Introduction to Managerial Accounting 7th Canadian Edition By Peter C. Brewer Solution manuals

Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 1 1 Chapter 1 An Introduction to Managerial Accounting Solutions to Questions 1-1 Managerial accounting is concerned with providing information primarily to managers for their use internally in the organization for the purposes of strategy, planning, implementation and control. Financial accounting is concerned with providing information primarily to investors, creditors, and others outside of the organization. 1-2 Essentially, the manager carries out three major activities in an organization: planning, implementation, and control. All three activities involve decisionmaking and use managerial accounting information. This is depicted in Exhibit 1- 1. 1-3 The Planning, Implementation and Control Cycle involves the following steps: (1) formulating plans which often includes preparing budgets, (2) overseeing day-today activities which includes organizing, directing and motivating people, resource allocation and decision making, and (3) controlling which includes providing feedback via performance reports. 1-4 In contrast to financial accounting, managerial accounting: (1) focuses on the needs of the manager; (2) places more emphasis on the future; (3) emphasizes relevance and timeliness, rather than verifiability and precision; (4) emphasizes the segments of an organization; (5) is not governed by IFRS or ASPE; and (6) is not mandatory. 1-5 The lean business model focuses on continuous improvement by eliminating waste in the organization. Companies that adopt the lean business model usually implement one or more of the following management practices. • Just-in-time (JIT): A production and inventory control system in which materials are purchased and units are produced only as needed to meet actual customer demand. • Total quality management (TQM): An approach to continuous improvement that focuses on serving customers and uses teams of frontline workers to systematically identify and solve problems. • Process re-engineering: An approach to improvement that involves completely redesigning business processes in order to eliminate unnecessary steps, reduce errors, and reduce costs. • Theory of constraints (TOC): A management approach that emphasizes the importance of managing constraints. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 2 Introduction to Managerial Accounting, Seventh Canadian Edition 1-6 Benefits • Improves operational processes that makes the business efficient • It leads to reduction or elimination of waste • It improves profitability and reduces costs • It reduces the turnaround time to fulfill customer orders improving customer satisfaction Limitations • Production schedule can get hampered if any external shocks lead to supply chain disturbance • Lean processes must be complimented with agile processes to adapt swiftly to changing customer needs. 1-7 Pros • Funds tied up in maintaining inventory can be used elsewhere • Areas previously used to store inventories are made available for other more productive uses • The time required to fill an order is reduced, resulting in quicker response to customers and consequentially greater potential sales • Defect rates are reduced resulting in less waste and greater customer satisfaction • More effective operations Cons • Increased number of purchase orders to buy raw materials and/or other components used in manufacturing products • There is little room for errors and defects in products because this could throw the production facility off schedule • There is a high reliance and dependence on suppliers to meet delivery deadlines as well as supply products that have no defects and require minimal inspection 1-8 Agree. Ethical behaviour is the foundation of a successful market economy. If we cannot trust people to act ethically in their business dealings with us, we will be inclined to invest less, scrutinize more and waste money and time (scarce resources) trying to protect ourselves. Ethical standards and Codes of Conduct aid the smooth running of the economy. In addition, the lack of regulatory requirements (IFRS, ASPE) regarding managerial accounting makes ethical behaviour even more critical. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 1 3 Solutions to Exercises Exercise 1-1 (LO1 CC2) Item Financial Accounting Managerial Accounting a) Preparing budgeted statements of income and financial position for the next year X b) Analyzing the profitability of a new project X c) Preparing the income statement and balance sheet X d) Preparing a weekly performance report for the product manager X e) Costing and pricing a new product X Exercise 1-2 (LO1 CC1) Planning Implementation Control a) Doing a cost–benefit analysis of buying new planes versus leasing them X b) Estimating the cost of utilities to be incurred during the next quarter X c) Documenting variances from standard costs of different products X Copyright © 2023 McGraw Hill Ltd. All rights reserved. 4 Introduction to Managerial Accounting, Seventh Canadian Edition d) Compiling the raw material wastage report for the past month X e) Changing procurement process based on an internal audit report X f) Documenting the savings from reductions in raw materials inventory resulting from the adoption of a just-in-time inventory system X Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 1 5 Solutions to Problems Problem 1-1 (LO3 CC5) a) This has ethical implications because the code of ethics mandates that all professional accountants will abide by the fundamental principles. There are two possible issues here – integrity and objectivity. By not reporting the inventory as obsolete, Emily will be violating the principle of integrity and due care. There is also an issue of personal integrity here; as a professional accountant she is required “to be straightforward and honest in all professional and business relationships.” Also, as a professional accountant, Emily should not allow her professional judgement to be compromised by bias or conflict of interest. It would be hard for Emily to take ethical action in this situation because the management team is likely to be senior to her in hierarchy. Emily should raise this matter to her chief financial officer. b) The main ethical implications here are the issues of Professional Behaviour and Objectivity. The code mandates that a member will conduct themselves at all times in a manner which will maintain the good reputation of the profession and serve the public interest. Also, the professional accountants should not allow their business judgement to be compromised by bias, conflict of interest or undue influence of others. Thus, the accountant should not provide better financial projections than their professional judgement. Problem 1-2 (LO3 CC5) There is an ethical dilemma associated with the request to issue sales invoices for ‘fictitious’ sales. The manager is wanting to meet a revenue target by recording sales at the end of the year that are later reversed. If the professional accountant records this, then it violates the principles of Professional Behaviour, Integrity and Due Care as well as Objectivity. The professional accountant should explain to the manager the rules for recognizing revenue. They should also tell the manager about the code of ethics governing the profession as well as the reputational damage to the organization when it is discovered that the company is violating the rules of rules of revenue recognition. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 1 Chapter 2 Cost Concepts Solutions to Questions 2-1 Cost behaviour refers to how a cost will react or respond to changes in the level of business activity. 2-2 No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit of the activity level (e.g., number of beds occupied). A fixed cost is fixed in total, but will vary inversely on a per-unit basis with changes in the level of activity. 2-3 When fixed costs are involved, the cost per unit of activity will depend on the activity volume (or level). For example, as production increases, the cost per unit will fall because the fixed cost is spread over more units. Conversely, as production declines, the cost per unit will rise since a constant fixed cost figure will be spread over fewer units. 2-4 The cost of direct materials included in a product is a variable cost; similarly, sales commissions paid out on a per unit basis or as a percentage of sales dollars is a variable cost. On the other hand, costs such as building rent and the salary of a general manager are fixed costs. 2-5 Fixed costs in total do not vary with volume within a relevant range. However, fixed costs per unit of volume decrease as volume increases and increases as volume decreases. Therefore, an inverse relationship exists between volume and fixed costs per unit of volume. 2-6 Manufacturing overhead is an indirect cost since these costs cannot be easily and conveniently traced to individual products. 2-7 A differential cost is a cost that differs between alternatives in a decision. An opportunity cost is the potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken now or in the future. 2-8 No; differential costs can be either variable or fixed. For example, the alternatives might consist of purchasing one computer software program over another to simplify the accounts receivable process. The difference in the fixed costs of purchasing the two programs would be a differential cost. 2-9 The three major elements of product costs in a manufacturing company are direct materials, direct labour, and manufacturing overhead. 2-10 a. Direct materials: Direct materials are an integral part of a finished product and can be conveniently traced into it. b. Indirect materials: Indirect materials are generally small items of material such as glue and nails. They may become an integral part of a finished product but are traceable into the product only at great cost or inconvenience. Indirect materials are ordinarily classified as part of manufacturing overhead. c. Direct labour: Direct labour includes those labour costs that can be easily traced to particular products. Direct labour is also called “touch labour.” d. Indirect labour: Indirect labour includes the labour costs of workers who do not directly work on products but provide a support function. Examples of such labour include janitors, supervisors, materials handlers, and other factory workers that cannot be Copyright © 2023 McGraw Hill Ltd. All rights reserved. 2 Introduction to Managerial Accounting, Seventh Canadian Edition conveniently traced directly to particular products. e. Manufacturing overhead: Manufacturing overhead includes all manufacturing costs except direct materials and direct labour. 2-11 PC = DM + DL CC = DL + MOH PC = DM + CC - MOH 2-12 A product cost is any cost incurred for the purchase or the manufacture of goods. In the case of manufactured goods, these costs consist of direct materials, direct labour, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred. Examples include selling (marketing) and administrative expenses. 2-13 The income statement of a manufacturing firm differs from the income statement of a merchandising firm in the cost of goods sold section. The merchandising firm sells finished goods that it has purchased from a supplier. These goods are listed as “Purchases” in the cost of goods sold section. Since the manufacturing firm produces its goods rather than buying them from a supplier, it lists “Cost of Goods Manufactured” in place of “Purchases.” Also, the manufacturing firm identifies its inventory in this section as “Finished Goods Inventory,” rather than as “Merchandise Inventory.” 2-14 The schedule of cost of goods manufactured is used to list and organize the manufacturing costs that have been incurred. These costs are organized under the three major headings of direct materials, direct labour, and manufacturing overhead. The total costs incurred are adjusted for any change in the Work in Process inventory to determine the cost of goods manufactured (i.e., finished) during the period. The schedule of cost of goods manufactured ties into the income statement through the Cost of Goods Sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the “Purchases” account in a merchandising firm. 2-15 A manufacturing firm has three inventory accounts: Raw Materials, Work in Process, and Finished Goods. The merchandising firm generally identifies its inventory account simply as Merchandise Inventory. 2-16 Since product costs follow units of product into inventory, they are sometimes called inventoriable costs. The flow is from direct materials, direct labour, and manufacturing overhead into Work in Process. As goods are completed, their cost is removed from Work in Process and transferred into Finished Goods. As goods are sold, their cost is removed from Finished Goods and transferred into Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement. 2-17 Yes, costs such as salaries and depreciation can end up as assets on the balance sheet if these are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of a period if there are unsold units. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 3 The Foundational 15 (LO1 – CC1; LO2 – CC2; LO3 – CC3; LO4 – CC4, 5, 6, 7) 1. Direct materials ..................................................... $ 6.00 Direct labour ......................................................... 3.50 Variable manufacturing overhead ........................... 1.50 Variable manufacturing cost per unit....................... $11.00 Variable manufacturing cost per unit (a) ................. $11.00 Number of units produced (b) ................................ 20,000 Total variable manufacturing cost (a) × (b)............. $220,000 Fixed manufacturing overhead per unit (c).............. $5.00 Number of units produced (d) ................................ 20,000 Total fixed manufacturing cost (c) × (d).................. 100,000 Total product (manufacturing) cost......................... $320,000 2. Sales commissions................................................. $1.50 Variable administrative expense.............................. 0.75 Variable selling and administrative per unit.............. $2.25 Variable selling and admin. per unit (a)................... $2.25 Number of units sold (b)........................................ 20,000 Total variable selling and admin. expense (a) × (b)......................................................... $45,000 Fixed selling and administrative expense per unit ($4 fixed selling + $3 fixed admin.) (c) ................ $7.00 Number of units sold (d)........................................ 20,000 Total fixed selling and administrative expense (c) × (d)..................................................................... 140,000 Total period (nonmanufacturing) cost ..................... $185,000 3. Direct materials ..................................................... $ 6.00 Direct labour ......................................................... 3.50 Variable manufacturing overhead ........................... 1.50 Sales commissions................................................. 1.50 Variable administrative expense.............................. 0.75 Variable cost per unit sold...................................... $13.25 Copyright © 2023 McGraw Hill Ltd. All rights reserved. 4 Introduction to Managerial Accounting, Seventh Canadian Edition The Foundational 15 (continued) 4. Direct materials .................................................. $ 6.00 Direct labour...................................................... 3.50 Variable manufacturing overhead ........................ 1.50 Sales commissions.............................................. 1.50 Variable administrative expense........................... 0.75 Variable cost per unit sold................................... $13.25 5. Variable cost per unit sold (a).............................. $12.50 Number of units sold (b)..................................... 8,000 Total variable costs (a) × (b)............................... $100,000 6. Variable cost per unit sold (a).............................. $13.25 Number of units sold (b)..................................... 25,000 Total variable costs (a) × (b)............................... $331,250 7. Total fixed manufacturing cost (see requirement 1) (a) ................................... $100,000 Number of units produced (b)............................. 16,000 Average fixed manufacturing cost per unit produced (a) ÷ (b).......................................... $6.25 8. Total fixed manufacturing cost (see requirement 1) (a) ................................... $100,000 Number of units produced (b) ............................. 25,000 Average fixed manufacturing cost per unit produced (a) ÷ (b).......................................... $4.00 9. Total fixed manufacturing cost (see requirement 1)......................................... $100,000 10. Total fixed manufacturing cost (see requirement 1)......................................... $100,000 Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 5 The Foundational 15 (continued) 11. Variable overhead per unit (a)............................... $1.50 Number of units produced (b) ............................... 16,000 Total variable overhead cost (a) × (b).................... $24,000 Total fixed overhead (see requirement 1)............... 100,000 Total manufacturing overhead cost ........................ $124,000 Total manufacturing overhead cost (a)................... $124,000 Number of units produced (b) ............................... 16,000 Manufacturing overhead per unit (a) × (b)............. $7.75 12. Variable overhead per unit (a)............................... $1.50 Number of units produced (b) ............................... 25,000 Total variable overhead cost (a) × (b).................... $37,500 Total fixed overhead (see requirement 1)............... 100,000 Total manufacturing overhead cost ........................ $137,500 Total manufacturing overhead cost (a)................... $137,500 Number of units produced (b) ............................... 25,000 Manufacturing overhead per unit (a) × (b)............. $5.50 13. Sales revenue (@$22.00 per unit) .......................... $440,000 Less: Cost of goods sold (same as product costs in requirement 1) ............ 320,000 Gross margin......................................................... $120,000 14. Direct materials per unit ....................................... $6.00 Direct labour per unit............................................ 3.50 Direct manufacturing cost per unit (a) ................... $9.50 Number of units produced (b) ............................... 22,000 Total direct manufacturing cost (a) × (b) ............... $209,000 Variable overhead per unit (a)............................... $1.50 Number of units produced (b) ............................... 22,000 Total variable overhead cost (a) × (b).................... $33,000 Total fixed overhead (see requirement 1)............... 100,000 Total indirect manufacturing cost........................... $133,000 Copyright © 2023 McGraw Hill Ltd. All rights reserved. 6 Introduction to Managerial Accounting, Seventh Canadian Edition The Foundational 15 (continued) 15. Direct materials per unit ....................................... $6.00 Direct labour per unit............................................ 3.50 Variable manufacturing overhead per unit.............. 1.50 Sales commissions 1.50 Variable administrative expense 0.75 Incremental manufacturing cost per unit................ $13.25 Solutions to Brief Exercises Brief Exercise 2-1(LO3 CC3) (10 minutes) The cost concept that best applies to Bill’s response is the concept of opportunity cost. Bill’s response of “no free lunch” suggests that the cost of the lunch is the time foregone which he could have utilized in completing the report. For Bill, the alternatives are time required to complete the financial performance report and time required to attend the company lunch. If Bill attends the lunch he will have less time available to finish the report and if he stays to finish the report he would miss the company lunch. Brief Exercise 2-2(LO1 CC1) (15 minutes) 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 since the number of people who come to the rock concert depends on the amount of advertising. However, one can argue that if the price is within reason, any U2 rock concert in Vancouver will be sold out, and the function of advertising is simply to let people know the event will be happening. Moreover, while advertising may affect the number of people who ultimately buy tickets, the causation is in one direction. If more people buy tickets, the advertising costs don’t go up. Cost Behaviour Variable Fixed 1. The costs of advertising a BTS rock concert in Vancouver ………………………………………….. X Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 7 2. The cost of leasing a CT-scan diagnostic machine at the hospital in London............................................ X 3. The costs of shipping Alexa to retail stores ................. X 4. Property taxes on your local cinema........................... X 5. The costs of synthetic materials used to make Reebok running shoes........................................................ X 6. The electrical costs of running a roller coaster at the West Edmonton Mall .............................................. X 7. Depreciation on the Starbucks building in Halifax........ X Brief Exercise 2-3(LO3 CC3) (15 minutes) Item Differential Cost Opportunity Cost Sunk Cost 1. Cost of the old printing machine X 2. The salary of the head of the Printing Department 3. The salary of the head of the Finance Department 4. Rent on the space occupied by the Printing department 5. The cost of maintaining the old printer X 6. Benefits from a new state-ofthe-art scanner X 7. Cost of electricity to run the printing machine X Note: The costs of the salaries of the heads of the Printing and the Finance Departments and the rent on the space occupied by Printing are neither differential costs, nor opportunity costs, nor sunk costs. These are costs that do not differ between the alternatives and are therefore irrelevant in the decision, but they are not sunk costs since they occur in the future. The opportunity cost of the foregone benefit from a new state-of-the-art scanner is not a differential cost in the decision to replace the old printer with a new printer, but if the decision were instead whether to acquire a scanner or a printer, this opportunity cost would also be a differential cost. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 8 Introduction to Managerial Accounting, Seventh Canadian Edition Brief Exercise 2-4 (LO4 CC4, 5, 6) (15 minutes) 1. Monthly salary of the company’s accountant: Administrative cost. 2. The cost of a fan installed in a computer: Direct Materials cost. 3. Rental on equipment used to assemble computers: Manufacturing Overhead 4. The cost of advertising in the local community newspaper: Marketing and Selling cost. 5. Monthly charge paid to an outside company for quality testing (20% of the computers assembled are sent for testing): Manufacturing Overhead 6. The wages of employees who assemble computers from components: Direct Labour cost. 7. The salary of the assembly shop’s supervisor: Manufacturing Overhead. 8. Sales commissions paid to the company’s salespeople: Marketing and Selling cost. 9. Rent on the facility: Manufacturing Overhead. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 9 Brief Exercise 2-5(LO4 CC7) (15 minutes) Product (Inventoriable) Cost Period (Non-inventoriable) Cost 1. Depreciation on salespersons’ cars............. X 2. Rent on equipment used in the factory ...... X 3. Lubricants used for maintenance of factory equipment............................................. X 4. Salaries of finished goods warehouse personnel.............................................. X 5. Soap and paper towels used by factory workers at the end of a shift .................. X 6. Sales supervisors’ salaries ......................... X 7. Property taxes on the factory building........ X 8. Materials used in boxing units of finished product for shipment overseas (units are not normally boxed)............................... X 9. Advertising outlays ................................... X 10. Workers’ compensation insurance on factory employees ................................. X 11. Depreciation on chairs and tables in the administrative boardroom ...................... X 12. The salary of the production quality supervisor for the company.................... X 13. Depreciation on a Learjet used by the company's executives ............................ X 14. Rent on rooms at a Florida resort for manufacturing conference...................... X 15. Attractively designed box for packaging breakfast cereal..................................... X Copyright © 2023 McGraw Hill Ltd. All rights reserved. 10 Introduction to Managerial Accounting, Seventh Canadian Edition Brief Exercise 2-6(LO5 CC9, 10; LO6 CC 11) (15 minutes) Brides N Grooms Income Statement For the Month Ended XXXX Sales ............................................................. $3,000,000 Cost of goods sold: Beginning merchandise inventory .................. $ 150,000 Add: Purchases ............................................ 950,000 Goods available for sale ................................ 1,100,000 Deduct: Ending merchandise inventory .......... 200,000 900,000 Gross margin................................................... 2,100,000 Less operating expenses: Selling expense ............................................ 365,000 Administrative expense ................................. 435,000 800,000 Net income ..................................................... $1,300,000 Brief Exercise 2-7(LO6 CC11, 12) (15 minutes) Lompac Products Schedule of Cost of Goods Manufactured Direct materials: Beginning raw materials inventory.................. $340,000 Add: Purchases of raw materials..................... 870,000 Raw materials available for use ...................... $1,210,000 Deduct: Ending raw materials inventory.......... 210,000 Raw materials used in production ................... $ 1,000,000 Direct labour .................................................... 245,000 Manufacturing overhead ................................... 560,000 Total manufacturing costs ................................. $1,805,000 Add: Beginning work in process inventory.......... 150,000 $1,955,000 Deduct: Ending work in process inventory.......... 170,000 Cost of goods manufactured ............................. $ 1,785,000 Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 11 Solutions to Exercises Exercise 2-1(LO1 CC1; LO3 CC3; LO4 CC4, 5, 6, 7) (45 minutes) By Behaviour By Function By Relevance Product Cost Period Cost Name of the Cost Variable Cost Fixed Cost Direct Materials Direct Labour Mfg. Overhead Selling & Administr ative Opportunity Cost Sunk Cost Rental revenue foregone, $75,000 per year.................. X Direct materials cost, $60 per unit ..................................... X X Rental cost of warehouse, $2,000 per month................. X X Rental cost of equipment, $25,000 per month............... X X Direct labour cost, $80 per unit X X Depreciation of the annex space, $5,000 per year ......... X X X Advertising cost, $250,000 per year..................................... X X Supervisor's salary, $5,500 per month.................................. X X Electricity for machines, $2.40 per unit................................ X X Shipping cost, $18 per unit ...... X X Copyright © 2023 McGraw Hill Ltd. All rights reserved. 12 Introduction to Managerial Accounting, Seventh Canadian Edition Return earned on investments, $3,000 per year.................... X Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 13 Exercise 2-2(LO1 CC1; LO3 CC3; LO4 CC7) (15 minutes) 1. Product; variable 6. Period; variable 2. Conversion 7. Product; period; fixed 3. Opportunity 8. Product 4. Prime 9. Period 5. Sunk 10. Fixed; product; conversion Exercise 2-3(LO1 CC 1; LO2 CC2) (15 minutes) Cost Behaviour To Quantity of Baked Goods Produced Cost Item Variable Fixed Direct Indirect 1. Accountant’s salary.............. X X 2. Building depreciation ........... X X 3. Flour used in the making of croissants......................... X X 4. Bakery manager’s salary ...... X X 5. Wages of bakers.................. X X 6. Rent of commercial ovens used in baking.................. X X 7. Insurance on the building..... X X Copyright © 2023 McGraw Hill Ltd. All rights reserved. 14 Introduction to Managerial Accounting, Seventh Canadian Edition Exercise 2-4(LO1 CC1; LO4 CC7) (30 minutes) Selling and Administrative Cost Product Cost Cost Behaviour Cost Item Variable Fixed 1. Apples processed and canned by Del Monte Corporation X X 2. Advertising by a dental office..... X X 3. Shipping canned apples from a Del Monte plant to customers . X* X 4. Insurance on IBM’s manufacturing facilities .......... X X 5. Commissions paid to London Drugs salespersons ................ X X 6. Steering wheels installed in BMWs ................................... X X 7. Depreciation of factory lunchroom facilities at a General Electric plant............. X X 8. Insurance on Samsung’s corporate office ..................... X X 9. Salary of a supervisor overseeing production of circuit boards at HewlettPackard................................. X X 10. Hamburger buns in a Burger King outlet ............................ X X * This will likely be a semi-fixed cost because shipping costs will not vary by can but by a truckload of cans. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 15 Exercise 2-5(LO5 CC10; LO6 CC11, 12) (45 minutes) 1. Mason Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ........................... $18,000 Add: Purchases of raw materials................................ 180,000 Raw materials available for use.................................. 198,000 Deduct: Raw materials inventory, ending ................... 12,500 Raw materials used in production .............................. $185,500 Direct labour ............................................................... 70,000 Manufacturing overhead: Indirect labour.......................................................... 45,000 Maintenance, factory equipment................................ 6,000 Insurance, factory equipment.................................... 1,900 Rent, factory facilities................................................ 24,000 Supplies ................................................................... 3,600 Depreciation, factory equipment ................................ 4,500 Total overhead costs.................................................... 85,000 Total manufacturing costs ............................................ 340,500 Add: Work in process, beginning .................................. 10,300 350,800 Deduct: Work in process, ending .................................. 15,150 Cost of goods manufactured......................................... $335,650 2. The cost of goods sold section of Mason Company’s income statement: Finished goods inventory, beginning ............................ $ 18,100 Add: Cost of goods manufactured................................ 335,650 Goods available for sale .............................................. 353,750 Deduct: Finished goods inventory, ending .................... 23,000 Cost of goods sold ...................................................... $330,750 Copyright © 2023 McGraw Hill Ltd. All rights reserved. 16 Introduction to Managerial Accounting, Seventh Canadian Edition Exercise 2-6(LO4 CC8) (30 minutes) 1.a)Bolts of polyester purchased...................................................... 10,000 Bolts drawn from inventory........................................................ 9,200 Bolts remaining in inventory ...................................................... 800 Cost per bolt............................................................................. × $80 Cost in Raw Materials Inventory at June 30 ................................ $ 64,000 b)Bolts of polyester used in production (9,200 – 200) 9,000 Linens completed and transferred to Finished Goods (90% × 9,000)................................................................................... 8,100 Linens still in Work in Process at June 30 ................................... 900 Cost per bolts ........................................................................... × $80 Cost in Work in Process Inventory at June 30 ............................. $ 72,000 c)Linens completed and transferred to Finished Goods (above) ...... 8,100 Linens sold during the month (70% × 8,100) ............................. 5,670 Linens still in Finished Goods at June 30..................................... 2,430 Cost per bolts ........................................................................... × $80 Cost in Finished Goods Inventory at June 30 .............................. $194,400 d)Linens sold during the month (above)........................................ 5,670 Cost per bolts ........................................................................... × $80 Cost in Cost of Goods Sold at April 30 ........................................ $453,600 e)Bolts used for customer samples................................................ 200 Cost per bolts ........................................................................... × $80 Cost in Selling Expense at June 30 ............................................. $ 16,000 2. a) Raw Materials Inventory—balance sheet b) Work in Process Inventory—balance sheet c) Finished Goods Inventory—balance sheet d) Cost of Goods Sold—income statement e) Selling Expense—income statement Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 17 EXERCISE 2-7 (LO6 CC12) (15 minutes) Direct material used = $ 78,000 Direct labour costs = $ 15,000 Manufacturing overhead = $ 16,500 Total Manufacturing costs= $ 109,500 Opening inventory of work in process = $ 13,000 Less: Ending inventory of work in process = $ 2,000 Cost of goods manufactured = $ 120,500 EXERCISE 2-8 (LO5 CC10; LO6 CC11, 12) (7 minutes) Cost of goods sold = Sales – Gross margin = $1,700,000 – (40% × $1,700,000) = $1,700,000 - $680,000 = $1,020,000 Note that Cost of Goods Sold = Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory Therefore, Beginning finished goods inventory = Cost of goods sold – Cost of goods manufactured + Ending finished goods inventory = $1,020,000 - $975,000 + 85,000 = $130,000 Copyright © 2023 McGraw Hill Ltd. All rights reserved. 18 Introduction to Managerial Accounting, Seventh Canadian Edition Solutions to Problems Problem 2-1 (LO1 CC1; LO4 CC4, 5, 7) (30 minutes) By Behaviour By Function By Relevance Variable Cost Fixed Cost Product Cost Period Cost Opportu nity Cost Sunk Cost Name of the Cost Direct Materials Direct Labour Mfg. Overhead Selling & Adminis trative Staci's present salary, $70,000/year ................. X Building rent, $2,500/ month............................ X X Clay and glaze, $3.50/pot .. X X Wages of production workers, $12/pot............ X X Advertising, $2,600/month. X X Sales commission, $4/pot... X X Rent of production equipment, $1,300/month ................ X X Legal and filing fees, $5,0001 .......................... X X X Rent of sales office, $1,250/month ................ X X Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 19 Phone for taking orders, $40/month..................... X X Interest lost on savings account, $1,200/year...... X 1 Not a fixed cost per se because they are not a recurring expense. 2. The $5,000 cost of incorporating the business is not a differential cost. Even though the cost was incurred to start the business, it is a sunk cost. Whether Staci produces pottery or stays in her present job, she will have incurred this cost. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 20 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-2 (LO1 CC 1; LO2 CC2; LO4 CC4, 5, 6) (30 minutes) Note to the instructor: There may be several exceptions to the answers below. The purpose of this problem is to get the students to start thinking about cost behaviour and cost purposes; therefore, try to avoid lengthy discussions about how a particular cost is classified. Variable or Fixed Selling Cost Administrative Cost Manufacturing (Product) Cost Cost Item Direct Indirect 1. Property taxes, corp. office..... F X 2. Boxes used for packaging detergent........................... V X 3. Salespersons’ commissions ..... V X 4. Production supervisor’s salary. F X 5. Depreciation, executive automobiles........................ F X 6. Wages of workers assembling computers .......................... V X 7. Packing supplies for out-ofprovince shipment .............. V X 8. Insurance, finished goods warehouses........................ F X 9. Office computers ................... F X 10. Advertising costs.................... F X 11. “Chips” used in producing calculators.......................... V X 12. Shipping costs on merchandise sold................ V X 13. Magazine subscriptions, factory lunchroom............... F X 14. Velcro in a garment factory .... V X Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 21 Problem 2-2 (continued) Variable or Fixed Selling Cost Administrative Cost Manufacturing (Product) Cost Cost Item Direct Indirect 15. Billing costs ........................... V X* 16. Executive life insurance.......... F X 17. Software used in textbook production.......................... F X 18. Fringe benefits, assembly line workers.............................. V X** 19. Yarn used in sweater production.......................... V X 20. Wages of receptionist, executive offices ................. F X * Could be administrative cost. ** Could be indirect cost. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 22 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-3(LO1 CC1; LO2 CC2; LO4 CC4, 6) (60 minutes) 1. Cost Behaviour Selling or Administrative Product Cost Cost Item Variable Fixed Cost Direct Indirect Factory labour, direct................. $340,000 $340,000 Advertising................................ $ 80,000 $ 80,000 Factory supervision.................... 90,000 $90,000 Property taxes, factory building .. 14,500 14,500 Sales commissions..................... 160,000 160,000 Insurance, factory ..................... 5,500 5,500 Depreciation, office equipment... 24,000 24,000 Lease cost, factory equipment.... 16,000 16,000 Indirect materials, factory .......... 26,000 26,000 Depreciation, factory building..... 18,000 18,000 General office supplies (billing)... 8,000 8,000 General office salaries................ 80,000 80,000 Direct materials used (wood, bolts, etc.) ............................. 214,000 214,000 Utilities, factory ......................... 50,000 50,000 Total costs ................................ $798,000 $328,000 $352,000 $554,000 $220,000 Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 23 Problem 2-3 (continued) 2. Direct .......................................................... $554,000 Indirect........................................................ 220,000 Total............................................................ $774,000 $774,000 ÷ 4,000 sets = $193.50 per set 3. The average product cost per set would decrease. This is because the fixed costs would be spread over more units, causing the cost per unit to drop. 4. a) Yes. Ideally, the president would want to sell at the company’s regular price (which may be labelled as ‘wishful thinking’) or at the average production cost ($193.50) to avoid “incurring a loss.” He might expect a figure even higher than the average production cost to cover a portion of the administrative costs. The brother-in-law probably will be thinking of “cost” as including only direct materials used, or, at most, direct materials and direct labour. Direct materials alone would be only $85 per set, and direct materials and direct labour would be only $105. It is possible that the brother-in-law’s pricing of materials at a building supply store may be more or less than $85. b) The term is relevant (or incremental) cost. The full, regular price of a set might not be appropriate here, since the company is operating only at 80% of its full capacity. Therefore, the president must ideally recover all the incremental costs that will be incurred in producing an additional patio set for the brother-in-law. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 24 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-4 (LO4 CC7) (30 minutes) 1. The controller is correct in his viewpoint that the salary cost should be classified as a selling (marketing) cost. The duties described in the problem have nothing to do with the manufacture of a product, but rather deal with movement of finished units from the factory to distribution warehouses. As stated in the text, selling costs would include all costs necessary to secure customer orders and get the finished product into the hands of customers. Coordination of shipments of finished units from the factory to distribution warehouses fall in this category. 2. No, the president is not correct; from the point of view of the reported net income for the year, it does make a difference how the salary cost is classified. If the salary cost is classified as a selling expense, all of it will appear on the income statement as a period cost. However, if the salary cost is classified as a manufacturing (product) cost, then it will be added to Work in Process Inventory along with other manufacturing costs for the period. To the extent that goods are still in process at the end of the period, part of the salary cost will remain with these goods in the Work in Process Inventory account. Only that portion of the salary cost that has been assigned to finished units will leave the Work in Process Inventory account and be transferred into the Finished Goods Inventory account. In like manner, to the extent that goods are unsold at the end of the period, part of the salary cost will remain with these goods in the Finished Goods Inventory account. Only the portion of the salary that has been assigned to finished units that are sold during the period will appear on the income statement as an expense (part of Cost of Goods Sold) for the period. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 25 Problem 2-5 (LO5 CC10; LO6 CC11, 12) (45 minutes) Case 1 Case 2 Case 3 Case 4 Direct materials ..................... $ 14,500 $ 60,000 $ 5,000 $ 23,000 Direct labour ......................... 19,000 * 23,000 7,000 14,000 Manufacturing overhead......... 25,000 44,000 8,000 * 19,000 Total manufacturing costs ...... 58,500 127,000 * 20,000 56,000 * Beginning work in process inventory............................ 3,500 8,000 3,000 0 * Ending work in process inventory............................ (4,000)* (4,000) (4,000)* (8,500) Cost of goods manufactured... $58,000 $131,000 * $19,000 $47,500 * Sales..................................... $80,000 $201,000 $36,000 $90,000 Beginning finished goods inventory............................ 10,000 12,500 3,000 * 12,000 * Cost of goods manufactured... 58,000 * 131,000 * 19,000 * 47,500 Goods available for sale ......... 68,000 * 143,500 * 22,000 * 59,500 Ending finished goods inventory............................ (4,000)* (11,500) (4,000) (3,500) Cost of goods sold ................. 64,000 * 132,000 * 18,000 56,000 * Gross margin......................... 16,000 69,000 * 18,000 34,000 * Operating expenses ............... (12,000)* (33,500) (13,000)* (25,000) * Net income............................ $ 4,000 $ 35,500 * $ 5,000 $ 9,000 * Missing data in the problem. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 26 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-6 (LO5 CC9, 10; LO6 CC11, 12) (75 minutes) 1. GALLUP ENTERPRISES Schedule of Cost of Goods Manufactured For the Month Ended August 31 Direct materials: Raw materials inventory, August 1.......................... $ 51,000 Add: Purchases of raw materials............................. 402,000 Raw materials available for use............................... 453,000 Deduct: Raw materials inventory, August 31 ........... 88,000 Raw materials used in production ........................... $365,000 Direct labour ............................................................ 120,000 Manufacturing overhead: Indirect labour cost................................................ 19,000 Utilities (70% × $45,000)....................................... 31,500 Depreciation, factory equipment ............................. 34,000 Insurance (40% × $28,000)................................... 11,200 Rent on facilities (60% × $140,000) ....................... 84,000 Total overhead costs................................................. 179,700 Total manufacturing costs ......................................... 664,700 Add: Work in process inventory, August 1 .................. 28,000 692,700 Deduct: Work in process inventory, August 31............ 34,000 Cost of goods manufactured...................................... $658,700 Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 27 Problem 2-6 (continued) 2. GALLUP ENTERPRISES Income Statement For the Month Ended August 31 Sales................................................................................. $920,000 Less cost of goods sold: Finished goods inventory, August 1.................................. $ 50,000 Add: Cost of goods manufactured.................................... 658,700 Goods available for sale .................................................. 708,700 Deduct: Finished goods inventory, August 31 ................... 55,000 653,700 Gross margin..................................................................... 266,300 Less operating expenses: Utilities (30% × $45,000)................................................ 13,500 Depreciation, sales equipment......................................... 18,000 Insurance (60% × $28,000)............................................ 16,800 Rent on facilities (40% × $140,000) ............................... 56,000 Selling and administrative salaries.................................... 38,000 Advertising ..................................................................... 95,000 237,300 Net income (loss)............................................................... $ 29,000 3. In preparing the income statement for August, Hilda did not (1) distinguish between product costs and period costs, and (2) recognize the changes in inventories between the beginning and end of the month. Once these errors have been corrected, the financial condition of the company looks much better (although net income is still just over 3% of sales ) and selling the company may not yet be advisable. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 28 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-7 (LO1 CC1; LO5 CC10; LO6 CC11, 12) (75 minutes) 1. MERIWELL COMPANY Schedule of Cost of Goods Manufactured For the year just completed Direct materials: Raw materials inventory, beginning ...................... $ 9,000 Add: Purchases of raw materials........................... 125,000 Raw materials available for use............................. 134,000 Deduct: Raw materials inventory, ending .............. 6,000 Raw materials used in production ......................... $128,000 Direct labour .......................................................... 70,000 Manufacturing overhead: Depreciation, factory............................................ 27,000 Utilities, factory ................................................... 8,000 Maintenance, factory............................................ 40,000 Supplies, factory .................................................. 11,000 Insurance, factory................................................ 4,000 Indirect labour..................................................... 15,000 Total overhead costs............................................... 105,000 Total manufacturing costs ....................................... 303,000 Add: Work in process inventory, beginning............... 17,000 320,000 Deduct: Work in process inventory, ending............... 30,000 Cost of goods manufactured.................................... $290,000 Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 29 Problem 2-7 (continued) 2. MERIWELL COMPANY Income Statement For the year just completed Sales...................................................................... $500,000 Cost of goods sold: Finished goods inventory, beginning ..................... $ 20,000 Add: Cost of goods manufactured......................... 290,000 Goods available for sale ....................................... 310,000 Deduct: Finished goods inventory, ending ............. 40,000 270,000 Gross margin.......................................................... 230,000 Less operating expenses: Selling expenses .................................................. 80,000 Administrative expenses....................................... 110,000 190,000 Net income............................................................. $ 40,000 3. Direct materials: $128,000 ÷ 10,000 units = $12.80 per unit. Factory Depreciation: $27,000 ÷ 10,000 units = $2.70 per unit. 4. Direct materials: Average cost per unit: $12.80 (unchanged) Total cost: 15,000 units × $12.80 per unit = $192,000. Factory Depreciation: Average cost per unit: $27,000 ÷ 15,000 units = $1.80 per unit. Total cost: $27,000 (unchanged) The average production cost per unit will decrease (see explanation below). 5. Average cost per unit for depreciation dropped from $2.70 to $1.80, because of the increase in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a per unit basis as the activity level rises. The average cost per unit for direct materials remained the same because a direct material is variable cost which remains constant on a per-unit basis. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 30 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-8 (LO1 CC1; LO5 CC9, 10; LO6 CC11, 12) (90 minutes) 1. SUPERIOR COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, beginning ...................... $ 30,000 Add: Purchases of raw materials........................... 390,000 * Raw materials available for use............................. 420,000 Deduct: Raw materials inventory, ending .............. 10,000 Raw materials used in production ......................... $410,000 * Direct labour .......................................................... 73,000 Manufacturing overhead: Insurance, factory................................................ 8,000 Utilities, factory ................................................... 65,000 Indirect labour..................................................... 60,000 Cleaning supplies, factory..................................... 7,000 Rent, factory building........................................... 90,000 Maintenance, factory............................................ 40,000 Total overhead costs............................................... 270,000 Total manufacturing costs ....................................... 753,000 (given) Add: Work in process inventory, beginning............... 37,000 * 790,000 Deduct: Work in process inventory, ending............... 20,000 Cost of goods manufactured.................................... $770,000 The cost of goods sold section of the income statement follows on the next page. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 31 Problem 2-8 (continued) Finished goods inventory, beginning........................ $ 20,000 Add: Cost of goods manufactured ........................... 770,000 * Goods available for sale .......................................... 790,000 * Deduct: Finished goods inventory, ending................ 50,000 Cost of goods sold.................................................. $740,000 (given) * These items must be computed by working backwards up through the statements. An effective way of doing this is to place the form and known balances on the chalkboard, and then to work toward the unknown figures. 2. Direct materials: $410,000 ÷ 50,000 units = $8.20 per unit. Rent, factory building: $90,000 ÷ 50,000 units = $1.80 per unit. 3. Per Unit Total Direct materials ............... $8.20 (Same) $328,000 ** (Changed) Rent, factory building....... $ 2.25 * (Changed) $ 90,000 (Same) * $90,000 ÷ 40,000 units = $2.25 per unit. ** $8.20 × 40,000 units = $328,000. 4. The average cost per unit for rent increased from $1.80 to $2.25, because of the decrease in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a per unit basis as the activity level rises. The average cost per unit for direct materials remained the same because direct materials is a variable cost which remains constant on a per-unit basis. The total change is in relation to amount of goods produced. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 32 Introduction to Managerial Accounting, Seventh Canadian Edition PROBLEM 2-9 (LO1 – CC1; LO2 – CC2; LO4 – CC5, CC6, CC7; LO5 – CC9) (40 minutes) 1. Behaviour Function VARIABLE FIXED MFG SALES/MKT ADMIN Direct materials & components $ 3,200,000 $3,200,000 Direct production wages $ 1,448,000 $1,448,000 Production supervisory salaries $ 261,400 $ 261,400 Salaries paid to sales representatives $ 464,000 $ 84,000 $ 548,000 Advertising $ 675,300 $ 675,300 Insurance $ 115,670 $ 75,186 $ 40,484 Building rent $ 258,640 $181,048 $ 38,796 $ 38,796 Other salaries $1,160,000 $ 580,000 $ 232,000 $348,000 Honorarium to the members of the Board $ 430,200 $430,200 Production quality control $ 78,390 $ 52,260 $ 130,650 Market research $ 346,200 $ 346,200 Depreciation $1,326,700 $ 928,690 $ 265,340 $132,670 Facilities management $ 884,230 $353,692 $530,538 Legal $ 685,600 $685,600 Personnel department $196,500 $196,500 Utilities - production $ 298,410 $ 554,190 $ 852,600 Utilities - other $ 144,136 $ 216,204 $ 180,170 $180,170 Customer service $ 229,350 $ 688,050 $ 917,400 $5,862,286 $7,935,144 $8,011,266 $ 3,203,206 $2,582,958 $13,797,430 $ 13,797,430 Note that the amounts are calculated using the percentage breakdowns given in the data. Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 33 Problem 2-9 (continued) 2. Product costs (manufacturing costs from table in Part 1) = $8,011,266 Period costs (sales/marketing + administration from table in Part 1) = $3,203,206 + $2,582,958 = $5,786,164 Product costs are classified as direct and indirect as follows: Product costs Direct Indirect Direct materials & components √ Direct production wages √ Production supervisory salaries √ Insurance √ Building rent √ Other salaries √ Production quality control √ Depreciation √ Facilities management √ Utilities - production √ Copyright © 2023 McGraw Hill Ltd. All rights reserved. 34 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-9 (continued) 3. CRATER CORPORATION - NORTH AMERICAN DIVISION INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2022 Sales Revenue $23,200,000 Less: Cost of goods sold Materials and components $ 3,200,000 Production wages 1,448,000 Production supervisory salaries 261,400 Insurance 75,186 Building rent 181,048 Other salaries 580,000 Production quality control 130,650 Depreciation 928,690 Facilities management 353,692 Utilities - production 852,600 8,011,266 Gross margin $15,188,734 Less: Selling & administrative expenses Salaries paid to sales representatives 548,000 Advertising 675,300 Insurance 40,485 Building rent 77,592 Other salaries 580,000 Honorarium paid to Board members 430,200 Market research 346,200 Depreciation 398,010 Facilities management 530,538 Legal 685,600 Personnel department 196,500 Utilities - other 360,340 Customer service 917,400 5,786,165 Net income $ 9,402,569 Gross margin per unit = $15,188,734 ÷ 60,000 ≈ $253.15 Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 35 PROBLEM 2-10 (LO4 CC7; LO5 CC10) (30 minutes) 1. The income statement includes several conceptual errors including: • The amount of purchases instead of direct materials used • Inventories do not seem to have been considered in computing the cost of goods manufactured and goods sold • Annual insurance amount included rather than a quarterly amount • Format of the income statement does not follow the conventional classification of the cost of goods sold, gross margin and selling & administrative costs 2. RUSSELL MANUFACTURING COMPANY COST OF GOODS MANUFACTURED STATEMENT FOR THE QUARTER ENDING DECEMBER 31 2022 Direct materials: Beginning inventory $ 7,860 + Purchases 171,948 = Direct materials available for use $ 179,808 - Ending inventory 6,870 = Direct materials used $ 172,938 Direct labour 160,072 Overhead: Indirect materials 73,692 Indirect labour 106,714 Manufacturing utilities 49,400 Facility rental 72,000 Depreciation 38,100 Quarterly insurance 10,000 Management salaries 232,800 582,706 Total manufacturing costs $ 915,716 + Beginning WIP inventory 9,120 - Ending WIP inventory 8,070 = Cost of goods manufactured $ 916,766 Copyright © 2023 McGraw Hill Ltd. All rights reserved. 36 Introduction to Managerial Accounting, Seventh Canadian Edition Problem 2-10 (continued) Notes: 1. Purchase of direct materials = $245,640 × 70% 2. Indirect materials = $245,640 × 30% 3. Direct labour = $266,786 × 60% 4. Indirect labour = $266,786 × 40% 5. Facility rental = $90,000 × 80% 6. Depreciation = $63,500 × 60% 7. Management salaries = $388,000 × 60% 3. RUSSELL MANUFACTURING COMPANY INCOME STATEMENT FOR THE QUARTER ENDING DECEMBER 31 2022 Sales $1,367,600 Cost of goods sold: Beginning FG inventory $ 7,420 + Cost of goods manufactured 916,766 = Cost of goods available for sale 924,186 - Ending FG inventory 11,280 = Cost of goods sold 912,906 Gross margin $ 454,694 Selling, general and administrative expenses: Advertising 37,000 Administrative travel 27,600 Facility rental 18,000 Depreciation 25,400 Sales commissions 41,000 Office utilities 22,400 Management salaries 155,200 326,600 Net income $ 128,094 Notes: 1. Facility rental = $90,000 × 20% 2. Depreciation = $63,500 × 40% 3. Management salaries = $388,000 × 40% Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 37 Problem 2-11 (LO4 CC5; LO5 CC 9, 10; LO6 CC11, 12) (20 minutes) 1. SofTouch Corporation Income Statement For the Year Ended December 31, XXXX Sales (332,000 dolls @ $24 per doll) $7,968,000 Cost of goods sold (332,000 @ $12.50 per doll) 4,150,000 Gross margin 3,818,000 Selling and administrative expenses: Commissions ($2.50 per doll) $830,000 Advertising 650,000 Administration 570,000 2,050,000 Net income $1,768,000 Note: The number of dolls sold is computed as: Beginning finished goods inventory 20,000 + Number of units produced 340,000 - Ending finished goods inventory 28,000 = 332,000 2 a. Prime cost ($2.25 + $0.50) $2.75 b. Conversion cost ($0.50 + $2.50 + $7.25) $10.25 c. Variable cost ($2.25 + $0.50 + $2.50 + 2.50) $7.75 Copyright © 2023 McGraw Hill Ltd. All rights reserved. 38 Introduction to Managerial Accounting, Seventh Canadian Edition Comprehensive Problem (LO1 CC1; LO3 CC3; LO4 CC4, 5, 6, 7) (60 minutes) 1. Cost Classification Behaviour Function Relevance Cost Item Variable Fixed Product Period Opportunity Sunk Lost rental income √ Direct materials √ √ Direct labour √ √ Equipment rental √ √ Warehouse space rental √ √ Manufacturing facility (building) depreciation √ √ √ Production supervisor salary √ √ Other production costs √ √ Delivery costs √ √ Selling and administrative √ √ Annual return on investments foregone √ Copyright © 2023 McGraw Hill Ltd. All rights reserved. Solutions Manual, Chapter 2 39 Comprehensive Problem (continued) 2. Product Cost (₹) Per unit Direct materials 6,000.00 Direct labour 2,750.00 Manufacturing overhead: Equipment rental (₹450,000 ÷ 3,600 units) 125.00 Manufacturing facility depreciation (₹400,500 ÷ 3,600) 111.25 Production supervisor salary (₹78,120 ÷ 3,600) 21.70 Other production costs 80.00 337.95 Total product costs per unit 9,087.95 3. Incremental Costs for 500 Additional Units (₹) Per unit Direct materials 6,000 Direct labour 2,750 Other production costs 80 Delivery costs 520 Total costs per unit (₹) 9,350 Total costs for 500 units (₹) 2,805,000 Note that all the variable costs are incremental costs; however, fixed costs are assumed to remain constant within a certain relevant range. The only issue is that currently the capacity is 4,000 units and producing additional 500 units will result in a capacity utilization of 102.5% (4,100 ÷ 4,000 units). This in turn means that production is outside of the relevant range and may require the incurrence of additional fixed costs. Copyright © 2023 McGraw Hill Ltd. All rights reserved. 40 Introduction to Managerial Accounting, Seventh Canadian Edition Thinking Analytically (LO3CC5, 7; LO5CC9, 10; LO6CC11, 12) (30 minutes) Schedule of Cost of Goods Manufactured KHAN MACHINES, INC. COST OF GOODS MANUFACTURED STATEMENT FOR THE YEAR ENDING DECEMBER 31 2022 Direct materials: Beginning inventory $ 36,000 + P