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Principles of Accounting, Volume 2: Managerial Accounting

Problem Set A

Principles of Accounting, Volume 2: Managerial AccountingProblem Set A
Table of contents
  1. Preface
  2. 1 Accounting as a Tool for Managers
    1. Why It Matters
    2. 1.1 Define Managerial Accounting and Identify the Three Primary Responsibilities of Management
    3. 1.2 Distinguish between Financial and Managerial Accounting
    4. 1.3 Explain the Primary Roles and Skills Required of Managerial Accountants
    5. 1.4 Describe the Role of the Institute of Management Accountants and the Use of Ethical Standards
    6. 1.5 Describe Trends in Today’s Business Environment and Analyze Their Impact on Accounting
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Thought Provokers
  3. 2 Building Blocks of Managerial Accounting
    1. Why It Matters
    2. 2.1 Distinguish between Merchandising, Manufacturing, and Service Organizations
    3. 2.2 Identify and Apply Basic Cost Behavior Patterns
    4. 2.3 Estimate a Variable and Fixed Cost Equation and Predict Future Costs
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Cost-Volume-Profit Analysis
    1. Why It Matters
    2. 3.1 Explain Contribution Margin and Calculate Contribution Margin per Unit, Contribution Margin Ratio, and Total Contribution Margin
    3. 3.2 Calculate a Break-Even Point in Units and Dollars
    4. 3.3 Perform Break-Even Sensitivity Analysis for a Single Product Under Changing Business Situations
    5. 3.4 Perform Break-Even Sensitivity Analysis for a Multi-Product Environment Under Changing Business Situations
    6. 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  5. 4 Job Order Costing
    1. Why It Matters
    2. 4.1 Distinguish between Job Order Costing and Process Costing
    3. 4.2 Describe and Identify the Three Major Components of Product Costs under Job Order Costing
    4. 4.3 Use the Job Order Costing Method to Trace the Flow of Product Costs through the Inventory Accounts
    5. 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production
    6. 4.5 Compute the Cost of a Job Using Job Order Costing
    7. 4.6 Determine and Dispose of Underapplied or Overapplied Overhead
    8. 4.7 Prepare Journal Entries for a Job Order Cost System
    9. 4.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment
    10. Key Terms
    11. Summary
    12. Multiple Choice
    13. Questions
    14. Exercise Set A
    15. Exercise Set B
    16. Problem Set A
    17. Problem Set B
    18. Thought Provokers
  6. 5 Process Costing
    1. Why It Matters
    2. 5.1 Compare and Contrast Job Order Costing and Process Costing
    3. 5.2 Explain and Identify Conversion Costs
    4. 5.3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage
    5. 5.4 Explain and Compute Equivalent Units and Total Cost of Production in a Subsequent Processing Stage
    6. 5.5 Prepare Journal Entries for a Process Costing System
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  7. 6 Activity-Based, Variable, and Absorption Costing
    1. Why It Matters
    2. 6.1 Calculate Predetermined Overhead and Total Cost under the Traditional Allocation Method
    3. 6.2 Describe and Identify Cost Drivers
    4. 6.3 Calculate Activity-Based Product Costs
    5. 6.4 Compare and Contrast Traditional and Activity-Based Costing Systems
    6. 6.5 Compare and Contrast Variable and Absorption Costing
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  8. 7 Budgeting
    1. Why It Matters
    2. 7.1 Describe How and Why Managers Use Budgets
    3. 7.2 Prepare Operating Budgets
    4. 7.3 Prepare Financial Budgets
    5. 7.4 Prepare Flexible Budgets
    6. 7.5 Explain How Budgets Are Used to Evaluate Goals
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Standard Costs and Variances
    1. Why It Matters
    2. 8.1 Explain How and Why a Standard Cost Is Developed
    3. 8.2 Compute and Evaluate Materials Variances
    4. 8.3 Compute and Evaluate Labor Variances
    5. 8.4 Compute and Evaluate Overhead Variances
    6. 8.5 Describe How Companies Use Variance Analysis
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  10. 9 Responsibility Accounting and Decentralization
    1. Why It Matters
    2. 9.1 Differentiate between Centralized and Decentralized Management
    3. 9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments
    4. 9.3 Describe the Types of Responsibility Centers
    5. 9.4 Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  11. 10 Short-Term Decision Making
    1. Why It Matters
    2. 10.1 Identify Relevant Information for Decision-Making
    3. 10.2 Evaluate and Determine Whether to Accept or Reject a Special Order
    4. 10.3 Evaluate and Determine Whether to Make or Buy a Component
    5. 10.4 Evaluate and Determine Whether to Keep or Discontinue a Segment or Product
    6. 10.5 Evaluate and Determine Whether to Sell or Process Further
    7. 10.6 Evaluate and Determine How to Make Decisions When Resources Are Constrained
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  12. 11 Capital Budgeting Decisions
    1. Why It Matters
    2. 11.1 Describe Capital Investment Decisions and How They Are Applied
    3. 11.2 Evaluate the Payback and Accounting Rate of Return in Capital Investment Decisions
    4. 11.3 Explain the Time Value of Money and Calculate Present and Future Values of Lump Sums and Annuities
    5. 11.4 Use Discounted Cash Flow Models to Make Capital Investment Decisions
    6. 11.5 Compare and Contrast Non-Time Value-Based Methods and Time Value-Based Methods in Capital Investment Decisions
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Balanced Scorecard and Other Performance Measures
    1. Why It Matters
    2. 12.1 Explain the Importance of Performance Measurement
    3. 12.2 Identify the Characteristics of an Effective Performance Measure
    4. 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added
    5. 12.4 Describe the Balanced Scorecard and Explain How It Is Used
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  14. 13 Sustainability Reporting
    1. Why It Matters
    2. 13.1 Describe Sustainability and the Way It Creates Business Value
    3. 13.2 Identify User Needs for Information
    4. 13.3 Discuss Examples of Major Sustainability Initiatives
    5. 13.4 Future Issues in Sustainability
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Thought Provokers
  15. A | Financial Statement Analysis
  16. B | Time Value of Money
  17. C | Suggested Resources
  18. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
  19. Index
PA 1.

LO 6.1Colonels uses a traditional cost system and estimates next year’s overhead will be $480,000, with the estimated cost driver of 240,000 direct labor hours. It manufactures three products and estimates these costs:

Chart showing the figures for Small, Medium, and Large, respectively. Units: 32,000, 12,000, 4,000. Direct Materials Cost: $5, $8, $9. Direct Labor Hours per Unit: 4, 6, 10.

If the labor rate is $25 per hour, what is the per-unit cost of each product?

PA 2.

LO 6.1Five Card Draw manufactures and sells 24,000 units of Diamonds, which retails for $180, and 27,000 units of Clubs, which retails for $190. The direct materials cost is $25 per unit of Diamonds and $30 per unit of Clubs. The labor rate is $25 per hour, and Five Card Draw estimated 180,000 direct labor hours. It takes 3 direct labor hours to manufacture Diamonds and 4 hours for Clubs. The total estimated overhead is $720,000. Five Card Draw uses the traditional allocation method based on direct labor hours.

  1. What is the gross profit per unit for Diamonds and Clubs?
  2. What is the total gross profit for the year?
PA 3.

LO 6.2A local picnic table manufacturer has budgeted these overhead costs:

Purchasing $70,000, Handling materials 33,333, Machine setups 70,500, Inspections 25,500, and Utilities 45,000.

They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

Cost Drivers are: Orders, Material moves, Machine setups, Number of inspections, and Square feet. Activities are, respectively: 700, 1,334, 15,000, 5,000, 180,000.

Recent success has yielded an order for 1,000 tables. Assume direct labor costs per hour of $20. Determine how much the job would cost given the following activities:

Order (units) 1,000; Direct materials 112,700; Machine hours 15,200; Direct labor hours 5,300; Number of purchase orders 60; Number of material moves 800; Number of machine setups 100; Number of inspections 450; Number of square feet occupied 8,000.
PA 4.

LO 6.2Explain how each activity in this list can be associated with the corresponding unit or batch level provided.

  1. Assembling products: unit level
  2. Issuing raw materials: batch level
  3. Machine setup: batch level
  4. Inspection: unit level
  5. Loading the labeling machine: batch level
  6. Equipment maintenance: batch level
  7. Printing a banner: unit level
  8. Moving material: batch level
  9. Ordering a part: batch level
PA 5.

LO 6.3Medical Tape makes two products: Generic and Label. It estimates it will produce 423,694 units of Generic and 652,200 of Label, and the overhead for each of its cost pools is as follows:

Cost Pool and Estimated Overhead are: Material receipts 133,000; Machine setups 300,000; Assembly 700,000; Inspection 250,000; Total 1,383,000.

It has also estimated the activities for each cost driver as follows:

Driver, Generic and Label, respectively. Inspections, 400, 600. Requisitions, 450, 950. Parts, 300, 400. Setups, 250, 350.

How much is the overhead allocated to each unit of Generic and Label?

PA 6.

LO 6.3Box Springs, Inc., makes two sizes of box springs: twin and double. The direct material for the twin is $25 per unit and $40 is used in direct labor, while the direct material for the double is $40 per unit, and the labor cost is $50 per unit. Box Springs estimates it will make 5,000 twins and 9,000 doubles in the next year. It estimates the overhead for each cost pool and cost driver activities as follows:

Activity Cost Pools, Driver, Estimated Overhead, Use per Twin, Use per Double, respectively. Framing, Square feet of pine, 210,000, 5,000, 2,000. Padding, Square feet of quilting, 220,000, 120,000, 100,000. Filling, Square feet of filling, 320,000, 500,000, 300,000. Labeling, Number of boxes, 240,000, 800,000, 400,000. Inspection, Number of inspections, 170,000, 12,000, 5,000.

How much does each unit cost to manufacture?

PA 7.

LO 6.3Please use the information from this problem for these calculations. After grouping cost pools and estimating overhead and activities, Box Springs determined these rates:

Purchasing (per order) $55. Utilities (per square foot) 3. Machine setups (per machine hour) 8. Supervision (per direct labor hour) 5.

It estimates there will be five orders in the next year, and those jobs will involve:

Orders 5. Square feet 200. Machine hours 50. Direct labor hours 35. Direct materials 1,500. Direct labor rate $25.

What is the total cost of the jobs?

PA 8.

LO 6.4A company has traditionally allocated its overhead based on machine hours but had collected this information to change to activity-based costing:

Estimated Activity by Activity Center for Product 1, Product 2, and Estimated Cost, respectively. Machine setups, 15, 45, $10,800. Assembly parts, 3,000 3,000, 144,600. Packaging pieces, 500, 400, 55,350. Machine hour per unit, 4, 3. Production volume 750, 1,500
  1. How much overhead would be allocated to each unit under the traditional allocation method?
  2. How much overhead would be allocated to each unit under activity-based costing?
PA 9.

LO 6.4Carlton’s Kitchens makes two types of pasta makers: Strands and Shapes. The company expects to manufacture 70,000 units of Strands, which has a per-unit direct material cost of $10 and a per-unit direct labor cost of $60. It also expects to manufacture 30,000 units of Shapes, which has a per-unit material cost of $15 and a per-unit direct labor cost of $40. It is estimated that Strands will use 140,000 machine hours and Shapes will require 60,000 machine hours. Historically, the company has used the traditional allocation method and applied overhead at a rate of $21 per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is shown:

Machine setups $900,000; Machine processing 4,000,000; Material requisitions 100,000; Total overhead $4,190,000.

The cost driver for each cost pool and its expected activity is shown:

For Strands, Shapes, and Total, respectively. Machine setups 100, 200, 300. Machine hours 140,000, 60,000, 200,000. Parts requisitions 80, 120, 200.
  1. What is the per-unit cost for each product under the traditional allocation method?
  2. What is the per-unit cost for each product under ABC costing?
  3. Compared to ABC costing, was each product’s overhead under- or overapplied?
  4. How much was overhead under- or overapplied for each product?
PA 10.

LO 6.4Carlton’s Kitchen’s three cost pools and overhead estimates are as follows:

Activity Cost Pools, Cost Driver, Estimated Overhead, Use per Product A, and Use per Product B, respectively. Machine setups, Setups, $128,000, 5,000, 3,000. Assembly, Number of parts, 105,000, 25,000, 45,000. Machine maintenance, Machine hours, 150,000, 12,500, 37,500.

Compare the overhead allocation using:

  1. The traditional allocation method
  2. The activity-based costing method

(Hint: the traditional method uses machine hours as the allocation base.)

PA 11.

LO 6.4Lampierre makes brass and gold frames. The company computed this information to decide whether to switch from the traditional allocation method to ABC:

Brass and Gold, respectively. Units planned, 750, 125. Material moves, 400, 100. Machine setups, 400, 600. Direct labor hours, 700, 1,200.

The estimated overhead for the material cost pool is estimated as $12,500, and the estimate for the machine setup pool is $35,000. Calculate the allocation rate per unit of brass and per unit of gold using:

  1. The traditional allocation method
  2. The activity-based costing method
PA 12.

LO 6.4Portable Seats makes two chairs: folding and wooden. This information was obtained to review the decision to consider ABC:

Folding Chairs, Wooden Chairs, and Total Cost, respectively. Material requisitions, 500 pounds, 200 pounds, $55,000. Inspections, 150, 50, $25,000. Labor hours, 2,600, 2,400

Compute the overhead assigned to each product under:

  1. The traditional allocation method
  2. The activity-based costing method
PA 13.

LO 6.5Grainger Company produces only one product and sells that product for $100 per unit. Cost information for the product is:

Direct Material $15 per Unit
Direct Labor $25 per Unit
Variable Overhead $5 per Unit
Fixed Overhead $34,000

Selling expenses are $4 per unit and are all variable. Administrative expenses of $20,000 are all fixed. Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.

  1. Compute net income under
    1. absorption costing
    2. variable costing
  2. Reconcile the difference between the income under absorption and variable costing.
PA 14.

LO 6.5Summarized data for Walrus Co. for its first year of operations are:

Sales $5,000,000. Production costs (120,000 units): Direct material 1,800,000, Direct labor 1,500,000. Manufacturing overhead: variable 900,000, fixed 300,000. Selling and administrative expenses: variable 260,000, fixed 440,000.
  1. Prepare an income statement under absorption costing
  2. Prepare an income statement under variable costing
PA 15.

LO 6.5Happy Trails has this information for its manufacturing:

Direct Materials $15; Direct labor $15; Variable manufacturing overhead $3; Fixed manufacturing overhead $25; Units produced 27,000; Units sold 19,000.

Its income statement under absorption costing is:

Sales $1,900,500. Less Cost of Goods Sold: Beginning Inventory 0 plus Cost of Goods Manufactured 1,566,000 equals Cost of Goods Available for Sale 1,566,000 less Ending Inventory 464,000 equals Cost of Goods Sold 1,102,000. Equals Gross Profit 798,500. Less Sales and Admin Expenses: Variable 133,000 and Fixed 300,000, Total Sales and Admin Expenses 433,000. Equals Net Operating Income $365,500.

Prepare an income statement with variable costing and a reconciliation statement between both methods.

PA 16.

LO 6.5Appliance Apps has the following costs associated with its production and sale of devices that allow appliances to receive commands from cell phones.

Beginning inventory 0. Units produced 25,000. Units sold 20,000. Selling price per unit $145. Variable sales and administration expenses $5. Fixed sales and administration expenses $975,000. Direct material cost per unit $25. Direct labor cost per unit $11. Variable manufacturing overhead cost per unit $3. Fixed manufacturing Overhead cost per month $980,000.

Prepare an income statement under both the absorption and variable costing methods along with a reconciliation between the two statements.

PA 17.

LO 6.5This information was collected for the first year of manufacturing for Appliance Apps:

Direct materials per unit $2.50; Direct labor per unit $1.50; Variable manufacturing overhead per unit $0.25; Variable selling and administration expenses $1.75; Units produced 40,000; Units sold 35,000; Sales price $12; Fixed manufacturing expenses $140,000; Fixed selling and administration expenses $20,000.

Prepare an income statement under variable costing, and prepare a reconciliation to the income under the absorption method.

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