Cornerstones Of Managerial Accounting, Third Canadian Edition Solution Manual

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1-1CHAPTER 1INTRODUCTION TO MANAGERIAL ACCOUNTINGDISCUSSION QUESTIONS1.Managerialaccountingistheprovisionofaccounting information for internal users in afirm.2.The three broad objectives of managerialaccountingareplanning,controlling,anddecision making.3.Theusersofmanagerialaccountinginformationaregenerallymanagersandotheremployeesofafirm.Managerialaccountinginformationistypicallynotprovided to outsiders but may be in selectedcases. For example, a bank may requirebudgeting information for the next few yearsbefore agreeing to grant a loan.4.A managerial accounting information systemtypicallyprovidesbothfinancialandnonfinancialinformation.Forexample,financial information on cost of production istracked.Otherinformation,suchasthenumber of warranty returns, may also betrackedbythemanagementinformationsystem.5.Controlling is sometimes called performanceevaluation. It involves comparing the actualoutcome with the expected outcome to seewhat differences, if any, exist.6.Planningoccursfirst.Itrequiressettingobjectivesandidentifyingthemeansofachieving those objectives. Then, the resultsof the plan are compared with the plan, whichiscalledcontrolling.Clearly,itisalsofeedback,inthatanyimpedimentsorunexpectedoccurrencesarenoted.Thisfeedback is then used to develop the plan forthe next period.7.Managerial accounting is internally focused,does not follow mandatory rules, keeps trackof both financial and nonfinancial information,emphasizes the future, and relies on a broadrange of disciplines. Financial accounting isexternallyfocused,followsexternallyimposedrules(suchasGAAP),hasanhistoricalorientation,andprovidesinformation about the company as a whole.8.Hugeimprovementsintechnology,transportation, and communication over thepast50yearshavechangedtheworldsignificantly.Managerialaccountantshavehad to broaden their focus beyond simplefinancial reporting to include the gathering ofinformation on all types of costs and of thevalue of the product or service to customers.These broader costs are used in planningand decision making.9.Customer value is the difference betweenwhat a customer pays for a product or serviceand what the customer receives in return.Thefocusoncustomervalueforcesmanagementaccountingtolookatmanytypes of costs, not simply manufacturing cost.These may include the price of the good orservice, maintenance costs, search costs,learning costs, and disposal costs.10.Today’smanagerialaccountantmustunderstand many functions of the business,frommanufacturingtomarketingtodistribution to customer service, in order toprovide appropriate information for managingthe value chain. Increased international trademeans that the managerial accountant mustbe familiar not only with business practicesand laws in their own country but also in thecountries with which their company trades.11.Enterprise risk management (ERM) refers tothe formal process of identifying the factorsor threats, both internal and external to theorganization,thatmightpreventtheorganizationfromachievingitsstrategicobjectives. The managerial accountant playsan increasingly important role in ERM byprovidingfinancialandnonfinancialmeasuresofthesethreatsandcommunicating them to high-level executives(e.g., chief risk officer, chief financial officer,board of directors) in the organization whomanage these factors.12.Thevaluechainisthesetofactivitiesrequired to design, develop, produce, market,anddeliverproductsandservicestocustomers. It is important because it helpsthe company to understand its role in serving

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1-2customersandtodevelopstrategiccompetence.13.Linepositionsarethosethathavedirectresponsibility for the basic objectives of anorganization.Thesetypicallyincludeproducingandsellingaproduct.Staffpositionsaresupportiveinnature(e.g.,human resources, maintenance) and haveonlyindirectresponsibilityforanorganization’s basic objectives.14.Yes, the controller should be a member ofseniormanagement.Thisisbecausethecontroller, as the chief accountant for thefirm, has a wealth of information needed byseniormanagementindeterminingthestrategic direction of the firm.15.Ethical behaviour involves choosing actionsthat are right, proper, and just. It is possibleto teach aspects of ethical behaviour in amanagerial accounting classroom. Studentsneed to see examples of right and wrong inbusiness.Theseexampleshelpthemtorecognizeethicaldilemmastheywillfacelater on the job.16.Onemajorthemeorexecutivepressurecommon to many of the accounting scandalsis a focus on the short-term future, rather thanthelong-term.Forexample,WorldComwrongly decided to increase current periodnetincomebyinappropriatelydecreasingcurrent period expenses (by recording moreof the expenditures as an asset that would beexpensedinsmallamountseachperiodrather than all at once in the current period).Oftentimes,thehigh-levelexecutivesthatperpetrate such financial fraud are rewardedby incentives that overweight current-periodnet income performance relative to long-termnetincomeperformance.Anothermajortheme common to many of the accountingand banking frauds is a lack of sufficienttransparency, or clarification, in the types andtiming of the information that is reported topartiesoutside of the organization. Somebusiness experts also would argue that athirdcommonthemeunderlyingmanyofthesescandalswasthelackofsufficientoversight (i.e., watchdog mentality) by theperpetrating organization’s auditors, board ofdirectors, or both.17.TheCharteredProfessionalAccountant(CPA)istheCanadianprofessionalaccounting designation. The three previousforms of designation discussed are CertifiedManagementAccountant,CharteredAccountant,andCertifiedGeneralAccountant.EXERCISESExercise 1–1a.Decision makingb.Controllingc.Planningd.Decision makinge.Planningf.Decision makingExercise 1–2a.Managerial accounting orientedb.Financial accounting orientedc.Managerial accounting orientedd.Financial accounting orientede.Managerial accounting oriented

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1-3Exercise 1–31.The total product is the product and its features (processing speed, disk drives,software packages, and so on), the service, the operating and maintenancerequirements, and the delivery speed.2.One company is emphasizing lower costs, and the other is attempting todifferentiate its laptop by offering faster delivery and higher-quality service.3.The Confiar’s service component and its delivery time appear to be better thanDrantex’s. Thus, the realization of these features appears to outweigh theadditional sacrifice (the additional operating and maintenance cost) associatedwith the Confiar laptop. The implications for management accounting arestraightforward.Themanagementaccountinginformationsystemshouldcollect and report information about customer realization and sacrifice. Muchof 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 customerreceives, while lowering the price decreases the amount paid. In total, customervalue has increased and presumably this should make the Drantex laptop muchmore competitive. This example illustrates how quality, time, and costs areessential competitive weapons. It also illustrates how critical it is for themanagement accounting system to collect and report data concerning thesethree dimensions.Exercise 1–41.Joan Dennison is staff. She is in a support role—she prepares reports and helpsexplain and interpret them. Her role is to help the line managers more effectivelycarry out their responsibilities.Steven Swasey is a line manager. He has direct responsibility for producinggarden hoses. Clearly, one of the basic objectives for the existence of amanufacturing firm is to make a product. Thus, Steven has direct responsibilityfor a basic objective and therefore holds a line position.2.Line functions typically have a direct role in the delivery of the product orservice offered by a company, while the staff functions fill a support role.

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1-4Exercise 1–5It 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 personmore senior than Peter in the athletics and recreation department and inform themof his proposal. Her customers have an expectation that their employees andsuppliers will act in an ethical manner and, if they do not, that they will be reportedby anyone who knows.Exercise 1–61.Brad is not behaving ethically in this situation. By delaying the marketingcampaign by a month, he is simply deferring the problem to a later date: the endofnextfiscalyear.Ifhedoesnotmeethisnumbersbecauseofpoorperformance, he should not try to fool the system by taking action that maymake it appear that he has succeeded.2.Bradcouldemployanynumberoflegitimatestrategiestoovercomehisdilemma:•Generate much higher sales by increasing the number of calls made bysalespeople;•Cut back on major expenses that will not impact the capability of operatingthe division effectively.Exercise 1–71.By the time most students graduate from high school, they have not had muchexposure to business. Therefore, they do not have full knowledge of acceptablebehaviour in the business environment. Students may not know that certainpractices are unethical because they may not be familiar with the behaviouralnorms associated with these practices. Once students begin to learn businesspractices, they begin to see what ethical dilemmas can arise in a businesscontext. They then are able to apply the moral training they have had to dealwith the situations. Furthermore, evidence exists that ethical reasoning can bechanged for the better. Thus, instruction in ethics can be a vital part of abusiness student’s education.2. Sacrificing self-interest is a choice that each person must make. Others may beinfluenced by those individuals who behave ethically. Individuals committed toethical behaviour produce societies committed to ethical behaviour (not viceversa).

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

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2-1CHAPTER 2BASIC MANAGERIAL ACCOUNTING CONCEPTSDISCUSSION QUESTIONS1.A cost object is something for which you wantto know the cost. For example, a cost objectmay be the human resources department of acompany. The costs related to that cost objectmight include salaries of employees of thatdepartment,telephonecostsforthatdepartment,anddepreciationonofficeequipment. Another example is a customergroup of a company. Atlantic City and LasVegas casinos routinely treat heavy gamblersto free rooms, food, and drink. The casinoowners know the benefits yielded by these highrollers and need to know the costs of keepingthem happy, such as the opportunity cost oflost revenue from the rooms, the cost of thefood, and so on.2.Accumulating costs is the way that costs aremeasuredandtracked.Assigningcostsislinking costs to some cost object. For example,a company accumulates or tracks costs byenteringthemintotheaccountingrecords.Directmaterialswouldbeenteredintothematerialsaccount;directlabourwouldbeentered into the direct labour account. Thesecosts are then assigned to units of product.3.A direct cost is one that can be traced to thecost object, typically by physical observation.An indirect cost cannot be traced to the costobject. The same cost can be direct for onepurpose and indirect for another. For example,the salariespaid to purchasing departmentemployees in a factory are a direct cost to thepurchasing department but an indirect cost(overhead) to units of product.4.The cost of goods manufactured is the sum ofdirect materials, direct labour, and overheadused in producing the units completed in afactory.5.Prime cost is the sum of direct materials anddirect labour. Conversion cost is the sum ofdirect labour and overhead. Total product costconsists of direct materials, direct labour, andoverhead. This is not equal to the sum of primecost and conversion cost because direct labourwould be double counted.6.A product is tangible in that you can see, feel,and take it with you. Examples of productsincludeatubeoftoothpaste,a car,oranorange. A service is a task or activity performedforacustomer.Forexample,thedentalhygienist who cleans your teeth provides aservice.7.Cost is the amount of cash or cash equivalentsacrificed for goods and/or services that areexpected to bring a current or future benefit tothe organization. An expense is an expiredcost; the benefit has been used up.8.Aperiodcostisonethatisexpensedimmediately, rather than being inventoried likea product cost.9.Allocationmeansthatanindirectcostisassigned to a cost object using a reasonableandconvenientmethod.Sincenocausalrelationship exists, allocating indirect costs isbased on convenience or some assumed link-age.10.Manufacturing overhead includes all productcosts other than direct materials and directlabour.Itisbecausetheremainingmanufacturing(product)costsaregatheredintoonecategorythatoverheadisoftenthought of as a “catchall.”11.Direct materials purchases are first enteredinto the materials inventory. They may or maynot be used during the month. Only when thematerials are withdrawn from inventory for useinproductionaretheyknownas“directmaterials.”12.Thepercentagecolumnontheincomestatement gives some insight into the relativespending on the various expense categories.These percentages can then be compared withthose of other firms in the same industry to seeif the company’s spending appears to be in lineoroutoflinewiththeexperiencesofitscompetitors.13.The income statement for a manufacturing firmincludes the cost of goods sold, which is thesumofdirectmaterials,directlabour,andoverhead. The income statement for a servicefirm includes the cost of services sold. There

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2-2are no beginning or ending inventories in aservice organization.14.Sellingcostsarethecostsofsellinganddelivering products and services. Examplesinclude free samples, advertising, sponsorshipof sporting events, commissions on sales, andthe depreciation on delivery trucks (such asCoca-Cola trucks).15.The cost of goods manufactured is the cost ofdirect materials, direct labour, and overheadfor the units produced (completed) during atime period. The cost of goods sold is the costof direct materials, direct labour, and overheadfor the units sold during a time period. Thenumber of units produced is not necessarilyequal to the number of units sold during aperiod. For example, a company may produce1,000 pairs of jeans in a month but sell only 900pairs.

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2-3CORNERSTONE EXERCISESCornerstone Exercise 2–1Direct materials$ 48,000Direct labour80,000Manufacturing overhead112,000Total product cost$240,000Per-unit product cost =8,000$240,000 = $30Therefore, one hockey stick costs $30 to produce.Cornerstone Exercise 2–2Direct materials$ 48,000Direct labour80,000Total prime cost$128,000Per-unit prime cost =8,000$128,000 = $16Direct labour$ 80,000Manufacturing overhead112,000Total conversion cost$192,000Per-unit conversion cost =8,000$192,000 = $24Cornerstone Exercise 2–3Materials inventory, June 1$ 42,000Purchases180,000Materials inventory, June 30(51,000)Direct materials used in production$171,000

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2-4Cornerstone Exercise 2–4Direct materials*$171,000Direct labour165,000Manufacturing overhead215,000Total manufacturing cost for June551,000WIP, June 160,000WIP, 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 =units18,000$540,000= $30Cornerstone Exercise 2–5Slapshot CompanyCost of Goods Sold StatementFor the Month of JuneCost of goods manufactured .........................................................$ 540,000Finished goods inventory, June 1 .................................................160,000Finished goods inventory, June 30 ...............................................(215,000)Cost of goods sold..........................................................................$ 485,000Number of units sold:Finished goods inventory, June 1 .................................................5,000Units finished during June .............................................................18,000Finished goods inventory, June 30 ...............................................(7,000)Units sold during June ...................................................................16,000

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2-5Cornerstone Exercise 2–6Slapshot CompanyIncome StatementFor the Month of JuneSales revenue (16,000 × $90).....................................$1,440,000Cost of goods sold.....................................................485,000Gross margin ..............................................................955,000Less:Selling expense:Commissions (0.15 × $1,440,000) ........................$216,000Fixed selling expense...........................................200,000416,000Administrative expense .............................................115,000Operating income.......................................................$424,000Cornerstone Exercise 2–7Slapshot CompanyIncome StatementFor the Month of JunePercent*Sales revenue (16,000 × $90)...............................$1,440,000100.0Cost of goods sold...............................................485,00033.7Gross margin ........................................................955,00066.3Less:Selling expense:Commissions (0.15 × $1,440,000) .................. $216,000Fixed selling expense.....................................200,000416,00028.9Administrative expense .......................................115,0008.0Operating income.................................................$424,00029.4*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 always100% 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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2-6Cornerstone 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 2–8Allstar ExposureIncome StatementFor the Past MonthSales revenues ...........................................................$410,000Less operating expenses:Sales commissions...............................................$ 50,000Technology............................................................75,000Research and development .................................200,000Selling expenses...................................................10,000Administrative expenses......................................35,000370,000Operating income .................................................$ 40,000

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2-7EXERCISESExercise 2–91.Selling expensesPeterSalary$40,000×100%=$ 40,000Commission$40,000×100%=40,000LaurenSalary$50,000×75%=37,500Commission$35,000×100%=35,000Elizabeth Salary$50,000×60%=30,000Commission$25,000×100%=25,000$207,500Administrative expensesPeterSalary$40,000×0%=$0Commission$40,000×0%=0*LaurenSalary$50,000×25%=12,500Commission$35,000×0%=0*Elizabeth Salary$50,000×40%=20,000Commission$25,000×0%=0*$32,5002.Lauren and Elizabeth are paid more salary than Peter because they haveless opportunity to earn commission since they do not spend 100% oftheir time selling.*Note that commission is completely a selling expense; it is not allocatedbetween selling and administrative expense.

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2-8Exercise 2–10a.Salary of cell supervisor—Directb.Power to heat and cool the plant in which the cell is located—Indirectc.Materials used to produce the motors—Directd.Maintenance for the cell’s equipment—Indirecte.Labour used to produce motors—Directf.Cafeteria that services the plant’s employees—Indirectg.Depreciation on the plant—Indirecth.Depreciation on equipment used to produce the motors—Directi.Ordering costs for materials used in production—Indirectj.Engineering support—Indirectk.Cost of maintaining the plant and grounds—Indirectl.Cost of the plant’s personnel office—Indirectm.Property tax on the plant and land—IndirectExercise 2–111.Direct materials—Product costDirect labour—Product costManufacturing overhead—Product costSelling expense—Period cost2.Direct materials$17,000Direct labour13,000Manufacturing overhead12,000Total product cost$42,0003.Unit product cost =6,000$42,000 = $7

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2-9Exercise 2–12Product CostPeriod CostCostsDirectMaterialsDirectLabourManufacturingOverheadSellingExpenseAdministrativeExpenseDirect materials$324,000Factory rent$36,000Direct labour$180,000Factory utilities9,450Supervision inthe factory75,000Indirect labour inthe factory45,000Depreciation onfactoryfactoryequipment13,500Salescommissions$ 40,500Sales salaries97,500Advertising55,500Depreciation onthe headquar-ters building$ 15,000Salary of thecorporatereceptionist45,000Otheradministrativecosts262,500Salary of thefactoryreceptionist42,000Totals$324,000$180,000$220,950$193,500$322,5002.Direct materials$324,000Direct labour180,000Manufacturing overhead220,950Total product cost$724,9503.Total period cost = $193,500 + $322,500 = $516,0004.Unit product cost =30,000$724,950 = $24.1655.Costs directly associated with the manufacturing process are part of productcosts. All other costs are treated as period costs.

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2-10Exercise 2–13CostsDirectMaterialsDirectLabourFactoryOverheadJarsXSugarXFruitXPectinXBoxesXDepreciation on the factory buildingXCooking equipment operators’ wagesXFilling equipment operators’ wagesXPackers’ wagesXJanitors’ wagesXReceptionist’s wagesXTelephoneXUtilitiesXRental of Santa Claus suitXSupervisory labour salariesXInsurance on factory buildingXDepreciation on factory equipmentXOil to lubricate filling equipmentXExercise 2–141.Direct materials$1,200,000Direct labour240,000Manufacturing overhead960,000Total product cost$2,400,0002.Product cost per unit=Total product costNumber of units=19,200$2,400,000 = $125

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