of the contribution margin ratio (CMR).

Total increase in contribution margin = ($60,000 x 50%) + ($15,000 x 50%) + ($20,000 x 12.5%) = $30,000 + $7,500 + $2,500 = $40,000

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 27

PROBLEM SET B
Problem 18-1B (20 minutes) The managerial accounting professional must do more than assign value to ending inventory and cost of goods sold. S/he must understand the industry and the current business environment of the company. The managerial accounting professional must be able to estimate the costs and benefits of business plans. This can include, for example, cost/benefit analyses of (1) a JIT manufacturing system and/or (2) a new computer or technology system to better serve the customer. Specifically for the home electronics industry, the managerial accountant must estimate the potential revenue of new home electronic lines and the costs of production. To estimate the revenue and costs of production the managerial accountant must understand the home electronics industry and the related competitive forces in the global home electronics industry.

Problem 18-2B (60 minutes)

Note: There is more than one solution to this problem. This problem is a useful in class team activity after students have worked on it alone.

Sample solution
Photography Store TQM JIT CI

1. Ritz Camera Courteous and Video employees, Delivery as fast as possible 2. Local Camera Store Courteous employees, Delivery as fast as possible

Inventory delivered daily

New products, for example disposable camera New products, for example digital camera or cameras built into cell phones.

Inventory delivered daily

Students should record how these organizations compete on the same or similar factors.

McGraw-Hill Companies, Inc., 2005 28 Fundamental Accounting Principles, 17th Edition

Problem 18-3B (45 minutes) Part 1 Cost classification and amounts

Cost by Behavior Cost by Function Costs Variable Fixed Product Period Plastic for CDs$1,000.................. $ 1,000 $ 1,000 Wages of assembly workers $20,000...................................... 20,000 20,000 Rent cost of factory$4,500.......... $ 4,500 4,500 Systems staffs salary$10,000..... 10,000 $ 10,000 Labeling (12,000 outsourced) $2,500 total................................ 2,500 2,500 Rent cost of office equipment$700 700 700 Upper management salaries $100,000..................................... 100,000 100,000 Annual fees for cleaning service$3,000......................... 3,000 3,000 Sales commissions$0.50 per CD. $0.50 x $0.50 x
CDs sold CDs sold

Machinery depreciation$15,000. .

15,000

15,000

Part 2
HIP-HOP Contribution Margin Income Statement For Year Ended December 31, 2005 Sales ($15 x 12,000) .......... $180,000 100% Variable costs Plastic for CDs................. $ 1,000 Assembly worker wages. . 20,000 Labeling........................... 2,500 Sales commissions.......... 6,000 29,500 16% Contribution margin........... $150,500 Contribution margin ratio 84%*
*Contribution margin ratio = Contribution margin ($150,500) / Sales ($180,000).

Part 3

Analysis Component

Contribution margin shows how much of total sales is available to cover fixed cost and contribute to operating income. This is why the title for this statement is Contribution Margin Income Statement. Contribution margin ratio shows management the percent of each sales dollar that is available to cover fixed costs and to contribute to operating income. That is, for each $1 of sales, $0.84 is available to cover both fixed costs and contribute to operating income.

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 29

Problem 18-4B (30 minutes)

MEMORANDUM
TO: FROM: DATE: SUBJECT:

The memorandum content should include the following points: The memorandum should begin with a clarification between prime and conversion costs. Prime costs are resources consumed with direct production of a good. Thus, prime costs consist of direct materials and direct labor. Conversion costs are resources consumed by converting the product to a finished good. Thus, conversion costs are direct labor and factory overhead. Prime and conversion costs are also classified as product costs because they are capitalized and expensed when the product is sold. Period costs are resources committed to support sales and administration. For example, sales commission and office rent are labeled period costs. Period costs are not capitalized.

Problem 18-5B (60 minutes)

Note: There can be more than one right answer to this problem. Students can experience some frustration in completing this assignment. Their reaction is normal and a part of the process in learning how difficult it is to make estimates of opportunity costs.

A good answer to this problem should show estimates for (a) lost revenue from both repeat business and referrals from satisfied customers, and (b) the added costs associated with both re-work and lost production. A good answer would also show that purchasing a higher quality product at a greater cost can save money in the long run. Specifically, the answer should appear similar to the following: (1) From the data available in Decision Maker, the company saves $60,000, computed as 2000 motorcycles multiplied by $30 per seat ($145 - $115). (2) Estimates must be made of opportunity costs (and revenues): (a) Lost customer revenue from repeat business and referrals (8 lost customers x $4,000 lost contribution margin) = $32,000. (b) Lost production (1% x 250 days x 8 hours x $500 per hour) = $10,000. (3) Recommend to buy from Supplier (B) based on the following: The $60,000 out-of-pocket cost savings exceed the total cost of lost contribution margin ($32,000) and lost production ($10,000).

McGraw-Hill Companies, Inc., 2005 30 Fundamental Accounting Principles, 17th Edition

Problem 18-6B (40 minutes) Part 1 Unit and dollar amounts of raw materials inventory in blades Beginning inventory, December 31, 2004 (2,000 x $15) ................... $ 30,000 Purchases of blades during 2005 (45,000 x $15) ............................. Blade inventory available for production........................................
Ending inventory, December 31, 2005 ([2,000+45,000-40,000*] x $15)

675,000 705,000 105,000 $600,000

Blade inventory transferred to production.......................................

*20,000 pairs of skates = 40,000 blades

Part 2

Analysis Component Topics of discussion for the memorandum include:

General description of the JIT inventory system and how it operates. Cutting the blade inventory in half would free up $52,500 of working capital (7,000 units x x $15). The funds freed up could be used to reduce debt, train employees, or purchase new equipment. The company would save on insurance, tracking, warehouse space, time, and material handling costs if inventory is reduced. Additional costs from a JIT system would arise from more frequent ordering, deliveries, and possibly handling.

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 31

Problem 18-7B (40 minutes) Part 1 MERCHANDISING BUSINESS CARDINAL DRUG RETAIL Partial Income Statement For Year Ended December 31, 2005 Cost of goods sold Merchandise inventory, December 31, 2004.......................... Merchandise purchases........................................................... Goods available for sale.......................................................... Less merchandise inventory, December 31, 2005................. Cost of goods sold................................................................... MANUFACTURING BUSINESS NANDINA MFG Partial Income Statement For Year Ended December 31, 2005 Cost of goods sold Finished goods inventory, December 31, 2004...................... Cost of goods manufactured................................................... Goods available for sale.......................................................... Less finished goods inventory, December 31, 2005.............. Cost of goods sold................................................................... Part 2
TO: FROM: DATE: SUBJECT:

$ 50,000 350,000 400,000 25,000 $375,000

$200,000 686,000 886,000 300,000 $586,000

MEMORANDUM

The answers will vary slightly but should include: The Merchandise Inventory account on December 31 for Cardinal Drug and the Finished Goods Inventory account on December 31 for Nandina Mfg. are computed and reported on the income statement as part of cost of goods sold. The inventory accounts must also be included in the current asset section of the balance sheet. The Merchandise Inventory account at December 31 for Cardinal Drug and the Finished Goods Inventory account at December 31 for Nandina Mfg. are the inventory accounts. Since Nandina Mfg. is a manufacturer, it will also have raw materials and goods in process inventory accounts.

McGraw-Hill Companies, Inc., 2005 32 Fundamental Accounting Principles, 17th Edition

Problem 18-8B (75 minutes) Part 1 FIRETHORN FURNITURE Manufacturing Statement For Year Ended December 31, 2005 Direct materials Raw materials inventory, December 31, 2004........ Raw materials purchases........................................ Raw materials available for use.............................. Less raw materials inventory, December 31, 2005. Direct materials used............................................... Direct labor................................................................... Factory overhead Depreciation expenseFactory equipment........... Factory supervision................................................. Factory supplies used.............................................. Factory utilities......................................................... Indirect labor............................................................. Miscellaneous production costs............................. Rent expenseFactory building............................. Maintenance expenseFactory equipment........... Total factory overhead costs................................... Total manufacturing costs.......................................... Goods in process inventory, December 31, 2004..... Total cost of goods in process.................................. Less goods in process inventory, December 31, 2005. Cost of goods manufactured..................................... $ 42,375 896,375 938,750 72,430

$ 866,320 564,500

37,400 123,500 8,060 39,500 61,000 10,440 95,500 32,375

407,775 1,838,595 14,500 1,853,095 16,100 $1,836,995

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 33

Problem 18-8B (Continued) Part 2 FIRETHORN FURNITURE Income Statement For Year Ended December 31, 2005 Sales......................................................................... Less sales discounts.............................................. Net sales.................................................................. Cost of goods sold Finished goods inventory, December 31, 2004.... $ 179,200 Cost of goods manufactured................................. 1,836,99 5 Goods available for sale......................................... 2,016,195 Less finished goods inventory, December 31, 2005 143,750 Cost of goods sold................................................. Gross profit from sales............................................ Operating expenses Selling expenses Advertising expense............................................. Depreciation expenseSelling equipment........ Rent expenseSelling space.............................. Sales salaries expense......................................... Total selling expenses.......................................... General and administrative expenses Depreciation expenseOffice equipment.......... Office salaries expense........................................ Rent expenseOffice space................................ Total general and administrative expenses........ Total operating expenses....................................... Income before state and federal taxes.................... Income taxes expense.............................................. Net income.................................................................

$5,002,000 59,375 4,942,625

1,872,445 3,070,180

22,250 12,125 29,000 297,30 0 10,440 72,875 25,62 5

360,675

108,940 469,615 2,600,565 138,700 $2,461,865

McGraw-Hill Companies, Inc., 2005 34 Fundamental Accounting Principles, 17th Edition

Problem 18-8B (Continued) Part 3

Raw Materials Finished Goods

Cost of raw materials used.......................................... Cost of finished goods sold........................................ Beginning inventory..................................................... Ending inventory.......................................................... Total beginning plus ending inventory....................... Average inventory (Total / 2)........................................ Turnover ratios (COGS / Average inventory)............. Days sales in inventory [(Ending inv./COGS) x 365].....

$866,320 $1,872,445 $ 42,375 $ 179,200 72,430 143,750 $114,805 $ 322,950 $ 57,403 $ 161,475 15.1 30.5 11.6 28.0

Discussion: The inventory turnover ratio for the raw materials inventory is higher than the turnover ratio for finished goods. One reason for the difference could be that source of supply for raw materials is relatively dependable, so that the management believes it is not necessary to carry a larger inventory to sustain operations through periods when the supply might be interrupted. The company is carrying 30.5 days supply of raw materials inventory and 28.0 days of finished goods inventory. During the year, the company increased its inventory of raw materials by 71% but decreased its inventory of finished goods by 20%.

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 35

Problem 18-9B (60 minutes)

Instructor note: There is more than one possible solution to this problem.

Part 1 Some possible suggestions: Add additional products/services such as Coffee bar, Juices, and Unique bagels. (Another approach may be to increase efficiency such as make-your-own products, delivery services, etc.) Part 2 Figure Sales: CMR*:
*

One possible solution using the suggestions from Part 1 Source (from student) (from student) Coffee bar $10,000 50% Juices $5,000 50% Unique bagels $25,000 10%

Estimate of the contribution margin ratio.

Total increase in contribution margin = ($10,000 x 50%) + ($5,000 x 50%) + ($25,000 x 10%) = $5,000 + $2,500 + $2,500 = $10,000

McGraw-Hill Companies, Inc., 2005 36 Fundamental Accounting Principles, 17th Edition

SERIAL PROBLEM
Serial Problem, Success Systems (50 minutes) 1.
Cost by Behavior Product Costs Variable X Laminate coverings for desktops..... X Wages of desk assembler................. Taxes on assembly workshop.......... Glue to assemble workstation X component parts........................... Depreciation on tools........................ X Electricity for workshop.................... Monthly flat fee to clean workshop.. Fixed Cost by Traceability Direct Indirect
X X X X X X X X X X

2. Success Systems Manufacturing Statement For Month Ended January 31, 2006 Direct materials....................................................................... Direct labor ............................................................................. Factory overhead costs.......................................................... Total manufacturing costs .................................................... Add goods in process, December 31, 2005.......................... Total cost of goods in process.............................................. Less goods in process, January 31, 2006............................ Cost of goods manufactured................................................. 3. Success Systems Partial Income Statement For Month Ended January 31, 2006 Cost of goods sold Finished goods inventory, December 31, 2005................. Cost of goods manufactured.............................................. Goods available for sale..................................................... Less finished goods inventory, January 31, 2006............ Cost of goods sold..............................................................

$1,925 652 260 2,837 0 2,837 1,596 $1,241

0 1,241 1,241 144 $1,097

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 37

Reporting in Action

BTN 18-1

1. The Management Discussion & Analysis section paints a picture showing Krispy Kreme to be a reasonably successful company. Nevertheless, Krispy Kreme shareholders face many of the same risks that all companies facesuch as competition, consumer demands, and changing markets. In reading its Management Discussion & Analysis we see that Krispy Kreme faces numerous risk factors that will contribute to future performance including: the Companys ability to manage growth possible delays in store openings quality of franchise store operations price and availability of raw materials to produce doughnut mixes changes in customer preferences and perceptions risks associated with competition compliance with government regulations fluctuations in operating and quarterly results 2. It is the managerial accountants responsibility to try to attach a dollar value to the individual risk components. The greater the risk the more important it is that management has a back-up plan if and when something goes wrong. Also, if a project is high risk, it must offer substantial financial returns to justify its existence. 3. Solutions depend on the annual report information collected.

Comparative Analysis

BTN 18-2

1. These companies balance sheets do not provide explicit clues as to the nature of the business, either manufacturing or merchandising. 2. In Krispy Kremes Note #4, the inventory components are detailed raw material, goods in process, finished goods, purchased merchandise, and manufacturing supplies. We rarely see this type of detail on the face of the balance sheet because the financial reports are designed to provide summary financial information. The notes are designed to provide explanatory and detailed information. In addition, its Management Discussion and Analysis section provides much more information regarding Krispy Kremes manufacturing activities.

McGraw-Hill Companies, Inc., 2005 38 Fundamental Accounting Principles, 17th Edition

Comparative Analysis (Continued) 3.

Ratio Krispy Kreme Current Year Prior Year
$316,946*/ $16,159

Tastykake Current Year Prior Year

$111,187/ $6,777 $103,297/ $8,412

$381,489/ Inventory turnover....... $24,365 = 15.66 365/15.66 Days sales in inventory. = 23

= 19.61 365/19.61 = 19

= 16.41 365/16.41 = 22

= 12.28 365/12.28 = 30

*Per the investor relations department at Krispy Kreme, cost of goods sold is the only expense reported as part of operating expenses.

Interpretation Inventory turnover ratio reflects on the companys efficiency in using inventory to generate profits. Generally, the higher the inventory turnover, the better the performance (provided customers are able to obtain products when they desire them). The days sales in inventory ratio reflects on the liquidity of inventory. The smaller the number of days, the earlier the company receives cash from its inventory. 4. A successful JIT inventory system would increase the inventory turnover ratio and reduce the number of days sales in inventory. A JIT inventory management system is an internal management issue and is not specifically required to be discussed in an annual report. A reduction in days sales in inventory for Tastykake, from every 30 days to 22 days, provides evidence that they were more effective and efficient in managing inventory for the current year. Given that both Krispy Kreme and Tastykake market food products we would expect days sales in inventory to be quite low to insure the freshness of the product.

Ethics Challenge

BTN 18-3

1. Raw materials are part of inventory and should be capitalized (set up as assets). Their costs are subsequently reported as part of cost of goods sold when the finished goods that require these materials are sold. If the CD raw materials were expensed in the current period, the financial statements would not be in conformance with GAAP, nor with standard practices in managerial accounting.

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 39

Ethics Challenge (Continued) 2. The challenge is how to handle a request to use ones accounting skills in an inappropriate manner. It is important to remember that the behavior of the managerial accountant is governed by rules of ethical behavior. This means that ones response to the chief financial officer can rely on the rules of ethical behavior by the managerial accounting profession (these guidelines are available at www.IMAnet.org or www.aicpa.org). Moreover, it is better that the managerial accountant not make an argument of me versus CFO. That is, it is much more difficult for the chief financial officer to argue against a profession compared to an individual.

Communicating in Practice

BTN 18-4

Instructor note: The solution to this project depends on the database and career fields reviewed.

The objective of this Communicating in Practice project is to make students aware of the earnings potential of different professionsparticularly, the often higher salaries of accounting professionals with several years of experience. It also directs them to the schools career services and placement office or relevant information in the library or on the Web. Finally, it provides useful experience in effectively communicating financial information in memorandum format.

Taking It to the Net

BTN 18-5

Standards of Ethical Conduct for Management Accountants are posted at the Web site: http://www.IMAnet.org These standards (in abbreviated form) are: Competence maintain an appropriate level of professional competence. Confidentiality refrain from disclosing confidential information. Integrity professional behavior at all times; for example, avoid conflict of interest situations. Objectivity communicate information fairly and objectively.

McGraw-Hill Companies, Inc., 2005 40 Fundamental Accounting Principles, 17th Edition

Teamwork in Action
Part 1
a. Materials used = Beg. Materials = $177,500 = $881,875

BTN 18-6

+ Materials purchased + $872,500

- End. materials - $168,125

b. Factory overhead
= Depreciation on factory equipment + factory supervision + factory supplies used + factory utilities + Indirect labor + Miscellaneous production costs + Rent on factory building + Maintenance on factory equipment

= $32,500 + $122,500 + $15,750 + $36,250 + $60,000 + $8,500 + $79,750 + $27,875 = $383,125 c. Total manufacturing costs = Materials used (from a) + Direct labor + Factory overhead (from b) = $881,875 + $650,750 + $383,125 = $1,915,750 d. Total cost of goods in process = Beg. GIP Inv. + Total manufacturing costs (from c) = $15,875 + $1,915,750 = $1,931,625 e. Cost of goods manufactured = Total cost of goods in process - Ending GIP Inventory = $1,931,625 - $14,000 = $1,917,625

Part 2 Requires that the team check answer to part (1e) with instructor before proceeding to part (3).

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 41

Teamwork in Action (Continued) Part 3 a. Net sales = Sales - Sales discounts = $3,275,000 - $57,500 = $3,217,500 b. Cost of goods sold = $164,375 = $1,953,000
= Beg. finished goods + Cost of goods manuf. (from 1e) - End. finished goods

$1,917,625

$129,000

c. Gross profit = Net sales (from a) - Cost of goods sold (from b) = $3,217,500 $1,953,000 = $1,264,500 d. Total operating expenses = Advertising expense + Depreciation expense on office equipment + Depreciation expense on selling equipment + Office salaries expense + Rent expense on office space + Rent expense on selling space + Sales salaries expense = $19,125 + $8,750 + $10,000 + $100,875 + $21,125 + $25,750 + $286,250 = $471,875 e. Net income before taxes = Gross profit (from c) - Total operating expenses (from d) = $1,264,500 $471,875 = $792,625

McGraw-Hill Companies, Inc., 2005 42 Fundamental Accounting Principles, 17th Edition

Business Week Activity

BTN 18-7

1. Yes, Mattel does use just-in-time inventory management. The article references the use of just-in-time, particularly during the holiday season. 2. Overall strategies include striving for less dependence on costly licensed products, better inventory control, and to develop more toys inhouse. 3. Mattels CEO is implementing the following specific changes: Mattel is producing fewer items for big movie tie-ins. As markets mature in the U.S., Mattel will push products overseas. Mattel hopes to raise international sales to 50% of its overall sales. Mattel is pushing more brand extensions. For example, as product sales sag for a particular toy, then a new version of the toy (such as a Rapunzel Barbie) will be created. Mattel will ship toys later in the year to insure that they are on shelves during the peak holiday season. Mattel is trying to spot hot new product opportunities early to save on licensing fees. Mattel is working on more in-house toy development with a new inhouse development group.

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 43

Entrepreneurial Decision

BTN 18-8

Revenue-side: The revenues received by Lindsay are probably categorized as advertising revenues. By using the advertising account Lindsay can track revenues received for advertising separately from sales of snacks. Cost-side: The advertising fees paid by Universal studios are a fixed cost for Universal. The advertising fees would be classified as indirect costs (traceability) and as a period cost (function). Note that Universal does not actually produce the snack product and that the advertising expenses are likely classified as selling expenses on the Universal Studios income statement.

Hitting the Road BTN

18-9

Instructor note: Student responses will vary depending on the restaurant chosen.

The general framework of a good response includes: 1. The usual activities are serving customer at counter serving customer at drive-up preparing food taking orders clean-up miscellaneous others Costs associated with each activity include Direct and indirect materials such as meat, bread, pickles, and other direct and indirect material costs. Direct and indirect labor Overhead- such as rent, heat, and electricity

2.

The student should observe that most available cost information is classified by function such as rent, wages, and cleaning supplies. This makes it difficult to understand the cost behavior of each process. We will see in a later chapter how activity-based costing can help measure the costs of each process. 3. Answers will vary because classification of fixed or variable depends on the costs identified in part 2.

McGraw-Hill Companies, Inc., 2005 44 Fundamental Accounting Principles, 17th Edition

Global Decision

BTN 18-10

1. Grupo Bimbo provides inventory details in its Note 5. 2. 2002 Raw materials, containers and wrapping.................... $390,153 Orders-in-process................. Finished products................. Advances to suppliers.......... Other...................................... Inventory reserve.................. Raw materials-in-transit....... 6,816 330,877 96,688 47,764 (2,043) 34,453 2001 43.1% $384,519 0.8 36.6 10.7 5.3 -0.2 3.8 19,092 267,535 35,795 36,588 0 23,082 50.2% 2.5 34.9 4.7 4.8 0 3.0

Totals..................................... $904,708
*Total does not foot due to rounding.

100.0%* $766,611 100.0%*

3. The chapter separates manufacturing inventory into three components: raw materials, goods-in-process, and finished goods. Grupo Bimbo reports these same three inventorieshowever, goods-in-process is referred to as orders-in-process. Grupo Bimbo uses more accounts than those described in the chapter to track its manufacturing inventory. The additional accounts include: raw materials-in-transit, advances to suppliers, and other. This decision by Grupo Bimbo to expand their inventory accounting illustrates that companies can tailor managerial accounting systems to best meet the information needs of the company.

McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 18 45