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Chapter 18
Introduction to Managerial Accounting
Review Questions
1. What is the primary purpose of managerial accounting?
The primary purpose of managerial accounting is to provide information to help managers plan,
direct, control, and make decisions.
2. List six differences between financial accounting and managerial accounting.
Financial accounting and managerial accounting differ on the following 6 dimensions: (1) primary
users, (2) purpose of information, (3) focus and time dimension of the information, (4) rules and
restrictions, (5) scope of information, and (6) behavioral.
3. Explain the difference between line positions and staff positions.
Line positions are directly involved in providing goods or services to customers. Staff positions
support line positions.
4. Explain the differences between planning, directing, and controlling.
Planning means choosing goals and deciding how to achieve them. Directing involves running the
day-to-day operations of a business. Controllingis the process of monitoring operations and keeping
the company on track.
5. List the four IMA standards of ethical practice, and briefly describe each.
The four IMA standards of ethical practice and a description of each follow.
I. Competence.
Maintain an appropriate level of professional expertise by continually developing knowledge
and skills.
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.
Recognize and communicate professional limitations or other constraints that preclude
responsible judgment or successful performance of an activity.
II. Confidentiality.
Keep information confidential except when disclosure is authorized or legally required.
Inform all relevant parties regarding appropriate use of confidential information. Monitor
subordinates’ activities to ensure compliance.
Refrain from using confidential information for unethical or illegal advantage.
© 2018 Pearson Education, Inc. 18-2
III. Integrity.
Mitigate actual conflicts of interest, regularly communicate with business associates to avoid
apparent conflicts of interest. Advise all parties of any potential conflicts.
Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Abstain from engaging in or supporting any activity that might discredit the profession.
IV. Credibility.
Communicate information fairly and objectively.
Disclose all relevant information that could reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or recommendations.
Disclose delays or deficiencies in information, timeliness, processing, or internal controls in
conformance with organization policy and/or applicable law.
6. Describe a service company, and give an example.
Service companies sell time, skills, and knowledge. Examples of service companies include phone
service companies, banks, cleaning service companies, accounting firms, law firms, medical
physicians, and online auction services.
7. Describe a merchandising company, and give an example.
Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory
of products, and managers are accountable for the purchasing, storage, and sale of the products.
Examples of merchandising companies include toy stores, grocery stores, and clothing stores.
8. How do manufacturing companies differ from merchandising companies?
Merchandising companies resell products they previously bought from suppliers, whereas
manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into
new finished products. In contrast to merchandising companies, manufacturing companies have a
broad range of production activities that require tracking costs on three kinds of inventory.
9. List the three inventory accounts used by manufacturing companies, and describe each.
The three inventory accounts used by manufacturing companies are Raw Materials Inventory, Work-
in-Process Inventory, and Finished Goods Inventory.
Raw Materials Inventory includes materials used to manufacture a product. Work-in-Process
Inventory includes goods that have been started in the manufacturing process but are not yet
complete. Finished Goods Inventory includes completed goods that have not yet been sold.
© 2018 Pearson Education, Inc. 18-3
10. Explain the difference between a direct cost and an indirect cost.
A direct cost is a cost that can be easily and cost-effectively traced to a cost object (which is
anything for which managers want a separate measurement of cost). An indirect cost is a cost that
cannot be easily or cost-effectively traced to a cost object.
11. What are the three manufacturing costs for a manufacturing company? Describe each.
The three manufacturing costs for a manufacturing company are direct materials, direct labor, and
manufacturing overhead. Direct materials are materials that become a physical part of a finished
product and whose costs are easily traceable to the finished product. Direct labor is the labor cost of
the employees who convert materials into finished products. Manufacturing overhead includes all
manufacturing costs except direct materials and direct labor, such as indirect materials, indirect
labor, factory depreciation, factory rent, and factory property taxes.
12. Give five examples of manufacturing overhead.
Examples of manufacturing overhead include costs of indirect materials, indirect labor, repair and
maintenance in factory, factory utilities, factory rent, factory insurance, factory property taxes,
manufacturing plant managers’ salaries, and depreciation on manufacturing buildings and
equipment.
13. What are prime costs? Conversion costs?
Prime costs are direct materials plus direct labor. Conversion costs are direct labor plus
manufacturing overhead. Note that direct labor is classified as both a prime cost and a conversion
cost.
14. What are product costs?
Product costs are the cost of purchasing or making a product. These costs are recorded as an asset
and not expensed until the product is sold. Product costs include direct materials, direct labor, and
manufacturing overhead.
15. How do period costs differ from product costs?
Period costs are non-manufacturing costs that are expensed in the same accounting period in which
they are incurred, whereas product costs are recorded as an asset and not expensed until the
accounting period in which the product is sold.
© 2018 Pearson Education, Inc. 18-4
16. How is cost of goods manufactured calculated?
Cost of Goods Manufactured is calculated as Beginning Work-in-Process Inventory + Total
Manufacturing Costs Incurred during the Year – Ending Work-in-Process Inventory. Total
Manufacturing Costs Incurred during the Year = Direct Materials Used + Direct Labor +
Manufacturing Overhead.
17. How does a manufacturing company calculate cost of goods sold? How is this different from a mer-
chandising company?
For a manufacturing company, the activity in the Finished Goods Inventory account provides the
information for determining Cost of Goods Sold. A manufacturing company calculates Cost of
Goods Sold as Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending
Finished Good Inventory.In addition, a manufacturing company must track costs from Raw
Materials Inventory and Work-in-Process Inventory in order to compute Cost of Goods
Manufactured used in the previous equation.
For a merchandising company, the activity in the Merchandise Inventory account provides the
information for determining Cost of Goods Sold. A merchandising company calculates Cost of
Goods Sold as Beginning Merchandise Inventory + Purchases and Freight In – Ending Merchandise
Inventory.
18. How does a manufacturing company calculate unit product cost?
A manufacturing company calculates unit product cost as Cost of Goods Manufactured / Total
number of units produced.
19. How does a service company calculate unit cost per service?
A service company calculates unit cost per service as Total Costs / Total number of services
provided.
20. How does a merchandising company calculate unit cost per item?
A merchandising company calculates unit cost per item as Total Cost of Goods Sold / Total number
of items sold.
© 2018 Pearson Education, Inc. 18-5
Short Exercises
S18-1Comparing managerial accounting and financial accounting
Learning Objective 1
For each of the following, indicate whether the statement relates to managerial accounting (MA) or
financial accounting (FA):
a. Helps investors make investment decisions.
b. Provides detailed reports on parts of the company.
c. Helps in planning and controlling operations.
d. Reports must follow Generally Accepted Accounting Principles (GAAP).
e. Reports audited annually by independent certified public accountants.
SOLUTION
a. FA
b. MA
c. MA
d. FA
e. FA
S18-2Identifying ethical standards
Learning Objective 1
The Institute of Management Accountants’ Statement of Ethical Professional Practice requires ma-
nagerial accountants to meet standards regarding competence, confidentiality, integrity, and credi-
bility. Consider the following situations. Which standard(s) is(are) violated in each situation?
a. You tell your brother that your company will report earnings significantly above financial ana-
lysts’ estimates.
b. You see others take home office supplies for personal use. As an intern, you do the same thing,
assuming that this is a ―perk.‖
c. At a company-paid conference on e-commerce, you skip the afternoon session and go sightsee-
ing.
d. You failed to read the detailed specifications of a new accounting software package that you
asked your company to purchase. After it is installed, you are surprised that it is incompatible
with some of your company’s older accounting software.
e. You do not provide top management with the detailed job descriptions they requested because
you fear they may use this information to cut a position in your department.
© 2018 Pearson Education, Inc. 18-6
S18-2, cont.
SOLUTION
a. Confidentiality
b. Integrity
c. Competence (skipping the session); Integrity (company-paid conference)
d. Competence
e. Credibility; Integrity
S18-3Distinguishing between direct and indirect costs
Learning Objective 2
Granger Cards is a manufacturer of greeting cards. Classify its costs by matching the costs to the
terms.
1. Direct materials
2. Direct labor
3. Indirect materials
4. Indirect labor
5. Other manufacturing overhead
a. Artists’ wages
b. Wages of materials warehouse workers
c. Paper
d. Depreciation on manufacturing equipment
e. Manufacturing plant manager’s salary
f. Property taxes on manufacturing plant
g. Glue for envelopes
SOLUTION
a. 2
b. 4
c. 1
d. 5
e. 4
f. 5
g. 3
© 2018 Pearson Education, Inc. 18-7
S18-4Computing manufacturing overhead
Learning Objective 2
Sunglasses Unlimited Company manufactures sunglasses. Following is a list of costs the company
incurred during May. Use the list to calculate the total manufacturing overhead costs for the month.
Glue for frames $ 250
Depreciation on company cars used by sales force 4,000
Plant depreciation 7,500
Interest Expense 1,500
Lenses 52,000
Company president’s salary 24,500
Plant foreman’s salary 3,500
Plant janitor’s wages 1,300
Oil for manufacturing equipment 150
SOLUTION
Glue for frames $ 250
Plant depreciation 7,500
Plant foreman’s salary 3,500
Plant janitor’s wages 1,300
Oil for manufacturing equipment 150
Total manufacturing overhead $ 12,700
S18-5Identifying product costs and period costs
Learning Objective 2
Classify each cost of a paper manufacturer as either a product cost or a period cost:
a. Salaries of scientists studying ways to speed forest growth.
b. Cost of computer software to track WIP Inventory.
c. Cost of electricity at the paper mill.
d. Salaries of the company’s top executives.
e. Cost of chemicals to treat the paper.
f. Cost of TV ads.
g. Depreciation on the manufacturing plant.
h. Cost to purchase wood pulp.
i. Life insurance on the CEO.
© 2018 Pearson Education, Inc. 18-8
S18-5, cont.
SOLUTION
a. Period cost
b. Product cost
c. Product cost
d. Period cost
e. Product cost
f. Period cost
g. Product cost
h. Product cost
i. Period cost
© 2018 Pearson Education, Inc. 18-9
S18-6Computing cost of goods sold, merchandising company
Learning Objective 3
Use the following information for The Windshield Helper, a retail merchandiser of auto wind-
shields, to compute the cost of goods sold:
Web Site Maintenance $ 7,900
Delivery Expense 400
Freight In 2,400
Purchases 47,000
Ending Merchandise Inventory 5,500
Revenues 63,000
Marketing Expenses 10,700
Beginning Merchandise Inventory 8,600
SOLUTION
Beginning merchandise inventory $ 8,600
Purchases $ 47,000
Freight in 2,400 49,400
Cost of goods available for sale 58,000
Ending merchandise inventory (5,500)
Cost of goods sold $ 52,500
S18-7Computing cost of goods sold and operating income, merchandising company
Learning Objective 3
Consider the following partially completed income statements for merchandising companies and compute the
missing amounts:
Smith, Inc. Allen, Inc.
Net Sales Revenue $ 101,000 $ (d)
Cost of Goods Sold:
Beginning Merchandise Inventory (a) 29,000
Purchases and Freight In 50,000 (e)
Cost of Goods Available for Sale (b) 89,000
Ending Merchandise Inventory (2,200) (2,200)
Cost of Goods Sold 61,000 (f)
Gross Profit 40,000 114,000
Selling and Administrative Expenses (c) 84,000
Operating Income $ 12,000 $ (g)
© 2018 Pearson Education, Inc. 18-10
S18-7, cont.
SOLUTION
Solutions: Calculations:
(a) $13,200 $63,200 [b, below] – $50,000
(b) $63,200 $61,000 + $2,200
(c) $28,000 $40,000 – $12,000
(d) $200,800 $86,800 + 114,000
(e) $60,000 $89,000 – $29,000
(f) $86,800 $89,000 – $2,200
(g) $30,000 $114,000 – $84,000
Order of calculations:
Smith, Inc.: (b), (a), (c)
Allen, Inc.: (e), (f), (d), and (g)
S18-8Computing direct materials used
Learning Objective 3
Tuscany, Inc. has compiled the following data:
Purchases of Direct Materials $ 6,300
Freight In 400
Property Taxes 800
Ending Direct Materials 1,300
Beginning Direct Materials 4,100
Compute the amount of direct materials used.
SOLUTION
Beginning Direct Materials $ 4,100
Purchases of Direct Materials $ 6,300
Freight In 400 6,700
Direct Materials Available for Use 10,800
Ending Direct Materials (1,300)
Direct Materials Used $ 9,500
© 2018 Pearson Education, Inc. 18-11
S18-9Computing cost of goods manufactured
Learning Objective 3
Use the following inventory data for Caddy Golf Company to compute the cost of goods manufac-
tured for the year:
Direct Materials Used $ 12,000
Manufacturing Overhead 21,000
Work-in-Process Inventory:
Beginning Balance 1,000
Ending Balance 5,000
Direct Labor 9,000
Finished Goods Inventory:
Beginning Balance 18,000
Ending Balance 4,000
SOLUTION
Beginning Work-in-Process Inventory $ 1,000
Direct Materials Used $ 12,000
Direct Labor 9,000
Manufacturing Overhead 21,000
Total Manufacturing Costs Incurred during the Year 42,000
Total Manufacturing Costs to Account For 43,000
Ending Work-in-Process Inventory (5,000)
Cost of Goods Manufactured $ 38,000
© 2018 Pearson Education, Inc. 18-12
S18-10Computing cost of goods sold, manufacturing company
Learning Objective 3
Use the following information to calculate the cost of goods sold for The Ellis Company for the
month of June:
Finished Goods Inventory:
Beginning Balance $ 30,000
Ending Balance 10,000
Cost of Goods Manufactured 165,000
SOLUTION
Beginning Finished Goods Inventory $ 30,000
Cost of Goods Manufactured 165,000
Cost of Goods Available for Sale 195,000
Ending Finished Goods Inventory (10,000)
Cost of Goods Sold $ 185,000
S18-11Matching business trends terminology
Learning Objective 4
Match the term with the correct definition.
1. A philosophy designed to integrate all organizational
areas in order to provide customers with superior prod-
ucts and services while meeting organizational objec-
tives. Requires improving quality and eliminating de-
fects and waste.
2. Use of the Internet for business functions such as sales
and customer service. Enables companies to reach cus-
tomers around the world.
3. Evaluating a company’s performance by its economic,
social, and environmental impact.
4. Software system that integrates all of a company’s
functions, departments, and data into a single system.
5. A system in which a company produces products just
when they are needed to satisfy needs. Suppliers deliv-
er materials when they are needed to begin production,
and finished units are completed at the right time for
delivery to customers.
a.ERP
b.JIT
c.E-commerce
d.TQM
e.Triple bottom
line
© 2018 Pearson Education, Inc. 18-13
S18-11, cont.
SOLUTION
1. d.
2. c.
3. e.
4. a.
5. b.
S18-12Calculating unit cost per service
Learning Objective 5
Marx and Tyler provides hair-cutting services in the local community. In February, the business cut
the hair of 190 clients, earned $4,800 in revenues, and incurred the following operating costs:
Hair Supplies Expense $ 950
Wages Expense 548
Utilities Expense 190
Depreciation Expense—Equipment 60
What was the cost of service to provide one haircut?
SOLUTION
Cost of one haircut = Total operating costs / Total number of haircuts
= [$950 + $548 + $190 + $60] / 190 haircuts
= $1,748 / 190 haircuts
= $9.20 per haircut
© 2018 Pearson Education, Inc. 18-14
Exercises
E18-13Comparing managerial accounting and financial accounting
Learning Objective 1
Match the following terms to the appropriate statement. Some terms may be used more than once,
and some terms may not be used at all.
Directing Managerial
Creditors Managers
Controlling Planning
Financial Stockholders
a. Accounting systems that must follow GAAP.
b. External parties for whom financial accounting reports are prepared.
c. The role managers play when they are monitoring day-to-day operations and keeping the compa-
ny on track.
d. Internal decision makers.
e. Accounting system that provides information on a company’s past performance.
f. Accounting system not restricted by GAAP.
g. The management function that involves choosing goals and deciding how to achieve them.
SOLUTION
a. Financial
b. Creditors and Stockholders
c. Controlling
d. Managers
e. Financial
f. Managerial
g. Planning
© 2018 Pearson Education, Inc. 18-15
