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Introduction To Managerial Accounting, Fifth Canadian Edition Solution Manual

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    Chapter 1 An Introd uction to Managerial Accounting Solutions to Questions 1 - 1 Managerial accounting is concerned with providing information primarily to managers for their use internally in the organization for the purposes of strategy, planning, implementation and control . Financial accounting is concerned with providing information primarily to investors , creditors, and others outside of the organization. 1 - 2 Essentially, the manager carries out three major activities in an organization: planning, implementation , and control . All three activities involve decision - making and use managerial accounting information. This is depicted in Exhibit 1 - 1. 1 - 3 The Planning , Implementation and Control Cycle involves the following steps: (1) formulating plans which often includes preparing budgets , (2) overseeing day - to - day activities which includes organizing, directing and motivating people, resource allocation and decision making, and (3) controlling which includes providing feedback via performance reports. 1 - 4 In contrast to financial accounting, managerial accounting: (1) focuses on the needs of the manager; (2) places more emphasis on the future; (3) emphasizes relevance and timeliness , rather than verifiability and precision; (4) emphasizes the segments of an organization; (5) is not governed by IFRS or ASPE ; and (6) is not mandatory. 1 - 5 The lean business model focuses on continuous improvement by eliminating waste in the organization. Companies that adopt the lean business model usually implement one or more of the following management practices .  J ust - in - time (JIT): A production and inventory control system in which materials are purchased and units are produced only as needed to meet actual customer demand .  T otal quality management (TQM): A n approach to continuous improvement that focuses on serving customers and uses teams of front - line workers to systematically identify and solve problems .  P rocess re - engineering: A n approach to improvement that involves completely redesigning business processes in order to eliminate unnecessary steps, reduce errors, and reduce costs .

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     T heory of constraints (TOC): A management approach that emphasizes the importance of managing constraints. 1 - 6 Pros  Funds tied up in maintaining inventor y can be used elsewhere  Areas previously used to store inventories are made available for other more productive uses  The time required to fill an order is reduced, resulting in quicker response to customers and consequentially greater potential sales  Defect rates are reduced resulting in less waste and greater customer satisfaction  More effective operations Cons  Increased number of purchase orders to buy raw materials and/or other components used in manufacturing products  There is little room for errors and defects in products because this could throw the production facility off schedule  There is a high reliance and dependence on suppliers to meet delivery deadlines as well as supply products that have no defects and require minimal inspection 1 - 7 Agree. Ethical behavio u r is the foundation of a successful market economy. If we cannot trust people to act ethically in their business dealings with us, we will be inclined to invest less,scrutinize more and waste money and time (scarce resources) trying to protect ourselves. Ethical standards and Codes of C onduct aid the smooth running of the economy. In addition, the lack of regulatory requirements (IFRS, ASPE) regarding managerial accounting makes ethical behaviour even more critical.

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    Solutions to Exercises Exercise 1 - 1 (LO1 CC2) Item Financial Accounting Managerial Accounting a) Prepar ing a cash budget for the next quarter X b) Analyzing the profitability of a request from a potential customer X c) Accumulating the transactions for the previous sixmonths to prepare an income statement X d) Preparing a weekly performance report for the branch manager X e) Preparing an announcement to be released to the financial analysts X Exercise 1 - 2 (LO1 CC1) Planning Implementation Control a) Doing a “cost - benefit” analysis of adding a new branch versus installing new ATMs X b) Estimating the cost of raw materials to be purchased during the next quarter X c) Analyzing market demand X

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    to assist in the preparation of the sales budget d) Compiling the labour report for the past week X e) Outlining the changes to a process based on a process reengineering team report X f) Documenting the savings from reductions in raw materials inventory resulting from the adoption of a just - in - time inventory system X

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    Solutions to Problems Problem 1 - 1 (LO3 CC5) a) This has ethical implications because the code of ethics mandates that all professional accountants will abide by the fundamental principles. There are two possible issues here – confidentiality and integrity. By sending the reports to the analyst Cleo will be violating the principle of confidentiality, she cannot “…disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties . ” One might argue that there is also an issue of personal integrity here; as a professional accountant she is required “to be straightforward and honest in all professional and business relationships.” b) The main ethical implication here is the issue of confidentiality of client data. The code mandates that a member will not disclose any confidential information concerning his/her employer unless acting in the course of his/her duties or when required to be disclosed in a lawsuit. As such informing ones parents of the folly of their investment choice would be unethical. Problem 1 - 2 (LO3 CC5) There is an ethical dilemma associated with the student’s request. There is the need for fairness among all the students who wrote the exam, and ignoring the mid - semester exam result for one student is unfair to the other students. As a student aiming to become a manager , it is important that the student does not engage in any activity considered as incompatible with the conduct of a manager . A request for special treatment that would be unfair to other students could be considered a violation of the principles of Integrity ( the dealings are not straightforward and honest) , Objectivity ( a bias is introduced to the relative grading in the course ) , and Professional Behaviour (special treatment for some, does not comply with school rules, and could discredit the reputation of the school ’s standards ) .

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    Bringing in a doctor’s note one month after writing an exam and using that as a reason to explain his/her poor performance would also not be considered ethical. Presenting a note one month after an event , to address a matter that should have been dealt with contemporaneously , violates the principle of Integrity (the dealings are not straightforward), and Professional Competence and Due Care ( the obligation to act diligently in accordance with standards).

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    Chapter 2 Cost Concepts Solutions to Questions 2 - 1 Cost behaviour refers to how a cost will react or respond to changes in the level of business activity. 2 - 2 No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit of the activity level (e.g., number of beds occupied). A fixed cost is fixed in total, but will vary inversely on a per - unit basis with changes in the level of activity. 2 - 3 When fixed costs are involved, the cost per unit of activity will depend on the activity volume (or level). For example, a s production increases, the cost per unit will fall because the fixed cost is spread over more units. Conversely, as production declines, the cost per unit will rise since a constant fixed cost figure will be spread over fewer units. 2 - 4 The cost of direct materials included in a product is a variable cost; similarly, sales commissions paid out on a per unit basis or as a percentage of sales dollars is a variable cost. On the other hand, costs such as building rent and the salary of a general manager are fixed costs. 2 - 5 Fixed costs in total do not vary with volume within a relevant range. However, fixed costs per unit of volume decrease as volume increases and increases as volume decreases. Therefore, an inverse relationship exists between volume and fixed costs per unit of volume. 2 - 6 Manufacturing overhead is an indirect cost since these costs cannot be easily and conveniently traced to individual products. 2 - 7 A differential cost is a cost that differs between alternatives in a decision. An opportunity cost is the potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken now or in the future. 2 - 8 No; differential costs can be either variable or fixed. For example, the alternatives might consist of purchasing one computer software program over another to simplify the accounts receivable process . The difference in the fixed costs of purchasing the two programs would be a differential cost. 2 - 9 The three major elements of product costs in a manufacturing company are direct materials, direct labour , and manufacturing overhead. 2 - 10 a. Direct materials: Direct materials are an integral part of a finished product and can be conveniently traced into it. b. Indirect materials: Indirect materials are generally small items of material such as glue and nails. They may become an integral part of a finished product but are traceable into the product only at great cost or inconvenience. Indirect materials are ordinarily classified as part of manufacturing overhead. c. Direct labo u r: Direct labo u r includes those labour costs that can be easily traced to particular products. Direct labo u r is also called “touch labour .” d. Indirect labo u r: Indirect labo u r includes the labo u r costs of workers who do not directly work on products but provide a support function. Examples of such labour include janitors, supervisors, materials handlers, and other factory workers that cannot be

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    conveniently traced directly to particular products. e. Manufacturing overhead: Manufacturing overhead includes all manufacturing costs except direct materials and direct labour . 2 - 11 PC = DM + DL CC = DL + MOH PC = DM + CC - MOH 2 - 12 A product cost is any cost in curred for the purchase or the manufacture of goods. In the case of manufactured goods, these costs consist of direct materials, direct labour , and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred. Examples include selling (marketing) and administrative expenses. 2 - 1 3 The income statement of a manufacturing firm differs from the income statement of a merchandising firm in the cost of goods sold section. The merchandising firm sells finished goods that it has purchased from a supplier. These goods are listed as “Purchases” in the cost of goods sold section. Since the manufacturing firm produces its goods rather than buying them from a supplier, it lists “Cost of Goods Manufactured” in place of “Purchases.” Also, the manufacturing firm identifies its inventory in this section as “Finished Goods Inventory,” rather than as “Merchandise Inventory.” 2 - 1 4 The schedule of cost of goods manufactured is used to list and organize the manufacturing costs that have been incurred. These costs are organized under the three major headings of direct materials, direct labour , and manufacturing overhead. The total costs incurred are adjusted for any change in the Work in Process inventory to determine the cost of goods manufactured (i.e. , finished) during the period. The schedule of cost of goods manufactured ties into the income statement through the Cost of Goods Sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the “Purchases” account in a merchandising firm. 2 - 1 5 A manufacturing firm has three inventory accounts: Raw Materials, Work in Process, and Finished Goods. The merchandising firm generally identifies its inventory account simply as Merchandise Inventory. 2 - 1 6 Since product costs follow units of product into inventory, they are sometimes called inventoriable costs. The flow is from direct materials, direct labour , and manufacturing overhead into Work in Process. As goods are completed, their cost is removed from Work in Process and transferred into Finished Goods. As goods are sold, their cost is removed from Finished Goods and transferred into Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement. 2 - 1 7 Yes, costs such as salaries and depreciation can end up as assets on the balance sheet if these are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of a period if there are unsold units.

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    Solutions to Foundational 15 The Foundational 15 ( LO1 – CC1; LO2 – CC2; LO3 – CC3; LO4 – CC4, 5, 6, 7) 1. Direct materials ................................ ................................ .... $ 6.00 Direct labour ................................ ................................ ........ 3.50 Variable manufacturing overhead ................................ ........... 1.50 Variable manufacturing cost per unit ................................ ...... $11.00 Variable manufacturing cost per unit (a) ................................ $11.00 Number of units produced (b) ................................ ............... 10,000 Total variable manufacturing cost (a) × (b) ............................ $110,000 Fixed manufacturing overhead per unit (c) ............................. $4.00 Number of units produced (d) ................................ ............... 10,000 Total fixed manufacturing cost (c) × (d) ................................ . 40,000 Total product (manufacturing) cost ................................ ........ $150,000 2. Sales commissions ................................ ................................ $1.00 Variable administrative expense ................................ ............. 0.50 Variable selling and administrative per unit ............................. $1.50 Variable selling and admin. per unit (a) ................................ .. $1.50 Number of units sold (b) ................................ ....................... 10,000 Total variable selling and admin. expense (a) × (b) ................................ ................................ ........ $15,000 Fixed selling and administrative expense per unit ($3 fixed selling + $2 fixed admin.) (c) ............................... $5.00 Number of units sold (d) ................................ ....................... 10,000 Total fixed selling and administrative expense (c) × (d) ................................ ................................ .................... 5 0,000 Total period (nonmanufacturing) cost ................................ ..... $65,000 3. Direct materials ................................ ................................ .... $ 6.00 Direct labour ................................ ................................ ........ 3.50 Variable manufacturing overhead ................................ ........... 1.50 Sales commissions ................................ ................................ 1.00 Variable administrative expense ................................ ............. 0.50 Variable cost per unit sold ................................ ..................... $12.50

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    The Foundational 15 (continued) 4. Direct materials ................................ ................................ .... $ 6.00 Direct labour ................................ ................................ ........ 3.50 Variable manufacturing overhead ................................ ........... 1.50 Sales commissions ................................ ................................ 1.00 Variable administrative expense ................................ ............. 0.50 Variable cost per unit sold ................................ ..................... $12.50 5. Variable cost per unit sold (a) ................................ ................ $12.50 Number of units sold (b) ................................ ....................... 8,000 Total variable costs (a) × (b) ................................ ................. $ 100,000 6. Variable cost per unit sold (a) ................................ ................ $12.50 Number of units sold (b) ................................ ....................... 12,500 Total variable costs (a) × (b) ................................ ................. $ 156,250 7. Total fixed manufacturing cost (see requirement 1) (a) ................................ ...................... $40,000 Number of units produced (b) ................................ ............... 8,000 Average fixed manufacturing cost per unit produced (a) ÷ (b) ................................ ............................ $ 5.00 8. Total fixed manufacturing cost (see requirement 1) (a) ................................ ...................... $40,000 Number of units produced (b) ................................ ............... 12,500 Average fixed manufacturing cost per unit produced (a) ÷ (b) ................................ ............................ $3 .20 9. Total fixed manufacturing cost (see requirement 1) ................................ ........................... $40,000 10. Total fixed manufacturing cost (see requirement 1) ................................ ........................... $40,000

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    The Foundational 15 (continued) 11. Variable overhead per unit (a) ................................ ............... $ 1 .50 Number of units produced (b) ................................ ............... 8,000 Total variable overhead cost (a) × (b) ................................ .... $12,000 Total fixed overhead (see requirement 1) ............................... 40,000 Total manufacturing overhead cost ................................ ........ $52,000 Total manufacturing overhead cost (a) ............................. $52,000 Number of units produced (b) ................................ ......... 8 ,000 Manufacturing overhead per unit (a) × (b) ....................... $6.50 12. Variable overhead per unit (a) ................................ ............... $ 1 .50 Number of units produced (b) ................................ ............... 12,500 Total variable overhead cost (a) × (b) ................................ .... $18,750 Total fixed overhead (see requirement 1) ............................... 40,000 Total manufacturing overhead cost ................................ ........ $58,750 Total manufacturing overhead cost (a) ............................. $58,750 Number of units produced (b) ................................ ......... 12 ,500 Manufacturing overhead per unit (a) × (b) ....................... $4.70 13. Sales revenue (@$22.00 per unit) ................................ .......... $220,000 Less: Cost of goods sold ( same as product costs in requirement 1 ) ........................... 15 0, 000 Gross margin ................................ ................................ ........ $ 70,00 0 14. Direct materials per unit ................................ ........................ $6.00 Direct labour per unit ................................ ............................ 3.50 Direct manufacturing cost per unit (a) ................................ .... $9.50 Number of units produced (b) ................................ ............... 11,000 Total direct manufacturing cost (a) × (b) ............................... $104,500 Variable overhead per unit (a) ................................ ......... $ 1 .50 Number of units produced (b) ................................ ......... 11,000 Total variable overhead cost (a) × (b) .............................. $16,500 Total fixed overhead (see requirement 1) ......................... 40,000 Total indirect manufacturing cost ................................ ..... $56,500

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    The Foundational 15 (continued) 15. Direct materials per unit ................................ ........................ $6.00 Direct labour per unit ................................ ............................ 3.50 Variable manufacturing overhead per unit .............................. 1 .50 Incremental manufacturing cost per unit ................................ $11.00 Solutions to Brief Exercises Brief Exercise 2 - 1 ( LO3 CC 3 ) (10 minutes) The cost concept that best applies to Bill’s response is the concept of opportunity cost. Bill’s response of “no free lunch” suggests that the cost of the lunch is the time foregone which he could have utilized in completing the report. For Bill, the alternatives are time required to complete the financial performance report and time required to attend the company lunch. If Bill attends the lunch he will have less time available to finish the report and if he stays to finish the report he would miss the company lunch. Brief Exercise 2 - 2 ( LO1 CC1) (15 minutes) Note to the instructor: A few of these costs may generate lively debate. For example, some may argue that the cost of advertising a U2 rock concert is a variable cost since the number of people who come to the rock concert depends on the amount of advertising. However, one can argue that if the price is within reason, any U2 rock concert in Vancouver will be sold out, and the function of advertising is simply to let people know the event will be happening. Moreover, while advertising may affect the number of people who ultimately buy tickets, the causation is in one direction. If more people buy tickets, the advertising costs don’t go up . Cost Behaviour Variable Fixed 1. The costs of advertising a U2 rock concert in Vancouver ………………………………………….. X 2. Depreciation on the Hard Rock Cafe building in Ottawa .................. X 3. The electrical costs of running a roller coaster at the West Edmonton Mall ................................ ................................ . X

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    4. Property taxes on your local cinema ................................ .............. X 5 . The costs of synthetic materials used to make Reebok running shoes ................................ ................................ ........... X 6 . The costs of shipping Apple iPods to retail stores .......................... X 7 . The cost of leasing a CT - scan diagnostic machine at the American Hospital in Paris ................................ .................... X Brief Exercise 2 - 3 ( LO3 CC 3 ) (15 minutes) Item Differential Cost Opportunity Cost Sunk Cost 1. Cost of the old printing machine X 2. The salary of the head of the Printing Department 3. The salary of the head of the Finance Department 4. Rent on the space occupied by the Printing department 5. The cost of maintaining the old printer X 6. Benefits from a new state - of - the - art scanner X 7. Cost of electricity to run the printing machine X Note: The costs of the salaries of the head s of the Printing and the Finance Department s and the rent on the space occupied by Printing are neither differential costs, nor opportunity costs, nor sunk costs. These are costs that do not differ between the alternatives and are therefore irrelevant in the decision, but they are not sunk costs since they occur in the future. The opportunity cost of the foregone benefit from a new state - of - the - art scanner is not a differential cost in the decision to replace the old printer with a new printer, but if the decision were instead whether to acquire a scanner or a printer, this opportunity cost would also be a differential cost.

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    Brief Exercise 2 - 4 ( LO4 CC 4, 5, 6 ) ( 15 minutes) 1. Monthly salary of the company’s accountant: Administrative cost. 2. The cost of a fan installed in a computer: D irect M aterials c ost. 3. Rental on equipment used to assemble computers: Manufacturing Overhead 4. The cost of advertising in the local community newspaper: M arketing and S elling cost. 5. Monthly charge paid to an outside company for quality testing (20% of the computers assembled are sent for testing): Manufacturing Overhead 6. The wages of employees who assemble computers from components: D irect L abour c ost. 7. The salary of the assembly shop’s supervisor: Manufacturing Overhead. 8. Sales commissions paid to the company’s salespeople: M arketing and Selling cost. 9. Rent on the facility: Manufacturing Overhead.

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    Brief Exercise 2 - 5 ( LO4 CC 7 ) (15 minutes) Product (Inventoriable) Cost Period (Non - inventoriable) Cost 1. Depreciation on salespersons’ cars ................................ ................. X 2. Rent on equipment used in the factory ................................ ........... X 3. Lubricants used for maintenance of factory equipment ................................ ................................ ................. X 4. Salaries of finished goods warehouse personnel ................................ ................................ .................. X 5. Soap and paper towels used by factory workers at the end of a shift ................................ ....................... X 6. Sales supervisors’ salaries ................................ .............................. X 7. Property taxes on the factory building ................................ ............ X 8. Materials used in boxing units of finished product for shipment overseas (units are not normally boxed) ................................ ................................ ... X 9. Advertising outlays ................................ ................................ ........ X 10. Workers’ compensation insurance on factory employees ................................ ................................ ...... X 11. Depreciation on chairs and tables in the administrative boardroom ................................ ........................... X 12. The salary of the production quality supervisor for the company ................................ ........................ X 13. Depreciation on a Learjet used by the company's executives ................................ ................................ . X 14. Rent on rooms at a Florida resort for manufacturing conference ................................ .......................... X 15. Attractively designed box for packaging breakfast cereal ................................ ................................ ......... X

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