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Cornerstones Of Managerial Accounting, Third Canadian Edition Solution Manual

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    1-1 CHAPTER 1 INTRODUCTION TO MANAGERIAL ACCOUNTING DISCUSSION QUESTIONS 1. Managerial accounting is the provision of accounting information for internal users in a firm. 2. The three broad objectives of managerial accounting are planning, controlling, and decision making. 3. The users of managerial accounting information are generally managers and other employees of a firm. Managerial accounting information is typically not provided to outsiders but may be in selected cases. For example, a bank may require budgeting information for the next few years before agreeing to grant a loan. 4. A managerial accounting information system typically provides both financial and nonfinancial information. For example, financial information on cost of production is tracked. Other information, such as the number of warranty returns, may also be tracked by the management information system. 5. Controlling is sometimes called performance evaluation. It involves comparing the actual outcome with the expected outcome to see what differences, if any, exist. 6. Planning occurs first. It requires setting objectives and identifying the means of achieving those objectives. Then, the results of the plan are compared with the plan, which is called controlling. Clearly, it is also feedback, in that any impediments or unexpected occurrences are noted. This feedback is then used to develop the plan for the next period. 7. Managerial accounting is internally focused, does not follow mandatory rules, keeps track of both financial and nonfinancial information, emphasizes the future, and relies on a broad range of disciplines. Financial accounting is externally focused, follows externally imposed rules (such as GAAP), has an historical orientation, and provides information about the company as a whole. 8. Huge improvements in technology, transportation, and communication over the past 50 years have changed the world significantly. Managerial accountants have had to broaden their focus beyond simple financial reporting to include the gathering of information on all types of costs and of the value of the product or service to customers. These broader costs are used in planning and decision making. 9. Customer value is the difference between what a customer pays for a product or service and what the customer receives in return. The focus on customer value forces management accounting to look at many types of costs, not simply manufacturing cost. These may include the price of the good or service, maintenance costs, search costs, learning costs, and disposal costs. 10. Today’s managerial accountant must understand many functions of the business, from manufacturing to marketing to distribution to customer service, in order to provide appropriate information for managing the value chain. Increased international trade means that the managerial accountant must be familiar not only with business practices and laws in their own country but also in the countries with which their company trades. 11. Enterprise risk management (ERM) refers to the formal process of identifying the factors or threats, both internal and external to the organization, that might prevent the organization from achieving its strategic objectives. The managerial accountant plays an increasingly important role in ERM by providing financial and nonfinancial measures of these threats and communicating them to high-level executives (e.g., chief risk officer, chief financial officer, board of directors) in the organization who manage these factors. 12. The value chain is the set of activities required to design, develop, produce, market, and deliver products and services to customers. It is important because it helps the company to understand its role in serving

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    1-2 customers and to develop strategic competence. 13. Line positions are those that have direct responsibility for the basic objectives of an organization. These typically include producing and selling a product. Staff positions are supportive in nature (e.g., human resources, maintenance) and have only indirect responsibility for an organization’s basic objectives. 14. Yes, the controller should be a member of senior management. This is because the controller, as the chief accountant for the firm, has a wealth of information needed by senior management in determining the strategic direction of the firm. 15. Ethical behaviour involves choosing actions that are right, proper, and just. It is possible to teach aspects of ethical behaviour in a managerial accounting classroom. Students need to see examples of right and wrong in business. These examples help them to recognize ethical dilemmas they will face later on the job. 16. One major theme or executive pressure common to many of the accounting scandals is a focus on the short-term future, rather than the long-term. For example, WorldCom wrongly decided to increase current period net income by inappropriately decreasing current period expenses (by recording more of the expenditures as an asset that would be expensed in small amounts each period rather than all at once in the current period). Oftentimes, the high-level executives that perpetrate such financial fraud are rewarded by incentives that overweight current-period net income performance relative to long-term net income performance. Another major theme common to many of the accounting and banking frauds is a lack of sufficient transparency, or clarification, in the types and timing of the information that is reported to parties outside of the organization. Some business experts also would argue that a third common theme underlying many of these scandals was the lack of sufficient oversight (i.e., watchdog mentality) by the perpetrating organization’s auditors, board of directors, or both. 17. The Chartered Professional Accountant (CPA) is the Canadian professional accounting designation. The three previous forms of designation discussed are Certified Management Accountant, Chartered Accountant, and Certified General Accountant. EXERCISES Exercise 1–1 a. Decision making b. Controlling c. Planning d. Decision making e. Planning f. Decision making Exercise 1–2 a. Managerial accounting oriented b. Financial accounting oriented c. Managerial accounting oriented d. Financial accounting oriented e. Managerial accounting oriented

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    1-3 Exercise 1–3 1. The total product is the product and its features (processing speed, disk drives, software packages, and so on), the service, the operating and maintenance requirements, and the delivery speed. 2. One company is emphasizing lower costs, and the other is attempting to differentiate its laptop by offering faster delivery and higher-quality service. 3. The Confiar’s service component and its delivery time appear to be better than Drantex’s. Thus, the realization of these features appears to outweigh the additional sacrifice (the additional operating and maintenance cost) associated with the Confiar laptop. The implications for management accounting are straightforward. The management accounting information system should collect and report information about customer realization and sacrifice. Much of this information is external to the firm but clearly needed by management. 4. Better quality and shorter delivery time increase the value of what the customer receives, while lowering the price decreases the amount paid. In total, customer value has increased and presumably this should make the Drantex laptop much more competitive. This example illustrates how quality, time, and costs are essential competitive weapons. It also illustrates how critical it is for the management accounting system to collect and report data concerning these three dimensions. Exercise 1–4 1. Joan Dennison is staff. She is in a support role—she prepares reports and helps explain and interpret them. Her role is to help the line managers more effectively carry out their responsibilities. Steven Swasey is a line manager. He has direct responsibility for producing garden hoses. Clearly, one of the basic objectives for the existence of a manufacturing firm is to make a product. Thus, Steven has direct responsibility for a basic objective and therefore holds a line position. 2. Line functions typically have a direct role in the delivery of the product or service offered by a company, while the staff functions fill a support role.

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    1-4 Exercise 1–5 It is obviously not ethical for Mary to agree to Peter’s proposal; in fact, it is illegal. She should refuse to go along with this scheme and she should contact a person more senior than Peter in the athletics and recreation department and inform them of his proposal. Her customers have an expectation that their employees and suppliers will act in an ethical manner and, if they do not, that they will be reported by anyone who knows. Exercise 1–6 1. Brad is not behaving ethically in this situation. By delaying the marketing campaign by a month, he is simply deferring the problem to a later date: the end of next fiscal year. If he does not meet his numbers because of poor performance, he should not try to fool the system by taking action that may make it appear that he has succeeded. 2. Brad could employ any number of legitimate strategies to overcome his dilemma: • Generate much higher sales by increasing the number of calls made by salespeople; • Cut back on major expenses that will not impact the capability of operating the division effectively. Exercise 1–7 1. By the time most students graduate from high school, they have not had much exposure to business. Therefore, they do not have full knowledge of acceptable behaviour in the business environment. Students may not know that certain practices are unethical because they may not be familiar with the behavioural norms associated with these practices. Once students begin to learn business practices, they begin to see what ethical dilemmas can arise in a business context. They then are able to apply the moral training they have had to deal with the situations. Furthermore, evidence exists that ethical reasoning can be changed for the better. Thus, instruction in ethics can be a vital part of a business student’s education. 2. Sacrificing self-interest is a choice that each person must make. Others may be influenced by those individuals who behave ethically. Individuals committed to ethical behaviour produce societies committed to ethical behaviour (not vice versa).

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    1-5 Exercise 1–7 (Concluded) 3. While this sounds noble, many would disagree that managers are first seeking to serve others and accept personal financial rewards as a by-product of a good job. Pursuit of self-interest and personal financial well-being is not necessarily unethical. It is only when this pursuit is done at the expense of the collective good that the behaviour becomes questionable. 4. It is often true that unethical firms and individuals suffer financially. In the long run, some evidence suggests that ethical behaviour does pay. It is doubtful, however, that every unethical firm or individual is wiped out financially. Too many notable exceptions to this statement exist (for example, the selling of drugs by organized crime). 2. Many of the financial scandals in the past ten years may be as a result of people focusing more on the material gains that come from success and less on the ethical issues that face us. Exercise 1–8 Clearly, John was in the wrong to disclose confidential information to his employees when the information was not generally known and the employees were not at such a level that they ought to know this information. A manager has a duty to preserve the confidentiality of sensitive information about the company that the manager has learned as a result of their position. The employees should not act on the information because it would be unethical for them to act on “insider” information. Knowing the information is not wrong on the part of the employees, but acting on it is. Exercise 1–9 The approach being used by Reginald is ethically wrong. By insisting that junior staff not report all of their hours, he is misleading senior management not only of his performance, but also what performance should be expected in the future by other managers. Exercise 1–10 Answers will vary. Exercise 1–11 Answers will vary.

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    2-1 CHAPTER 2 BASIC MANAGERIAL ACCOUNTING CONCEPTS DISCUSSION QUESTIONS 1. A cost object is something for which you want to know the cost. For example, a cost object may be the human resources department of a company. The costs related to that cost object might include salaries of employees of that department, telephone costs for that department, and depreciation on office equipment. Another example is a customer group of a company. Atlantic City and Las Vegas casinos routinely treat heavy gamblers to free rooms, food, and drink. The casino owners know the benefits yielded by these high rollers and need to know the costs of keeping them happy, such as the opportunity cost of lost revenue from the rooms, the cost of the food, and so on. 2. Accumulating costs is the way that costs are measured and tracked. Assigning costs is linking costs to some cost object. For example, a company accumulates or tracks costs by entering them into the accounting records. Direct materials would be entered into the materials account; direct labour would be entered into the direct labour account. These costs are then assigned to units of product. 3. A direct cost is one that can be traced to the cost object, typically by physical observation. An indirect cost cannot be traced to the cost object. The same cost can be direct for one purpose and indirect for another. For example, the salaries paid to purchasing department employees in a factory are a direct cost to the purchasing department but an indirect cost (overhead) to units of product. 4. The cost of goods manufactured is the sum of direct materials, direct labour, and overhead used in producing the units completed in a factory. 5. Prime cost is the sum of direct materials and direct labour. Conversion cost is the sum of direct labour and overhead. Total product cost consists of direct materials, direct labour, and overhead. This is not equal to the sum of prime cost and conversion cost because direct labour would be double counted. 6. A product is tangible in that you can see, feel, and take it with you. Examples of products include a tube of toothpaste, a car, or an orange. A service is a task or activity performed for a customer. For example, the dental hygienist who cleans your teeth provides a service. 7. Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization. An expense is an expired cost; the benefit has been used up. 8. A period cost is one that is expensed immediately, rather than being inventoried like a product cost. 9. Allocation means that an indirect cost is assigned to a cost object using a reasonable and convenient method. Since no causal relationship exists, allocating indirect costs is based on convenience or some assumed link- age. 10. Manufacturing overhead includes all product costs other than direct materials and direct labour. It is because the remaining manufacturing (product) costs are gathered into one category that overhead is often thought of as a “catchall.” 11. Direct materials purchases are first entered into the materials inventory. They may or may not be used during the month. Only when the materials are withdrawn from inventory for use in production are they known as “direct materials.” 12. The percentage column on the income statement gives some insight into the relative spending on the various expense categories. These percentages can then be compared with those of other firms in the same industry to see if the company’s spending appears to be in line or out of line with the experiences of its competitors. 13. The income statement for a manufacturing firm includes the cost of goods sold, which is the sum of direct materials, direct labour, and overhead. The income statement for a service firm includes the cost of services sold. There

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    2-2 are no beginning or ending inventories in a service organization. 14. Selling costs are the costs of selling and delivering products and services. Examples include free samples, advertising, sponsorship of sporting events, commissions on sales, and the depreciation on delivery trucks (such as Coca-Cola trucks). 15. The cost of goods manufactured is the cost of direct materials, direct labour, and overhead for the units produced (completed) during a time period. The cost of goods sold is the cost of direct materials, direct labour, and overhead for the units sold during a time period. The number of units produced is not necessarily equal to the number of units sold during a period. For example, a company may produce 1,000 pairs of jeans in a month but sell only 900 pairs.

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    2-3 CORNERSTONE EXERCISES Cornerstone Exercise 2–1 Direct materials $ 48,000 Direct labour 80,000 Manufacturing overhead 112,000 Total product cost $240,000 Per-unit product cost = 8,000 $240,000 = $30 Therefore, one hockey stick costs $30 to produce. Cornerstone Exercise 2–2 Direct materials $ 48,000 Direct labour 80,000 Total prime cost $128,000 Per-unit prime cost = 8,000 $128,000 = $16 Direct labour $ 80,000 Manufacturing overhead 112,000 Total conversion cost $192,000 Per-unit conversion cost = 8,000 $192,000 = $24 Cornerstone Exercise 2–3 Materials inventory, June 1 $ 42,000 Purchases 180,000 Materials inventory, June 30 (51,000) Direct materials used in production $171,000

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    2-4 Cornerstone Exercise 2–4 Direct materials* $171,000 Direct labour 165,000 Manufacturing overhead 215,000 Total manufacturing cost for June 551,000 WIP, June 1 60,000 WIP, June 30 (71,000) Cost of goods manufactured $540,000 *Direct materials = $42,000 + $180,000 – $51,000 = $171,000 [This was calculated in Cornerstone Exercise 2–3.] Per-unit cost of goods manufactured = units 18,000 $540,000 = $30 Cornerstone Exercise 2–5 Slapshot Company Cost of Goods Sold Statement For the Month of June Cost of goods manufactured ......................................................... $ 540,000 Finished goods inventory, June 1 ................................................. 160,000 Finished goods inventory, June 30 ............................................... (215,000) Cost of goods sold .......................................................................... $ 485,000 Number of units sold: Finished goods inventory, June 1 ................................................. 5,000 Units finished during June ............................................................. 18,000 Finished goods inventory, June 30 ............................................... (7,000) Units sold during June ................................................................... 16,000

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    2-5 Cornerstone Exercise 2–6 Slapshot Company Income Statement For the Month of June Sales revenue (16,000 × $90) ..................................... $1,440,000 Cost of goods sold ..................................................... 485,000 Gross margin .............................................................. 955,000 Less: Selling expense: Commissions (0.15 × $1,440,000) ........................ $216,000 Fixed selling expense ........................................... 200,000 416,000 Administrative expense ............................................. 115,000 Operating income ....................................................... $ 424,000 Cornerstone Exercise 2–7 Slapshot Company Income Statement For the Month of June Percent* Sales revenue (16,000 × $90) ............................... $1,440,000 100.0 Cost of goods sold ............................................... 485,000 33.7 Gross margin ........................................................ 955,000 66.3 Less: Selling expense: Commissions (0.15 × $1,440,000) .................. $216,000 Fixed selling expense ..................................... 200,000 416,000 28.9 Administrative expense ....................................... 115,000 8.0 Operating income ................................................. $ 424,000 29.4 *Steps in calculating the percentages (the percentages are rounded): 1. Sales revenue percent = $1,440,000 $1,440,000 = 1.00 or 100% (sales revenue is always 100% of sales revenue) 2. Cost of goods sold percent = $1,440,000 $485,000 = 0.337 or 33.7% 3. Gross margin percent = $1,440,000 $955,000 = 0.663 or 66.3%

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    2-6 Cornerstone Exercise 2–7 (Continued) 4. Selling expense percent = $1,440,000 $416,000 = 0.289 or 28.9% 5. Administrative expense percent = $1,440,000 $115,000 = 0.0799 or 8.0% 6. Operating income percent = $1,440,000 $424,000 = 0.294 or 29.4% Cornerstone Exercise 2–8 Allstar Exposure Income Statement For the Past Month Sales revenues ........................................................... $410,000 Less operating expenses: Sales commissions............................................... $ 50,000 Technology ............................................................ 75,000 Research and development ................................. 200,000 Selling expenses ................................................... 10,000 Administrative expenses ...................................... 35,000 370,000 Operating income ................................................. $ 40,000

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    2-7 EXERCISES Exercise 2–9 1. Selling expenses Peter Salary $40,000 × 100% = $ 40,000 Commission $40,000 × 100% = 40,000 Lauren Salary $50,000 × 75% = 37,500 Commission $35,000 × 100% = 35,000 Elizabeth Salary $50,000 × 60% = 30,000 Commission $25,000 × 100% = 25,000 $207,500 Administrative expenses Peter Salary $40,000 × 0% = $ 0 Commission $40,000 × 0% = 0* Lauren Salary $50,000 × 25% = 12,500 Commission $35,000 × 0% = 0* Elizabeth Salary $50,000 × 40% = 20,000 Commission $25,000 × 0% = 0* $32,500 2. Lauren and Elizabeth are paid more salary than Peter because they have less opportunity to earn commission since they do not spend 100% of their time selling. *Note that commission is completely a selling expense; it is not allocated between selling and administrative expense.

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    2-8 Exercise 2–10 a. Salary of cell supervisor—Direct b. Power to heat and cool the plant in which the cell is located—Indirect c. Materials used to produce the motors—Direct d. Maintenance for the cell’s equipment—Indirect e. Labour used to produce motors—Direct f. Cafeteria that services the plant’s employees—Indirect g. Depreciation on the plant—Indirect h. Depreciation on equipment used to produce the motors—Direct i. Ordering costs for materials used in production—Indirect j. Engineering support—Indirect k. Cost of maintaining the plant and grounds—Indirect l. Cost of the plant’s personnel office—Indirect m. Property tax on the plant and land—Indirect Exercise 2–11 1. Direct materials—Product cost Direct labour—Product cost Manufacturing overhead—Product cost Selling expense—Period cost 2. Direct materials $17,000 Direct labour 13,000 Manufacturing overhead 12,000 Total product cost $42,000 3. Unit product cost = 6,000 $42,000 = $7

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    2-9 Exercise 2–12 Product Cost Period Cost Costs Direct Materials Direct Labour Manufacturing Overhead Selling Expense Administrative Expense Direct materials $324,000 Factory rent $ 36,000 Direct labour $180,000 Factory utilities 9,450 Supervision in the factory 75,000 Indirect labour in the factory 45,000 Depreciation on factory factory equipment 13,500 Sales commissions $ 40,500 Sales salaries 97,500 Advertising 55,500 Depreciation on the headquar- ters building $ 15,000 Salary of the corporate receptionist 45,000 Other administrative costs 262,500 Salary of the factory receptionist 42,000 Totals $324,000 $180,000 $220,950 $193,500 $322,500 2. Direct materials $324,000 Direct labour 180,000 Manufacturing overhead 220,950 Total product cost $724,950 3. Total period cost = $193,500 + $322,500 = $516,000 4. Unit product cost = 30,000 $724,950 = $24.165 5. Costs directly associated with the manufacturing process are part of product costs. All other costs are treated as period costs.

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    2-10 Exercise 2–13 Costs Direct Materials Direct Labour Factory Overhead Jars X Sugar X Fruit X Pectin X Boxes X Depreciation on the factory building X Cooking equipment operators’ wages X Filling equipment operators’ wages X Packers’ wages X Janitors’ wages X Receptionist’s wages X Telephone X Utilities X Rental of Santa Claus suit X Supervisory labour salaries X Insurance on factory building X Depreciation on factory equipment X Oil to lubricate filling equipment X Exercise 2–14 1. Direct materials $1,200,000 Direct labour 240,000 Manufacturing overhead 960,000 Total product cost $2,400,000 2. Product cost per unit = Total product cost Number of units = 19,200 $2,400,000 = $125

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