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Principles of Accounting, Volume 2: Managerial Accounting

Problem Set A

Principles of Accounting, Volume 2: Managerial AccountingProblem Set A
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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 7.2Lens Junction sells lenses for $45 each and is estimating sales of 15,000 units in January and 18,000 in February. Each lens consists of 2 pounds of silicon costing $2.50 per pound, 3 oz of solution costing $3 per ounce, and 30 minutes of direct labor at a labor rate of $18 per hour. Desired inventory levels are:

Beginning inventory for January 31, February 28, and March 31 respectively: Finished goods 4,500, 5,900, 5,000; Direct materials: silicon, 8,500, 9,100, 9,200; Direct materials: solution, 11,200, 12,000, 13,000.

Prepare a sales budget, production budget, direct materials budget for silicon and solution, and a direct labor budget.

PA 2.

LO 7.2The data shown were obtained from the financial records of Italian Exports, Inc., for March:

Estimated Sales, $560,000, Sales 567,923, Purchases 294,823, Ending Inventory of next month’s sales 10%, Administrative salaries 50,320, Marketing expense of estimated sales 5%, Sales commissions of estimated sales 2%, Rent expense 7,500, Depreciation expense 1,100, Utilities 2,500, Taxes on income (before taxes) 15%.

Sales are expected to increase each month by 10%. Prepare a budgeted income statement.

PA 3.

LO 7.2Echo Amplifiers prepared the following sales budget for the first quarter of 2018:

January, February, and March (respectively): Units, 1,000, 1,200, 1,500; Sales price $10, 10, 10; Budgeted sales, $10,000, 12,000, 15,000.

It also has this additional information related to its expenses:

Direct material per unit $1.50, Direct labor per unit 2, Variable manufacturing overhead per hour 0.50, Fixed manufacturing overhead per month 3,000, Sales commissions per unit 15, Sales salaries per month 5,000, Delivery expense per unit 0.50, Factory utilities per month 5,000, Administrative salaries per month 20,000, Marketing expenses per month 8,000, Insurance expense per month 11,000, Depreciation expense per month 9,000.

Prepare a sales and administrative expense budget for each month in the quarter ending March 31, 2018.

PA 4.

LO 7.2Prepare a budgeted income statement using the information shown.

Sales (units) 15,000, Sales price per unit $40, Uncollectible expense 1 percent of sales, Direct material per unit $2, Direct labor per unit (hours) .5, Direct labor rate per hour $20, Manufacturing overhead $15,000, Variable sales and administrative expenses per unit $2, Fixed sales and administrative expenses $20,000, Taxes (on income before taxes) 15 percent.
PA 5.

LO 7.2Spree Party Lights overhead expenses are:

Indirect material, pounds per unit 0.25, Indirect material cost per pound $2, Indirect labor hours 1, Indirect labor rate per hour $15, Variable maintenance per unit $.75, Variable utilities per unit $.20, Supervisor salaries $10,000, Maintenance salaries $9,000, Insurance $3,000, Depreciation $1,500.

Prepare a manufacturing overhead budget if the number of units to produce for January, February, and March are 2,500, 3,000, and 2,700, respectively.

PA 6.

LO 7.3Relevant data from the Poster Company’s operating budgets are:

Quarter 1 and Quarter 2 respectively: Sales $208,470, 211,539; Direct material purchases 115,295, 120,832; Direct labor 75,205, 73,299; Manufacturing overhead 25,300, 25,300; Selling and admin expenses 32,000, 32,500; Depreciation included in selling and admin 1,500, 1,000; Collections from customers 215,392, 240,155; Cash payments for purchases 114,295, 119,253.

Additional data: Capital assets were sold in January for $10,000 and $4,500 in May. Dividends of $4,500 were paid in February. The beginning cash balance was $60,359 and a required minimum cash balance is $59,000. Use this information to prepare a cash budget for the first two quarters of the year

PA 7.

LO 7.3Fill in the missing information from the following schedules:

Sales Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Expected sales (units) 7,500, 8,250, 8,750, 9.000, ?; Sales price per unit $45, 50, 50, 55; Total sales revenue $337,500, 412,500, 437,500, ?, ? Production Budget For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Q 1Year 2 (respectively): Expected Sales 7,500, 8,250, 8,750, 9,000, 8,000; plus Desired ending inventory 1,650, 1,750, 1,800, ?, 900; Total required units 9,150, 10,000, 10,550, 10,600, 8,900; minus Beginning Inventory 1,500, 1,650, 1,750, 1,800, 1,600; Equals required production 7,650, 8,350, 8800, ?, 7,300; Total ? Direct Materials Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Units to be produced 7,650, 8,350, 8,800, 8,800, 33,600; Times Direct material per unit 2, 2, 2, 2, 2; Total pounds needed for production 15,300, 16,700, 17,600, 17,600, 67,200; Add: desired ending inventory 4,175, 4,400, 4,400, 3,650, 3,650; Total material required 19,475, 21,100, 22,000, 21,250, 70,850; Less: beginning inventory 0, 4,175, 4,400, 4,400, –; Pounds of direct material purchase requirements 19,475, 16,925, 17,600, 16,850, 70,850; Cost per pound $1.50, 1.50, 1.50, 1.50, 1.50; Total cost of direct material purchase $29,213, 25,388, 26,400, 25,275, 106,275; Total ? $106,275. Direct Labor Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Units to be produced 7,650, 8,350, 8,800, 8,800, 33,600; Direct labor hours per unit 0.75, 0.75, 0.75, 0.75, 0.75; Total required direct labor hours 5,738, 6,263, 6,600, 6,600, 25,200; Labor cost per hour $25, 25, 25, 25, 25; Total direct labor cost $143,438, 156,563, 165,000, 165,000, 630,000.
PA 8.

LO 7.3Direct labor hours are estimated as 2,000 in Quarter 1; 2,100 in Quarter 2; 1,900 in Quarter 3; and 2,300 in Quarter 4. Prepare a manufacturing overhead budget using the information provided.

Indirect material per hour $1.00; Indirect labor per hour 1.25; Maintenance per hour 0.25; Utilities per hour 0.50; Supervisory salaries 17,000; Maintenance 5,000; Property taxes and insurance 6,000; Depreciation 3,500.
PA 9.

LO 7.3Fitbands’ estimated sales are:

October $131,982, November 195,723, December 249,283, January 124,298, February 124,284, March 124,373.

What are the balances in accounts receivable for January, February, and March if 65% of sales is collected in the month of sale, 25% is collected the month after the sale, and 10% is second month after the sale?

PA 10.

LO 7.3Sports Socks has a policy of always paying within the discount period and each of its suppliers provides a discount of 2% if paid within 10 days of purchase. Because of the purchase policy, 85% of its payments are made in the month of purchase and 15% are made the following month. The direct materials budget provides for purchases of $129,582 in November, $294,872 in December, $239,582 in January, and $234,837 in February. What is the balance in accounts payable for January 31, and February 28?

PA 11.

LO 7.4Prepare a flexible budgeted income for 120,000 units using the following information from a static budget for 100,000 units:

Sales price $90, Direct material per unit 30, Direct labor per unit 15, Variable manufacturing overhead per unit 13, Fixed manufacturing overhead 75,000, Variable sales and admin expenses per unit 3, Fixed sales and admin expenses 25,000, Taxes 30 percent of income before taxes.
PA 12.

LO 7.4Before the year began, the following static budget was developed for the estimated sales of 100,000. Sales are sluggish and management needs to revise its budget. Use this information to prepare a flexible budget for 80,000 and 90,000 units of sales.

Sales $3,500,000 less cost of goods sold: Direct material 900,000, Direct labor 1,000,000, Variable manufacturing overhead 80,000 equals 2,230,000 cost of goods sold Equals Gross profit 1,270,000 Less Variable sales and admin expenses 100,000 and Fixed sales and admin expenses 950,000 equals Income before taxes 220,000 Less Taxes 66,000 equals Net Income $154,000.
PA 13.

LO 7.4Caribbean Hammocks currently sells 75,000 units at $50 per unit. Its expenses are:

Direct material per unit $9, Direct labor per unit 10, Variable manufacturing overhead per unit 7, Variable sales and admin expenses per unit 2, Fixed manufacturing overhead 75,000, Fixed sales and admin expenses 850,000, Taxes 30 percent of income before taxes.

Management believes it can increase sales by 5,000 units for every $5 decrease in sales price. It also believes the additional sales will allow a decrease in direct material of $1 for each additional 5,000 units. Prepare a flexible budgeted income statement for 75,000-, 80,000-, and 85,000-unit sales.

PA 14.

LO 7.4Total Pop’s data show the following information:

January, February, March, April, May (respectively): Estimated sales (in units) 15,000, 14,500, 16,000, 15,500, 15,800; Sales price per unit $45, 45, 45, 45, 45; Direct labor per unit 3, 3, 2.25, 2, 2; Labor rate per hour $18, 18, 21, 21, 21.

New machinery will be added in April. This machine will reduce the labor required per unit and increase the labor rate for those employees qualified to operate the machinery. Finished goods inventory is required to be 20% of the next month’s requirements. Direct material requires 2 pounds per unit at a cost of $3 per pound. The ending inventory required for direct materials is 15% of the next month’s needs. In January, the beginning inventory is 3,000 units of finished goods and 4,470 pounds of material. Prepare a production budget, direct materials budget, and direct labor budget for the first quarter of the year.

PA 15.

LO 7.4Identify the document that contains the information listed in these lines from the budgeted balance sheet shown.

  1. Cash
  2. Accounts receivable
  3. Raw materials inventory
  4. Computers
  5. Accounts payable
Assets: Cash $2,500,000A; Accounts receivable 5,381,239 B; Raw materials inventory 3,149,183 C; Finished goods inventory 6,239,138 Equals Total current assets $17,269,560; Property, plant, and equipment: Computers $150,000 D, Machinery 9,745,231, less Accumulated Depreciation (5,385,733) equals Net Property, plant, and equipment 4,509,498 Equals Total assets $21,779,058; Liabilities: Accounts Payable $3,242,938 E; Notes payable 8,289,722 Equals Total liabilities $11,532,660; Stockholders’ equity: Common stock $5,000,000, Retained earnings 5,246,398 Equals Total stockholders’ equity $10,246,398; Total liabilities and stockholders’ equity $21,779,058.
PA 16.

LO 7.5Titanium Blades refines titanium for use in all brands of razor blades. It prepared a static budget for the sales of 5,000 units. These variances were observed:

Actual Results and Variances, respectively: Sales $150,000, $25,000 Favorable; Variable expenses 77,800, 12,800 Unfavorable; Fixed expenses 70,300, 300 Unfavorable; Net income (loss) 1,900, 11,900 Unfavorable.

Determine the static budget and use the information to prepare a flexible budget and analysis for the 6,000 units actually sold.

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