CHAPTER 1 INTRODUCTION TO MANANGERIAL ACCOUNTING

Part A - Discussion Question

1. What is managerial accounting?
Managerial accounting is the provision of information for internal users in a
firm.

2. What are the three broad objectives of managerial accounting?

The three broad objectives of managerial accounting are to provide
information for planning, controlling, and decision making.

3. How do managerial accounting and financial accounting differ? Give your

answer by filling the table below

Financial Accounting Managerial Accounting

- Externally focused - Internally focused
- Must follow externally imposed - No mandatory rules
rules
- Objective financial information - Financial and information; subjective
information possible nonfinancial
- Historical orientation - Emphasis on the future
- Information about the firm as a - Internal evaluation and decisions based
whole on very detailed information
- More self-contained - Broad, multidisciplinary

4. Explain the meaning of customer value. How is focusing on customer value

changing managerial accounting?
Customer value is the difference between what a customer pays for a product
or service and what she or he receives in return. The focus on customer value
forces management accounting to look at many types of costs, not simply
manufacturing cost. These may include the price of the good or service,
maintenance costs, search costs, learning costs, and disposal costs.

5. What is the value chain? Why is it important?

The value chain is the set of activities required to design, develop, produce,
market, and deliver products and services to customers. It is important
 because it helps the company to understand its role in serving customers and
to develop strategic competence.

Part A - Multiple-choice exercises

Highlighting the best answer
Q1 The provision of accounting information for internal users is known as
A Accounting
B Financial accounting
C Managerial accounting
D Information provision
E Accounting for planning and control

Q2 The users of managerial accounting information include

A For-profit companies
B Not-for-profit organizations
C City government
D Educational institutions
E All of these

Q3 Setting objectives and identifying methods to achieve those objectives is

called
A Planning
B Decision making
C Controlling
D Performance evaluation
E None of these

Q4 The process of choosing among competing alternatives is called

A Planning
B Decision making
C Controlling
D Performance evaluation
E None of these

Q5 Which of the following is characteristic of managerial accounting?

A There is an internal focus.
B Subjective information may be used.
C There is an emphasis on the future.
D It is broad-based and multidisciplinary.
E All of these

Q6 Which of the following is characteristic of financial accounting?

A There is a historical orientation.
B Subjective information may be used.
C There is an internal focus.
D It is broad-based and multidisciplinary.
E None of these
 CHAPTER 2. PRACTICE AND EXERCISE
PART A. DISCUSSION QUESTIONS
1) Explain the difference between cost and expense
Cost is the amount of cash or cash equivalent sacrificed for goods and/or services
that are expected to bring a current or future benefit to the organization. An
expense is an expired cost; the benefit has been used up.

2) What is the difference between accumulating cost and assigning cost?

Accumulating costs is the way that costs are measured and recorded. Assigning
costs is linking costs to some cost object. For example, a company accumulates or
tracks costs by entering them into the chart of accounts. Direct materials would be
entered into the materials account; direct labor would be entered into the direct
labor account. Then, these costs are assigned to units of product.

3) What is cost object? Give some examples?

A cost object is something for which you want to know the cost. For example, a
cost object may be the human resources department of a company. The costs
related to that cost object might include salaries of employees of that department,
telephone costs for that department, and depreciation on office equipment. Another
example is a customer group of a company. Atlantic City and Las Vegas casinos
routinely treat heavy gamblers to free rooms, food, and drink. The casino owners
know the benefits yielded by these high rollers and need to know the costs of
keeping them happy, such as the opportunity cost of lost revenue from the rooms,
the cost of the food, and so on.

4) What is allocation?
Allocation means that an indirect cost is assigned to a cost object using a
reasonable and convenient method. Since no causal relationship exists, allocating
indirect costs is based on convenience or some assumed linkage.

5) What is the cost of goods manufactured?

The cost of goods manufactured is the sum of direct materials, direct labor, and
overhead used in producing the units completed during the current period and
transferred to finished goods inventory.

6) What is the difference between cost of goods manufactured and cost of goods
sold?
The cost of goods manufactured is the cost of direct materials, direct labor, and
overhead for the units produced (completed) during a time period. The cost of
goods sold is the cost of direct materials, direct labor, and overhead for the units
sold during a time period. The number of units produced is not necessarily equal to
the number of units sold during a period. For example, a company may produce
1,000 pairs of jeans in a month but sell only 900 pairs.
7) Complete the IMPORTANT EQUATIONS below
Total product cost = Direct materials cost + Direct labor cost + Manufacturing
overhead cost
Per-unit cost = Total Product Cost ÷ No of Units Produced
Prime cost = Direct materials + Direct labor
Conversion cost = Direct labor + Manufacturing Overhead
COMG = Beginning WIP inventory + Direct materials used in production +
Direct labor used in production + Manufacturing overhead costs
used in production - Ending WIP inventory

Direct
Beginning Ending
materials
= inventory of + Purchases - inventory of
used in
materials materials
production
COGS= Beginning finished goods inventory + Cost of goods manufactured
- Ending finished goods inventory
Sales Revenue = Price x Units sold
Gross Margin = Sales Revenue – COGS
Operating Income = Gross margin – Operating expenses

PART B. EXERCISES
Ex 2-1
Slapshot Company makes ice hockey sticks. Last week, direct materials (wood, paint,
Kevlar, and resin) costing $24,000 were put into production. Direct labor of $20,000
(10 workers x 100 hours x $20 per hour) was incurred. Manufacturing overhead
equaled $56,000. By the end of week, the company had manufactured 4,000 hockey
sticks.
Required:
1. Calculate the total production cost for last week
2. Calculate the per-unit cost of one hockey stick that was produced last week.
Ex2-2
Refer to the information for Slapshot Company in Ex2-1
Required:
1. Calculate the total prime cost for last week.
2. Calculate the per-unit prime cost.
3. Calculate the total conversion cost for last week.
4. Calculate the per-unit conversion cost for last week.

Ex2-3
Slapshot Company makes ice hockey sticks. On June 1, Slapshot had $42,000 of
materials in inventory. During the month of June, the company purchased $126,000 of
materials. On June 30, material inventory equaled $51,000.
Required: Calculate the direct materials used in production for the month of June

Ex2-4
Slapshot Company makes ice hockey sticks. During the month of June, the company
purchased $126,000 of materials. Also, during the month of June, Slapshot Company
incurred direct labor cost of $165,000 and manufacturing overhead of $215,000.
Inventory information is as follows:
June 1 June 30
Materials $42,000 $51,000
Work in process $60,000 $71,000
Required:
1. Calculate cost of goods manufactured for the month of June
2. Calculate the cost of one hockey stick assuming that 18,000 sticks were
completed during June.

Ex 2-5
Slapshot Company makes ice hockey sticks. During the month of June, 18,000 sticks
were completed at a cost of goods manufactured of $486,000. Suppose that on June 1,
Slapshot had 5,000 units in finished goods inventory costing $160,000 and on June 30,
7,000 units in finished goods inventory costing $215,000.
Required:
1. Prepare a cost of goods sold statement for the month of June.
2. Calculate the number of sticks that were sold during June.
Ex 2-6
Slapshot Company makes ice hockey sticks and sold 16,000 sticks during the month
of June at a total cost of $431,000. Each stick sold at a price of $90. Slapshot also
incurred two types of selling costs: commissions equal to 15 percent of the sales price,
and other selling expense of $200,000. Administrative expense totaled $115,000.
Required: Prepare an income statement for Slapshot Company for the month of June

Ex2-7
Refer to the information for Slapshot Company in Ex 2-6
Required: Prepare an income statement for Slapshot Company for the month of June
and calculate the percentage of sales revenue represented by each line of the income
statement. (Note: Round answers to one decimal place)
Ex 2-8
Allstar Exposure designs and sells advertising services to small, relatively unknown
companies. Last month, Allstar had sales commissions costs of $50,000, technology
cost of $75,000, and research and development costs of $200,000. Selling expenses
were $10,000, and administrative expenses equaled $35,000. Sale totaled $410,000.
Required: Prepare an income statement for Allstar for the past month.
 CHAPTER 3
PRACTICE AND EXERCISE
Ex3-1
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Product costs include:
Direct materials per helmet $ 30
Direct labor per helmet 8
Variable factory overhead per helmet 4
Total fixed factory overhead 20,000
Variable selling expense is a commission of $3 per helmet; fixed selling and
administrative expense totals $29,500.
Required:
1. Calculate the total variable cost per unit
2. Calculate the total fixed expense for the year
3. Prepare a contribution margin income statement for Head-First Company for
the coming year

Ex3-2
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory
overhead, and variable selling expense). Total fixed cost equals $49,500 (includes
fixed factory overhead and fixed selling and administrative expense).
Required:
1. Calculate the break-even number of helmets.
 2. Check your answer by preparing a contribution margin income statement based
on the break-even units.

Ex 3-3
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory
overhead, and variable selling expense). Total fixed factory overhead is $20,000 and
fixed selling and administrative expense is $29,500.
Required:
1. Calculate the variable cost ratio.
2. Calculate the contribution margin ratio.
3. Prepare a contribution margin income statement based in the budgeted figures
for the next year. In a column next to the income statement, show the
percentages based on sales for sales, total variable cost, and total contribution
margin.
Ex 3-4
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Variable cost is 60 percent of the sales price; contribution margin is 40 percent
of the sales price. Total fixed cost equals $49,500 (includes fixed factory overhead
and fixed selling and administrative expense).
Requires:
1. Calculate the sales revenue that Head-First must make to break even by using
the break-even point in sales equation.
2. Check your answer by preparing a contribution margin income statement based
on the break-even point in sales dollars.
Ex 3-5
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory
overhead, and variable selling expense). Total fixed cost equals $49,500 (includes
fixed factory overhead and fixed selling and administrative expense).
Required:
1. Calculate the number of helmets Head-First must sale to earn an operating
income of $81,900.
2. Check your answer by preparing a contribution margin income statement based
on the number of units calculated.

Ex 3-6
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Unit variable cost is 60 percent of the sales price; contribution margin is 40
percent of the sales price. Total fixed cost equals $49,500 (includes fixed factory
overhead and fixed selling and administrative expense).
Required:
1. Calculate the sales revenue that Head-First must make to earn operating
income of $81,900.
2. Check your answer by preparing a contribution margin income statement based
on the sales dollars calculated in requirement 1.

Ex 3-7
Suppose that Head-First Company now sells both bicycle helmets and motorcycle
helmets. The bicycle helmets are priced at $75 and have variable cost of $45 each.
The motorcycle helmets are priced at $220 and have variable costs of $140 each. Total
fixed cost for Head-First as a whole equal $58,900 (includes all fixed factory overhead
and fixed selling and administrative expense). Next year, Head-First expects to sell
5,000 bicycle helmets and 2,000 motorcycle helmets.
Required:
1. Form a package of bicycle and motorcycle helmets based on the sales mix
expected for the coming year.
2. Calculate the break-even point in units for bicycle helmets and for motorcycle
helmets.
3. Check your answer by preparing a contribution margin in come statement.
Ex 3-8
Head-First Company now sells both bicycle helmets and motorcycle helmets. Next
year, Head-First expects to produce total revenue of $570,000 and incur total variable
cost of $388,000. Total fixed cost is expected to be $58,900.
Required:
1. Calculate the break-even point in sales dollars for Head-First. (Note: round the
contribution margin ratio to four decimal places.)
2. Check your answer by preparing a contribution margin income statement
Ex3-9
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory
overhead, and variable selling expense). Total fixed cost equals $49,500 (includes
fixed factory overhead and fixed selling and administrative expense). Break-even
units equal 1,650.
Required:
1. Calculate the margin of safety in the terms of the number of units.
2. Calculate the margin of safety in the terms of sales revenue.

Ex 3-10
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory
overhead, and variable selling expense). Total fixed cost equals $49,500 (includes
fixed factory overhead and fixed selling and administrative expense). Operating
income at 5,000 units sold is $100,500.
Required:
Calculate the degree of operating leverage. (Note: Round answer to the nearest tenth.)

Ex 3-11
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming
year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory
overhead, and variable selling expense). Total fixed cost equals $49,500 (includes
fixed factory overhead and fixed selling and administrative expense). Operating
income at 5,000 units sold is $100,500. The degree of operating is 1.5. Now Head-
First expects to increase sales by 10 percent next year.
Required:
1. Calculate the percentage change in operating income expected.
Calculate the operating income expected next year using the percent change in
operating income calculated in Requirement 1.