SOLUTIONS OF EXERCISES
CHAPTER 2 (2): MANAGERIAL ACCOUNTING AND COST CONCEPTS
EXERCISE 2–2 Classifying Manufacturing Costs [LO2–2]
The PC Works assembles custom computers from components supplied by various
manufacturers.
The company is very small and its assembly shop and retail sales store are housed in a
single facility in a Redmond, Washington, industrial park. Listed below are some of the
costs that are incurred at the company.
Required:
For each cost, indicate whether it would most likely be classified as direct labor, direct
materials, manufacturing overhead, selling, or an administrative cost.
1. The cost of a hard drive installed in a computer.
2. The cost of advertising in the Puget Sound Computer User newspaper.
3. The wages of employees who assemble computers from components.
4. Sales commissions paid to the company’s salespeople.
5. The wages of the assembly shop’s supervisor.
6. The wages of the company’s accountant.
7. Depreciation on equipment used to test assembled computers before release to
customers.
8. Rent on the facility in the industrial park.
SOLUTIONS
Exercise 2-2
1. The cost of a hard drive installed in a computer: direct materials.
2. The cost of advertising in the Puget Sound Computer User newspaper: selling.
3. The wages of employees who assemble computers from components: direct labor.
4. Sales commissions paid to the company’s salespeople: selling.
5. The wages of the assembly shop’s supervisor: manufacturing overhead.
6. The wages of the company’s accountant: administrative.
7. Depreciation on equipment used to test assembled computers before release to
customers: manufacturing overhead.
8. Rent on the facility in the industrial park: a combination of manufacturing overhead,
selling, and administrative. The rent would most likely be prorated on the basis of the
amount of space occupied by manufacturing, selling, and administrative operations.
EXERCISE 2–3 Classification of Costs as Product or Period Cost [LO2–3]
Suppose that you have been given a summer job as an intern at Issac Aircams, a company
that manufactures sophisticated spy cameras for remote-controlled military
reconnaissance aircraft. The company, which is privately owned, has approached a bank
for a loan to help it finance its growth.
The bank requires financial statements before approving such a loan. You have been
asked to help prepare the financial statements and were given the following list of costs:
1. Depreciation on salespersons’ cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods warehouse.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisors’ salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are not normally
boxed.)
9. Advertising costs.
10. Workers’ compensation insurance for factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Cost of leasing the corporate jet used by the company’s executives.
14. The cost of renting rooms at a Florida resort for the annual sales conference.
15. The cost of packaging the company’s product.
Required:
Classify the above costs as either product costs or period costs for the purpose of
preparing the financial statements for the bank.
SOLUTIONS
Exercise 2-3
Product Cost Period Cost
1. Depreciation on salespersons’ cars ........................ X
2. Rent on equipment used in the factory .................. X
3. Lubricants used for machine maintenance.............. X
Salaries of personnel who work in the finished
4. X
goods warehouse...............................................
Soap and paper towels used by factory workers at
5. X
the end of a shift ...............................................
6. Factory supervisors’ salaries.................................. X
7. Heat, water, and power consumed in the factory ... X
Materials used for boxing products for shipment
8. X
overseas (units are not normally boxed)..............
9. Advertising costs .................................................. X
Workers’ compensation insurance for factory
10. X
employees.........................................................
Depreciation on chairs and tables in the factory
11. X
lunchroom.........................................................
The wages of the receptionist in the administrative
12. X
offices...............................................................
Cost of leasing the corporate jet used by the
13. X
company's executives ........................................
The cost of renting rooms at a Florida resort for the
14. X
annual sales conference.....................................
15. The cost of packaging the company’s product........ X
CHAPTER 3 (5): COST- VOLUME- PROFIT RELATIONSHIPS
SOLUTIONS
The Foundational 15
1. The contribution margin per unit is calculated as follows:
Total contribution margin (a) $8,000
Total units sold (b) 1,000 units
Contribution margin per unit (a) ÷ (b) . $8.00 per unit
The contribution margin per unit ($8) can also be derived by calculating
the selling price per unit of $20 ($20,000 ÷ 1,000 units) and deducting
the variable expense per unit of $12 ($12,000 ÷ 1,000 units).
2. The contribution margin ratio is calculated as follows:
Total contribution margin (a) $8,000
Total sales (b) $20,000
Contribution margin ratio (a) ÷ (b)...... 40%
3. The variable expense ratio is calculated as follows:
Total variable expenses (a) $12,000
Total sales (b)........ $20,000
Variable expense ratio (a) ÷ (b) .... 60%
4. The increase in net operating is calculated as follows:
Contribution margin per unit (a) $8.00 per unit
Increase in unit sales (b) 1 unit
Increase in net operating income (a) × (b) $8.00
5. If sales decline to 900 units, the net operating would be computed as
follows:
Total Per Unit
Sales (900 units) $18,000 $20.00
Variable expenses 10,800 12.00
Contribution margin 7,200 $ 8.00
Fixed expenses......... 6,000
Net operating income $ 1,200
6. The new net operating income would be computed as follows:
Total Per Unit
Sales (900 units) $19,800 $22.00
Variable expenses..... 10,800 12.00
Contribution margin... 9,000 $10.00
Fixed expenses......... 6,000
Net operating income. $ 3,000
7. The new net operating income would be computed as follows:
Total Per Unit
Sales (1,250 units) $25,000 $20.00
Variable expenses 16,250 13.00
Contribution margin 8,750 $ 7.00
Fixed expenses....... 7,500
Net operating income $ 1,250
8. The equation method yields the break-even point in unit sales, Q, as follows:
Profit = Unit CM × Q - Fixed expenses
$0 = ($20 - $12) × Q - $6,000
$0 = ($8) × Q - $6,000
$8Q = $6,000
Q = $6,000 ÷ $8
Q = 750 units
9. The equation method yields the dollar sales to break-even as follows:
Profit = CM ratio × Sales - Fixed expenses
$0 = 0.40 × Sales - $6,000
0.40 × Sales = $6,000
Sales = $6,000 ÷ 0.40
Sales = $15,000
The dollar sales to break-even ($15,000) can also be computed by multiplying the selling
price per unit ($20) by the unit sales to breakeven (750 units).
10. The equation method yields the target profit as follows:
Profit = Unit CM × Q - Fixed expenses
$5,000 = ($20 - $12) × Q - $6,000
$5,000 = ($8) × Q - $6,000
$8Q = $11,000
Q = $11,000 ÷ $8
Q = 1,375 units
11. The margin of safety in dollars is calculated as follows:
Sales $20,000
Break-even sales (at 750 units) 15,000
Margin of safety (in dollars) $ 5,000
The margin of safety as a percentage of sales is calculated as follows:
Margin of safety (in dollars) (a) $5,000
Sales (b) $20,000
Margin of safety percentage (a) ÷ (b) ....... 25%
12. The degree of operating leverage is calculated as follows:
Contribution margin (a) $8,000
Net operating income (b) $2,000
Degree of operating leverage (a) ÷ (b) 4.0
13. A 5% increase in sales should result in a 20% increase in net operating income,
computed as follows:
Degree of operating leverage (a) 4.0
Percent increase in sales (b) 5%
Percent increase in net operating income (a) × (b) 20%
14. The degree of operating leverage is calculated as follows:
Contribution margin (a) $14,000
Net operating income (b) $2,000
Degree of operating leverage (a) ÷ (b) 7.0
15. A 5% increase in sales should result in 35% increase in net operating income,
computed as follows:
Degree of operating leverage (a) 7.0
Percent increase in sales (b) 5%
Percent increase in net operating income (a) × (b) 35%
CHAPTER 4 (8): MASTER BUDGETING
SOLUTIONS
1. The budgeted sales for July are computed as follows:
Unit sales (a) ............................. 10,000
Selling price per unit (b) ............. $70
Total sales (a) × (b) ................... $700,000
2. The expected cash collections for July are computed as follows:
July
June sales: $588,000 × 60%................... $352,800
July sales: $700,000 × 40%................... 280,000
Total cash collections................ $632,800
3. The accounts receivable balance at the end of July is:
July sales (a) ........... $700,000
Percent uncollected (b) 60%
Accounts receivable (a) × (b) $420,000
4. The required production for July is computed as follows:
July
Budgeted sales in units.................. 10,000
Add desired ending inventory*....... 2,400
Total needs................................... 12,400
Less beginning inventory**............ 2,000
Required production ...................... 10,400
*August sales of 12,000 units × 20% = 2,400 units.
**July sales of 10,000 units × 20% = 2,000 units.
5. The raw material purchases for July are computed as follows:
July
Required production in units of finished goods 10,400
Units of raw materials needed per unit of finished goods 5
Units of raw materials needed to meet production............ 52,000
Add desired units of ending raw materials inventory* ....... 6,100
Total units of raw materials needed................................. 58,100
Less units of beginning raw materials inventory**............ 5,200
Units of raw materials to be purchased............................ 52,900
*61,000 pounds × 10% = 6,100 pounds.
**52,000 pounds × 10% = 5,200 pounds.
6. The cost of raw material purchases for July is computed as follows:
Units of raw materials to be purchased (a) 52,900
Unit cost of raw materials (b)..... $2.00
Cost of raw materials to be purchased (a) × (b). $105,800
7. The estimated cash disbursements for materials purchases in July is
computed as follows:
July
June purchases:
$62,216
$88,880 × 70%......................
July purchases:
31,740
$105,800 × 30%....................
Total cash disbursements........... $93,956
8. The accounts payable balance at the end of July is:
July purchases (a)...................... $105,800
Percent unpaid (b) ..................... 70%
Accounts payable (a) × (b)......... $74,060
9. The estimated raw materials inventory balance at the end of July is computed as follows:
Ending raw materials inventory (pounds) (a)...... 6,100
Cost per pound (b)........................................... $2.00
Raw material inventory balance (a) × (b) .......... $12,200
10. The estimated direct labor cost for July is computed as follows:
July
Required production in units .............. 10,400
Direct labor hours per unit................. × 2.0
Total direct labor-hours needed (a)..... 20,800
Direct labor cost per hour (b)............. $15
Total direct labor cost (a) × (b).......... $312,000
11. The estimated unit product cost is computed as follows:
Quantity Cost Total
Direct materials.......... 5 pounds $2 per pound $10.00
Direct labor................ 2 hours $15 per hour 30.00
Manufacturing overhead ... 2 hours $10 per hour 20.00
Unit product cost........... $60.00
12. The estimated finished goods inventory balance at the end of July is
computed as follows:
Ending finished goods inventory in units (a) 2,400
Unit product cost (b) $60.00
Ending finished goods inventory (a) × (b) $144,000
13. The estimated cost of goods sold for July is computed as follows:
Unit sales (a) ................................................... 10,000
Unit product cost (b) ........................................ $60.00
Estimated cost of goods sold (a) × (b) .............. $600,000
The estimated gross margin for July is computed as follows:
Total sales (a) .................................................. $700,000
Cost of goods sold (b) ...................................... 600,000
Estimated gross margin (a) – (b)....................... $100,000
14. The estimated selling and administrative expense for July is computed as follows:
July
Budgeted unit sales................................... 10,000
Variable selling and administrative..............
× $1.80
expense per unit.....................................
Total variable expense............................... $18,000
Fixed selling and administrative expenses... 60,000
Total selling and administrative expenses ... $78,000
15. The estimated net operating income for July is computed as follows:
Gross margin (a).............................................. $100,000
Selling and administrative expenses (b) ............. 78,000
Net operating income (a) – (b).......................... $ 22,000
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