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Principles of Accounting, Volume 2: Managerial Accounting

Problem Set B

Principles of Accounting, Volume 2: Managerial AccountingProblem Set B
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PB 1.

LO 2.1Hicks Products produces and sells patio furniture through a national dealership network. They purchase raw materials from a variety of suppliers and all manufacturing, and assembly work is performed at their plant outside of Cleveland, Ohio. They recorded these costs for the year ending December 31, 2017. Construct an income statement for Hicks Products, to reflect their net income for 2017.

Sales revenue $3,100,000, Straight-line depreciation on office equipment 90,000, Advertising and marketing expense 625,000, Administrative salaries 136,000, Cost of goods sold 1,700,000, Rent on corporate headquarters 65,000.
PB 2.

LO 2.1Conner & Scheer, Attorneys at Law, provide a wide range of legal services for their clients. They employ several paralegal and administrative support staff in order to provide high-quality legal services at competitive prices. For the year ending December 31, 2017, the firm reported these income and expenses. Using this information, construct an income statement to reflect the firm’s net income for 2017.

Service revenue $2,250,000, Paralegal salaries 215,000, Supplies and materials 42,000, Utilities 26,000, Office rent 58,000, Administrative expenses 195,000, Attorney salaries 925,000.
PB 3.

LO 2.1Puzzles, Pranks & Games is a retail business selling children’s toys and games as well as a wide selection of jigsaw puzzles and accessories. They purchase their inventory from local and national wholesale suppliers. For the year ending December 31, 2017, they reported these revenues and expenses. Using this information, prepare an income statement for Puzzles, Pranks & Games for 2017.

Sales revenue $415,000, Rent 24,000, Advertising 13,000, Sales staff salaries 45,000, Merchandise inventory 210,000, Utilities 11,000, Supplies 4,000.
PB 4.

LO 2.2Pocket 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, or selling and administrative.6

  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
PB 5.

LO 2.2Using the costs listed in the previous problem, classify the costs as either product costs or period costs.

PB 6.

LO 2.3Gadell Farms produces venison sausage that is distributed to grocery stores throughout the Southeast. They have collected this shipping cost data:

Month, Tons Produced, Packaging Cost, respectively: January, 6, $1,700; February, 4, 2,000; March, 3, 2,100; April, 8, 2,700; May, 2, 1,602; June, 7, 1,900; July, 5, 2,300.
  1. Prepare a scatter graph of the shipping data. Plot cost on the vertical axis and tons produced on the horizontal axis. Is the relationship between packaging costs and tons produced approximately linear? Draw a straight line through the scatter graph.
  2. Using the high-low method, estimate the cost formula for Gadell Farms’ packaging costs.
  3. The least-squares regression method was used and the analysis resulted in this cost equation: Y = 1650 + 78.57x. Comment on the accuracy of your high-low method estimation.
  4. What would you estimate packaging costs to be if Gadell Farms shipped 10 tons in a single month? Use the cost formula you obtained in part B. Comment on how accurately this is reflected by the scatter graph you constructed.
  5. What factors other than number of tons produced do you think could affect Gadell Farm’s packaging expense? Explain.

Footnotes

  • 6Attribution: Modification of work by Roger Hermanson, James Edwards, and Michael Maher. Accounting Principles: A Business Perspective. 2011, CC BY. Source: Available at https://open.umn.edu/opentextbooks/textbooks/383.
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