CHAPTER 2

Basic Cost Management Concepts and

Accounting for Mass Customization Operations
ANSWERS TO REVIEW QESTIONS
2-1 Product costs are costs that are associated with manufactured goods until the time
period during which the products are sold, when the product costs become
expenses. Period costs are expensed during the time period in which they are
incurred.
2-2 Product costs are also called inventoriable costs because they are assigned to
manufactured goods that are inventoried until a later period, when the products are
sold. The product costs remain in the Wor-in-Process or !inished-"oods #nventory
account until the time period when the goods are sold.
2-$ The most important difference between a manufacturing firm and a service industry
firm, with regard to the classification of costs, is that the goods produced by a
manufacturing firm are inventoried, whereas the services produced by a service
industry firm are consumed as they are produced. Thus, the costs incurred in
manufacturing products are treated as product costs until the period during which
the goods are sold. %ost of the costs incurred in a service industry firm to produce
services are operating expenses that are treated as period costs.
2.& The five types of production processes are as follows'
(ob shop' )ow production volume* little standardi+ation* one-of-a-ind
products. ,xamples include custom home construction, feature film
production, and ship building.
-atch' %ultiple products* low volume. ,xamples include construction
e.uipment, tractor trailers, and cabin cruisers.
/ssembly line' / few ma0or products* higher volume. ,xamples include
itchen appliances and automobile assembly.
%ass customi+ation' 1igh production volume* many standardi+ed
components* customi+ed combination of components. /n example is the
computer industry.
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2ontinuous flow' 1igh production volume* highly standardi+ed commodity
products. ,xamples include food processing, textiles, lumber, and
chemicals.
2-3 The term mass customi+ation is used to describe an industry such as the computer
industry, where large numbers of identical components are mass produced, and then
these components are combined in a customi+ed way to customer specifications.
!or example, when a customer places an order for a 4ell computer on line, the
company assembles 0ust the components re.uested by the customer, loads the
re.uested software, and ships the customi+ed computer system. 5iewed in this
light, the term mass customi+ation is not internally inconsistent.
2-6 The cost of idle time is treated as manufacturing overhead because it is a normal
cost of the manufacturing operation that should be spread out among all of the
manufactured products. The alternative to this treatment would be to charge the cost
of idle time to a particular 0ob that happens to be in process when the idle time
occurs. #dle time often results from a random event, such as a power outage.
2harging the cost of the idle time resulting from such a random event to only the 0ob
that happened to be in process at the time would overstate the cost of that 0ob.
2-7 8vertime premium is included in manufacturing overhead in order to spread the
extra cost of the overtime over all of the products produced, since overtime often is
a normal cost of the manufacturing operation. The alternative would be to charge the
overtime premium to the particular 0ob in process during overtime. #n most cases,
such treatment would overstate the cost of that 0ob, since it is only coincidental that
a particular 0ob happened to be done on overtime. The need for overtime to complete
a particular 0ob results from the fact that other 0obs were completed during regular
hours.
2-9 The phrase :different costs for different purposes; refers to the fact that the word
:cost; can have different meanings depending on the context in which it is used.
2ost data that are classified and recorded in a particular way for one purpose may be
inappropriate for another use.
2-< The city of Tampa would use cost information for planning when it developed a
budget for its operations during the next year. #ncluded in that budget would be
pro0ected costs for police and fire protection, street maintenance, and city
administration. /t the end of the year this budget would be used for cost control. The
actual costs incurred would be compared to pro0ected costs in the budget. 2ity
administrators would also use cost data in maing decisions, such as where to
locate a new fire station.
2-1= / fixed cost remains constant in total across changes in activity, whereas the total
variable cost changes in proportion to the level of activity.
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2"# Solutions Manual
2-11 The fixed cost per unit declines as the level of activity >or cost driver? increases. The
cost per unit is reduced because the total fixed cost, which does not change as
activity changes, is spread over a larger number of activity units.
2-12 The variable cost per unit remains constant as the level of activity >or cost driver?
changes. Total variable costs change in proportion to activity, and the additional
variable cost when one unit of activity is added is the variable cost per unit.
2-1$ / volume-based cost driver, such as the number of passengers, causes costs to be
incurred because of the .uantity of service offered by the airline. /n operations-
based cost driver, such as hub domination, affects costs because of the basic way in
which the airline conducts its operations. "reater control over a hub airport@s
facilities and services gives an airline greater ability to control its operating costs.
2-1& a. Aumber of students' volume-based cost driver. This characteristic of the college
relates to the .uantity of services provided.
b. Aumber of disciplines offered for study' operations-based cost driver. The
greater the diversity in a college@s course offerings, the greater will be the costs
incurred, regardless of the overall si+e of the student body.
c. Brban versus rural location' operations-based cost driver. / college@s location
will affect the type of housing and food facilities re.uired, the cost of obtaining
services, and the cost of transportation for college employees acting on behalf of
the college.
2-13 ,xamples of direct costs of the food and beverage department in a hotel include the
money spent on the food and beverages served, the wages of table service
personnel, and the costs of entertainment in the dining room and lounge. ,xamples
of indirect costs of the food and beverage department include allocations of the
costs of advertising for the entire hotel, of the costs of the grounds and maintenance
department, and of the hotel general manager@s salary.
2-16 2osts that are liely to be controllable by a city@s airport manager include the wages
of personnel hired by the airport manager, the cost of heat and light in the airport
manager@s administrative offices, and the cost of some materials consumed in the
process of operating the airport, such as cleaning, painting, and maintenance
materials. 2osts that are liely to be uncontrollable by the city@s airport manager
include depreciation of the airport facilities, fees paid by the airport to the federal
government for air traffic control services, and insurance for the airport employees
and patrons.
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2-17 a. Bncontrollable cost
b. 2ontrollable cost
c. Bncontrollable cost
2-19 8ut-of-pocet costs are paid in cash at or near the time they are incurred. /n
opportunity cost is the potential benefit given up when the choice of one action
precludes the selection of a different action.
2-1< / sun cost is a cost that was incurred in the past and cannot be altered by any
current or future decision. / differential cost is the difference in a cost item under
two decision alternatives.
2.2= / marginal cost is the extra cost incurred in producing one additional unit of output.
The average cost is the total cost of producing a particular .uantity of product or
service, divided by the number of units of product or service produced.
2.21 The process of registering for classes varies widely among colleges and
universities, and the responses to this .uestion will vary as well. ,xamples of
information that might be useful include the credit re.uirements and course
re.uirements to obtain a particular degree, and a list of the prere.uisites for each of
the elective courses in a particular ma0or. Cuch information could help the student
plan an academic program over several semesters or .uarters. /n example of
information that might create information overload is a comprehensive listing of
every course offered by the college in the past five years.
2-22 The purchase cost of the old bar code scanners is a sun cost, since it occurred in
the past and cannot be changed by any future course of action. The manager is
exhibiting a common behavioral tendency to pay too much attention to sun costs.
2-2$ a. 4irect cost
b. 4irect cost
c. #ndirect cost
d. #ndirect cost
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2"% Solutions Manual
SO&TIONS TO E'ERCISES
,D,E2#C, 2-2& >1= %#ABT,C?
The general formula for solving all three cases is as follows'
-eginning
inventory of
finished goods
+
2ost of goods
manufactured
during period
F
,nding
inventory of
finished goods
=
2ost-of-
goods sold
expense
Bsing this formula, we can find the missing amounts as follows'
2ase
# ## ###
-eginning inventory of finished goods............... G 9&,===H G12,=== 7,===
/dd' 2ost of goods manufactured...................... &1<,=== <3,=== $19,===H
Cubtract' ,nding inventory of finished goods. . . <9,=== 9,=== 21,===
2ost of goods sold................................................ G&=3,=== G<<,===H G$=&,===
H/mount missing in exercise.
,D,E2#C, 2-23 >1= %#ABT,C?
1. 1ours wored..................................................................................................... &=
Wage rate............................................................................................................ G 2=
Total compensation........................................................................................... G9==
2. 2lassification'
4irect labor >$3 hours G2=?....................................................................... G7==
8verhead >idle time' 3 hours G2=?............................................................ 1==
Total compensation...................................................................................... G9==
,D,E2#C, 2-26 >1= %#ABT,C?
1. Eegular wages >&= hours G16?....................................................................... G 6&=
8vertime wages >3 hours G2=?....................................................................... 1==
Total compensation........................................................................................... G 7&=
2. 8vertime hours................................................................................................... 3 hrs.
8vertime premium per hour >G2= G16?.......................................................... G &
Total overtime premium..................................................................................... G 2=
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2") Solutions Manual
,D,E2#C, 2-26 >28AT#AB,4?
$. 2lassification'
4irect labor >&3 hours G16?....................................................................... G 72=
8verhead >overtime premium' 3 hours G&?............................................. 2=
Total compensation...................................................................................... G 7&=
,D,E2#C, 2-27 >$= %#ABT,C?
%ass customi+ation is well suited to 4ell 2omputerIs operations because of the companyIs
direct-selling approach, in which customers order customi+ed computer systems, often on
line. Then 4ell orders 0ust the components necessary to assemble the computer systems
that have been ordered, and delivery is made in a relatively short period of time.
,D,E2#C, 2-29 >2= %#ABT,C?
1. Tire costs' Product cost, variable, direct material
2. Cales commissions' Period cost, variable
$. Wood glue' Product cost, variable, either direct material or manufacturing overhead
>i.e., indirect material? depending on how significant the cost is
&. Wages of security guards' Product cost, variable, manufacturing overhead
3. Calary of financial vice-president' Period cost, fixed
6. /dvertising costs' Period cost, fixed
7. Ctraight-line depreciation' Product cost, fixed, manufacturing overhead
9. Wages of assembly-line personnel' Product cost, variable, direct labor
<. 4elivery costs on customer shipments' Period cost, variable
1=. Aewsprint consumed' Product cost, variable, direct material
11. Plant insurance' Product cost, fixed, manufacturing overhead
12. "lass costs' Product cost, variable, direct material
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,D,E2#C, 2-2< >23 %#ABT,C?
1. A&E'AN+RIA A&MINM COM,AN-
SC.E+&E O/ COST O/ 0OO+S MAN/ACTRE+
/OR T.E -EAR EN+E+ +ECEMBER $!1 #2'!
4irect material'
Eaw-material inventory, (anuary 1......................................... G 3=,===
/dd' Purchases of raw material............................................. 23=,===
Eaw material available for use................................................ G$==,===
4educt' Eaw-material inventory, 4ecember $1..................... 7=,===
Eaw material used................................................................... G2$=,===
4irect labor.................................................................................... &==,===
%anufacturing overhead'
#ndirect material....................................................................... G 1=,===
#ndirect labor............................................................................ 23,===
4epreciation on plant and e.uipment.................................... 1==,===
Btilities...................................................................................... 23,===
8ther......................................................................................... $=,===
Total manufacturing overhead................................................ 1<=,===
Total manufacturing costs........................................................... G92=,===
/dd' Wor-in-process inventory, (anuary 1............................... 12=,===
Cubtotal.......................................................................................... G<&=,===
4educt' Wor-in-process inventory, 4ecember $1..................... 113,===
2ost of goods manufactured........................................................ G923,===
2. A&E'AN+RIA A&MINM COM,AN-
SC.E+&E O/ COST O/ 0OO+S SO&+
/OR T.E -EAR EN+E+ +ECEMBER $!1 #2'!
!inished-goods inventory, (anuary 1............................................................ G1==,===
/dd' 2ost of goods manufactured................................................................ 923,===
2ost of goods available for sale.................................................................... G<23,===
4educt' !inished-goods inventory, 4ecember $1........................................ 163,===
2ost of goods sold.......................................................................................... G76=,===
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2"3 Solutions Manual
,D,E2#C, 2-2< >28AT#AB,4?
$. A&E'AN+RIA A&MINM COM,AN-
INCOME STATEMENT
/OR T.E -EAR EN+E+ +ECEMBER $!1 #2'!
Cales revenue.................................................................................................. G1,1=3,===
)ess' 2ost of goods sold............................................................................... 76=,===
"ross margin................................................................................................... G $&3,===
Celling and administrative expenses............................................................. 11=,===
#ncome before taxes........................................................................................ G 2$3,===
#ncome tax expense........................................................................................ <&,===
Aet income....................................................................................................... G 1&1,===
&. #n the electronic version of the solutions manual, press the 2TE) ey and clic on
the following lin' -B#)4 / CPE,/4C1,,T =2-2<.D)C
,D,E2#C, 2-$= >13 %#ABT,C?
Aumber of %uffler Eeplacements
3== 6== 7==
Total costs'
!ixed costs................................................................... >a? G&2,=== G&2,=== >b? G&2,===
5ariable costs.............................................................. >c? 23,=== $=,=== >d? $3,===
Total costs.............................................................. >e? G67,=== G72,=== >f? G77,===
2ost per muffler replacement'
!ixed cost..................................................................... >g? G 9& >h? G 7= >i? G 6=
5ariable cost................................................................ >0? 3= >? 3= >l? 3=
Total cost per muffler replacement...................... >m? G1$& >n? G12= >o? G11=
,xplanatory Aotes'
>a? Total fixed costs do not vary with activity.
>c? 5ariable cost per replacement J G$=,===K6== J G3=
Total variable cost for 3== replacements J G3= 3== J G23,===
>g? !ixed cost per replacement J G&2,===K3== J G9&
>0 ? 5ariable cost per replacement J G23,===K3== J G3=
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,D,E2#C, 2-$1 >13 %#ABT,C?
1. Phone bill, (anuary' G123 L >G.23 9,===?........................................ G2,123
Phone bill, !ebruary' G123 L >G.23 3,===?....................................... G1,$73
2. 2ost per call, (anuary' G2,123K9,===.................................................. G .266 >rounded?
2ost per call, !ebruary' G1,$73K3,===................................................ G .273
$. !ixed component, (anuary................................................................. G 123
5ariable component, (anuary' G.23 9,===...................................... 2,===
Total..................................................................................................... G2,123
&. Cince each phone call costs G.23, the marginal cost of maing the 6,==1st call is G.23.
3. The average cost of a phone call in (anuary >rounded? is G.266 >G2,123K9,===?.
,D,E2#C, 2-$2 >3 %#ABT,C?
%artin Chrood@s expenditure is a sunk cost. #t is irrelevant to any future decision %artin may
mae about the land.
,D,E2#C, 2-$$ >3 %#ABT,C?
/nnual cost using ,uropean component' G9,<== 2=............................................ G179,===
/nnual cost using Part /2==' >G&,<== L G73=? 2=.................................................. 11$,===
/nnual differential cost............................................................................................... G63,===
,D,E2#C, 2-$& >3 %#ABT,C?
1. The G1&,=== is the opportunity cost associated with using the computer in the
4epartment of ,ducation for wor in the governor@s office.
2. The G1&,=== leasing cost should be assigned to the governor@s office. #t was incurred
as a result of activity in that office.
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2"!2 Solutions Manual
,D,E2#C, 2-$3 >1= %#ABT,C?
1. Mour decision to see the game really cost you G23, the amount forgone when you
refused to sell the ticet. / convenient way to thin about this is as follows' Mou
could have sold the ticet for G23, thereby resulting in a profit on the deal of G13 >G23
sales proceeds minus G1= out-of-pocet purchase cost?. #nstead, you went to the
game, which left you relieved of your G1= out-of-pocet cost. The difference between
the G1= reduction in your wealth and the G13 profit you could have had is G23. Thus,
G23 is the true cost of going to the game.
2. The G23 is an opportunity cost. /t the time you made the decision to attend the
game, the G1= you actually had paid for the ticet is a sunk cost. #t is not relevant to
any future decision.
,D,E2#C, 2-$6 >13 %#ABT,C?
1. The marginal cost would include any food and beverages consumed by the
passenger and perhaps an imperceptible increase in fuel costs.
2. #n most cases, only the cost of the food and beverage consumed by the customer
would be a marginal cost. #t is unliely that the restaurant would need to employ
additional service personnel, dishwashers, and so on.
$. The marginal cost of a flight would include the aircraft fuel, wages of the flight crew
and airport maintenance personnel, and the food and beverages consumed by the
passengers and crew.
&. The marginal cost would include the additional wages or commissions earned by the
branch ban employees and the additional electricity used for light, heat, and
computer e.uipment.
3. The marginal cost of the sis would include the direct material. #t is unliely that
labor and other costs would change with the addition of only one more product unit.
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SO&TIONS TO ,ROB&EMS
PE8-),% 2-$7 >2= %#ABT,C?
1. 1. #ncome statement
2. -alance sheet
$. #ncome statement
&. #ncome statement
3. 2ost-of-goods-manufactured schedule
6. #ncome statement
7. 2ost-of-goods-manufactured schedule
9. 2ost of-goods-manufactured schedule
<. -alance sheet, cost-of-goods-manufactured schedule
1=. #ncome statement
11. #ncome statement
2. The asset that differs among these businesses is inventory. Cervice businesses
typically carry no >or very little? inventory. Eetailers and wholesalers normally stoc
considerable inventory. %anufacturers also carry significant inventories, typically
subdivided into three categories' raw material, wor in process, and finished goods.
$. The income statements of service business normally have separate sections for
operating revenues, operating expenses, and other income >expenses?. #n contrast,
those of retailers, wholesalers, and manufacturers disclose sales revenue, followed
immediately by cost of goods sold and gross margin. 8perating expenses are listed
next followed by other income >expenses?.
&. The basic difference falls in the area of inventory. Traditional manufacturers
produce finished goods, which are then placed in warehouses awaiting sale. #n
contrast, with a direct-sales, mass-customi+ation firm, the receipt of a sales order
triggers the manufacturing process as well as the purchasing system, the latter to
ac.uire needed raw materials. !inished-goods and raw-material inventories >along
with wor in process? of mass-customi+ers are, therefore, much lower than the
inventories carried by traditional firms.
PE8-),% 2-$9 >$= %#ABT,C?
1. %anufacturing overhead'
#ndirect laborNNNNNNNNNNNN. G1=<,===
-uilding depreciation >G9=,=== x 73O?.. 6=,===
8ther factory costsNNNNNNNNN.. $&&,===
TotalNNNNNNNNNNNNNN... G31$,===
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2"!# Solutions Manual
PE8-),% 2-$9 >28AT#AB,4?
2. 2ost of goods manufactured'
4irect material'
Eaw-material inventory, (an. 1NNNNNN G 13,9==
/dd' Purchases of raw materialNNNNN.. 173,===
Eaw material available for useNNNNNN. G1<=,9==
4educt' Eaw-material inventory, 4ec. $1N. 19,2==
Eaw material usedNNNNNNNNNNN.. G172,6==
4irect laborNNNNNNNNNNNNNNNN.. 23&,===
%anufacturing overheadNNNNNNNNNN.. 31$,===
Total manufacturing costsNNNNNNNNN.. G<$<,6==
/dd' Wor-in-process inventory, (an. 1NNN. $3,7==
CubtotalNNNNNNNNNNNNNNNN.. G<73,$==
4educt' Wor-in-process inventory, 4ec. $1N. 62,1==
2ost of goods manufacturedNNNNNNNN.. G<1$,2==
$. 2ost of goods sold'
!inished-goods inventory, (an. 1NNNNN.. G 111,1==
/dd' 2ost of goods manufacturedNNNNN <1$,2==
2ost of goods available for saleNNNNNN. G1,=2&,$==
4educt' !inished-goods inventory, 4ec. $1N <7,<==
2ost of goods soldNNNNNNNNNNNN. G <26,&==
&. Aet income'
Cales revenueNNNNNNNNNNNNNN.. G1,&<3,===
)ess' 2ost of goods soldNNNNNNNNN. <26,&==
"ross marginNNNNNNNNNNNNNN... G 369,6==
Celling and administrative expenses'
CalariesNNNNNNNNNNNNNNN... G1$$,===
-uilding depreciation >G9=,=== x 23O?N... 2=,===
8therNNNNNNNNNNNNNNNNN 1<3,=== $&9,===
#ncome before taxesNNNNNNNNNNN.. G 22=,6==
#ncome tax expense >G22=,6== x $=O?NNN.. 66,19=
Aet incomeNNNNNNNNNNNNNNN... G 13&,&2=
3. The company sold 11,3== units during the year >G1,&<3,=== P G1$=?. Cince 16= of the
units came from finished-goods inventory >1,$3= F 1,1<=?, the company would have
manufactured 11,$&= units >11,3== F 16=?.
6. #n the electronic version of the solutions manual, press the 2TE) ey and clic on
the following lin' -uild a Cpreadsheet =2-$9.xls

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Managerial Accounting, 9/e Global Edition 2-!$
PE8-),% 2-$< >23 %#ABT,C?
Cince gross margin e.uals $=O of sales, cost of goods sold e.uals 7=O of sales, or
G2$1,=== >G$$=,=== x 7=O?. Thus, the finished goods destroyed by the fire cost G&&,===,
computed as follows'
!inished-goods inventory, (an. 1 >given?NNNNN.. G $7,===
/dd' 2ost of goods manufacturedHNNNNNNNN 2$9,===
2ost of goods available for sale >given?NNNNNN G273,===
4educt' !inished-goods inventory, /pr. 12HNNNN &&,===
2ost of goods sold >calculated above?NNNNNN.. G2$1,===
H!ill in these blans, given the other numbers in this table.
4irect material used'
4irect material averages 23O of prime costs >i.e., direct material L direct labor?.
Thus' )et D J direct material used
D J >D L G12=,===? x 23O
=.73D J G$=,===
D J G&=,===
%anufacturing overhead'
%anufacturing overhead e.uals 3=O of total production costs.
Thus' )et M J manufacturing overhead
M J >direct material used L direct labor L manufacturing overhead? x 3=O
M J >G&=,=== L G12=,=== L M? x 3=O
=.3=M J G9=,===
M J G16=,===
The wor in process destroyed by the fire cost G1=$,===, computed as follows'
4irect materialNNNNNNNNNNNNN.NNN G &=,===
4irect labor >given?NNNNNNNNNNNNNN. 12=,===
%anufacturing overheadNNNNNNNNNNN... 16=,===
Total manufacturing costsNNNNNNNNNN... G$2=,===
/dd' Wor-in-process inventory, (an. 1 >given?N 21,===
CubtotalNNNNNNNNNNNNNNNNN.. G$&1,===
4educt' Wor-in-process inventory, /pr. 12HNN. 1=$,===
2ost of goods manufactured >from above?NNN. G2$9,===
HG1=$,=== J G$&1,=== F G2$9,===
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2"!% Solutions Manual
PE8-),% 2-&= >23 %#ABT,C?
1. !ixed manufacturing overhead per unit'
G6==,=== 2&,=== units produced J G23
/verage unit manufacturing cost'
4irect materialNNNNNNNNN.. G 2=
4irect laborNNNNNNNNNNN $7
5ariable manufacturing overhead.. &9
!ixed manufacturing overheadNN 23
/verage unit costNNNNNN.. G1$=
ProductionNNNNNNNNNNN. 2&,=== units
CalesNNNNNNNNNNNNNN 2=,=== units
,nding finished-goods inventoryN &,=== units
2ost of 4ecember $1 finished-goods inventory'
&,=== units x G1$= J G32=,===
2. Aet income'
Cales revenue >2=,=== units x G193?NNNN G$,7==,===
2ost of goods sold >2=,=== units x G1$=?N.. 2,6==,===
"ross marginNNNNNNNNNNNNNN. G1,1==,===
Celling and administrative expensesNNN.. 96=,===
#ncome before taxesNNNNNNNNNNN G 2&=,===
#ncome tax expense >G2&=,=== x $=O?NNN 72,===
Aet incomeNNNNNNNNNNNNNNN. G 169,===

$. >a? Ao change. 4irect labor is a variable cost, and the cost per unit will remain
constant.
>b? Ao change. 4espite the decrease in the number of units produced, this is a
fixed cost, which remains the same in total.
>c? Ao change. Celling and administrative costs move more closely with changes
in sales than with units produced. /dditionally, this is a fixed cost.
>d? #ncrease. The average unit cost of production will change because of the per-
unit fixed manufacturing overhead. / reduced production volume will be
divided into the fixed dollar amount, which increases the cost per unit.
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PE8-),% 2-&1 >&= %#ABT,C?
2ase / 2ase - 2ase 2
-eginning inventory, raw material................................ G6=,===H G 1=,===

G 13,===

&3,===

93,===H
33,===H
123,===

16=,===

$&=,===

13,===H
3,===

$3=,===

2=,===H
$7=,===

23,===

$&3,===H
&9=,===

1$3,===H
&3,===H
<=,===

&=,===H
3=,===

,nding inventory, raw material...................................... <=,=== =H
Purchases of raw material............................................. 1==,=== 93,===

4irect material used........................................................ 7=,=== <3,===

4irect labor...................................................................... 2==,===H 1==,===

%anufacturing overhead................................................ 23=,=== 13=,===H
Total manufacturing costs............................................. 32=,=== $&3,===

-eginning inventory, wor in process.......................... $3,=== 2=,===

,nding inventory, wor in process............................... $=,===H $3,===

2ost of goods manufactured......................................... 323,=== $$=,===H
-eginning inventory, finished goods............................ 3=,=== &=,===

2ost of goods available for sale.................................... 373,===H $7=,===H
,nding inventory, finished goods................................. $=,===H &=,===H
2ost of goods sold......................................................... 3&3,=== $$=,===

Cales................................................................................ 9==,===H 3==,===H
"ross margin.................................................................. 233,=== 17=,===

Celling and administrative expenses............................ 1=3,===H 7=,===

#ncome before taxes....................................................... 13=,=== 1==,===H
#ncome tax expense........................................................ &=,=== &3,===

Aet income...................................................................... 11=,===H 33,===H
H/mount missing in problem.
PE8-),% 2-&2 >23 %#ABT,C?
1. a. Total prime costs'
4irect material................................................................................... G 2,1==,===
4irect labor'
Wages............................................................................................ &93,===
!ringe benefits.............................................................................. <3,===
Total prime costs.............................................................................. G 2,69=,===
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2"!) Solutions Manual
PE8-),% 2-&2 >28AT#AB,4?
b. Total manufacturing overhead'
4epreciation on factory building..................................................... G 113,===
#ndirect labor' wages........................................................................ 1&=,===
Production supervisor@s salary........................................................ &3,===
Cervice department costs................................................................. 1==,===
#ndirect labor' fringe benefits........................................................... $=,===
!ringe benefits for production supervisor...................................... <,===
Total overtime premiums paid......................................................... 33,===
2ost of idle time' production employees........................................ &=,===
Total manufacturing overhead......................................................... G 3$&,===
c. Total conversion costs'
4irect labor >G&93,=== L G<3,===?..................................................... G 39=,===
%anufacturing overhead................................................................... 3$&,===
Total conversion costs..................................................................... G1,11&,===
d. Total product costs'
4irect material................................................................................... G2,1==,===
4irect labor........................................................................................ 39=,===
%anufacturing overhead................................................................... 3$&,===
Total product costs........................................................................... G$,21&,===
e. Total period costs'
/dvertising expense......................................................................... G <<,===
/dministrative costs......................................................................... 13=,===
Eental of office space for sales personnel...................................... 13,===
Cales commissions........................................................................... 3,===
Product promotion costs.................................................................. 1=,===
Total period costs............................................................................. G 27<,===
2. The G13,=== in rental cost for sales office space rental is an opportunity cost. #t
measures the opportunity cost of using the former sales office space for raw-
material storage.
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PE8-),% 2-&$ >$3 %#ABT,C?
1. SAN /ERNAN+O /AS.IONS COM,AN-
SC.E+&E O/ COST O/ 0OO+S MAN/ACTRE+
/OR T.E -EAR EN+E+ +ECEMBER $!1 #2'#
4irect material'
Eaw-material inventory, (anuary 1............................................ G &=,===
/dd' Purchases of raw material................................................ 2==,===
Eaw material available for use................................................... G2&=,===
4educt' Eaw-material inventory, 4ecember $1........................ 23,===
Eaw material used...................................................................... G213,===
4irect labor...................................................................................... 2==,===
%anufacturing overhead'
#ndirect material.......................................................................... G 1=,===
#ndirect labor............................................................................... 13,===
Btilities' plant.............................................................................. &=,===
4epreciation' plant and e.uipment........................................... 9=,===
8ther............................................................................................ 9=,===
Total manufacturing overhead................................................... 223,===
Total manufacturing costs............................................................. G6&=,===
/dd' Wor-in-process inventory, (anuary 1................................. &=,===
Cubtotal........................................................................................... G69=,===
4educt' Wor-in-process inventory, 4ecember $1...................... 2=,===
2ost of goods manufactured......................................................... G66=,===
2. SAN /ERNAN+O /AS.IONS COM,AN-
SC.E+&E O/ COST O/ 0OO+S SO&+
/OR T.E -EAR EN+E+ +ECEMBER $!1 #2'#
!inished goods inventory, (anuary 1............................................................ G 2=,===
/dd' 2ost of goods manufactured................................................................ 66=,===
2ost of goods available for sale.................................................................... G69=,===
4educt' !inished-goods inventory, 4ecember $1........................................ 3=,===
2ost of goods sold.......................................................................................... G6$=,===
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2"!3 Solutions Manual
PE8-),% 2-&$ >28AT#AB,4?
$. SAN /ERNAN+O /AS.IONS COM,AN-
INCOME STATEMENT
/OR T.E -EAR EN+E+ +ECEMBER $!1 #2'#
Cales revenue.................................................................................................. G<9=,===
)ess' 2ost of goods sold............................................................................... 6$=,===
"ross margin................................................................................................... G$3=,===
Celling and administrative expenses............................................................. 13=,===

#ncome before taxes........................................................................................ G2==,===
#ncome tax expense........................................................................................ <=,===
Aet income....................................................................................................... G11=,===
&. #n the electronic version of the solutions manual, press the 2TE) ey and clic on
the following lin' -uild a Cpreadsheet =2-&$.xls
PE8-),% 2-&& >13 %#ABT,C?
1. Eegular hours' &= G12.................................................................................... G&9=
8vertime hours' 9 G16.................................................................................... 129
Total cost of wages............................................................................................ G6=9
2. a. 4irect labor' $9 G12................................................................................... G&36
b. %anufacturing overhead >idle time?' 1 G12.............................................. 12
c. %anufacturing overhead >overtime premium?' 9 >G16 F G12?................. $2
d. %anufacturing overhead >indirect labor?' < G12...................................... 1=9
Total cost of wages....................................................................................... G6=9
PE8-),% 2-&3 >2= %#ABT,C?
1. a, d, g, i
2. a, d, g, 0
$. b, d, g,
&. b, f
3. b, d, g,
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PE8-),% 2-&3 >28AT#AB,4?
6. a, d, g,
7. a, d, g, 0
9. b, c, f
<. b, d, g,
1=. b, c and dH, e and f and gH, H
HThe building is used for several purposes.
11. b, c, f
12. b, c, h
1$. b, c, f
1&. b, c, e
13. b, c and d
=
, e and f and g
=
,
=
=
The building that the furnace heats is used for several purposes.
PE8-),% 2-&6 >2= %#ABT,C?
1. $ hours >G12 L G$? J G&3
Aotice that the overtime premium on the flight is not a direct cost of the flight.
2. $ hours G12 .3 J G19
This is the overtime premium, which is part of "aines@ overall compensation.
$. The overtime premium should be included in overhead and allocated across all of
the company@s flights.
&. The G92 is an opportunity cost of using "aines on the flight departing from Topea
on /ugust 11. The cost should be assigned to the /ugust 11 flight departing from
Topea.
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PE8-),% 2-&7 >13 %#ABT,C?
1. "raph of raw-material cost'
2. Production )evel in Pounds Bnit 2ost Total 2ost
1 G33 per pound G33
1= G33 per pound G33=
1,=== G33 per pound G33,===
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Eaw material cost
G1,63=,===
G1,1==,===
G33=,===
1=,=== 2=,=== $=,===
Eaw material >pounds?
G2,2==,===

PE8-),% 2-&9 >23 %#ABT,C?

1. "raph of fixed production cost'
2. Production )evel in
Mards
Bnit
!ixed 2ost
Total !ixed
2ost
1 G1==,=== per yard G1==,===
1= G1=,=== per yard G1==,===
1=,=== G1= per yard G1==,===
&=,=== G2.3= per yard G1==,===
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2"## Solutions Manual
!ixed production cost
G1==,===
1=,=== 2=,=== $=,===
Production levels >yards?
&=,===
PE8-),% 2-&9 >28AT#AB,4?
$. "raph of unit fixed production cost'
PE8-),% 2-&< >1= %#ABT,C?
2ost #tem
Aumber
4irect or
#ndirect
Partially 2ontrollable by
4epartment Cupervisor
1. indirect no
2. indirect no
$. direct yes
&. direct no
3. direct yes
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Managerial Accounting, 9/e Global Edition 2-#$
&=,===
Bnit fixed
production cost
G3.==
1=,=== 2=,=== $=,===
Production levels >yards?
G2.3=
G$.$$
G1=.==

PE8-),% 2-3= >1= %#ABT,C?

2ost #tem Aumber Product 2ost or Period 2ost
1. periodH
2. product
$. product
&. product
3. product
6. periodH
7. product
9. periodH
<. product
HCervice industry firms typically treat all costs as
operating expenses which are period expenses. Cuch
firms do not inventory costs.
PE8-),% 2-31 >13 %#ABT,C?
5ariable or
!ixed
2=x2
!orecast
,xplanation
4irect material............................................... 5 G$,<==,=== G$,===,=== 1.$=
4irect labor.................................................... 5 2,96=,=== G2,2==,=== 1.$=
%anufacturing overhead
Btilities >primarily electricity?................. 5 192,=== G1&=,=== 1.$=
4epreciation on plant and e.uipment... ! 23=,=== same
#nsurance................................................. ! 16=,=== same
Cupervisory salaries............................... ! $==,=== same
Property taxes......................................... ! 21=,=== same
Celling costs
/dvertising.............................................. ! 1<3,=== same
Cales commissions................................. 5 1$=,=== G1==,=== 1.$=
/dministrative costs
Calaries of top management and staff. . ! $72,=== same
8ffice supplies........................................ ! &=,=== same
4epreciation on building
and e.uipment..................................... ! 9=,=== same
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PE8-),% 2-32 >13 %#ABT,C?
1. f, average cost
2. e, marginal cost
$. c, sun cost
&. a, opportunity cost
3. d, differential cost
6. b, out-of-pocet cost
7. e, marginal cost
PE8-),% 2-3$ >2= %#ABT,C?
1. b, d, e,
2. a, c, e,
$. h
&. a, d, eH, 0
HThe hotel general manager may have some control over the total space allocated to
the itchen.
3. d, e, i
6. i
7. d, e, i
9. a, d, e,
<. a, d, e,
1=. 0
11. g >The G$== cost savings is a differential cost.?
12. a, c, e
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PE8-),% 2-3$ >28AT#AB,4?
1$. d, e,
1&. e,
13. b, d
H
, e,
H
Bnless the dishwasher has been used improperly.
PE8-),% 2-3& >&= %#ABT,C?
1. 2aterpillar is a manufacturing firm. #ts income statement highlights the firm@s cost-
of-goods-sold expense, which is the cost of all of the processed food products sold
during the year. 2ost of goods sold is subtracted from net sales to arrive at the
gross profit. The company@s other operating expenses then are subtracted from the
gross profit.
Wal-%art Ctores, #nc. is a retail firm. #ts income statement also shows the firm@s
cost of sales, which is another name for cost of goods sold. The cost of sales
includes all of the costs of ac.uiring merchandise for resale. The company@s other
operating expenses are identified separately from cost of sales.
Couthwest /irlines 2ompany is an airline, which is a service industry firm. The
company does not sell an inventoriable product, but rather provides air
transportation service. Therefore, the company@s income statement does not list any
cost-of-goods-sold expense. /ll of its expenses are operating expenses.
2. 2ost-accounting data are used to measure all of the costs on all three companies@
income statements. !or example, the cost-accounting system at 2aterpillar
measures the cost of direct labor, direct material, and manufacturing overhead
incurred in the manufacturing process. Wal-%art Ctores@ cost-accounting system
measures the cost of ac.uiring merchandise for resale. Couthwest /irlines@ cost-
accounting system measures the cost of aviation fuel consumed.
$. The ticet agents@ salaries would be included in salaries, wages, and benefits.
4epreciation of the airline@s computer e.uipment would be included in depreciation.
&. Wal-%art Ctores@ cost of newspaper advertising would be included in selling
expenses. The cost of merchandise sold would be included in cost of sales >same as
cost of goods sold?.
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PE8-),% 2-3& >28AT#AB,4?
3. The salary for a 2aterpillar brand manager would be included in selling expenses.
Production employees@ salaries are product costs, so they are part of the cost of
goods sold. Cimilarly, raw-material costs are product costs, and they are included in
cost of goods sold.
PE8-),% 2-33 >1= %#ABT,C?
1. G&3= >G<3= G3==?
2. G$9= >G1,7&= G1,$6=?
$. G$6= >G2,1== G1,7&=?
&. G&73 >G<3=K2?
3. G&$3 >G1,7&=K&?
6. G&2= >G2,1==K3?
PE8-),% 2-36 >23 %#ABT,C?
1. b, c, g, h, 0, m
2. a, c, i, 0, l
$. b, d, i, 0, m
&. a, d, i, 0, l
3. a, c, i, 0, l
6. e
7. a, c, i, 0, l
9. f
<. b, d, , m
1=. a, c, i, 0, m
11. b, c, i, 0, l
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PE8-),% 2-36 >28AT#AB,4?
12. a, c, i, 0, l
1$. b, c, g, 0, l
1&. b, d, i, 0, l
13. b, c, i, 0, l
PE8-),% 2-37 >23 %#ABT,C?
1. 8utput
>.73 liter bottles? 2alculation Bnit 2ost
1=,=== G137,===K1=,=== G13.7=
13,=== G173,3==K13,=== G11.7=
2=,=== G1<&,===K2=,=== G<.7=
The unit cost is minimi+ed at a sales volume of 2=,=== bottles.
2. 8utput
>.73 liter bottles?
Cales
Eevenue
Total
2osts Profit
1=,=== G19=,=== G137,=== G2$,===
13,=== 223,=== 173,3== &<,3==
2=,=== 2&=,=== 1<&,=== &6,===
Profit is maximi+ed at a production level of 13,=== bottles of wine.
$. The 13,===-bottle level is best for the company, since it maximi+es profit.
&. The unit cost decreases as output increases, because the fixed cost per unit declines
as production and sales increase.
/ lower price is re.uired to motivate consumers to purchase a larger amount of
wine.
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PE8-),% 2-39 >13 %#ABT,C?
1. #f the company buys $=,=== units of Part %E2&, at a price of GX per unit, its total cost
will be'
>$=,=== GX? L G6=,===
#f the company manufactures the parts, its total cost will be'
>$=,=== G11? L G13=,===
-y e.uating these two expressions for total cost, we can solve for the price, X, at
which the total cost is the same under the two alternatives'
( ) ( )
1&
&2=,=== $=,===
13=,=== 11 $=,=== 6=,=== $=,===
=
=
+ = +
X
X
X
Thus the firm will reali+e a net benefit by purchasing Part %E2& if the outside
supplier charges a price less than G1&.
2. #f the firm buys Y units of Part %E2& at a price of G12.973 per unit, the total cost will
be'
( ) G6=,=== G12.973 + Y
#f the company manufactures Y units of Part %E2&, the total cost will be'
G13=,=== >G11 + Y)
#f we e.uate these expressions, we can solve for the number of parts, Y, at which the
firm will be indifferent between maing and buying Part %E2&.
&9,===
<=,=== 1.973
13=,=== 11 6=,=== 12.973
=
=
+ = +
Y
Y
Y Y
Thus, the company will be indifferent between the two alternatives if it re.uires
&9,=== units of Part %E2& each month.
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SO&TIONS TO CASES
2/C, 2-3< >$= %#ABT,C?
1. MEMORAN+M
4ate' Today
To' (ames 2assanitti
!rom' #. %. Ctudent
Cub0ect' 2osts related to Printer 2ase 4epartment
The G2<,3== building rental cost allocated to the Printer 2ase 4epartment is part of
larger rental costs for the entire building. ,ven if the Printer 2ase 4epartment is
closed down, 2ompTech still will occupy the entire building. Therefore, the entire
rental cost, including the G2<,3== portion allocated to the Printer 2ase 4epartment,
will be incurred whether or not the department closes.
The real cost of the space occupied by the Printer 2ase 4epartment is the G$<,===
the company is paying to rent warehouse space. This cost would be avoided if the
Printer 2ase 4epartment were closed, since the storage operation could be moved
into the companyIs main building. The G$<,=== rental cost is the opportunity cost of
using space in the main building for the Printer 2ase 4epartment.
The supervisor of the Printer 2ase 4epartment will be retained by the company
regardless of the decision about the Printer 2ase 4epartment. 1owever, if the Printer
2ase 4epartment is ept in operation the company will have to hire a new supervisor
for the /ssembly 4epartment. The salary of that new supervisor is a relevant cost of
continuing to operate the Printer 2ase 4epartment.
/nother way of looing at the situation is to reali+e that with the Printer 2ase
4epartment in operation, the company will need two supervisors' the current Printer
2ase 4epartment supervisor and a new supervisor for the /ssembly 4epartment.
/lternatively, if the Printer 2ase 4epartment is closed, only the current Printer 2ase
4epartment supervisor will be needed. 1e or she will move to the /ssembly
4epartment. The difference, then, between the two alternatives is the cost of
compensation for the new /ssembly 4epartment supervisor if the Printer 2ase
4epartment is not closed.
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2/C, 2-3< >28AT#AB,4?
2. The controller has an ethical obligation to state accurately the pro0ected cost savings
from closing the Printer 2ase 4epartment. The production manager and other
decision maers have a right to now the financial implications of closing the
department. Ceveral of the ethical standards for management accountants >listed in
2hapter 1? apply, including the following'
Competence:
%aintain an appropriate level of professional expertise by continually developing
nowledge and sills.
Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
Provide decision support information and recommendations that are accurate,
clear, concise, and timely.
Eecogni+e and communicate professional limitations or other constraints that
would preclude responsible 0udgment or successful performance of an activity.
Credibility:
2ommunicate information fairly and ob0ectively.
4isclose all relevant information that could reasonably be expected to influence
an intended userIs understanding of the reports, analyses, or recommendations.
4isclose delays or deficiencies in information, timeliness, processing, or internal
controls in conformance with organi+ation policy andKor applicable law.
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2/C, 2-6= >3= %#ABT,C?
1. a. !astQ 2ompany would be indifferent to ac.uiring either the small-volume copier,
1=2&C, or the medium-volume copier, 1=2&%, at the point where the costs for
1=2&C and 1=2&% are e.ual. This point may be calculated using the following
formula, where X e.uals the number of copies'
>5ariable cost
S
X
S
? L fixed cost
S
J >variable cost
M
X
M
? L fixed cost
M
1=2&C 1=2&%
G.1&X L G9,=== J G.=<X L G11,===
G.=3X J G$,===
X J 6=,=== copies
The conclusion is that !astQ 2ompany would be indifferent to ac.uiring either
the 1=2&C or 1=2&% machine at an annual volume of 6=,=== copies.
b. / decision rule for selecting the most profitable copier, when the volume can be
estimated, would establish the points where !astQ 2ompany is indifferent to
each machine. The volume where the costs are e.ual between alternatives can
be calculated using the following formula, where X e.uals the number of copies'
>5ariable cost
S
X
S
? L fixed cost
S
J >variable cost
M
X
M
? L fixed cost
M
!or the 1=2&C machine compared to the 1=2&% machine'
1=2&C 1=2&%
G.1&X L G9,=== J G.=<X L G11,===
G.=3X J G$,===
X J 6=,=== copies
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2/C, 2-6= >28AT#AB,4?
!or the 1=2&% machine compared to the 1=2&" machine'
1=2&% 1=2&"
G.=<X L G11,=== J G.=3X L G2=,===
G.=&X J G<,===
X J 223,=== copies
The decision rule is to select the alternative as shown in the following chart.
/nticipated /nnual 5olume 8ptimal %odel 2hoice
=6=,=== 1=2&C
6=,===223,=== 1=2&%
223,=== and higher 1=2&"
2. a. The previous purchase price of the endor on hand, G3.== per gallon, and the
average cost of the endor inventory, G&.73 per gallon, are sun costs. These
costs were incurred in the past and will have no impact on future costs. They
cannot be changed by any future action and are irrelevant to any future decision.
/lthough the current price of endor is G3.3= per gallon, no endor will be
purchased at this price. Thus, it too is irrelevant to the current special order. #f
the order is accepted, the re.uired 9== gallons of endor will be replaced at a cost
of G3.73 per gallon. Therefore, the real cost of endor for the special order is
G&,6== >9== G3.73?.
b. The G2=,=== paid by /lderon for its stoc of tatooine is a sun cost. #t was
incurred in the past and is irrelevant to any future decision. The current maret
price of G11 per ilogram is irrelevant, since no more tatooine will be purchased.
#f the special order is accepted, /lderon will use 1,3== ilograms of its tatooine
stoc, thereby losing the opportunity to sell its entire 2,===-ilogram stoc for
G1&,===. Thus, the G1&,=== is an opportunity cost of using the tatooine in
production instead of selling it to Colo #ndustries. %oreover, if /lderon uses
1,3== ilograms of tatooine in production, it will have to pay G1,=== for its
remaining 3== ilograms to be disposed of at a ha+ardous waste facility. This
G1,=== disposal cost is an out-of-pocet cost.
The real cost of using the tatooine in the special order is G13,=== >G1&,===
opportunity cost L G1,=== out-of-pocet cost?.
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Managerial Accounting, 9/e Global Edition 2-$$
2/C, 2-6= >28AT#AB,4?
$. The pro0ected donations from the wildlife show amount to G1==,=== >1= percent of
the T5 audience at G1=,=== per 1 percent of the viewership?. The pro0ected donations
from the manufacturing series amount to G73,=== >13 percent of the T5 audience at
G3,=== per 1 percent of the viewership?. Therefore, the differential revenue is G23,===,
with the advantage going to the wildlife show. 1owever, if the manufacturing show is
aired, the station will be able to sell the wildlife show to networ T5. Therefore, airing
the wildlife show will result in the incurrence of a G23,=== opportunity cost.
The conclusion, then, is that the station@s management should be indifferent
between the two shows, since each would generate revenue of G1==,===.
Wildlife show >1= G1=,===? G1==,=== donation
%anufacturing show >13 G3,===? G 73,=== donation
%anufacturing show >sell wildlife show? 23,=== sales proceeds
G1==,=== total revenue
/OCS ON ET.ICS >Cee page 61 in the text.?
Was World2omIs controller 0ust following ordersR
The World2om controller allegedly did not perform his professional duties in
accordance with relevant laws, regulations, and ethical standards for practitioners of
managerial accounting and financial management. The 0ustification that the controller
maes for this alleged unethical duping of investors, that he was ordered to do so by
senior management, is an insufficient defense of his actions. 1e was legally and
ethically obliged to find and correct accounting errors, and to mae an accurate
representation of the firmIs financial position to his fellow managers, the board of
directors, and the investing public. Cometimes, because of negligence or conflicts of
interest, senior management may accidentally or purposely give unethical instructions.
The controller is obliged under these circumstances to uphold his professional integrity
and insist on an appropriate treatment of the accounting information.
[Final version]
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2"$% Solutions Manual