chap 1.docx

CHAPTER 16

MANAGEMENT ACCOUNTING: A BUSINESS PARTNER

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 23

SOLUTIONS TO EXERCISES

Ex. 16–1 a. Management accountingb. Manufacturing overheadc. None (These are prime costs.)d. None (The statement describes direct manufacturing costs.)e. Work in Process Inventoryf. Cost of finished goods manufacturedg. Period costs

Ex. 16–2 a. Direct materialsb. Either direct labor or manufacturing overhead (If every automobile produced is sub-

ject to the same testing before it is released to dealers, this cost is an element of direct labor. If testing is on a sample basis, it might be appropriate to consider this a part of manufacturing overhead.)

c. Manufacturing overheadd. Direct materialse. Direct laborf. Manufacturing overheadg. Manufacturing overheadh. Manufacturing overhead

Ex. 16–3 a. Indirect product costb. Direct product costc. Period costd. Period coste. Indirect product costf. Period costg. Indirect product costh. Period cost

Ex. 16–4 Work in process inventory, beginning of the year................................................... $ 35,000Manufacturing costs applied to production:

Direct materials used........................................................................... $245,000Direct labor.......................................................................................... 120,000Manufacturing overhead.................................................................... 300,000

Total manufacturing costs.................................................................................. 665,000 Total cost of all goods in process during the year.................................................... $700,000Less: Cost of finished goods manufactured.............................................................. 675,000 Work in process inventory, end of the year.............................................................. $ 25,000

24 © The McGraw-Hill Companies, Inc., 2005

Ex. 16–5 a. NuTronics, Inc.Schedule of the Cost of Finished Goods Manufactured

For the Year Ended December 31, 2005

Work in process, January 1, 2005....................................................................... $ 12,000Manufacturing costs assigned to production:

Direct materials used.................................................................... $210,000Direct labor.................................................................................... 120,000Manufacturing overhead.............................................................. 192,000

Total manufacturing costs........................................................................... 522,000 Total cost of all goods in process during the year.............................................. $534,000Less: Work in process inventory, December 31, 2005....................................... 8,000 Cost of finished goods manufactured.................................................................. $ 526,000

b. $26.30 per unit ($526,000 cost of finished goods manufactured, divided by 20,000 units)

Ex. 16–6 a. Direct materials inventory, Jan. 1....................................................................... $ 8,700Direct materials purchased.............................................................................. 25,750Less: Direct materials used in production...................................................... (26,000 )

Direct materials inventory, Jan. 31..................................................................... $ 8,450

Work in process inventory, Jan. 1....................................................................... $ 76,500Direct materials used........................................................................................ 26,000Direct labor used............................................................................................... 42,000Manufacturing overhead applied.................................................................... 32,400Less: Finished goods transferred out.............................................................. (69,000 )

Work in process inventory, Jan. 31..................................................................... $107,900

Finished goods inventory, Jan. 1......................................................................... $ 53,000Cost of finished goods transferred in.............................................................. 69,000Less: Cost of goods sold.................................................................................... (89,000)

Finished goods inventory, Jan. 31....................................................................... $ 33,000


b. Manufacturing overhead, Jan. 1......................................................................... $ 0Indirect materials purchased........................................................................... 3,500Supervisor salaries............................................................................................ 12,000Indirect labor costs........................................................................................... 3,000Depreciation...................................................................................................... 4,500Factory utilities................................................................................................. 7,800Factory insurance............................................................................................. 4,200Property taxes on factory................................................................................. 3,000Less: Manufacturing overhead applied.......................................................... (32,400)

Manufacturing overhead, Jan. 31....................................................................... $ 5,600

c. Operating income for the month of January:Revenues............................................................................................................ $165,000

Cost of goods sold............................................................................................. (89,000)

Gross profit....................................................................................................... 76,000

Operating expenses:

Sales commissions..................................................................... $16,500Advertising expense.................................................................. 6,300 (22,800)

Operating income................................................................................................. $ 53,200

Ex. 16–7 The answer to this question depends upon one’s interpretation of the word “manipulate.” It is common practice to manipulate managerial reports in order to make them more useful for decision making purposes. However, if reports are manipulated in order to change their underlying meaning (e.g., for personal gain or to exploit others), such behav-ior is unethical.


SOLUTIONS TO PROBLEMS

20 Minutes, Easy PROBLEM 16–1

AQUA-MARINE



PROBLEM 16–1

AQUA-MARINE (concluded)

b. Comments on deducting manufacturing costs from revenue:

No—the entire $775,000 in manufacturing costs is not deducted from the revenue of the current year. Manufacturing costs are product costs, not period costs. Product costs are viewed as the cost of creating inventory, not as “expenses” of the current period. If the inventory remains on hand at the end of the period, the product costs appear in the balance sheet as the cost of this inventory. When the units are sold, the product costs are deducted from the related sales revenue as the cost of goods sold. This accomplishes the objective of “matching” revenue with the related costs and expenses of generating that revenue.

The disposition of the $775,000 in manufacturing costs “incurred” during the year is summarized below:

Total manufacturing costs “incurred” during the year........................................................ $775,000Less: Amounts representing inventory at year-end:

Materials inventory.......................................................................................... $ 9,000Work in process inventory............................................................................... 38,000Finished goods inventory................................................................................. 78,000 125,000

Manufacturing costs deducted from revenue (cost of goods sold)....................................... $ 650,000



ROAD RANGER CORPORATION



SUPERIOR LOCKS, INC.



GRONBACK CORPORATION


35 Minutes, Medium PROBLEM 16–5

HILLSDALE MANUFACTURING


PROBLEM 16–5

HILLSDALE MANUFACTURING (concluded)


35 Minutes, Strong PROBLEM 16–6

TOLEDO TOY CO.


PROBLEM 16–6

TOLEDO TOY CO. (concluded)

e. Direct labor is a product cost, and therefore, it becomes “attached” to the products manufactured. To the extent that units manufactured during 2005 were sold in that year, the direct labor costs incurred in manufacturing those units comprise part of the cost of goods sold. To the extent that manufactured units remain on hand, either as work in process or as finished goods, the direct labor costs represent part of the cost of this inventory.



NEVIS TOOLS


PROBLEM 16–7

NEVIS TOOLS (concluded)



IDAHO PAPER COMPANY



MAYVILLE COMPANY



RIDGEWAY COMPANY



RAYMOND ENGINEERING CO.


PROBLEM 16–11

RAYMOND ENGINEERING CO. (concluded)

d. Evaluation of Raymond’s conclusions:

Raymond is in error both about the $66.36 unit cost of production and about the overall unprofitability of the business. In concluding that the business sustained a net loss, Raymond treated product costs as if they were period costs to be offset against the revenue of the year. Actually, a total of $166,000 of the product costs incurred should be assigned to the ending inventories of materials ($46,000), work in process ($31,500), and finished goods ($88,500). The costs associated with these ending inventories are assets at year-end, not expenses of the period. Raymond’s erroneous calculation of a net loss may be reconciled to the actual net income of the business as follows:

Net loss calculated by Raymond............................................................................................. $ (53,000)Add: Product costs erroneously deducted as expense........................................................... 166,000 Actual operating income.......................................................................................................... $113,000Less: Income taxes (ignored by Raymond)............................................................................ 33,900 Actual net income (see part c)................................................................................................. $ 79,100

Raymond has made three errors in computing the cost of production. First, he included selling and administrative expenses in his calculations. These costs do not relate to the manufacturing process and, therefore, are not part of the cost to manufacture the valves. Second, included in Raymond’s total costs of $663,600 are $77,500 applicable to the ending inventories of materials ($46,000) and of work in process ($31,500). Since these costs do not relate to goods completed during the year, they should not be included in the unit cost of finished goods. Third, Raymond divided his total cost figure by only the 10,000 units sold during the period, rather than by the 13,000 finished units manufactured (10,000 units sold + 3,000 finished units in inventory). The correct average unit cost of finished goods manufactured is $29.50, as computed in part b. This amount compares very favorably with competitors’ manufacturing costs of approximately $35 per unit.



WEST TEXAS GUITAR COMPANY

a. The errors and shortcomings in the illustrated income statement include the following:

(1) All manufacturing costs incurred during the first year of operations have incorrectly been included in the cost of goods sold. The portions of these costs that are applicable to the ending inventories of materials, work in process, and finished goods are assets at year-end and should not be deducted from the revenue of this first year.

(2) Dividends declared on common stock have been offset against revenue in measuring net income. Dividends are not an expense and do not enter into the computation of net income or net loss.

(3) Period expenses are improperly included in the cost of goods sold. As a result, the cost of goods sold is improperly determined and the income statement does not disclose important subtotals, such as gross profit, total operating expenses, and operating income.

As a result of deduction from revenue of dividends declared and of manufacturing costs relating to ending inventories of raw materials, goods in process, and finished goods, it is reasonable to conclude that the company’s actual net income is higher than the amount shown in the income statement.


PROBLEM 16–12

WEST TEXAS GUITAR COMPANY (concluded)


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