Skip to content
Textbook Guides

Solution Manual For Managerial Accounting, 7th Edition

  • Accounting
  • 361 pages
  • Shared February 2025
  • 159 downloads

Master complex problems with Solution Manual For Managerial Accounting, 7th Edition, your go-to guide for step-by-step solutions.

Preview 31 of 361 pages

See the first 31 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    Chapter 1 Managerial Accounting in the Information Age QUESTIONS 1. The goal of managerial accounting is to provide information needed for planning, control, and decision making. 2. Budgeted performance is a useful benchmark for evaluating current period performance. 3. This question asks students to identify three differences between financial and managerial accounting. In the text, five differences are noted: a) Managerial accounting is directed at internal rather than external users of accounting information. b) Managerial accounting may deviate from generally accepted accounting principles (GAAP). c) Managerial accounting may present more detailed information. d) Managerial accounting may present more nonmonetary information. e) Managerial accounting places more emphasis on the future. 4. Examples of nonmonetary information that might appear in managerial accounting reports include: the quantity of material consumed in production, the number of hours worked by the office staff, and the number of product defects. 5. Total variable costs change in proportion to business activity while total fixed costs do not change. 6. Salaries of the employees in the grocery department would be a controllable cost for the manager of the grocery department at a Walmart store . Depreciation related to the building housing the grocery department would be a noncontrollable cost. 7. Incremental analysis involves a comparison of the revenues that change and the costs that change when a decision alternative is considered . If incremental revenue exceeds incremental cost, the decision alternative should be undertaken. 8. “You get what you measure!” suggests that managers’ behaviors are affected by performance measures. 9. Information flows up and down the value chain and between companies and their suppliers and between companies and their customers. Information technology is helping companies track buying patterns of customers and send targeted selling messages to them electronically . Information technology is also helping companies better manage their supply chains and gain internal efficiencies. 10. A legal action is not necessarily ethical. Ethical actions involve “what’s right” while legal actions involve operating within boundaries of the law.

  2. Page 2
  3. Page 3
    Read page 3 as text

    Jiambalvo Managerial Accounting 1 - 2 EXERCISES E1. [LO 3 ] Suppose the company selected is Microsoft. Measure 1: Number of errors in a piece of software. Favorable outcome: Number of errors is reduced. Unfavorable outcome: Software products are not released on a timely basis. Measure 2: Sales to new customers as a percent of total sales. Favorable outcome: Sales staff works hard to develop new clients. Unfavorable outcome: Company loses existing customers who receive less attention from the sales staff. Measure 3: Average time spent handling customer service calls. Favorable outcome: Customer service representatives handle more calls per hour. Unfavorable outcome: Customer questions are not fully addressed and customer satisfaction decreases. E2. [LO 2 ] The only costs that are relevant to a decision are incremental costs — that is, costs that change when an action is taken. The cost of the old copier is a sunk cost and will not change. Therefore, it is irrelevant to Rachel’s decision. E 3 . [LO 4 ] The code suggests that Guthrie clarify the ethical issue by confidential discussion with an objective advisor (this might be the IMA Ethics Counseling service) to obtain a better understanding of possible courses of action. Guthrie should then discuss the problem with the manager to whom his boss reports (since his boss is involved in the ethical dilemma). If the issue is not successfully resolved, Guthrie should consider disassociating from Bellwether. E4. [LO 4 ] Possible answers include: The CRM system notes that a customer makes significant wine purchases at dinners. At her next stay, the hotel provides a complimentary bottle of a limited release high - end wine resulting in increased customer loyalty. The CRM system notes that a customer has had three bookings in the last year. When the customer checks in, the hotel offers a complimentary room upgrade which results in increased customer loyalty. The CRM system identifies the top 1,000 guests in terms of annual billings and does a direct mailing of certificates that can be redeemed for a free night's stay resulting in increased customer loyalty. The CRM system notes that a customer has traveled with a small dog and wants the staff to walk the dog in the park in the early morning. The reservationist asks if

  4. Page 4
    Read page 4 as text

    Chapter 1 Managerial Accounting in the Information Age 1 - 3 this service is needed when booking an upcoming stay and makes sure a staff person is available. E5. [LO 1 ] Megan can prepare a profit budget for each store (planning). At the end of the accounting period, she can compare actual profit to the budget for each store (control). Significant differences from the budget should be investigated to determine their cause s . E6. [LO 1 ] “c” is false. There are many possible reasons, other than lack of effective management, why actual costs are greater than planned. Typically, performance reports only suggest areas that should be investigated. E7. [LO 1 ] Deidre should not be concerned that cost of sales has increased. Cost of sales is a variable cost and it is expected that it will increase when sales increase. In the budget, cost of sales ($400,000) is 67% of sales ($600,000). Actual cost of sales ($425,000) is 61% of actual sales ($700,000). Thus, while cost of sales has increased, it has not increased disproportionate to the increase in sales. E8. [LO 1] . Managerial accounting focuses on accounting information for internal decision - making. This focus differs from financial accounting in a number of ways. For example managerial accounting: 1) focuses on internal users, 2) can deviate from generally accepted accounting principles (GAAP), 3) presents more detailed information, 4) presents more nonmonetary information, and 5) places emphasis on the future. E9. [LO 1 ] For purposes of awarding bonuses, it may be advisable to record sales when orders are placed so that the sales force is rewarded on a timely basis. If the company waited until the order was delivered, the sales force might be rewarded more than a year after obtaining a customer order. The point is that for internal reporting purposes, companies need not follow GAAP. E10. [LO 2 ] a. variable b. fixed c. variable d. fixed E11. [ LO 2 ] a. variable b. variable c. fixed d. fixed e. variable

  5. Page 5
    Read page 5 as text

    Jiambalvo Managerial Accounting 1 - 4 E12. [LO 2 ] A cost is controllable by a manager whose actions affect the cost. Thus, for example, advertising may be a controllable cost for a store manager (who decides how much to spend on advertising) but it would be a non - controllable cost for the manager of a department at the store (who is not consulted about the amount to spend on advertising). E13. [LO 2 , 3 ] Takesha should not consider how much he paid for the old machine because that is a sunk cost. He should consider the value of the old machine in the used lab machine market — an incremental cash inflow equal to the market value of the old machine that will result if he buys a new lab machine. E14. [LO 2 ] Incremental revenue per day $2,500 Less incremental costs: Labor $700 Parts 500 Transportation 100 Office staff 200 1,500 Incremental Profit per Day $1,000 Opportunity cost = $1,000 per day x 52 days = $52,000 Rent and depreciation do not enter into the calculation of the opportunity cost since these costs are not incremental (they will be incurred whether or not Ken decides to stay open on Saturday). E 15. [LO 2 ] If Zachary visits his friend, he will incur a $560 (16 hours x $35) opportunity cost. E16. [LO 2, 3 ] The incremental production cost per gallon is likely to be less than $6 because part of the $6 amount relates to fixed costs such as depreciation of equipment. Since the incremental cost per gallon is less than $6, the incremental cost to produce 15,000 gallons is less than $90,000. E17. [LO 3 ] a. When a second shift is added, material costs, workers’ salaries, and benefits are likely to increase. b. Depreciation of the building will not increase when a second shift is added. E18. [LO 3 ] The owner of LA Porsche may link Hulmut’s annual bonus to the average customer satisfaction rating. Thus, there is a link between the measure and Hulmut’s financial welfare. Some actions that Hulmut can take that may help ratings would be to 1) provide a comfortable waiting area for customers, 2) provide free coffee and snacks in the waiting area, and 3) provide transportation service for customers while their car s are under repair.

  6. Page 6
    Read page 6 as text

    Chapter 1 Managerial Accounting in the Information Age 1 - 5 E19. [LO 5 ] The IMA’s Statement of Ethical Professional Practice does not directly address this issue so students may take either side of this issue. Shauna does have obligations: Students could argue that the practice of entertaining customers with lavish vacations is a type of bri b e that would violate the Integrity standard (refrain from engaging in any conduct that would prejudice carrying out duties ethically). Shauna does not have obligations: Students could argue that the practice of entertaining customers is not against the law and does not reduce one’s ability to carry out duties ethically. E20. [LO 5 ] . Responses will vary. Examples of Controller duties are as follows: Cost accounting, preparation of financial statements in accordance with GAAP, budgeting, variance analysis, advisor to senior leadership. Examples of skills are as follows: BA in Accounting, CPA, 5 - 10 years accounting experience, 5 years management experience, excellent written and verbal communication skills . E21 . Student answers will vary.

  7. Page 7
    Read page 7 as text

    Jiambalvo Managerial Accounting 1 - 6 PROBLEMS P1. [LO 1 , 2 ] a. Santiago’s Salsa Budgeted Production Costs May 20 20 30,000 Production Jars of Salsa Ingredient cost * $24,000 Labor cost ** 14,400 Rent 5,000 Depreciation 6,000 Other 1,000 Total $50,400 *($20,000 ÷ 25,000) x 30,000 **($12,000 ÷ 25,000) x 30,000 b. With a wage rate of $20, 720 hours ($14,400 ÷ $20) will be needed in May. In April, only 600 hours were needed ($12,000 ÷ $20). Thus, 120 additional hours will be needed in May. The company can plan on hiring a part - time worker in May (approximately 30 hours per week) . Unless management anticipates the need for the part - time worker (by preparing a budget), he or she may not be hired on a timely basis. c. The actual cost per unit in April was $1.76 ($44,000 ÷ 25,000 units). The cost per unit in May is anticipated to be only $1.68 ($50,400 ÷ 30,000 units). Unit cost declines because some costs are fixed and do not increase with increases in volume.

  8. Page 8
    Read page 8 as text

    Chapter 1 Managerial Accounting in the Information Age 1 - 7 P2. [LO 2 , 3 ] a. The variable costs are $1.28 per jar of salsa as follows: 25,000 Production Jars of Salsa Ingredient cost $20,000 Labor cost 12,000 Total $32,000 $32,000 ÷ 25,000 jars of salsa = $1.28 per jar of salsa. Thus, the incremental cost of producing an extra 50,000 jars of salsa is $64,000 (i.e., $1.28 × 50,000). b. The incremental revenue associated with a price reduction of $0.40 is $100,000 as follows: Original Revenue (325,000 × $5.00) $1,625,000 Revenue with price change (375,000 × $4.60) 1,725,000 Incremental revenue associated with price change $ 100,000 c. Yes, the price should be lowered since the incremental cost of this action ($64,000 in part a) is less than the incremental revenue ($100,000 in part b). P3. [LO 1 , 2 ] Sales Department Budgeted Costs, 20 20 (Assuming Sales of $11,000,000) Salaries (fixed) $400,000 Commissions (variable) 165,000 Advertising (fixed) 100,000 Charge for office space (fixed) 3,000 Office supplies & forms (variable) 2,200 Total $670,200 Commissions [($150 ÷ $10,000) x $11, 000,000] = $165,000 Office supplies & forms [($2,000 ÷ $10,000,000) x $11,000,000] = $2,200

  9. Page 9
    Read page 9 as text

    Jiambalvo Managerial Accounting 1 - 8 P4. [LO 1 ] a. Sales exceeded the budget by 10.7% ($75,000 ÷ $700,000), while cost of merchandise increased by 22.9 % and salaries increased by only 11.4%. Thus, the investigation should focus on cost of merchandise since a 22.9 % increase is disproportionate to the increase in sales. b. Electricity would not be a controllable cost for the manager of sporting goods, and it is doubtful that including it on a performance report for sporting goods would be useful. P5. [LO 1 , 2 ] Cyril should expect some costs to be greater than budgeted. Variable production costs will increase with the number of units produced, while fixed production costs are not expected to increase. In the example, it is reasonable to assume that materials, direct labor and utilities are variable costs while the remaining costs (supervisory salaries, machine maintenance, depreciation of building, depreciation of equipment and janitorial) are fixed. (Note that a case can be made for other classifications.) P6. [LO 1 , 2 , 3 ] a. The information on the income statement, balance sheet and statement of cash flow is highly summarized for the entity as a whole. Linda needs product level information which is much more detailed. b. Examples of nonfinancial measures might be: Web site visits, number of repeat customers, delivery time, and customer satisfaction. c. Linda could improve customer satisfaction ratings by offering discounts, improving delivery time, improving customer service, and improving quality. d. Examples of costs in Linda’s operation are cost of contact lenses (variable), depreciation of computing equipment (fixed), salaries of information technology staff (fixed), and shipping (variable). P7. [LO 3 ] a. Managers may focus (too much) on new customers and ignore current customers who account for most of the company’s sales. b. Managers could decrease cost of goods sold by overproducing (i.e., producing more than needed for current sales and reasonable inventory) in an effort to decrease unit cost and cost of sales. However, this would result in an inventory buildup and excess inventory holding costs.

  10. Page 10
    Read page 10 as text

    Chapter 1 Managerial Accounting in the Information Age 1 - 9 c. Managers may be able to decrease selling and administrative expense in the short - run by cutting the number of employees. However, this may hurt employee morale and customer service. If that is the case, it may, in the long run, hurt company profitability. P8. [LO 2 , 3 ] a. Incremental revenue will be $640 ($160 x 4). b. Incremental costs would include, for example, the cost of soap and shampoo, the cost of cleaning the room, and the cost of cleaning towels and bedding. c. Most likely, the incremental revenue will exceed the incremental costs, which are relatively low (e.g., shampoo and soap are inexpensive and cleaning personnel are paid fairly low wages). P9. [LO 5 ] Answers based on Sears Holding Company Code of Conduct. a. “ For example, you may not share pricing data among competing vendors.” b. “ Additionally, a ssociates may not use Company time or resources to support personal political activities or use their position to coerce or pressure associates to make contributions or support a candidate or political cause .” c. “ Under no circumstances may an associate accept, keep, or purchase a sample directly from a vendor." d. “ You must not disclose Sears Holding Company proprietary or confidential information to anyone not authorized to receive it or with no need to know the information. ”

  11. Page 11
    Read page 11 as text

    Jiambalvo Managerial Accounting 1 - 10 Case 1 - 1. [ LO 2 , 5 ] LOCAL 635 Summary Union is disputing “cost of meal” charges to hotel employees. • Distinguishes among fixed, variable, sunk, and opportunity costs. • Makes the point that there is no generally accepted meaning of the term “cost.” Questions to ask students : 1. What is the source of conflict between Local 635 and the Riverside Hotel? 2. What are some examples of variable, fixed, sunk, and opportunity costs in the context of the Local 635 case? 3. What do you think is the incremental cost of an employee meal? 4. I contend that it is possible that the incremental cost is more than $300. How is this possible? 5. How should the contract be worded to avoid similar problems in the future? Discussion I start this case by asking a student to explain the source of conflict between Local 635 and the Riverside Hotel. The student is likely to explain that while employees are focused on the incremental cost of a meal, management is focused on various fixed costs as well as the incremental costs. This leads to a major take away — there is no generally accepted meaning of the term cost . We know what’s meant by fixed cost, variable cost, opportunity cost, sunk cost, etc., but there is ambiguity as to what exactly cost means. To begin working on the vocabulary of managerial accounting, I ask students for examples of variable, fixed, sunk, and opportunity costs in the context of the Local 635 case. The primary variable cost is the cost of food items (e.g., the cost of meat and salad ingredients). A fixed cost would be the depreciation on the oven (which is also a sunk cost). An opportunity cost would arise if a worker ate the last prime rib and the hotel lost a sale. I then ask the class to estimate the incremental cost of an employee meal. Most students think it is less than $1 5 . I then suggest that it is possible that the incremental cost is more than $300 ! When asked to explain how this is possible, students focus on opportunity costs. Suppose an employee eats the last prime rib just before a steady

  12. Page 12
    Read page 12 as text

    Chapter 1 Managerial Accounting in the Information Age 1 - 11 customer, who always eats prime rib, comes into the restaurant. If this customer becomes disgruntled and never returns to the restaurant, the hotel could easily be out $300 or more in the next few months. How should the contract be rewritten? Students generally recommend that meal subsidies be based on some percent of menu prices. For example, meals could be free as long as 70% of the total of menu prices is less than $1 5 . To wrap up, it should be noted that to ensure quality and customer satisfaction, kitchen workers must be motivated to do a good job. Thus, the hotel should be motivated to settle this dispute quickly in a way that seems fair to workers.

  13. Page 13
    Read page 13 as text

    Jiambalvo Managerial Accounting 1 - 12 Case 1 - 2. [ LO 3 ] BOSWELL PLUMBING PRODUCTS Summary A senior manager is requesting information on the “cost” of a product. • Makes the point that appropriate cost information depends on the manager. Questions to ask students : 1. What did the senior manager ask Nick and how did he reply? 2. Why is Nick’s response “Why do you want to know?” appropriate from the standpoint of incremental analysis? 3. What cost information would be relevant to a decision to drop the product that would not be relevant to a decision to increase a production run by 100 units? Discussion A senior manager has asked Nick Somner to tell her the cost of the D45 valve. Nick replies, “Why do you want to know?” This response is appropriate from the standpoint of incremental analysis. The cost information that the senior manager needs to make a decision depends on the decision she is facing. Thus, “Why do you want to know?” is just Nick’s way of asking “What decision are you facing?” If the senior manager is thinking of dropping the product, Nick should provide information on the incremental costs that will be saved if the product is dropped. If she is thinking of increasing a production run, Nick should provide the incremental cost associated with this action. For example, if the product is dropped, the company may save the cost of setting up the production line, the cost of ordering materials, and the cost of supervision. None of these costs are relevant to a decision to increase a production run by 100 units since none of these costs will change with the addition of 100 units to a planned production run.

  14. Page 14
    Read page 14 as text

    Chapter 2 Job - Order Costing for Manufacturing and Service Companies QUESTIONS 1. Manufacturing costs include all costs associated with the production of goods. Examples of manufacturing costs are: labor costs of workers directly involved with manufacturing goods, cost of all materials directly traced to products, indirect factory labor, indirect materials used in production, depreciation of production equipment, and depreciation of the manufacturing facility. Nonmanufacturing costs are all costs that are not associated with the production of goods. These typically include selling costs and general and administrative costs. 2. Product costs are assigned to goods produced and become an expense when inventory is sold. Period costs are not assigned to goods produced. Period costs are identified with accounting periods and are expensed in the period incurred. 3. Two common types of product costing systems are (1) job - order costing systems and (2) process costing systems. Job - order costing systems are generally used by companies that produce individual products or batches of unique products. Companies that use job - order costing systems include custom home builders, airplane manufacturers, and ship - building companies. Process costing systems are used by companies that produce large numbers of identical items pass ing through uniform and continuous production operations. Process costing tends to be used by beverage companies and producers of chemicals, paints, and plastics. 4. A job cost sheet is a form that is used to accumulate the cost of producing a job. The job cost sheet contains information on direct materials, direct labor, and manufacturing overhead related to a particular job. 5. Actual overhead is not known until the end of the accounting period. If managers used actual overhead rates to apply overhead to jobs, they would have to wait until the end of the period to determine the cost of jobs. In order to make timely decisions, managers need to know the cost of jobs before the end of the accounting period.

  15. Page 15
    Read page 15 as text

    Jiambalvo Managerial Accounting 2 - 2 6. An important characteristic of a good overhead allocation base is that it should be strongly related to overhead cost. Assume that setup costs are classified as manufacturing overhead. The number of setups that a job requires would be a better allocation base for setup costs than would the number of direct labor hours worked on that job. Number of setups is more closely related to setup costs than is the number of direct labor hours and, therefore, the number of setups is a better allocation base. 7. In highly automated companies where direct labor cost is a small part of total manufacturing costs, it is unlikely that overhead costs vary with direct labor. Further, in such companies, predetermined overhead rates based on direct labor may be quite large. Thus, even a small change in labor (the allocation base) could have a large effect on the overhead cost allocated to a job. Companies that are capital - intensive should consider using machine hours as an allocation base (or better still, they should consider the use of an activity - based costing system, which is discussed in more detail in Chapter 6 ). 8. It is necessary to apportion over - or unde r - applied overhead among Work in Process Inventory , Finished Goods Inventory , and Cost of Goods Sold accounts if the amount in the Manufacturing Overhead account is material. This assumes that the balances in Work in Process and Finished Goods are relatively large. If a company used a just - in - time systems and these balances were quite small, then it would be reasonable to just close over - or under - applied overhead to Cost of Goods Sold. 9. An unexpected increase in production would typically result in overhead being overapplied. Overhead is applied using a predetermined rate which equals estimated total overhead cost (including variable and fixed overhead) divided by the estimated level of the allocation base. Overhead applied equals the predetermined rate times the actual use of the allocation base. An unexpected increase in production means that the fixed component of the predetermined overhead rate will be multiplied by a larger number than anticipated. Thus, more fixed overhead will be applied than the company is likely to incur. 10. As companies move to computer - controlled manufacturing systems and greater use of robotics , direct labor will likely decrease (due to decreased need for workers) and manufacturing overhead will likely increase (due to higher depreciation costs associated with the computer - controlled systems).

  16. Page 16
    Read page 16 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 3 EXERCISES E1. [LO 4 ] Managers at Company A will perceive that overhead cost allocated to jobs increases with the amount of direct labor used. If they are evaluated on how well they control the cost of jobs, they will try to cut back on labor, which not only reduces labor costs but also overhead allocated to jobs they supervise. Following similar logic, managers at Company B will cut back on machine time and managers at Company C will make a special effort to control material costs (by reducing waste, searching for lower prices, etc). Note that the measure of performance (reduction in job costs) combined with the approach to allocating overhead drives managers to focus on different factors — this is a good example of “You get what you measure!” E2. [LO 5 , 7 ] If over - or underapplied overhead is large, we typically allocate it to W ork in P rocess, F inished G oods and C ost of G oods S old based on the relative balances in these accounts. However, if a company uses JIT, the balances in W ork in P rocess and F inished G oods are likely to be quite small compared to the balance in C ost of G oods S old. Thus, there will be only a small difference between assigning all of the over - or under - applied overhead to cost of goods sold versus apportioning it among the three accounts based on their relative balances. E3. [LO 4, 5 ] The predetermined overhead rate at Precision Custom Molds is $100 per direct labor hour ($20,000,000 ÷ 200,000). Given Job 525 has 25 direct labor hours, $2,500 of overhead would be applied to it ($100 x 25). E4. [LO 3 ] a. P d. J b. P e. P c. J f. J E5. [LO 1, 2 ] a. Y e. N b. N f. Y c. Y g. Y d. Y h. N

  17. Page 17
    Read page 17 as text

    Jiambalvo Managerial Accounting 2 - 4 E6. [LO 2 , 4 ] Note that direct materials are charged to Work in Process Inventory while indirect materials are charged to Manufacturing Overhead. Work in Process Inventory 200,000 Raw Materials Inventory 200,000 Manufacturing Overhead 10,000 Raw Materials Inventory 10,000 E7. [LO 2 , 4 ] Note that direct materials are charged to Work in Process Inventory while indirect materials are charged to Manufacturing Overhead. Work in Process Inventory 1,500 Raw Materials Inventory 1,500 (250 + 350 + 400 + 500 = 1,500) Manufacturing Overhead 100 Raw Materials Inventory 100 E8. [LO 2 , 4 ] Note that direct labor is charged to Work in Process Inventory while indirect labor is charged to Manufacturing Overhead. Work in Process Inventory 70,000 Wages Payable 70,000 Manufacturing Overhead 50,000 Wages Payable 50,000

  18. Page 18
    Read page 18 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 5 E9. [LO 2 , 4 ] a. Job No. 201 110 hrs.  $ 10 /hr $ 1,100 90 hrs.  $21/hr. 1,890 40 hrs.  $12/hr. 48 0 Total $ 3,47 0 Job No. 202 50 hrs.  $20/hr. $ 1,000 Job No. 203 70 hrs.  $18/hr. $ 1,260 b. Labor Report for the month of February (by job): Time Job Ticket Hours Rate Cost 201 2101 110 10 .00 $1,100 201 2102 90 21 .00 1,890 201 2103 40 12 .00 480 240 3,47 0 202 2104 5 0 20.00 1,00 0 203 2105 7 0 1 8 .00 1,26 0 Total labor charges $ 5,73 0 Work in Process Inventory 5,73 0 Wages Payable 5, 73 0 E10. [LO 5 ] (1) Predetermined overhead allocation rate based on direct labor hours: $900,000 ÷ 60,000 DLH = $15 per direct labor hour (2) Predetermined overhead allocation rate based on direct labor costs: $900,000 ÷ $1,800,000 = $0.50 per dollar of direct labor (3) Predetermined overhead allocation rate based on machine hours: $900,000 ÷ 30,000 machine hours = $30 per machine hour

  19. Page 19
    Read page 19 as text

    Jiambalvo Managerial Accounting 2 - 6 E11. [LO 4 , 5 , 6 ] a. The use of predetermined overhead rates makes it possible to cost jobs immediately after they are completed. If a company used an actual overhead rate, then job costs would not be available until the end of the accounting period. If Franklin Computer Repair charges customers based on job cost, it would be detrimental to customer service and company cash flows to have to wait until the end of the accounting period to bill customers. b. The overhead rate is: $500,000 ÷ $800,000 = $0.625 per dollar of technician wages. Total job cost = $200 + $100 + ($100 x $ 0.625) = $362.50 E12. [LO 4 , 5 ] a. Predetermined overhead rates: Allocation base Predetermined Overhead Rate Direct labor hours $1,000,000 ÷ 2 0 ,000 DLH = $ 5 0 per direct labor hour Direct labor cost $1,000,000 ÷ $ 625 ,000 = $1. 6 0 per dollar of direct labor cost Machine hours $ 1,0 00,000 ÷ 20,000 MH = $ 50 per machine hour Direct material cost $ 1,0 00,000 ÷ $ 8 00,000 = $ 1.25 per dollar of direct material b. Cost of Job No. 253 using different allocation bases: Cost DLH DL cost MH DM cost Direct Materials $ 3,000 $ 3,000 $ 3,000 $ 3,000 Direct labor 3 , 750 3 , 750 3 , 750 3 , 750 Manufacturing Overhead * 7 , 5 00 6 , 00 0 5 , 0 00 3,750 Total $ 1 4 , 2 50 $ 12 , 75 0 $ 1 1 , 75 0 $ 10 ,550 *Overhead rates in “a” above x actual activity.

  20. Page 20
    Read page 20 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 7 E13. [LO 2 , 4 , 5 ] a. Overhead applied is equal to $ 3  $100,000 of direct labor = $ 3 00,000. Work in Process Inventory $ 3 00,000 Manufacturing Overhead $ 3 00,000 b. Actual overhead is $260,000 Manufacturing Overhead 260,000 Raw Materials Inventory 40,000 Wages Payable 80,000 Utilities Payable 25,000 Accumulated Depreciation 60,000 Repair s Payable 55,000 E14. [LO 5 , 7 ] a. Overhead applied is $ 300 , 000 while actual overhead is $26 0,000. Thus, Manufacturing Overhead has a $40,000 credit balance. The journal entry to close the account to Cost of Goods Sold is: Manufacturing Overhead 40,000 Cost of Goods Sold 40,000 b. Closing the balance in Manufacturing Overhead leads to product costs that are consistent with actual overhead costs rather than estimated overhead costs. c. Because Star Plastics uses a just - in - time inventory system, the balances in Work in Process and Finished Goods are likely to be quite small compared to Cost of Goods Sold. Thus, there is not likely to be a significant difference between charging the entire amount of overapplied overhead to Cost of Goods Sold versus apportioning it among Work in Process, Finished Goods and Cost of Goods Sold. E15. [LO 4, 5 ] Cost Summary: Job 325 Direct Material $ 10,000 Direct Labor (250 hours x $16/hour) 4,000 Manufacturing Overhead: ($25 per direct labor hour x 250 hours) 6,250 Total $20,250

  21. Page 21
    Read page 21 as text

    Jiambalvo Managerial Accounting 2 - 8 E16. [LO 4 , 5 , 6 ] Estimated overhead = $ 60 0,000 which is allocated based on cost of attorney and paraprofessional time. Budgeted salaries: (5  $ 3 00,000) + (9 x $ 10 0,000) = $ 2,40 0,000 Predetermined overhead rate = $ 60 0,000 ÷ $ 2,400 ,000 = $0.2 5 per dollar of attorney and paraprofessional time. If client services require $45,000 in salaries, then indirect costs assigned are: $45,000  $0.2 5 = $ 11 , 25 0. E17. [LO 5 ] Since the Manufacturing Overhead account has an ending credit balance (before adjustment), manufacturing overhead for the period is overapplied. The problem states that the balance is material — this suggests that we prorate the balance among Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. % of Total Accounts Balance Total Overapplied Adjustment Work in Process Inventory $ 500,000 25 $90,000 $22,500 Finished Goods Inventory 600,000 30 90,000 27,000 Cost of Goods Sold 900,000 45 90,000 40,500 Total $2,000,000 $90,000 Manufacturing Overhead 90,000 Work in Process Inventory 22,500 Finished Goods Inventory 27,000 Cost of Goods Sold 40,500 E18. [LO 7 ] Examples of negative events that would require a company holding inventory are as follows: 1. Strikes at a supplier would interrupt delivery of critical materials. 2. Unanticipated machine break - down s would interrupt production. 3. Natural disasters or terrorist attacks would interrupt the delivery of materials. E19. [LO 4 ] Estimated manufacturing overhead was $2,000,000 and eighty percent was fixed. When the sequence of material movements was changed and 30,000 of machine hours were saved, $1,600,000 (80% of $2,000,000) would remain unchanged. If variable manufacturing overhead is approximately $4 per hour ($400,000÷100,000) the new variable portion would be $280,000 ($4 x (100,000 – 30,000)) which would make the total overhead $1,880,000. The savings is only $120,000 or $4 per hour, which is much less than $20 per hour.

  22. Page 22
    Read page 22 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 9 PROBLEMS P1. [LO 3 ] a. Satterfield’s Custom Glass Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20 20 Beginning balance in work in process inventory $ 210,000 Add current manufacturing costs: Direct material $2,500,000 Direct labor 3,000,000 Manufacturing overhead 1,700,000 7,200,000 Total 7,410,000 Less ending balance in work in process inventory 300,000 Cost of goods manufactured $7,1 1 0,000 b. Satterfield’s Custom Glass Income Statement For the Year Ended December 31, 20 20 Sales $8,500,000 Less cost of goods sold: Beginning finished goods inventory $ 500,000 Add cost of goods manufactured 7,110,000 Cost of goods available for sale 7,610,000 Less ending finished goods inventory 400,000 7,210,000 Gross profit 1,290,000 Less nonmanufacturing expenses: Selling & admin. expenses 1,350 ,00 0 Net income (loss) $ ( 6 0,000 )

  23. Page 23
    Read page 23 as text

    Jiambalvo Managerial Accounting 2 - 10 P2. [LO 3 ] a. Terra Cotta Designs Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20 20 Beginning balance in work in process inventory $ 650,000 Add current manufacturing costs: Direct material: Beginning balance $ 450,000 Purchases 1,500,000 Ending balance (200,000) $1,750,000 Direct labor 2,500,000 Manufacturing Overhead 650,000 4,900,000 Total 5,550,000 Less ending balance in work in process inventory 350,000 Cost of goods manufactured $5,200,000 b. Terra Cotta Designs Income Statement For the Year Ended December 31, 20 20 Sales $7,000,000 Less cost of goods sold: Beginning finished goods inventory $ 750,000 Add cost of goods manufactured 5,200,000 Cost of goods available for sale 5,950,000 Less ending finished goods inventory 350,000 5,600,000 Gross profit 1,400,000 Less nonmanufacturing expenses: Selling expenses 500,000 General & admin. expenses 850,000 1,350,000 Net income $ 50,000

  24. Page 24
    Read page 24 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 11 P3. [LO 4 ] a. Cost of Jobs: 1005 1006 1007 1008 1009 1010 Direct m aterial s $ 650 $ 850 $ 1,550 $ 650 $ 450 $ 350 Direct l abor 1,600 2,000 3,300 1,400 900 700 Mfg. o verhead 2,880 * 3,600 5,940 2,520 1,620 1,260 Total $ 5,130 $ 6,450 $ 10,790 $ 4,570 $ 2,970 $ 2,310 *$1,600 x 180% b. Raw Material Inventory 5,500 Accounts Payable 5,500 (To record purchase of steel) Raw Material Inventory 2,400 Cash 2,400 (To record purchase of supplies) Work in Process Inventory 4,500 Manufacturing Overhead 1,000 Raw Material Inventory 5,500 (To record materials used in production) Work in Process Inventory 9,9 00 Manufacturing Overhead 6,5 00 Wages Payable 1 6 , 4 00 (To record labor) Work in Process Inventory 17,820 Manufacturing Overhead 17,820 (To record overhead applied to production : $9,900 x 180%) ) Finished G oods Inventory 26 , 940 Work in Process Inventory 2 6 , 940 (To record cost of jobs completed : Jobs 1005, 1006, 1007, and 1008) ) Accounts Receivable 40,410 Cost of Goods Sold 2 6 , 940 Sales (26,940 x 150%) 40,410 Finished Goods Inventory 26,940 (To record the sale of finished goods : Jobs 1005, 1006, 1007, and 1008) )

  25. Page 25
    Read page 25 as text

    Jiambalvo Managerial Accounting 2 - 12 P4. [LO 2 , 3, 4 ] a. The beginning balance in Work in Process is $14,500: Job 258 $5,000 Job 259 6,000 Job 260 3,500 Total $14,500 The ending balance in Work in Process Inventory is $8,400: Job 345 $2,500 Job 346 5,900 Total $8,400 b. The beginning balance in Finished Goods Inventory is $9,000: Job 257 $9,000 The ending balance in Finished Goods Inventory is $11,700: Job 341 $ 1,500 Job 342 3,300 Job 343 2,400 Job 344 4,500 Total $11,700 c. Cost of goods sold is determined as follows: Beginning balance in work in process inventory $ 14,500 Add current manufacturing costs: Direct material $ 750,000 Direct labor 1,650,000 Manufacturing overhead 2,150,000 4,550,000 Total 4,564,500 Less ending balance in work in process inventory 8,400 Cost of goods manufactured $4,556,100 Beginning finished goods inventory $ 9,000 Add cost of goods manufactured 4,556,100 Cost of goods available for sale 4,565,100 Less ending finished goods inventory 11,700 Cost of goods sold $4,553,400 Job 257 through Job 340 likely relate to the balance of Cost of Goods Sold.

  26. Page 26
    Read page 26 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 13 P5. [LO 4 , 5 ] a. Predetermined o verhead rate based on labor hours: $12,000,000 ÷ 300,000 hours = $40 per labor hour Overhead assigned to the model K25 shoe based on labor hours: $40 x 11,000 hours = $440,000 Predetermined o verhead rate based on labor cost: $12,000,000 ÷ $4,800,000 = $2.50 per labor dollar Overhead assigned to the model K25 shoe based on labor cost: $2.50 x $165,000 = $412,500 b. Direct labor cost is the preferred allocation base because workers paid a higher rate work on more complex jobs, and more complex jobs lead to more overhead cost. P6. [LO 4 , 5 ] a. Predetermined o verhead rate based on direct labor cost: $ 6 00,000 ÷ $300,000 labor cost = $ 2 . 00 per labor dollar Predetermined o verhead rate based on direct labor hours: $ 6 00,000 ÷ 10 ,000 hours = $ 60 .00 per labor hour Predetermined o verhead rate based on machine hours: $ 6 00,000 ÷ 5 ,000 machine hours = $ 120 per machine hour

  27. Page 27
    Read page 27 as text

    Jiambalvo Managerial Accounting 2 - 14 b. Overhead based on labor cost Job 9823 Job 9824 Direct m aterial $ 1,000 $ 2,000 Direct l abor 2 , 7 00 6 , 5 00 Overhead* 5,400 1 3 , 0 00 Total $ 9 , 100 $ 21 , 500 * Labor cost x $2 Overhead based on labor hours Job 9823 Job 9824 Direct m aterial $ 1,000 $ 2,000 Direct labor 2 , 7 00 6 , 5 00 Overhead * 6 , 0 0 0 1 2 ,0 0 0 Total $9 , 7 00 $20 , 50 0 * Direct labor hours x $ 60 Overhead based on machine hours Job 9823 Job 9824 Direct m aterial $ 1,000 $ 2,000 Direct labor 2 , 7 00 6 , 5 00 Overhead* 4,800 13,200 Total $ 8 , 50 0 $ 21 , 70 0 * Machine hours x $ 120 c. Given that depreciation on equipment accounts for 75 percent of overhead costs, an allocation based on machine hours seems reasonable. However, users of the job cost information should keep in mind that most of overhead applied to jobs is not an incremental cost since depreciation is a fixed cost .

  28. Page 28
    Read page 28 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 15 P7. [LO 5 ] a. Net Income, if over - applied overhead is immaterial and as signed to Cost of Goods Sold. OH applied = .75 x $700,000 = $525,000 Actual OH = 450,000 $ 75,000 Therefore, overhead was over - applied by $75,000 Sales $2,500,000 CGS ($1,000,000 - $75,000) 925,000 Gross Profit 1,575,000 Selling & Admin. Expenses 1,0 00,000 Net Income $ 575,000 b. Net Income, if over applied overhead is material and prorated among appropriate accounts. Adjusted Balance Proportion Adjustment Balance WIP Inventory $ 5 0,000 0.0 4 $ 3 , 000 $ 47,000 FG Inventory 200 ,000 0. 16 12 , 000 188 , 000 COGS 1,0 00,000 0. 8 0 60 , 00 0 9 40 , 00 0 Total $ 1, 250 ,000 1.00 $ 75 ,000 $ 1, 17 5 ,000 Sales $2,500,000 CGS 9 40 , 00 0 Gross Profit 1,56 0 , 00 0 Selling Expenses 400,000 Admin Expenses 600,000 Net Income $ 56 0 , 00 0 c. Assigning the entire amount of over applied overhead to Cost of Goods Sold results in higher net income than prorating over applied overhead among Work in Process, Finished Goods, and Cost of Goods Sold.

  29. Page 29
    Read page 29 as text

    Jiambalvo Managerial Accounting 2 - 16 P8. [LO 5 ] a. If overapplied overhead is assigned to Cost of Goods Sold, the adjusted balance will be: $ 4 40,000 - $ 50 ,000 = $ 390 ,000. b. If overapplied overhead is assigned to Work in Process Inventory , Finished Goods Inventory , and Cost of Goods Sold, the adjusted balances will be: Adjusted Balance Proportion Adjustment Balance WIP Inv. $ 66 ,000 0.1 2 $ 6,000 $ 60,000 FG Inv. 44 ,000 0.0 8 4,000 40,000 COGS 4 40,000 0. 80 40,000 400,000 Total $ 550 ,000 1.00 $ 50,000 $500,000 P9. [LO 4 , 5 , 6 ] a. Indirect cost per hour of service is $65: 50 professionals  1,600 hours = 80,000 hours per year. $5,200,000 indirect cost ÷ 80,000 hours = $65 per hour. b. Estimated cost of services for a potential client: Average salary per billable hour = $120,000 per year ÷ 1,600 hours = $75 per hour . Professional service (100 hours  $75 per hour) $ 7,500 Indirect costs (100 hours  $65 per hour ) 6,500 Total $14,000 P10. [LO 2 , 4 ] a. $30,000 + $40,000 - $15,000 = $55,000 b. $80,000 + $55,000 +$45,000 + $63,000 - $82,000 = $161,000 c. $95,000 + $161,000 - $110,000 = $146,000 d. $70,000 - $60,000 = $10,000

  30. Page 30
    Read page 30 as text

    Chapter 2 Job - Order Costing and Modern Manufacturing Practices 2 - 17 P11. [LO 4 , 5 ] a. The predetermined overhead rate is $ 2. 25 per direct labor dollar ($ 9 ,000,000 ÷ 4 , 0 00,000 = $ 2. 25 ). b. Work in Process Inventory 5,75 0,000 Raw Materials Inventory 5,75 0,000 c. Work in Process Inventory 4 , 5 00,000 Wages payable 4 , 5 00,000 d. Work in Process Inventory 10, 125 ,000 Manufacturing O verhead 10, 125 ,000 ($4, 5 00,000  $2. 25 = $10, 125 ,000) e. Cost of Goods Sold 875 ,000 Manufacturing overhead 875 ,000 ($11,000,000 - $10, 125 ,000 = $ 875 ,000) P12. [LO 4 , 5 ] a. Job 201 $17,000 × $3.25 = $ 55,250 Job 202 $20,500 × $3.25 = 66,625 Job 203 $9,000 × $3.25 = 29,250 $ 151,125 b. Job 201 $9,500 × $3.33 = $ 31,635 $3,000 × $4.76 = 14,280 $4,500 × $2.40 = 10,800 56,715 Job 202 $5,000 × $3.33 = 16,650 $6,500 × $4.76 = 30,940 $9,000 × $2.40 = 21,600 69,190 Job 203 $2,000 × $3.33 = 6,660 $5 ,000 × $4.76 = 23,800 $2,000 × $2.40 = 4,800 35,260 Total $ 161,165 c. It appears that the relation between overhead and labor cost is different in the three production departments. Thus, it is preferable to use separate overhead rates for each.

  31. Page 31
    Read page 31 as text

    Jiambalvo Managerial Accounting 2 - 18 P1 3 . [LO 4 , 5 ] Approximately 66 percent of overhead costs ($160,000 + $135,000) ÷ $450,000 ) are related to machinery. Without additional information, it appears that machine hours would be an appropriate overhead allocation base. The predetermined overhead allocation rate = $450,000 ÷ 15,000 machine hours = $30 per machine hour. P1 4 . [LO 5 , 6 ] Overhead is over applied Applied overhead ($6 x 35,000) $210,000 Actual overhead 200,000 Overapplied overhead $ 10,000 P1 5 . [ LO 5, 6] a. The predetermined overhead rate is $17 per repair technician hour ($170,000 ÷ 10,000 = $17). b. Overhead applied = $17  7,000 = $119,000 Overhead applied is $119,000 while actual overhead is $140,000. Thus, overhead is underapplied by $21,000 $119,000 – $140,000 = $ ( 21,000) c. The journal entry to close the account to Cost of Goods Sold is: Cost of Goods Sold 21,000 Manufacturing Overhead 21,000 P1 6 . [LO 4, 5, 6 ] a. The predetermined overhead rate is $2,750 per hour of operating room use. ($5,500,000 ÷ 2,000 hours = $2,750). The total overhead charge to Candice for 3 hours of operating room usage is $8,250 ($2,750 x 3 hours).

330 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Accounting study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.