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Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-2B (45 minutes)
Part 1
Cost classification and amounts
Cost by Behavior
Cost by Function
Costs
Variable Fixed
Product Period
Plastic for BDs—$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 staff’s salaries—$10,000 ......
Labeling (12,000 outsourced)—
$2,500 total ....................................
2,500
Rent cost of office equipment—$700....
Upper management salaries—
$100,000 ........................................
Annual fees for cleaning
service—$3,000 .............................
Sales commissions—$0.50 per BD ... $0.50 x
10,000
$ 10,000
2,500
700
700
100,000
100,000
3,000
3,000
$0.50 x
BDs sold
Machinery depreciation—$15,000 ......
BDs sold
15,000
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15,000
Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-2B (concluded)
Part 2
Hip-Hop
Calculation of Manufacturing Cost per BD
For Year Ended December 31, 2011
Item
Variable manufacturing costs
Total cost
Per unit cost *
Plastic for BDs ...................................
$ 1,000
$0.10
Wages of assembly workers ............
Labeling ..............................................
20,000
2,500
2.00
0.25
Total variable manufacturing cost ...
Fixed manufacturing costs
Cost of factory rent ...........................
23,500
2.35
4,500
0.45
Machinery depreciation ....................
Total fixed manufacturing costs ......
Total manufacturing costs
15,000
19,500
$43,000
1.50
1.95
$4.30
* Total cost / 10,000 BDs.
Part 3
If 15,000 BDs are produced, we would expect the cost of the plastic for the
BDs to increase to $1,500 (15,000 BDs x $0.10/BD), but the cost per unit to
stay at $0.10 per BD. Variable costs increase in total as the number of units
produced increases, but the unit cost remains constant.
Part 4
If 15,000 BDs are produced, we would expect the cost of the factory rent to
remain at $4,500 in total because it is a fixed cost. However, the cost per
unit will decrease to $0.30 per BD ($4,500 / 15,000 BDs). Fixed costs do not
change in total as production increases, but the unit cost will decrease as
production increases.
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Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-3B (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 as inventory 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.
14-3
Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-5B (40 minutes)
Part 1
Unit and dollar amounts of raw materials inventory in blades
Beginning inventory, December 31, 2010 (2,000 x $15) ...........................
$ 30,000
Purchases of blades during 2011 (45,000 x $15) .....................................675,000
Blade inventory available for production ..................................................705,000
Blade inventory transferred to production (40,000* x $15) ......................600,000
Ending inventory, December 31, 2011 (7,000** x $15) .................................
$105,000
*20,000 pairs of skates = 40,000 blades
**(2,000 + 45,000 – 40,000) = 7,000.
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 ½ 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.
14-4
Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-6B (40 minutes)
Part 1
MERCHANDISING BUSINESS
CARDINAL DRUG (Retail)
Partial Income Statement
For Year Ended December 31, 2011
Cost of goods sold
Merchandise inventory, December 31, 2010................................. $ 50,000
Merchandise purchases ................................................................. 350,000
Goods available for sale ................................................................. 400,000
Less merchandise inventory, December 31, 2011 ....................... 25,000
Cost of goods sold ......................................................................... $375,000
MANUFACTURING BUSINESS
NANDINA (Manufacturing)
Partial Income Statement
For Year Ended December 31, 2011
Cost of goods sold
Finished goods inventory, December 31, 2010 ............................ $200,000
Cost of goods manufactured ......................................................... 686,000
Goods available for sale ................................................................. 886,000
Less finished goods inventory, December 31, 2011 .................... 300,000
Cost of goods sold ......................................................................... $586,000
Part 2
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
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. Since Nandina Mfg. is a manufacturer, it will also have raw
materials and goods in process inventory accounts.
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Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-7B (10 minutes)
1.
2.
3.
4.
5.
B
B
A
B, C
C
6.
7.
8.
9.
10.
A
A
B
A
C, A
Problem 14-8B (75 minutes)
Part 1
FIRETHORN FURNITURE
Manufacturing Statement
For Year Ended December 31, 2011
Direct materials
Raw materials inventory, December 31, 2010 .......... $ 42,375
Raw materials purchases ........................................... 896,375
Raw materials available for use................................. 938,750
Less raw materials inventory, December 31, 2011.... 72,430
Direct materials used..................................................
Direct labor .....................................................................
Factory overhead
Depreciation expense—Factory equipment ............. 37,400
Factory supervision .................................................... 123,500
Factory supplies used ................................................
8,060
Factory utilities............................................................ 39,500
Indirect labor ............................................................... 61,000
Miscellaneous production costs ............................... 10,440
Rent expense—Factory building ............................... 95,500
Maintenance expense—Factory equipment ............. 32,375
Total factory overhead costs .....................................
Total manufacturing costs ............................................
Goods in process inventory, December 31, 2010 .......
Total cost of goods in process .....................................
Less goods in process inventory, December 31, 2011 ...
Cost of goods manufactured ........................................
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$ 866,320
564,500
407,775
1,838,595
14,500
1,853,095
16,100
$1,836,995
Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-8B (Continued)
Part 2
FIRETHORN FURNITURE
Income Statement
For Year Ended December 31, 2011
Sales..............................................................................
Less sales discounts ...................................................
Net sales .......................................................................
Cost of goods sold
Finished goods inventory, December 31, 2010 .........
$ 179,200
Cost of goods manufactured ......................................1,836,995
Goods available for sale ..............................................2,016,195
Less finished goods inventory, December 31, 2011 ..... 143,750
Cost of goods sold ......................................................
Gross profit from sales .................................................
Operating expenses
Selling expenses
Advertising expense .................................................. 22,250
Depreciation expense—Selling equipment ............. 12,125
Rent expense—Selling space ................................... 29,000
Sales salaries expense .............................................. 297,300
Total selling expenses...............................................
General and administrative expenses
Depreciation expense—Office equipment ............... 10,440
Office salaries expense ............................................. 72,875
Rent expense—Office space..................................... 25,625
Total general and administrative expenses ............
Total operating expenses............................................
Income before state and federal taxes .........................
Income taxes expense ...................................................
Net income......................................................................
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$5,002,000
59,375
4,942,625
1,872,445
3,070,180
360,675
108,940
469,615
2,600,565
138,700
$2,461,865
Chapter 14 - Managerial Accounting Concepts and Principles
Problem 14-8B (Continued)
Part 3
Raw
Materials
Finished
Goods
Cost of raw materials used ............................................. $866,320
Cost of finished goods sold............................................
$1,872,445
Beginning inventory ........................................................ $ 42,375 $ 179,200
Ending inventory ..............................................................
72,430
143,750
Total beginning plus ending inventory .......................... $114,805 $ 322,950
Average inventory (Total / 2) ........................................... $ 57,403 $ 161,475
Turnover ratios (COGS / Average inventory) .................
15.1
11.6
Days’ sales in inventory [(Ending inv./COGS) x 365] .......
30.5
28.0
*To calculate the turnover and days’ sales in inventory for raw materials, use raw materials used
rather than cost of goods sold. Turnover and days’ sales are rounded to one decimal place.
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 the 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%.
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