CHAPTER 18MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES EYE OPENERS 1. Financial accounting and managerial 6. The process of running day-to-day accounting are different in several ways. operations, given assigned responsibilities, Financial accounting information is reported is directing. in statements that are useful to persons or 7. Controlling groups outside of a company. These 8. Management by exception involves statements objectively report the results of monitoring results of implemented plans and past operations at fixed periods and the comparing the expected results with actual financial condition of the business under results. The feedback allows management generally accepted accounting principles. to isolate significant variances for further Managerial accounting information uses investigation and possible remedial action. both subjective and objective information to 9. Cost meet the specific needs of management. The information can be reported periodically 10. Memory chips would be considered a direct or as needed by management and can be materials cost and, hence, would be a direct reported for the entire entity or for segments cost associated with each microcomputer. of the organization. 11. Direct materials cost, direct labor cost, and 2. a. A line department is directly involved in factory overhead cost the basic objectives of the organization, 12. Direct materials cost while a staff department provides 13. If the cost of wages paid to employees is not service, assistance, or advice to line a significant portion of the total product cost, departments or other staff departments. the wages cost would be classified as part b. (1) Sales Department of factory overhead cost. (2) Personnel Department 14. Prime costs are the combination of direct 3. a. The role of the controller is to provide materials and direct labor costs, while financial and accounting advice and conversion costs are the combination of assistance to management. direct labor costs and factory overhead costs. b. The controller has a staff responsibility. 15. Product costs are composed of three 4. The five basic phases of the management elements of manufacturing costs: direct process are planning, directing, controlling, materials cost, direct labor cost, and factory improving, and decision making. Planning is overhead cost. These costs are treated as the process of establishing financial assets until the product is sold. Product expectations for the future through the use costs are sometimes referred to as of planning documents. Directing is the inventoriable costs. Period costs are costs process of assigning responsibility and using that are used in generating revenue during data to guide the operations of the firm. the current period. They are recognized as Controlling is using information as feedback expenses on the current period’s income to correct operations. Improving is using statement. data to monitor and guide process improvement. Decision making is involved 16. The three inventory accounts for a with all of the previous four processes of manufacturing business are as follows: management. a. Finished goods, representing goods in 5. The strategic plan is used to guide the use the state in which they are to be sold. of business resources over long-range b. Work in process, representing goods in horizons. the process of manufacture. 1 c. Materials, representing goods in the purchases) – $60,000 (ending materials state in which they were acquired. inventory). 17. Finished goods, work in process, and 21. A merchandising business purchases materials merchandise (products) in a finished state 18. The cost of finished goods and the cost of for resale to customers. The cost of product work in process included the following: sold is called cost of merchandise sold. A a. Direct materials—the costs of materials manufacturer makes the product it sells that enter directly into the finished using direct materials, direct labor, and product. factory overhead. The cost of the product sold is generally called cost of goods sold. b. Direct labor—the wages of factory workers who convert materials into a 22. a. An automobile manufacturer might use finished product. managerial reports to evaluate how effi- ciently raw materials, such as steel, and c. Factory overhead—the remaining costs, direct labor, such as assembly line em- other than direct materials and direct ployee wages, are used in the manufac- labor, of operating a factory. turing process. 19. Cost of goods sold b. Other reports might help management 20. The cost of direct materials used in determine the appropriate cost of the fi- production is $270,000. $50,000 (beginning nal product or help determine if a new materials inventory) + $280,000 (materials automated paint robot is a good invest- ment. PRACTICE EXERCISES PE 18–1A Planning (c) Decision making (b) Controlling (a) PE 18–1B Directing (a) Controlling (b) Planning (c) PE 18–2A a. FO b. FO c. DL d. DM PE 18–2B a. DL b. FO c. DM d. FO PE 18–3A a. C b. B c. P d. C .. Period cost d...... Product cost PE 18–4B a..................PE 18–3B a........000 Cost of goods manufactured............................................................000 Cost of direct materials used in production............000 Total manufacturing costs........... $53..... 54..................................000 Less work in process inventory.. February 28............ $79............000 Less finished goods inventory...................... 53.......... B PE 18–4A a.. C c..............................000 Factory overhead.................000 Total manufacturing costs incurred during February........000 Cost of finished goods available for sale...........000 Cost of goods manufactured. February 28.... $25............. Finished goods inventory...000 ..........000 b. 18..................... Period cost c.. Period cost c...... 13..... Product cost b........... $51............... P d. Work in process inventory..... February 1................000 Direct labor..... 26.................... 27......... Product cost PE 18–5A a.... C b........... $64........... February 1........ $ 9.............. Period cost b....... $11.... Product cost d...000 Cost of goods sold..... . $ 60..........................000 b.. $214. August 31.................000 Less work in process inventory.................... $ 36..000 Cost of finished goods available for sale....... August 31...................... 90........................... 16............. Finished goods inventory. August 1..............000 Direct labor.............. 44............ Work in process inventory........ 198......................... $ 20..000 Factory overhead.....000 ........... August 1................... 20...000 Cost of goods manufactured................... $198......................................................000 Total manufacturing costs...000 Less finished goods inventory...... $214...........PE 18–5B a.........000 Total manufacturing costs incurred during August 194............. $234.........................000 Cost of goods manufactured....................000 Cost of goods sold............000 Cost of direct materials used in production.......... work in process inventory b. Factory overhead cost g. 18–5 a. Direct labor cost Ex. Direct materials cost Ex. Direct materials cost e. period d. Factory overhead cost h. 18–2 a. Product cost n. b. Factory overhead cost b. Product cost f. Product cost i. Product cost b. Period cost d. Factory overhead cost h. Factory overhead cost b. Product cost k. Direct materials cost i. Period cost p. Factory overhead cost j. Product cost m. Period cost l. Direct materials cost e. Factory overhead cost c. 18–1 a. improve g. Factory overhead cost g. h. Period cost q. Period cost e. decreases f. Direct materials cost c. Direct materials cost f. conversion c. Period cost j. j Ex. 18–3 a. Product cost c. i. Product cost g. Product cost h. cost object . Period cost Ex. Period cost o. Direct labor cost d. Direct labor cost f. Direct materials cost d. EXERCISES Ex. costs e. 18–4 a. . ...................000 Total............................ and power.. The factory overhead incorrectly includes the following items: sales salaries... product Ex.............. operational e.. $ 1... indirect j. These items should not be included as factory overhead........... plant depreciation d.... and corporate office depreciation.................. indirect i...000 Depreciation—plant and equipment....... The corrected report is as follows: SECOND HAND INC........................... 2.. 18–7 a......................... indirect Ex. 425....... promotional expenses.... $ 490...000 Direct labor..000 955..... 125...... prime c...... direct c... indirect k... 2010 Cost of direct materials used in production.. The maintenance salaries and indirect materials should be included as factory overhead.. light.. 18–8 1........................ 50...000 Factory overhead: Maintenance salaries.........000 Heat........ 110... indirect g...... indirect l... 460....000 Insurance and property taxes—plant. direct b..............000 ...... improving g...................... direct f.....Ex...... $ 75................... Manufacturing Costs For the Quarter Ended March 31....... materials inventory b... indirect e.........000 Indirect materials. indirect f................ 18–6 a............... 135.... indirect d..000 Supervisor salaries...870............................. direct h...... corporate office insurance.... ............. $ 10.........................................000 Materials.............. 10...000 72........... $154... 18....000 Work in process..............................000 Cost of goods sold..........000 Total operating expenses...............................000 Accounts receivable............................................................. $30......000 Gross profit................................................................Ex... 20—: Materials ($52..................000 Work in Process ($40...............000)...... $140....000 – $140.................................................... 92.......................................000).............. $ 64.......................000 Supplies........................000 + $84........... 28............... 20— Revenues........... 18–9 a................................ $ 48.......................................... $ 28....................... $250........................000 Administrative expenses......................................000 – $110..................000 Prepaid insurance........... 40.........000 Ex.............................................................................000 Operating expenses: Selling expenses........................................000 ...000 Inventories: Finished goods.......000 Total current assets..... $44...........................000 – $40.................000 b....... Inventory balances on March 31.... 18–10 LAWSON COMPANY Balance Sheet December 31......000 Finished Goods ($140............000 Net income...................000)......... 22....... 110..... LAE MANUFACTURING COMPANY Income Statement For the Month Ended March 31...... 26........... $12...............000 + $60................................. 2010 Current assets: Cash.. 000 ($2.........................................000) e..... $290....000 Less materials inventory...000 Direct labor............000) b.................. $168.000 Ex............000 Cost of goods manufactured. 18–13 Work in process inventory. 2010.........000 Ex.................. 80........000 ($140...............000 ($16...... January 1. 18–11 Materials inventory.....000 – $275... $128. 18–14 a....000 ($76...000) f.. $160..... $342....... $25....000 ($140..........000 – $12..000 + $60.......................000 ($300..000 Factory overhead.....000) Ex.. $ 60.. 42............. 158.000 Cost of materials available for use.000) c.......000 Total manufacturing costs incurred.... $132..000 + $14............ $40.. 2010..........Ex... $14..000) c...... $422..... $110.... $360............000 Add manufacturing costs incurred during January: Cost of direct materials used in production...000 – $70................000 – $20..........000 Cost of direct materials used in production.. 72.... 18–12 a.000 ($76...000 ($300.........................000 – $70..... $ 50................000 – $30.000 Less work in process inventory.000) ................. 362....... 2010....000) d. October 31. $210.. $170................000 – $30..000) e..000) f.... $6.....000 ($190......000 ($190...... 160.....000 ($360..000) d..000 – $260.... October 1... 2010...000 Total manufacturing costs........000 – $3..................... $13............ $16.......000) b..000 Add materials purchased during October.000 – $62.... January 31..000 ($300................. $ 91............... April 1...........................................200 .....200 Less work in process inventory..200 Cost of finished goods available for sale.............................. 2010................ April 30............. April 1.100 Total factory overhead........ 2010 Work in process inventory................200 b....... $829............000 Less materials inventory... and power............. 2010............................... $119.. $511........................................000 Purchases... 2010.................................. 2010.........000 Cost of goods sold......... F... 4....................... 80........................................................000 Direct labor......600 Machinery depreciation.................................................................... 336....................600 Property taxes. 5.......................... 18–15 a.......................000 Cost of goods manufactured.................... 752.........................200 Less finished goods inventory............................... $871............000 Direct materials: Materials inventory........ 20....... April 30........ 2010.................. 133.......Ex....................... 315.000 Supplies....... 7.. 154.............. $ 33............200 Total manufacturing costs incurred during April......200 Total manufacturing costs.. $738.. April 30.......000 Cost of direct materials used in production $357........................000 Heat...900 Miscellaneous cost..000 Cost of goods manufactured............... 105..... 2010..................................... Finished goods inventory...........000 Factory overhead: Indirect labor..... MILLS MANUFACTURING COMPANY Statement of Cost of Goods Manufactured For the Month Ended April 30. $175.....000 Cost of materials available for use....... light................... $724.............. April 1............. 738... 9. ............................................................ 117....... Finished goods inventory..000 Operating expenses: Selling expenses....................................................000 Net income.000 Cost of goods manufactured...................................000 c...000 Cost of goods sold................ $ 76.....................................................................................................................000 . $ 54............................500 Total operating expenses..................... $242.............................. $486.. March 31............ 50.............. $294...............................................................500 Administrative expenses.............................. $244................. Sales........... 40.000 Cost of goods sold. 240...................000 Less finished goods inventory....................................000 Gross profit.................. March 1............ 244....... 2010............... $242...Ex.................. 2010..... $125...........000 Cost of finished goods available for sale....... Gross profit................................... 18–16 a.......000 b.................................................... .....000 Factory overhead costs (indirect labor and factory depreciation)..................... $207................ $ 30....000 Direct materials cost............................. $360................. $ 96............ Sales........................ $111........ 15..000 Finished goods inventory.........000 186...........................000 b.................................................000 Less cost of goods manufactured...................000 ...000 Direct labor cost...................... Purchased materials..................................... $150.............................. $ 21.......000 e..............000 Less gross profit................ 150.. $207..........................000 c................ 18–17 a.........................000 Less: Direct materials...................000 Work in process inventory....... 90........ 210................ Total manufacturing costs............... $96.............................................................. $ 27.......... Cost of goods manufactured............000 d.....................................000 Cost of goods sold.....................000 Less cost of goods sold......................................................... $180............... Total manufacturing costs........................ 180...000 Less materials inventory..........................Ex......... X i. X z. 18–1A Product Costs Period Costs Direct Direct Factory Materials Labor Overhead Selling Administrative Cost Cost Cost Cost Expense Expense a. X q. X d. X n. X b. X c. X . X l. X u. X f. X o. X w. X y. X e. X k. X x. X r. X p. X j. X t. PROBLEMS Prob. X m. X g. X h. X v. X s. X k. X j. X m. X p. X w. X q. X e. X l. X s. X . X n. X d.Prob. X x. X h. X o. X f. X u. X c. X i. X b. X r. X g. 18–2A Product Costs Period Costs Direct Direct Factory Materials Labor Overhead Selling Administrative Cost Cost Cost Cost Expense Expense a. X v. X t. X u. X j. X q. 18–3A 1. X c. X t. X n. X r. X p. X v. X h. a night’s stay in a hotel room. 2. X e. X l. The most logical definition for the final cost object would be a guest. X m. X k. Guests consume services such as a meal. X w. X b. X d. X f. room service. X s. X i. X . etc. Cost Direct Indirect a.Prob. X o. a telephone call. X g. ..000 ($360..........000 ($594....000 ($132... $134...000 + $230.000 + $150.....000 – $654. 18–4A 1.000) f.... Grant Company a.... 230......... $252..... $246..... 2010 Work in process inventory......000 – $612..000 Total manufacturing costs incurred during December.....000 – $126......000 – $217..000 ($654...000 Cost of direct materials used in production........................ 660.000) b.... 114..000 – $226. 2010................. December 1.. 2010......000 + $114........000 Cost of goods manufactured..000 – $150. $67....... $594. $329.000 ($209..............000 Less work in process inventory......000 Direct materials: Materials inventory.............000 ($1...000) d..........000) 2..... $108.........000 + $618.......000 – $660....000 – $114.000 Direct labor.....000) c.. 2010.000) b................ $906.000 Total manufacturing costs. $217... $538...... 252..... 115.......... $612......... December 1..Prob.....000) McClellan Company a. $654.......... 2010...000) e....000 ($1.000) e..000 + $91...000) d..000 – $115... $102...........000 ($906..........000 – $138. $388....000 – $209...000 + $198.............000 Factory overhead. $618... $217.000) f.000 Purchases.. $332................ McCLELLAN COMPANY Statement of Cost of Goods Manufactured For the Month Ended December 31... 329...................000 + $294.........150....000 Less materials inventory..... $360........ December 31...000 ...000 ($538.000 Cost of materials available for use.................. December 31........020..000 ($660...................000 – $660.000 ($78.......000) c.000 ($102... .........................................000 Less finished goods inventory......Prob.....................000 Cost of goods manufactured.................. 18–4A Concluded 3.................... $1...............000 Net income. December 31..020........................ $ 360. 108................... December 1... $114...........................000 Operating expenses......... 134......... McCLELLAN COMPANY Income Statement For the Month Ended December 31................ 660......................000 Cost of finished goods available for sale........000 Cost of goods sold.......000 Cost of goods sold: Finished goods inventory. 654...........................000 Gross profit................... 2010........ 2010 Sales.................. 2010................ $768.......................................................000 ... $ 226................. ..........351..........000 Less materials inventory..... 380...... 36............................................... $1... 946.....000 Heat. 19........ 2010.000 Direct labor........................900 Miscellaneous cost—factory..000 Cost of direct materials used in production.........400 Depreciation expense—factory equipment..................000 Factory overhead: Indirect labor......320 Less work in process inventory..... January 1........................000 Cost of goods manufactured............................................320 Total manufacturing costs incurred during the year...000 Direct materials: Materials inventory.............................400 Property taxes—factory............................. 2010.......... 430..............Prob...... $ 405...................... 11.. $225.................................... light.......................................000 Cost of materials available for use............... and power—factory..320 ........... $648.. 148................... 2010. 9...320 Total manufacturing costs....... 2010 Work in process inventory...... December 31.......... 423. $ 971....800 Supplies—factory....... 6..................................... $368............................... 14...... 18–5A 1..... 2010..................700 Rent expense—factory................ December 31.....120 Total factory overhead........... DEUTSCH CORPORATION Statement of Cost of Goods Manufactured For the Year Ended December 31........................................... January 1..... $ 50.... 280............000 Purchases....... January 1................... $ 366......361................................... 631.....000 Cost of goods sold..............320 Cost of finished goods available for sale......... 2010......... $1....000 Sales salaries expense... 2010...........................000 Cost of good sold: Finished goods inventory... 27.................................. 981........... $ 998........... DEUTSCH CORPORATION Income Statement For the Year Ended December 31...... $190........Prob. $147..........................................800 Net income..................300 $198.... 243.800 Selling expenses: Advertising expense.............980.........................000 Total operating expenses..000 433............... 2010 Sales....320 Gross profit.......680 Operating expenses: Administrative expenses: Office salaries expense................... $1............880 ...............................000 Cost of goods manufactured... December 31........... 380.....................320 Less finished goods inventory...... 24..000 Property taxes—office building....... 971....... 18–5A Concluded 2..................500 Depreciation expense— office equipment. $ 390..................... X t. X z.Prob. X r. X d. X m. X x. X . X h. X q. X w. X l. X i. 18–1B Product Costs Period Costs Direct Direct Factory Materials Labor Overhead Selling Administrative Cost Cost Cost Cost Expense Expense a. X j. X s. X c. X v. X k. X o. X e. X f. X u. X p. X n. X b. X y. X g. X n. X u. X e. X i. X w. X c.Prob. X k. X q. X f. X r. X h. 18–2B Product Costs Period Costs Direct Direct Factory Materials Labor Overhead Selling Administrative Cost Cost Cost Cost Expense Expense a. X p. X x. X m. X j. X . X t. X d. X o. X b. X v. X g. X s. X l. X b. X n. X l. Cost Direct Indirect a. X i. X p. X . X u. X m. X q. X d. X c. X s. X o. 18–3B 1. X f. The reason is that the cost can be accumulated at the patient level for billing and insurance reimbursement purposes. X k. X r. X h.Prob. The most logical definition for the final cost object would be the patient. X j. 2. X t. X e. X g. ......000 Factory overhead.........000 ($595....... $96........000 ($118. $134.000) b.000 ($92....... $ 63..000 + $423........ 17..... 78.................. 150.000 – $356............000 Less materials inventory.........000 Total manufacturing costs incurred during December..... $59.000 Purchases...... $168..000 – $59...000 ($350.000) e...000 Total manufacturing costs... 2010. 18–4B 1....000) 2..........000) b.000 Direct materials: Materials inventory..000 + $205.. 2010 Work in process inventory....000) c.000) e.. $514...........000 ($158... McCain Company a... $437..... $ 35............... $423.... $54...........................000) f... $158........000) f......000 – $168.........000 ($448....... December 1.000 + $62.. 205......... McCAIN COMPANY Statement of Cost of Goods Manufactured For the Month Ended December 31....000) Buffet Company a.000 .000 ($451..000 ($150.000) c. $185...000) d....................000 + $21....000 ($396.000 Direct labor.......000 Cost of materials available for use.............000 ($353.000 – $133.000 Cost of direct materials used in production... 2010.000 ($158...... 2010...Prob.000 + $78. December 31.............000 Less work in process inventory. 451...... $17.......000) d....000 – $356...... $423...... December 1.......... December 31.....................000 – $91.000 – $353.000 ($168.000 Cost of goods manufactured...........000 + $35............000 – $45....000 – $38.. $43...000 – $437.. $158... $451............. 91. 2010.............000 – $62.....000 + $63............000 – $104...... $92..... ........000 Gross profit....... December 31.. 18–4B Concluded 3.000 Cost of goods sold: Finished goods inventory.................. $118....................................................... December 1...................000 Cost of finished goods available for sale. $595............ $ 96... McCAIN COMPANY Income Statement For the Month Ended December 31.000 Net income......000 Less finished goods inventory........ 104..... 2010.................................... 62............000 Cost of goods manufactured................................................................. $158.....000 Cost of goods sold.............. 423............... 2010 Sales...... $541................Prob.....000 Operating expenses.... 437.............................................. 2010...........................................................000 ... ......... 2010.500 Cost of direct materials used in production.....200 Depreciation expense—factory equipment... 3............... 48.........................................500 Factory overhead: Indirect labor..................... ROSETTA COMPANY Statement of Cost of Goods Manufactured For the Year Ended December 31.... 272.... 5..500 Property taxes—factory..................500 Purchases......700 Less work in process inventory...............500 Less materials inventory.. January 1......................... and power—factory...... December 31... 18–5B 1............... 4..... 95.... $154................150 Rent expense—factory.... $ 59.. 73..................................... $283....................200 Heat........000 Direct labor......... light........................500 Miscellaneous cost—factory.200 .....000 Cost of materials available for use................................... 2010..................Prob.......... 2010............500 Cost of goods manufactured................ 73........... 2010 Work in process inventory.... $ 84........... $ 18..250 Supplies—factory...................000 Direct materials: Materials inventory............................................ 11...........200 Total manufacturing costs incurred during the year................700 Total manufacturing costs............. $ 81. December 31............................... 2.................. 3.......................400 Total factory overhead..................... 2010.................. $356................................ January 1.. 143....... ..............500 Selling expenses: Advertising expense..000 Cost of good sold: Finished goods inventory..................... December 31................................500 Total operating expenses....500 Cost of goods manufactured...... $370........................000 157.......200 Cost of finished goods available for sale. 245....... 10..........................500 Depreciation expense— office equipment. 105............ 17................... $371............ 2010 Sales... $ 52.....500 $ 87...........300 ...........000 Cost of goods sold.....700 Less finished goods inventory.............300 Operating expenses: Administrative expenses: Office salaries expense..Prob.............................. 2010..........500 Sales salaries expense.............. $665................. 283....500 Property taxes—headquarters building............. 18–5B Concluded 2.. 77................... ROSETTA COMPANY Income Statement For the Year Ended December 31................................... $ 87....000 Net income.. $ 59......................700 Gross profit............. January 1........................................ 293.. $126.............. 2010. Therefore. scrap. the financial concerns of the stockholder begin to diverge significantly from the day-to-day operating decision needs of the manager. The stockholders’ interest in profit is related to increasing shareholder value. Clearly. equipment availability. These strategies can be measured by both financial and nonfinancial means. waste. As such. and processes in the delivery of value to customers. quality. the division manager may be evaluated on the basis of financial accounting profit. Thus. . product. Thus. the statement may be true at only very high levels in the organization. although it is appropriate for Gretchen to take advantage of Earnhart’s policy of allowing employees to purchase materials at cost. Activity 18–2 The objectives of managerial accounting and financial accounting are different. Operational performance measures will focus on cost. her computation of the cost of the lumber is unethical. delivery time. SPECIAL ACTIVITIES Activity 18–1 Although Gretchen may appear to have technically complied with company policy. This list is much broader and more detailed than the financial statement numbers provided to the stockholders. Lower in the organization. and efficiency. selecting the lowest price has opened the door for criticism. the divisional manager would be evaluated by central management in nearly the same way that central management is evaluated by shareholders. For example. In one sense. the vice president’s statement is very incomplete. inventory levels. it is not surprising to see a much broader set of objective and subjective measures used internally in the organization to guide strategy and operations. she should have had someone else (such as her supervisor) determine the amount that she owed for the lumber. the statement becomes very inaccurate the closer one gets to the actual operations. therefore. The Statement of Ethical Conduct for Practitioners of Management Accounting and Financial Management requires that Gretchen avoid all actual or apparent conflict-of- interest situations. Managers must increase long-term shareholder value by engaging in strategies that enhance people. the vice president might use these data to determine resources that will be required based on a projection of amount and type of work required for the next period. The administrator could use managerial information to keep costs commensurate with services provided and to plan for staffing and nursing levels. Managerial accounting information would also be used to determine whether the bank should lease additional processing capacity or purchase a new central processing unit. The vice president of the Information Systems Division can use managerial accounting information in a number of different ways. and thereby in making decisions with respect to the amount of service that is appropriate in each particular case. This information can be used to determine the cost of various services. the administrator needs to know the source of the cost overruns. The administrator can also use managerial accounting information to determine if their costs are being covered by these fixed payments. The hospital administrator can use managerial accounting information in a number of different ways. For example. a cancer wing with three patients)? . Additionally.. managerial accounting information could also be used to achieve better control over information systems activities by evaluating the costs of ongoing operations. One way is for cost planning and control. If not. Does the hospital allow too many procedures? Require longer bed days? Have resources that are underutilized (e. based on the demand for information services.Activity 18–3 1.g. 2. This information can guide the CEO in allocating future effort and resources. the CEO needs managerial accounting information on the profitability of various product families. The copy shop manager needs fairly simple managerial accounting information. The CEO of the food company will use managerial accounting information to support the control of the three divisions. profitability of different regions. These activities will have some direct costs. lease expenses. collating. such as one-sided copy. The manager will need to estimate the impact of both of these costs in order to price the various copy jobs to the public. 4. Managerial accounting information will include the cost details necessary to price the various copy shop services at a level to cover equipment costs. etc.Activity 18–3 Concluded 3. two- sided copy. the copy shop manager needs to know the costs of performing various copy tasks. The CEO also needs to support strategic decision making. and some indirect costs. and profit. Each of the three divisions will be subject to a number of financial goals. At the most basic level. In this regard. and profitability of various customer segments. such as copy machine time. binding. . such as paper. The first hour charge covers the costs of transit. The fringe benefits and overhead added to the hourly rate are both reasonable. The materials storage and handling charge is a normal charge of maintaining a parts inventory for the benefit of clients that need parts. There are other parts of the bill that should not be in dispute. Jane should argue that the whole hour should not be billed. The trip back to the shop was nonproductive time that should not have been directly charged to Jane but should be part of The Nerd Squad’s overhead cost to all customers. this cost would not be incurred. b. Jane’s bill has a number of points that should be considered. If Jane brought the computer to the shop. are identified below. Jane should be charged the overtime only if the decision for overtime was caused by or required by Jane.Activity 18–4 1. Therefore. so Jane should be responsible for the costs of making the visit. The overtime premium should not have been charged to Jane. Thus. There was a board for the previous customer. However. with the appropriate argument. Some of the points. The trip back to the shop resulted in a $65 labor charge. The additional charge for the first hour is also reasonable. Fringe benefits are just another form of compensation. It’s only random misfortune that Jane was the last client of the day and therefore received the overtime premium. then there would be no overtime premium. The fringe benefit attaches directly to the direct labor. In other words. including overhead in the hourly rate is the most logical method of covering these costs. the repair person had to go back to the shop. Jane requires a home visit. a. since only one was stocked. Add to this the fact that the overtime would not have been necessary without the trip back to the shop. the labor portion of the bill should only be $55 + $45 + $45 = $145. The hour is the result of stocking out of a circuit board on the truck. Jane should not be responsible for this mistake. The overhead must be covered by all customers. which are directly attributable to making a home visit. What if Jane was the first appointment in the morning? If so. and the conclusion is that Jane should not be directly charged for overtime. The overtime premium should be part of The Nerd Squad’s overhead charged to all clients equally. The circuit board should have been with the repair person. . The Maintenance Department manager needs to be able to plan the resources to be used by the department. The cost of ending inventory is required at least when financial statements are prepared. 3. the product cost is multiplied by the units left in inventory. The measures can also monitor improvement in rework and control the number of network hours charged by floor personnel. The division controller will likely require inventory valuation at the close of every month. New processes are frequently troublesome. The plant manager can use the scrap and rework measures to guide operational improvement toward the location that is experiencing the greatest level of scrap or rework. 4. in order to have a good understanding of the month-by-month earnings of the division. The measures can guide the plant manager to locations or products where significant waste is occurring. . This measure of waste is fairly common in fabrication-type facilities. Activity 18–5 1. The plant manager is going to use cost information on scrap and rework to identify the amount of waste occurring in the plant. The manager may also know that a new process will be brought online during the next year. 2. Cost Direct Materials Direct Labor Overhead Circuit board X Storage and handling X Straight-time labor X Fringe benefits* X Overhead X Vehicle depreciation and fuel X Overtime premium X *Could be considered overhead. To determine the appropriate cost. The Burger Barn manager will use managerial accounting information to accumulate the costs associated with different menu items. The division controller will provide the ending inventory information by using managerial accounting information in determining the cost of products.Activity 18–4 Concluded 2. direct and indirect. the Maintenance Department manager may know the repair histories of various machines. The planning process involves identifying the required resources to fulfill the department’s objective. so the manager will need to budget additional resources to accommodate introduction of the new technology. The costs. For example. These histories can be used to forecast the repairs anticipated during the next year. will help in determining the pricing strategy. .......................... X Property taxes...................... X Building heat and A/C. X Copy machine operator wages.............................. X Packaging (bags and boxes)... X Cashier salary.................. X ........... X Covers.......................... X Manager salary.. X Store depreciation........... X Brochures....................... X Lease cost of copy machine.................................... Have half the class do the pizza restaurant and the other the copy shop.................... X Ink........................................................ X Computer depreciation.................... X Advertising........Activity 18–6 Note to Instructors: Consider having the teams compete for the most examples.................................. X Coupon costs.... X Repair costs ................ Some examples that may be offered by the students are the following: Copy and Graphics Shop Direct Direct Selling Cost Materials Labor Overhead Expenses Paper..................... X Graphic designer wages... and compare results...................................................................................... .......... X Repair costs ................................. cups.............................. X Beverage. X Building heat and A/C.................... X Depreciation on equipment and fixtures.................................................................... X Delivery person wages............ X Disposable plates........................ utensils............. such as those above. X Power costs for ovens....................... X Advertising.. X To-go boxes......................... X Store depreciation..... X Handbills... X Nondisposable plates......... utensils........................... X In service businesses................. cups..................................... X Salad ingredients........ X Manager salary.........................Activity 18–6 Concluded Pizza Restaurant Direct Direct Selling Cost Materials Labor Overhead Expenses Ingredients...................................................................................... X Coupon costs................. X Cashier salary............ the distinction between direct labor and overhead will not always be clear.... X Cook wages............................ ................. X Property taxes.......