Read
Problem 10-21 and discuss the differentiation between product versus general,
selling, and administrative costs by setting up financial statements from the
transactions in the problem.
Problem 10-21
Product versus general, selling, and administrative costs The following
transactions pertain to 2012, the first year operations of Hall Company. All
inventory was started and completed during 2012. Assume that all transactions
are cash transactions.
1. Acquired
$4,000 cash by issuing common stock.
2. Paid
$720 for materials used to produce inventory.
3. Paid
$1,800 to production workers.
4. Paid
$540 rental fee for production equipment.
5. Paid
$180 to administrative employees.
6. Paid
$144 rental fee for administrative office equipment.
7. Produced
300 units of inventory of which 200 units were sold at a price of $12 each.
Required
Prepare an income statement, balance sheet, and
statement of cash flows.
ATC 10-1 Business
Applications Case Financial versus managerial accounting The following
information was taken from the 2008 and 2009 Form 10-Ks for Dell, Inc.
FiscalYear
Ended January
30, 2009 February 1, 2008
Number of regular employees 76,500 82,700
Number of temporary employees 2,400 5,500
Revenues (in
millions) $61,101 $61,133
Properties owned or leased in the U.S. 7.4 million square feet 8.2 million square feet
Properties owned or leased outside the U.S. 9.4
million square feet 9.7 million square
feet
Total assets (in millions) $26,500 $27,561
Gross margin (in millions) $10,957 $11,671
Required
a. Explain
whether each line of information in the table above would best be described as
being primarily financial accounting or managerial accounting in nature.
b. Provide
some additional examples of managerial and financial accounting information
that could apply to Dell.
c. If
you analyze only the data you identified as financial in nature, does it appear
that Dell’s 2009 fiscal year was better or worse than its 2008 fiscal year?
Explain.
d. If
you analyze only the data you identified as managerial in nature, does it
appear that Dell’s 2009 fiscal year was better or worse than its 2008 fiscal
year? Explain.
Exercise
10-3 Classifying costs: product or G, S,
& A/asset or expense Required
Use the following format to classify each cost as a
product cost or a general, selling, and administrative (G, S, & A) cost.
Also indicate whether the cost would be recorded as an asset or an expense. The
first item is shown as an example.
Cost Category
Product/ G, S, & A
AAsset/ Expense
Research and development costs G, S, &
A Expense
Cost to set up manufacturing facility
Utilities used in factory
Cars for sales staff
Distributions to stockholders
General office supplies
Raw materials used in the manufacturing process
Cost to rent office equipment
Wages of production workers
Advertising costs
Promotion costs
Production supplies
Depreciation on administration building
Depreciation on manufacturing equipment
Exercise
10-6 Identifying product costs in a
manufacturing company
Tiffany
Crissler was talking to another accounting student, Bill Tyrone. Upon
discovering that the accounting department offered an upper-level course in
cost measurement, Tiffany remarked to Bill, “How difficult can it be? My
parents own a toy store. All you have to do to figure out how much something
costs is look at the invoice. Surely you don’t need an entire course to teach
you how to read an invoice.”
Required
a. Identify
the three main components of product cost for a manufacturing entity.
b. Explain
why measuring product cost for a manufacturing entity is more complex than
measuring product cost for a retail toy store.
c. Assume
that Tiffany’s parents rent a store for $7,500 per month. Different types of
toys use different amounts of store space. For example, displaying a bicycle
requires more store space than displaying a deck of cards. Also, some toys
remain on the shelf longer than others. Fad toys sell quickly, but traditional
toys sell more slowly. Under these circumstances, how would you determine the
amount of rental cost required to display each type of toy? Identify two other
costs incurred by a toy store that may be difficult to allocate to individual
toys.
Exercise
11-1 Identifying cost behavior
Deer
Valley Kitchen, a fast-food restaurant company, operates a chain of restaurants
across the nation. Each restaurant employs eight people; one is a manager who
is paid a salary plus a bonus equal to 3 percent of sales. Other employees, two
cooks, one dishwasher, and four waitresses, are paid salaries. Each manager is
budgeted $3,000 per month for advertising cost.
Required
Classify each of the following costs incurred by
Deer Valley Kitchen as fixed, variable, or mixed.
a. Cooks’
salaries at a particular location relative to the number of customers.
b. Cost
of supplies (cups, plates, spoons, etc.) relative to the number of customers.
c. Manager’s
compensation relative to the number of customers.
d. Waitresses’
salaries relative to the number of restaurants.
e. Advertising
costs relative to the number of customers for a particular restaurant.
f. Rental
costs relative to the number of restaurants.
Exercise
11-6 Fixed versus variable cost behavior
Lovvern
Trophies makes and sells trophies it distributes to little league ballplayers.
The company normally produces and sells between 8,000 and 14,000 trophies per
year. The following cost data apply to various activity levels.
Number of Trophies 8,000 10,000 12,000 14,000
Total costs incurred
Fixed $42,000
Variable 42,000
Total costs $84,000
Cost per unit
Fixed $ 5.25
Variable 5.25
Total cost per trophy $10.50
Required
a. Complete
the preceding table by filling in the missing amounts for the levels of
activity shown in the first row of the table. Round all cost per unit figures
to the nearest whole penny.
b. Explain
why the total cost per trophy decreases as the number of trophies increases.
Exercise
11-15 Break-even point Connor
Corporation sells products for $25 each that have variable costs of $13 per
unit. Connor’s
annual
fixed cost is $264,000.
Required
Determine the break-even point in units and dollars.
Complete the following problems from Chapter 10 & 11 and submit to the instructor by Day 7. These problems will be graded for accuracy. Problems: 10-20, 11-21, 11-25 (Part I), 11-28.
Problem 10-20 Effect
of product versus period costs on financial statements
Hoen Manufacturing Company experienced the following
accounting events during its first year of operation. With the exception of the
adjusting entries for depreciation, all transactions are cash transactions.
1. Acquired
$50,000 cash by issuing common stock.
2. Paid $8,000 for the materials used to make
products, all of which were started and completed during the year.
3. Paid
salaries of $4,400 to selling and administrative employees.
4. Paid
wages of $7,000 to production workers.
5. Paid
$9,600 for furniture used in selling and administrative offices. The furniture
was acquired
on January 1. It had a $1,600 estimated salvage
value and a four-year useful life.
6. Paid
$13,000 for manufacturing equipment. The equipment was acquired on January 1.
It
had a $1,000 estimated salvage value and a three-year
useful life.
7. Sold
inventory to customers for $25,000 that had cost $14,000 to make.
Required
Explain how these events would affect the balance
sheet, income statement, and statement of cash flows by recording them in a
horizontal financial statements model as indicated here. The first event is
recorded as an example. In the Cash Flow column, indicate whether the amounts
represent financing activities (FA), investing activities (IA), or operating
activities (OA).
Problem 11-21 Identifying cost behavior Required
Identify
the following costs as fixed or variable. Costs related to plane trips between
Seattle, Washington, and Orlando, Florida, follow. Pilots are paid on a per
trip basis.
a. Pilots’
salaries relative to the number of trips flown.
b. Depreciation
relative to the number of planes in service.
c. Cost
of refreshments relative to the number of passengers.
d. Pilots’
salaries relative to the number of passengers on a particular trip.
e. Cost
of a maintenance check relative to the number of passengers on a particular
trip.
f. Fuel
costs relative to the number of trips. First Federal Bank operates several
branch offices in grocery stores. Each branch employs a supervisor and two
tellers.
g. Tellers’
salaries relative to the number of tellers in a particular district.
h. Supplies
cost relative to the number of transactions processed in a particular branch.
i. Tellers’
salaries relative to the number of customers served at a particular branch.
j. Supervisors’
salaries relative to the number of branches operated.
k. Supervisors’
salaries relative to the number of customers served in a particular branch.
l. Facility
rental costs relative to the size of customer deposits. Costs related to
operating a fast-food restaurant follow.
m. Depreciation of equipment relative to the number
of restaurants.
n. Building
rental cost relative to the number of customers served in a particular
restaurant. o. Manager’s salary
of a particular restaurant relative to the number of employees.
p. Food
cost relative to the number of customers.
q. Utility
cost relative to the number of restaurants in operation.
r. Company
president’s salary relative to the number of restaurants in operation.
s. Land
costs relative to the number of hamburgers sold at a particular restaurant.
t.
Depreciation of equipment relative to the number of customers served at a
particular
restaurant.
Problem
11-25 Effects of operating
leverage on profitability
Webster
Training Services (WTS) provides instruction on the use of computer software
for the em- ployees of its corporate clients. It offers courses in the clients’
offices on the clients’ equipment. The only major expense WTS incurs is
instructor salaries; it pays instructors $5,000 per course taught. WTS recently
agreed to offer a course of instruction to the employees of Chambers
Incorporated at a price of $400 per student. Chambers estimated that 20
students would attend the course.
Base your answer on the preceding information.
Part 1: Required
a. Relative
to the number of students in a single course, is the cost of instruction a
fixed or a variable cost?
b. Determine
the profit, assuming that 20 students attend the course.
c. Determine
the profit, assuming a 10 percent increase in enrollment (i.e., enrollment
increases
to 22 students). What is the percentage change in
profitability?
d. Determine the profit, assuming a 10 percent
decrease in enrollment (i.e., enrollment de-
creases to 18 students). What is the percentage
change in profitability?
e. Explain
why a 10 percent shift in enrollment produces more than a 10 percent shift in
profitability. Use the term that identifies this phenomenon.
Problem
11-28 Determining the break-even
point and preparing a contribution margin income statement
Inman
Manufacturing Company makes a product that it sells for $60 per unit. The
company incurs variable manufacturing costs of $24 per unit. Variable selling
expenses are $12 per unit, annual fixed manufacturing costs are $189,000, and
fixed selling and administrative costs are $141,000 per year.
Required
Determine the break-even point in units and dollars
using the following approaches.
a. Equation
method.
b. Contribution margin per unit.
c. Contribution
margin ratio.
d. Confirm
your results by preparing a contribution margin income statement for the break
even sales volume.
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