SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS

Questions

➢ What are the major differences between managerial and financial accounting?

➢ Identify the three elements of cost incurred in manufacturing a product and indicate the distinguishing characteristics of each.

➢ Why might a company claim that the total cost of employing a person is $15.30 per hour when the employee’s wage rate is $10.50 per hour? How should this difference be classified and why?

➢ Why are certain costs referred to as period costs? What are the major types of period costs incurred by a manufacturer?

➢ Explain why the income statement of a manufacturing company differs from the income statement of a merchandising company.

➢ What is the general content of a statement of cost of goods manufactured? What is its relationship to the income statement?

➢ Real world question Assume Domino’s Pizza is considering offering a new product—a 6-inch (15.24 cm) pizza. Why would it matter if Domino’s Pizza knows how much it costs to produce and deliver this 6-inch (15.24 cm) pizza?

➢ Real world question Why is it becoming more important that the managers of hospitals understand their product costs?
Exercises

Exercise A The following costs are incurred by an electrical appliance manufacturer. Classify these costs as direct materials, direct labor, manufacturing overhead, selling, or administrative.

1. President’s salary.
2. Cost of electrical wire used in making appliances.
3. Cost of janitorial supplies (the janitors work in the factory).
4. Wages of assembly-line workers.
5. Cost of promotional displays.
6. Assembly-line supervisor’s salary.
7. Cost accountant’s salary (the accountant works in the factory).
8. Cost of cleaner used to clean appliances when they are completed.
9. Cost of aluminum used for toasters.
10. Cost of market research survey.

Exercise B Classify the costs listed in the previous exercise as either product costs or period costs.

Exercise C Gore Company makes products for sporting events. The following data are for the year ended December 31:

Prepare a Cost of Goods Manufactured Statement and compute the cost of goods sold.

Problem A Total Block, Inc., is considering a new sunscreen packet that contains a skin wipe with sunscreen on it. These would be particularly useful for people who do not want to carry a bottle of sunscreen, according to Sunspot’s marketing manager. Classify the following costs of this new product as direct materials, direct labor, manufacturing overhead, selling, or administrative.

1. President’s salary.
2. Packages used to hold the skin wipes.
3. Cleaning materials used to clean the skin wipe packages.
4. Wages of workers who package the product.
5. Cost of advertising the product.
6. The salary of the supervisor of the workers who package the product.
7. Cost accountant’s salary (the accountant works in the factory).
8. Cost of a market research survey.
9. Sales commissions paid as a percent of sales.
10. Depreciation of administrative office building.

Problem B Classify the costs listed in the previous problem as either product costs or period costs.

Problem C Good Vibrations, Inc., produces videotapes of musical performances. A newly hired executive of the company has asked you to sort through the records and prepare a statement of the company’s cost of goods manufactured. You find the following data from records prepared by Good Vibrations, Inc., for the year ended December 31:

You also learn that beginning Finished Goods Inventory on January 1, was $20,000 and ending Finished Goods Inventory on December 31, was $5,000. Sales for the year were $400,000. Selling expenses were $50,000 and administrative expenses were $75,000.

1. Prepare a statement of cost of goods manufactured for Good Vibrations, Inc., for the year ended December 31.
2. Prepare an income statement for Good Vibrations, Inc., for the year ended December 31.

Alternate problems

Alternate problem A Pocket Umbrella, Inc., is considering producing a new type of umbrella. This new pocket-sized umbrella would fit into a coat pocket or purse. Classify the following costs of this new product as direct materials, direct labor, manufacturing overhead, selling, or administrative.

1. Cost of advertising the product.
2. Fabric used to make the umbrellas.
3. Maintenance of cutting machines used to cut the umbrella fabric so it will fit the umbrella frame.
4. Wages of workers who assemble the product.
5. President’s salary.
6. The salary of the supervisor of the people who assemble the product.
7. Wages of the product tester who stands in a shower to make sure the umbrellas do not leak.
8. Cost of market research survey.
9. Salary of the company’s sales managers.
10. Depreciation of administrative office building.

Alternate problem B Classify the costs listed in Alternate problem A as either product costs or period costs.

Alternate problem C Presley Manufacturing Company is a producer of music compact discs (CDs) and tapes. The following account balances are for the year ended December 31

1. Prepare a statement of cost of goods manufactured for Presley Manufacturing Company for the year.
2. Prepare an income statement for the year ended December 31.

Beyond the numbers—Critical thinking

Business decision case A Companies often do work on a cost-reimbursement basis. That is, Company B reimburses Company A for the cost of doing work for Company B. Suppose your company has a contract that calls for reimbursement of direct materials and direct labor, but not overhead. Following are costs that various organizations incur; they fall into three categories: direct materials (DM), direct labor (DL), or overhead (OH).

Glue used to attach labels to bottles containing a patented medicine.

Compressed air used in operating paint sprayers for Student Painters, a company that paints houses and apartments.

Insurance on a factory building and equipment.

A production department supervisor’s salary.

Rent on factory machinery.

Iron ore in a steel mill.

Oil, gasoline, and grease for forklift trucks in a manufacturing company’s warehouse.

Services of painters in building construction.

Cutting oils used in machining operations.

Cost of paper towels in a factory employees’ washroom.

Payroll taxes and fringe benefits related to direct labor.

The plant electricians’ salaries.

Crude oil to an oil refinery.

Copy editor’s salary in a book publishing company.

1. Classify each of these items as direct materials, direct labor, or overhead.
2. Assume your classifications could be challenged in a court case. Indicate to your attorneys which of your answers for part a might be successfully disputed by the opposing attorneys. In which answers are you completely confident?

Writing assignment B Refer to Presley Manufacturing company, Alt Problem C. Assume the newly hired executive is a whiz at marketing, but a person whose eyes glaze over at the sight of a number. The executive wants you to explain the financial results for the year in words. Essentially, assume the executive has not seen the financial statements prepared. What would you say to convey the message in the financial statements? Keep it short—less than 100 words.Using the Internet—A view of the real world

Visit the website for a high technology company, such as HP, Intel Corporation, or IBM, and locate its annual report. Review the annual report to gain a general understanding of the company’s primary business segments and products. Write a report addressing the following questions based on your research. What products or services are provided by the company? How does the financial information provided in the annual report (focus on the income statement) differ from financial information used for managerial accounting purposes? As a manager making business decisions within the company, what additional information would you need? (Remember that the income statement may be referred to using different terminology such as statement of earnings or statement of operations.)

Visit the following website for Wells Fargo (a financial institution) and locate its annual report:

http://www.wellsfargo.com

Review the annual report to gain a general understanding of the company’s primary business segments and products. Write a report addressing the following questions based on your research. What products or services are provided by the company? How does the financial information provided in the annual report (focus on the income statement) differ from financial information used for managerial accounting purposes? As a manager making business decisions within the company, what additional information would you need? (Remember that the income statement may be referred to using different terminology such as statement of earnings or statement of operations.)

Visit the following website for Home Depot (a retail organization) and locate its annual report:

http://www.homedepot.com

Review the annual report to gain a general understanding of the company’s primary business segments and products. Write a report addressing the following questions based on your research. What products or services are provided by the company? How does the financial information provided in the annual report (focus on the income statement) differ from financial information used for managerial accounting purposes? As a manager making business decisions within the company, what additional information would you need? (Remember that the income statement may be referred to using different terminology such as statement of earnings or statement of operations.)