Solution Manual For Managerial Accounting, 7th Edition

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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.

Jiambalvo Managerial Accounting1-2
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.
E3. [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

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 causes.
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

Jiambalvo Managerial Accounting1-4
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).
E15. [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 cars are under repair.

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 bribe 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.

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Jiambalvo Managerial Accounting1-6
PROBLEMS
P1. [LO 1, 2]
a. Santiago’s Salsa
Budgeted Production Costs
May 2020
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.

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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, 2020
(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

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Jiambalvo Managerial Accounting1-8
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.

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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, associates 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.”

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Jiambalvo Managerial Accounting1-10
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.

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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 $15.
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.

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Jiambalvo Managerial Accounting1-12
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.

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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.

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Jiambalvo Managerial Accounting2-2
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 under-applied overhead among Work in
Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts if
the amount in the Manufacturing

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