Managerial Accounting

Practice 1

The following information refers to Blue Stores Company for the year 2019.
Prepare a Schedule of Cost of Goods Manufactured, a Schedule of Cost of Goods Sold
and an Income Statement for the year.
* The company closes overapplied or underapplied overhead into Cost of Goods Sold.

Work in Process Inventory January 1st $8,100

Income taxes 3,660
Administrative expenses (Salaries and 12,000
Services of administrative offices)
Purchases of raw material 40,000
Direct labor cost incurred 79,000
Selling expenses (Salaries of sales 9,700
personnel and Publicity)
Interest expense 1,500
Returns of raw material to supplier 1,000
Utilities for factory 8,400
Applied manufacturing overhead 58,000
Raw Material Inventory December 31st 11,000
Insurance on factory and equipment 3,600
Net Sales 205,800
Raw Material Inventory January 1st $10,100
Rent on factory building 3,100
Finished Goods Inventory December 31st 15,400
Indirect Labor 29,000
Finished Goods Inventory January 1st 14,000
Indirect Material 4,900
Work in Process Inventory December 31st 8,300
Depreciation on factory equipment 5,900

1
Practice 2

The following data pertains to Greenwood Company. Prepare a Schedule of Cost of

Goods Manufactured, a Schedule of Cost of Goods Sold and an Income Statement for
the year 2018.
* The company closes overapplied or underapplied overhead into Cost of Goods Sold.

Depreciation on factory building and machinery $120,000

Interest expense 9,000
Selling expenses (Commissions and Publicity) 90,000
Applied manufacturing overhead 577,500
Purchases of raw material 736,000
Finished Goods Inventory January 1st 35,000
Insurance on factory and equipment 40,000
Finished Goods Inventory December 31st 40,000
Administrative expenses (Salaries, Rent, Services) 170,000
Income taxes 19,800
Returns of raw material to supplier 5,000
Indirect Material 45,000
Direct labor 474,000
Net Sales 2,105,000
Work in Process Inventory January 1st 0
Raw Material Inventory December 31st 59,000
Utilities for factory 185,000
Indirect Labor 150,000
Raw Material Inventory January 1st 89,000
Work in Process Inventory December 31st 40,000
Rent on factory building 40,000

2
Practice 3

Orbit Company obtained the following information during March 2018.

Prepare a Schedule of Cost of Goods Manufactured, a Schedule of Cost of Goods Sold,
and an Income Statement for the month.
* The company closes overapplied or underapplied overhead into Cost of Goods Sold.

Work in Process Inventory March 31st $364,000

Raw Material Inventory March 1st 30,000
Raw Material Inventory March 31st 51,000
Rent on factory building 22,000
Net Sales 200,000
Depreciation on machinery and factory building 8,000
Returns of raw material to supplier 4,000
Insurance on factory and equipment 8,000
Finished Goods Inventory March 31st 105,200
Work in Process Inventory March 1st 151,200
Purchases of raw material 256,000
Indirect Labor 14,000
Administrative expenses (Salaries, Telephone 35,000
bill, Rent)
Indirect Material 500
Direct labor 90,200
Electricity and water for factory 30,000
Interest expense 3,000
Selling expenses (Marketing and Commissions) 15,600

Applied manufacturing overhead 83,000

Finished Goods Inventory March 1st 10,000
Income taxes 15,210

3
Practice 4

The following data refers to Gore Solutions Company for 2019.

Required:
a) Schedule of Cost of Goods Manufactured
b) Schedule of Cost of Goods Sold
c) Income Statement

* The company closes overapplied or underapplied overhead into Cost of Goods Sold.

Income taxes $29,700

Utilities for factory 105,000
Rent on factory building 90,000
Selling expenses (Salaries of sales personnel, 135,000
Advertising)
Finished Goods Inventory Jan 1st 52,500
Depreciation on factory building 187,500
Returns of raw material to supplier 0
Administrative expenses (Salaries of 283,500
administrative personnel, Rent, Services)
Insurance on factory and machinery 60,000
Raw Material Inventory Dec 31st 88,500
Net Sales 3,157,500
Indirect Labor 225,000
Direct labor 711,000
Indirect Material 67,500
Work in Process Inventory Jan 1st 0
Raw Material Inventory Jan 1st 133,500
Finished Goods Inventory Dec 31st 60,000
Purchases of raw material 1,096,500
Work in Process Inventory Dec 31st 60,000
Applied manufacturing overhead 640,800
Interest expense 120,000

4
Practice 5. Budgeting

Saboc Manufacturing, Inc. produces a 55 litre galvanised garbage bin. Management is

preparing the budgets for the last quarter of 2017.

Sales policy is 70% cash and 30% on account, which is collected the month following
the sale. Uncollectible accounts represent 2%. The sales price is $35 per garbage bin.

Estimated units of bins to be sold:

October 720
November 640
December 560

The company has a beginning work-in-process inventory in October for $1,200, and
expects to complete 90% of production by the end of December.

Saboc uses 1.5 kilograms of galvanised metal in each bin. Galvanised metal costs $6
per kilogram. Management wants each month´s materials beginning inventory to
represent 25% of that month´s production.

Materials are paid 80% in cash and 20% on account, which is paid the month after the
purchase.

Four garbage bins can be produced in one hour. Production personnel are paid an
average of $15.50 per hour.

Management requires that each month´s beginning inventory in units be 40% of that
month´s sales.

The beginning balance of cash in October is $10,000.

Indirect material costs are estimated as follows:

October $500
November $550
December $600

The cost of indirect labor required is $800 each month.

5
Other monthly overhead costs are estimated as follows:

Electricity $150
Maintenance $50
Utilities and property taxes $110
Rent $800
Depreciation expense $100

The general expenses per quarter consist of salaries of administrative personnel for
$4,000 and for sales personnel $2,000. Advertising $300, and other administrative
expenses $200.

Additional information:
• A bank loan for $50,000 will be obtained in October.
• Payments will be $5,000 each month plus an interest of $500.
• The company is going to invest in new equipment for $20,000 in November.
• Income taxes 30%

Practice 6. Budgeting

Newpak Corporation manufactures cardboard boxes used in shipping canned food, fruits
and vegetables.

They have the following policies and information:

• Sales are made 80% in cash and 20% on credit.

• All credit accounts are collected the quarter after the sale.
• The company estimates 2% of each quarter´s sales to be uncollectible.
• The desired ending inventory of finished goods is 10% of the next quarter´s
expected sales.
• The desired ending inventory of raw material is 10% of the next quarter´s
expected raw material requirements.
• Corrugating medium is purchased in the basis of a just in time system.
• Cash payments for material purchases are made 70% in cash and 30% on credit.
• There is no work in process inventory beginning nor ending balance.
• Cash balance 01/01/2017 $20,000.

6
The company has the following material and labor requirements:

Direct material required per 100 boxes

Paperboard 30 pounds at $0.20 per pound

Corrugating medium 20 pounds at $0.10 per pound

Direct labor per 100 boxes:

0.50 hour at $12 per hour

Manufacturing overhead costs anticipated per quarter:

Indirect material:
1st quarter $10,500, 2nd quarter $12,600, 3rd quarter $12,600, 4th quarter $16,800

Indirect labor:
1st quarter $50,000, 2nd quarter $55,000, 3rd quarter $55,000, 4th quarter $60,000.
Utilities 10,000
Property taxes 12,000
Maintenance 10,000

Electricity:
1st quarter $20,000 , 2nd quarter $24,000, 3rd quarter $24,000, 4th quarter $32,000.

Insurance 16,000
Depreciation 8,000
Rent 15,000

The following selling and administrative expenses are anticipated per quarter:

Management salaries and fringe benefits 90,000

Salaries and fringe benefits for sales personnel $30,000
Advertising 15,000
Computer operator salaries 20,000
Other administrative expenses 4,000
Commissions 5% of sales

7
The sales forecast in units for the next year is as follows:

1st quarter 100,000

2nd quarter 120,000
3rd quarter 120,000
4th quarter 160,000

Sales price $180 per hundred boxes

Inventory information for the next year:

Finished goods beginning and ending inventory $153,100.

Additional information:
• A loan will be obtained in the first quarter for $500,000.
• Payments will be $100,000 per quarter.
• Interest expense per quarter $12,000.
• Construction of plan addition during the 2nd quarter $300,000.
• Income taxes 30%

Practice 7. Budgeting

School Days Furniture, Inc. Manufactures a variety of desks, chairs, tables and shelf
units which are sold to public school systems throughout the midwest. The controller of
the company´s Desk division is currently preparing the master budget for the year 2018.

The following sales forecast has been made by the division´s sales manager:

1st quarter 3,000

2nd quarter 4,000
3rd quarter 6,000
4th quarter 5,500

Each desk-and-chair set requires 10 board feet of pine planks and 1.5 hours of direct
labor.

8
Each set sells for $80. They sell 80% in cash and 20% on account, which is collected
the quarter following the sale. The division estimates uncollectible accounts of 2%.

Pine planks cost $0.60 per board foot, and the division ends each quarter with enough
wood to cover 10 percent of the next quarter´s production requirements.
Material purchases are made 70 percent in cash and 30 percent on credit, which is paid
the quarter after the purchase.

The division incurs a cost of $21 per hour of direct labor wages. The division ends each
quarter with enough finished-goods inventory to cover 20 percent of the next quarter´s
sales.

The beginning balance of cash in 2018 is $30,000.

Indirect material costs are estimated as follows:

1st quarter $1,200

2nd quarter $1,250
3rd quarter $2,000
4th quarter $1,700

The cost of indirect labor required is $40,000 for each of the first two quarters, $50,000
in the third quarter, and $55,000 in the fourth quarter.

Other overhead costs per quarter are estimated next:

Electricity $5,000
Insurance $2,000
Maintenance $5,000
Utilities and property taxes $4,000
Rent $11,000
Depreciation expense $1,000

The general expenses per quarter consist of salaries of administrative personnel for
$10,000 and for sales personnel $8,000. Publicity $4,000, and other administrative
expenses $1,000.

Additional information:
• A bank loan for $100,000 will be obtained in the second quarter.
• Payments will be $20,000 each quarter plus an interest of $5,000.
• The company is going to invest in new equipment for $50,000 in the third quarter.
• There is no beginning nor ending balance of work-in-process.
• Income taxes 30%

9
Practice 8. Budgeting

Charming Chairs Company manufactures furniture and has requested to prepare the
master budget for the year ended June 2018.

Cash balance at July 1st 2017 $110,000.

There is some work-in-process at July 1st 2017 for $200,000.

Labor and materials requirements per unit are:

Cutting labor 1 hour at $20 per hour

Finishing labor 2 hours at $18 per hour
Pinewood 3 meters at $18 per meter
Stained wood 2 meters at $20 per meter

Forecast quarterly unit sales for coming year:

September quarter 4,000

December quarter 2,500
March quarter 3,000
June quarter 2,000

The sales price per unit is $430.

Sales are made 75% in cash and 25% on credit, which is collected the quarter after the
sale. No uncollectible accounts are expected.

The company requires an ending inventory of pinewood raw materials that is equal to
10% of the next quarter´s production requirements. Stained wood is purchased in a just
in time system.

Charming Chairs payments to suppliers are made 70% in the quarter of the purchase
and 30% the next quarter.

Also, ending inventory balance of finished goods should be equal to 20% of the next
quarter´s expected sales.

Indirect material costs expected:

September quarter $15,000

December quarter $12,000
March quarter $12,000
June quarter $10,000

10
Indirect labor cost per quarter is estimated at $22,000.

Other overhead costs per quarter:

Electricity and utilities $18,000

Insurance $4,000
Maintenance $6,000
Rent on factory building $6,000
Depreciation $10,000

General expenses per quarter are as follows:

Salaries to administrative personnel $30,000

Salaries to sales personnel $8,000
Commissions 2% of sales
Computer operator salaries $10,000
Other administrative expenses $15,000
Advertising $10,000

Additional information:

• A $100,000 loan will be obtained in March.

• Loan payments will be $15,000 each quarter plus an interest expense of $5,000.
• Investment on equipment in December for $200,000.
• The company expects to complete 90% of the work-in-process by the end of June
2018.
• Income taxes 30%

11
Practice 9. Cost-Volume-Profit Analysis

1. University Pizza delivers pizzas to the dormitories and apartments near a major state
university. The company´s annual fixed expenses are $54,000. The sales price of a pizza
is $10, and it costs the company $6 to make and deliver each pizza. (In the following
requirements, ignore income taxes).

Required:

1. Using the contribution-margin approach, compute the company´s break-even point

in units (pizzas).
2. What is the contribution-margin ratio?
3. Compute the break-even sales revenue. Use the contribution-margin ratio in your
calculation.
4. How many pizzas must the company sell to earn a target net profit of $60,000? Use
the equation method.

Practice 10. Cost-Volume-Profit Analysis

2. Rosario Company, which is located in Buenos Aires, Argentina, manufactures a

component used in farm machinery. The firm´s fixed costs are 2,000,000 p per year. The
variable cost of each component is 1,000 p, and the components are sold for 1,500 p
each. The company sold 7,000 components during the prior year. (p denotes the peso,
Argentina´s national currency. In the following requirements, ignore income taxes).

Required:

1. Compute the break-even point in units.

2. What will the new break-even point be if fixed costs increase by 5 percent?
3. What was the company´s net income for the prior year?
4. The sales manager believes that a reduction in the sales price to 1,400 p will result
in orders for 1,000 more components each year. What will the break-even point be
if the price is changed?
5. Should the price change discussed in requirement (4) be made? Explain.

12
Practice 11. Cost-Volume-Profit Analysis

Fast Clean Company sells a product used for car cleaning. The company´s fixed costs
for the month are $40,000. The cost to make each product is $30 and it is sold at $68.
Last month, the company sold 2,000 products.

Answer the following questions. You must include the procedure to support each
answer.

a) What is the company´s break-even point in units? Use the contribution margin
approach.
b) What is the company´s break-even point in sales? Use the contribution margin ratio.
c) How many units must the company sell to earn a target net profit of $100,000? Use
the contribution margin approach.
d) What was the company´s net income for the prior month?

Practice 12. Cost-Volume-Profit Analysis

Fashion Company sells dresses for executive women. The price of each dress is
$4,400 and the manufacturing cost per unit is $2,100. The company´s fixed costs are
$60,000. Last month, the company sold 98 dresses.

Answer the following questions. You must include the procedure to support each
answer.

a) What is the company´s break-even point in units? Use the contribution margin
approach.
b) What will the new break-even point be if fixed costs increase by 10%?
c) How many dresses must the company sell to earn a target net profit of $350,000?
d) What was the company´s net income for the prior month?

13
Practice 13. Cost-Volume-Profit Analysis
Break-even point with multiple products

Vincy Company sells 4 brands and wants to know the amount of units that must be
sold to have no profit or loss. They have the following information:

Fixed Costs in March 2014: $700,000

Sales Mix
Product A 35%
Product B 40%
Product C 10%
Product D 15%

Product A Product B Product C Product D

Unit Price $1,500 $1,700 $2,000 $1,000
Unit Variable Cost $800 $900 $1,200 $450

Practice 14. Cost-Volume-Profit Analysis

La Famosa Company has the following information in April 2014:

Fixed Costs: $100,000

Sales Mix
Product A 40%
Product B 20%
Product C 30%
Product D 10%

Product A Product B Product C Product D

Unit Sales Price $25 $10 $12 $17
Unit Variable Cost $10 $4 $7 $8

14
Practice 15. Cost-Volume-Profit Analysis

Marines Company sells 3 brands, X, Y and Z. The fixed cost per month is $120,000.

Sales mix:
Brand X 20%
Brand Y 30%
Brand Z 50%

Required:

a) Calculate the break-even point in units for each of the 3 brands.

b) Prepare the Contribution Income Statement for the month of April 2014.

Products Unit Unit variable

price cost
Brand X 400 120
Brand Y 480 115
Brand Z 350 80

Practice 16. Activity-Based Costing System

Knickknack Inc. manufactures two products: odds and ends. The firm uses a single,
plantwide overhead rate based on direct-labor hours. Production and product-costing
data are as follows:

Odds Ends
Production quantity 1,000 units 5,000 units
Direct material $40 $60
Direct labor (not including setup 30 (2 hr. at $15) 45 (3 hr. at $15)
time)
Manufacturing overhead* 96 (2 hr. at $48) 144 (3 hr. at $48)
Total cost per unit $166 $249

15
*Calculation of predetermined overhead rate:

Manufacturing overhead budget:

Machine-related costs… .......................................................................... $450,000

Setup and inspection ................................................................................ $180,000

Engineering ................................................................................................ $90,000

Plant-related costs… ................................................................................. $96,000

Total ......................................................................................................... $816,000

Predetermined overhead rate:

Budgeted manufacturing overhead = $816,000 = $48 per direct-labor hour

Budgeted direct-labor hours (1,000)(2) + (5,000)(3)

Knickknack, Inc. prices its products at 120 percent of cost, which yields target prices of
$199.20 for odds and $298.80 for ends. Recently, however, Knickknack has been
challenged in the market for ends by a European competitor, Bricabrac Corporation. A
new entrant in this market, Bricabrac, has been selling ends for $220 each.

Knickknack´s president is puzzled by Bricabrac´s ability to sell ends at such a low cost.
She has asked you (the controller) to look into the matter. You have decided that
Knickknack´s traditional, volume-based product-costing system may be causing cost
distortion between the firm´s two products. Ends are a high-volume, relatively simple
product. Odds, on the other hand, are quite complex and exhibit a much lower volume. As
a result, you have begun work on an activity-based costing system.

16
Required:

1. Let each of the overhead categories in the budget represent an activity cost pool.
Categorize each in terms of the type of activity (e.g. unit-level activity).

2. The following cost drivers have been identified for the four activity cost pools.

Activity Cost Pool Cost Driver Budgeted Level of Cost

Driver
Machine-related costs Machine hours 9,000 hr.
Setup and inspection Number of production 40 runs
runs
Engineering Engineering change 100 change orders
orders
Plant-related costs Square footage of space 1,920 sq. ft.

You have gathered the following additional information:

• Each odd requires 4 machine hours, whereas each end requires 1 machine hour.
• Odds are manufactured in production runs of 50 units each. Ends are
manufactured in 250 unit batches.
• Three-quarters of the engineering activity, as measured in terms of change
orders, is related to odds.
• The plant has 1,920 square feet of space, 80 percent of which is used in the
production of odds.

For each activity cost pool, compute a pool rate.

3. Determine the unit cost, for each activity cost pool, for odds and ends.

4. Compute the new product cost per unit for odds and ends, using the ABC system.

5. Using the same pricing policy as in the past, compute prices for odds and ends. Use
the product costs determined by the ABC system.

6. Show that the ABC system fully assigns the total budgeted manufacturing overhead
costs of $816,000.

7. Show how Knickknack´s traditional, volume-based costing system distorted its

product costs.

17
Practice 17. Activity-Based Costing System

18
 Practice 18. Activity-Based Costing System

Rehm Company manufactures a product that is available in both a deluxe model and a
regular model. The company has manufactured the regular model for years. The deluxe
model was introduced several years ago to tap a new segment of the market. Since the
introduction of the deluxe model, the company's profits have steadily declined, and
management has become increasingly concerned about the accuracy of its costing system.
Sales of the deluxe model have been increasing rapidly.

Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the
current year, the company has estimated that it will incur $6,000,000 in manufacturing
overhead cost and produce 15,000 units of the deluxe model and 120,000 units of the regular
model. The deluxe model requires 1.6 hours of direct labor time per unit, and the regular
model requires 0.8 hours. Material and labor costs per unit are as follows:

Deluxe Regular
Direct materials $154 $112
Direct labor $16 $8

21
Required:

1. Using direct labor-hours as the base for assigning manufacturing overhead cost to
products, compute the predetermined overhead rate. Using the predetermined overhead rate
and other data from the problem, determine the unit product cost of each model.

2. Management is considering using activity-based costing to apply manufacturing overhead

costs to products for external financial reports. The activity-based costing system would have
the following four activity cost pools:

Activity Cost Pool Activity Measure Estimated Overhead Costs

Purchase orders Number of purchase orders $252,000
Scrap/Rework orders Number of scrap/rework 648,000
orders
Product testing Number of tests 1,350,000
Machine-related Machine-hours 3,750,000
Total overhead cost $6,000,000

Expected Activity
Activity Measure Deluxe Regular Total
Number of purchase 400 800 1,200
orders
Number of 500 400 900
scarp/rework orders
Number of tests 6,000 9,000 15,000
Machine-hours 20,000 30,000 50,000

3. Compute the total amount of manufacturing overhead cost that would be applied to each
model using the activity-based costing system. After these totals have been computed,
determine the amount of manufacturing overhead cost per unit for each model.
4. Compute the unit product cost of each model (materials, labor, and manufacturing
overhead).

22