Introduction To Managerial Accounting, Fifth Canadian Edition Solution Manual

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Chapter 1An Introduction to ManagerialAccountingSolutions to Questions1-1Managerial accounting is concerned with providing informationprimarilytomanagers for their use internally in the organizationfor the purposes ofstrategy,planning, implementation and control. Financial accounting isconcerned with providing informationprimarilytoinvestors, creditors, andothers outside of the organization.1-2Essentially, the manager carries out three major activities in anorganization: planning,implementation, and control.All three activitiesinvolve decision-making and use managerial accounting information.Thisis depicted in Exhibit 1-1.1-3The Planning, Implementationand Control Cycle involves the followingsteps:(1)formulating planswhich often includes preparing budgets,(2)overseeing day-to-day activities which includesorganizing,directing andmotivating people,resource allocation and decision making,and (3)controlling which includes providing feedback via performance reports.1-4In contrast to financial accounting, managerial accounting: (1) focuses onthe needs of the manager; (2) places more emphasis on the future; (3)emphasizes relevance andtimeliness, rather thanverifiability andprecision; (4) emphasizes the segments of an organization; (5) is notgoverned byIFRS or ASPE; and (6) is not mandatory.1-5The lean business model focuses on continuous improvement byeliminating waste in the organization.Companies that adopt the leanbusiness model usually implement one or more of the followingmanagement practices.Just-in-time (JIT):Aproduction and inventory control system inwhich materials are purchased and units are produced only asneeded to meet actual customer demand.Total quality management (TQM):An approach tocontinuousimprovement that focuses onservingcustomers and uses teams offront-line workers to systematically identify and solve problems.Process re-engineering:An approach to improvement thatinvolves completely redesigning business processes in order toeliminate unnecessary steps, reduce errors, and reduce costs.

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Theory of constraints (TOC):Amanagement approach thatemphasizes the importance of managing constraints.1-6ProsFunds tied up inmaintaininginventorycan be used elsewhereAreas previously used to store inventories are made available forother more productive usesThe time required to fill an order is reduced, resulting in quickerresponse to customers and consequentially greater potential salesDefect rates are reduced resulting in less waste and greatercustomer satisfactionMore effective operationsConsIncreased number of purchase ordersto buy raw materials and/orother components used in manufacturing productsThere is little room for errors and defects in products because thiscould throw the production facility off scheduleThere is a high reliance and dependence on suppliers tomeetdelivery deadlines as well as supply products that have no defectsand require minimal inspection1-7Agree. Ethical behaviour is the foundation of a successful marketeconomy. If we cannot trust people to act ethically in their businessdealings with us, we will be inclined to invest less,scrutinize more andwaste money and time (scarce resources) trying to protect ourselves.Ethical standards andCodes of Conduct aid the smooth running of theeconomy.In addition, the lack of regulatory requirements (IFRS, ASPE)regarding managerial accounting makes ethical behaviour even morecritical.

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Solutions to ExercisesExercise1-1(LO1 CC2)ItemFinancialAccountingManagerialAccountinga)Preparinga cash budget for thenext quarterXb)Analyzing the profitability of arequest from a potentialcustomerXc)Accumulating the transactionsfor the previous sixmonths toprepare an income statementXd)Preparing a weeklyperformance report for thebranch managerXe)Preparing an announcement tobe released to the financialanalystsXExercise 1-2(LO1 CC1)PlanningImplementationControla)Doing a “cost-benefit”analysis of adding a newbranch versus installing newATMsXb)Estimatingthe cost ofrawmaterials to be purchasedduring the next quarterXc)Analyzing market demandX

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to assist in the preparationof the sales budgetd)Compiling the labour reportfor the past weekXe)Outlining the changes to aprocess based on a processreengineering team reportXf)Documenting the savingsfrom reductions in rawmaterials inventoryresulting from the adoptionof a just-in-time inventorysystemX

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Solutions to ProblemsProblem 1-1(LO3 CC5)a)This has ethical implications because the code of ethics mandates that allprofessional accountants will abide by the fundamental principles.Thereare two possible issues here–confidentiality and integrity.By sendingthe reports to the analyst Cleo will be violating the principle ofconfidentiality, she cannot“…disclose any such information to third partieswithout proper and specific authority, unless there is a legal orprofessional right or duty to disclose, nor use the information for thepersonal advantage of the professional accountant or third parties.”Onemight argue that there is also an issue of personal integrity here; as aprofessional accountant she is required “to be straightforward and honestin all professional and business relationships.”b)The main ethical implication here is the issue of confidentiality of clientdata. The code mandates that a member will not disclose any confidentialinformation concerning his/her employer unless acting in the course ofhis/her duties or when required to be disclosed in a lawsuit. As suchinforming ones parents of the folly of their investment choice would beunethical.Problem 1-2(LO3 CC5)Thereis anethical dilemma associated with the student’s request.Thereis the need for fairness among all the students who wrote the exam, andignoring the mid-semester exam result for one student is unfair to theother students.As a student aiming to become amanager, it is importantthat the student does not engage in any activity considered asincompatible with theconduct of a manager.A request forspecialtreatment that would be unfair to other students could be considered aviolation of the principles of Integrity (thedealings are not straightforwardand honest), Objectivity(abias is introduced to the relative gradingin thecourse), and Professional Behaviour(special treatment for some, does notcomply with school rules, and could discredit the reputation of the school’sstandards).

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Bringing in a doctor’s note one month after writing an exam and usingthat as a reason to explain his/her poor performance wouldalsonot beconsidered ethical.Presenting a note one month afteranevent,toaddress a matter that should have been dealt with contemporaneously,violates the principle ofIntegrity (the dealings are not straightforward),andProfessional Competence and Due Care (the obligation toactdiligently in accordance with standards).

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Chapter2Cost ConceptsSolutions to Questions2-1Cost behaviour refers to how a costwillreact or respond to changes in the level ofbusiness activity.2-2No. A variable cost is a cost that varies,in total, in direct proportion to changes in thelevel of activity. A variable cost is constant perunit of the activity level (e.g., number of bedsoccupied). A fixed cost is fixed in total, but willvary inversely on a per-unit basis with changesin the level of activity.2-3When fixed costs are involved, the costperunit ofactivitywill depend on theactivityvolume (or level).Forexample, as productionincreases, the cost per unit will fallbecausethefixed cost is spread over more units. Conversely,as production declines, the cost per unit will risesince a constant fixed cost figure will be spreadover fewer units.2-4The cost of direct materials included in aproduct is a variable cost; similarly, salescommissions paid out on a per unit basis or as apercentage of sales dollars is a variable cost.On the other hand, costs such as building rentand the salary of a general manager are fixedcosts.2-5Fixed costsin totaldo not vary withvolume within a relevant range.However, fixedcosts per unit of volume decrease as volumeincreases and increases as volume decreases.Therefore, an inverse relationship existsbetween volume and fixed costs per unit ofvolume.2-6Manufacturing overhead is an indirectcost since these costs cannot be easily andconveniently traced toindividualproducts.2-7A differential cost is a cost that differsbetween alternatives in a decision. Anopportunity cost is the potential benefit that isgiven up when one alternative is selected overanother. A sunk cost is a cost that has alreadybeen incurred and cannot be altered by anydecision taken now or in the future.2-8No; differential costs can be eithervariable or fixed. For example, the alternativesmight consist of purchasing onecomputersoftware program overanother tosimplify theaccounts receivable process. The difference inthe fixed costs of purchasing the twoprogramswould be a differential cost.2-9The three major elements of productcosts in a manufacturing company are directmaterials, directlabour, and manufacturingoverhead.2-10a.Direct materials: Direct materials are anintegral part of a finished product and can beconveniently traced into it.b.Indirect materials: Indirect materials aregenerally small items of material such as glueand nails. They may become an integral part ofa finished product but are traceable into theproduct only at great cost or inconvenience.Indirect materials are ordinarily classified as partof manufacturing overhead.c.Direct labour: Direct labour includes thoselabourcosts that can be easily traced toparticular products. Direct labour is also called“touchlabour.”d.Indirect labour: Indirect labour includesthe labour costs ofworkers who do not directlywork on products but provide a supportfunction.Examples of such labour includejanitors, supervisors, materials handlers, andother factory workers that cannot be

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conveniently traced directly to particularproducts.e.Manufacturing overhead: Manufacturingoverhead includes all manufacturing costsexcept direct materials and directlabour.2-11PC = DM + DLCC = DL + MOHPC = DM + CC-MOH2-12A product cost is any cost incurred forthe purchase or the manufacture of goods. Inthe case of manufactured goods, these costsconsist of direct materials, directlabour, andmanufacturing overhead. A period cost is a costthat is taken directly to the income statement asan expense in the period in which it is incurred.Examples include selling (marketing) andadministrative expenses.2-13The income statement of amanufacturing firm differs from the incomestatement of a merchandising firm in the cost ofgoods sold section. The merchandising firm sellsfinished goods that it has purchased from asupplier. These goods are listed as “Purchases”in the cost of goods sold section. Since themanufacturing firm produces its goods ratherthan buying them from a supplier, it lists “Costof Goods Manufactured” in place of “Purchases.”Also, the manufacturing firm identifies itsinventory in this section as “Finished GoodsInventory,” rather than as “MerchandiseInventory.”2-14The schedule of cost of goodsmanufactured is used to list and organize themanufacturing costs that have been incurred.These costs are organized under the three majorheadingsof direct materials, directlabour, andmanufacturing overhead. The total costsincurred are adjusted for any change in theWork in Process inventory to determine the costof goods manufactured (i.e.,finished) during theperiod.The schedule of cost of goodsmanufactured ties into the income statementthrough the Cost of Goods Sold section. Thecost of goods manufactured is added to thebeginning Finished Goods inventory todetermine the goods available for sale. In effect,the cost of goods manufactured takes the placeof the “Purchases” account in a merchandisingfirm.2-15A manufacturing firm has threeinventory accounts: RawMaterials, Work inProcess, and Finished Goods. The merchandisingfirm generally identifies its inventory accountsimply as Merchandise Inventory.2-16Since product costs follow units ofproduct into inventory, they are sometimescalled inventoriable costs. The flow is fromdirect materials, directlabour, andmanufacturing overhead into Work in Process.As goods are completed, their cost is removedfrom Work in Process and transferred intoFinished Goods. As goods are sold, their cost isremoved from Finished Goods and transferredinto Cost of Goods Sold. Cost of Goods Sold isan expense on the income statement.2-17Yes, costs such as salariesanddepreciationcan end up as assets on thebalance sheet if these are manufacturing costs.Manufacturing costs are inventoried until theassociated finished goods are sold. Thus, suchcosts may be part of either Work in Processinventory or Finished Goods inventory at the endof a period if there are unsold units.

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Solutions to Foundational 15The Foundational 15(LO1–CC1;LO2–CC2;LO3–CC3;LO4–CC4,5, 6, 7)1.Direct materials....................................................................$6.00Direct labour........................................................................3.50Variable manufacturing overhead...........................................1.50Variable manufacturing cost per unit......................................$11.00Variable manufacturing cost per unit (a)................................$11.00Number of units produced (b)...............................................10,000Total variable manufacturing cost (a) ×(b)............................$110,000Fixed manufacturing overhead per unit (c).............................$4.00Number of units produced (d)...............................................10,000Total fixed manufacturing cost (c) × (d).................................40,000Total product (manufacturing) cost........................................$150,0002.Sales commissions................................................................$1.00Variable administrative expense.............................................0.50Variable selling and administrative per unit.............................$1.50Variable selling and admin. per unit (a)..................................$1.50Number of units sold (b).......................................................10,000Total variable selling and admin. expense(a) × (b)........................................................................$15,000Fixed selling and administrative expense per unit($3 fixed selling + $2 fixed admin.) (c)...............................$5.00Number of units sold (d).......................................................10,000Total fixed selling and administrative expense (c) ×(d)....................................................................................50,000Total period(nonmanufacturing) cost.....................................$65,0003.Direct materials....................................................................$6.00Direct labour........................................................................3.50Variable manufacturing overhead...........................................1.50Sales commissions................................................................1.00Variable administrative expense.............................................0.50Variable cost per unit sold.....................................................$12.50

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TheFoundational 15 (continued)4.Direct materials....................................................................$6.00Direct labour........................................................................3.50Variable manufacturing overhead...........................................1.50Sales commissions................................................................1.00Variable administrative expense.............................................0.50Variable cost per unit sold.....................................................$12.505.Variable cost perunit sold (a)................................................$12.50Number of units sold (b).......................................................8,000Total variable costs (a) × (b).................................................$100,0006.Variable cost per unit sold (a)................................................$12.50Number of units sold (b).......................................................12,500Total variable costs (a) × (b).................................................$156,2507.Total fixedmanufacturing cost(see requirement 1) (a)......................................................$40,000Number of units produced (b)...............................................8,000Average fixed manufacturing cost per unitproduced (a) ÷ (b)............................................................$5.008.Total fixed manufacturing cost(see requirement 1) (a)......................................................$40,000Number ofunits produced (b)...............................................12,500Average fixed manufacturing cost per unitproduced (a) ÷ (b)............................................................$3.209.Total fixed manufacturing cost(see requirement 1)...........................................................$40,00010.Total fixed manufacturing cost(see requirement 1)...........................................................$40,000

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TheFoundational 15 (continued)11.Variable overhead per unit (a)...............................................$1.50Number of units produced (b)...............................................8,000Total variable overhead cost (a) × (b)....................................$12,000Total fixed overhead (see requirement 1)...............................40,000Total manufacturing overhead cost........................................$52,000Total manufacturing overhead cost (a).............................$52,000Number of units produced (b).........................................8,000Manufacturing overhead per unit (a) × (b).......................$6.5012.Variable overhead per unit (a)...............................................$1.50Number of units produced (b)...............................................12,500Totalvariable overhead cost (a) × (b)....................................$18,750Total fixed overhead (see requirement 1)...............................40,000Total manufacturing overhead cost........................................$58,750Total manufacturing overhead cost (a).............................$58,750Number of units produced (b).........................................12,500Manufacturing overhead per unit (a) × (b).......................$4.7013.Sales revenue (@$22.00 per unit)..........................................$220,000Less: Cost of goods sold(same as product costs inrequirement1)...........................150,000Grossmargin........................................................................$70,00014.Direct materials per unit........................................................$6.00Direct labour per unit............................................................3.50Direct manufacturing cost per unit (a)....................................$9.50Number of units produced (b)...............................................11,000Total direct manufacturing cost (a) × (b)...............................$104,500Variable overhead per unit (a).........................................$1.50Number of units produced (b).........................................11,000Total variable overhead cost (a) × (b)..............................$16,500Total fixed overhead (see requirement 1).........................40,000Total indirect manufacturing cost.....................................$56,500

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The Foundational 15 (continued)15.Direct materials per unit........................................................$6.00Direct labour perunit............................................................3.50Variable manufacturing overhead per unit..............................1.50Incremental manufacturing cost per unit................................$11.00Solutions to Brief ExercisesBrief Exercise 2-1(LO3CC3) (10 minutes)The cost concept that best applies to Bill’s response is the concept ofopportunitycost.Bill’s response of “no free lunch” suggests that the cost of the lunch is the timeforegone which he could have utilized in completing the report.For Bill, thealternatives are time required to complete the financial performance report and timerequired to attend the company lunch. If Bill attends the lunch he will have less timeavailable to finish the report and if he stays to finish the report he would miss thecompany lunch.Brief Exercise 2-2(LO1CC1)(15minutes)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 sincethe number of people who come to the rock concert depends on the amount ofadvertising. However, one can argue that if the price is within reason, any U2 rockconcert in Vancouver will be sold out, and the function of advertising is simply to letpeople know the event will be happening. Moreover, while advertising may affect thenumberof people who ultimately buy tickets, the causation is in one direction. If morepeople buy tickets, the advertising costs don’t go up.Cost BehaviourVariableFixed1.The costs ofadvertising a U2 rock concert inVancouver…………………………………………..X2.Depreciationon the Hard Rock Cafe building in Ottawa..................X3.The electrical costs of running a roller coaster at theWest Edmonton Mall.................................................................X

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4.Property taxes on your local cinema..............................................X5.The costs of synthetic materials used to makeReebokrunning shoes...........................................................................X6.The costs of shippingAppleiPodsto retail stores..........................X7.The cost of leasing aCT-scan diagnostic machine atthe American Hospital in Paris....................................................XBrief Exercise 2-3(LO3CC3)(15 minutes)ItemDifferentialCostOpportunityCostSunk Cost1.Cost of the old printing machineX2.The salary of the head of thePrinting Department3.The salary of the head of theFinance Department4.Rent on the space occupied bythePrinting department5.The cost of maintaining the oldprinterX6.Benefits from a new state-of-the-art scannerX7.Cost of electricity to run theprinting machineXNote: The costs of the salaries of the heads of thePrinting and the FinanceDepartmentsand the rent on the space occupied byPrintingare neither differentialcosts, nor opportunity costs, nor sunk costs. These are costs that do not differ betweenthe alternatives and are therefore irrelevant in the decision, but they are not sunk costssince they occur in the future.The opportunity cost of the foregone benefit from a newstate-of-the-art scanner is not a differential cost in the decision to replace the oldprinter with a new printer, but if the decision were instead whether to acquire a scanneror a printer, this opportunity cost would also be a differential cost.

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Brief Exercise2-4(LO4CC4, 5, 6) (15 minutes)1.Monthly salary of the company’s accountant: Administrative cost.2.The cost of afaninstalled in a computer:DirectMaterialscost.3.Rental on equipment used to assemble computers: Manufacturing Overhead4.The cost of advertising in thelocal communitynewspaper:Marketing andSellingcost.5.Monthly charge paid to anoutside company for quality testing (20% of thecomputers assembled are sent for testing): Manufacturing Overhead6.The wages of employees who assemble computers from components:DirectLabourcost.7.The salary of the assembly shop’s supervisor:Manufacturing Overhead.8.Sales commissions paid to the company’s salespeople:Marketing andSellingcost.9.Rent on the facility: Manufacturing Overhead.

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Brief Exercise2-5(LO4CC7)(15 minutes)Product(Inventoriable)CostPeriod(Non-inventoriable)Cost1.Depreciationon salespersons’ cars.................................................X2.Rent on equipment used in the factory...........................................X3.Lubricants used for maintenance offactoryequipment.................................................................................X4.Salaries of finished goods warehousepersonnel..................................................................................X5.Soap and paper towelsused by factoryworkers at the end of a shift.......................................................X6.Salessupervisors’ salaries..............................................................X7.Property taxes on the factory building............................................X8.Materials used in boxing units of finishedproduct for shipment overseas (units arenot normally boxed)...................................................................X9.Advertising outlays........................................................................X10.Workers’ compensation insurance onfactory employees......................................................................X11.Depreciationon chairs and tables in theadministrative boardroom...........................................................X12.The salary of theproduction qualitysupervisor for the company........................................................X13.Depreciationon aLearjetused by thecompany's executives.................................................................X14.Rent on rooms at a Florida resort formanufacturingconference..........................................................X15.Attractively designed box for packagingbreakfast cereal.........................................................................X

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