Chapter 16
Managerial Accounting Concepts and Principles
Study Guide
Do You Know…?
Learning Objective 1: Describe managerial accounting and the role of managerial
accounting in a business.
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The characteristics of managerial and financial accounting? (See exercises 1–3)
The potential users of financial and managerial accounting reports? (See exercises 4–6)
The basic phases of the management process? (See exercises 7–9)
Learning Objective 2: Describe and illustrate the following costs: direct and indirect
costs; direct materials, direct labor, and factory overhead costs; and product and
period costs.
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The various classifications of costs, including direct and indirect costs?
(See exercises 10–12)
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If costs are considered direct materials costs, direct labor costs, or factory overhead
costs? (See exercises 13–15)
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If costs are considered prime or conversion costs? (See exercises 16–18)
How to calculate a company’s product and period costs? (See exercises 19–21)
Learning Objective 3: Describe and illustrate the following statements for a
manufacturing business: balance sheet, statement of cost of goods manufactured,
and income statement.
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The distinguishing factors of a manufacturing business’s income statement and balance
sheet? (See exercises 22–24)
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How to calculate the cost of materials used? (See exercises 25, 29, and 33)
How to calculate total manufacturing costs incurred? (See exercises 26, 30, and 34)
How to determine the cost of goods manufactured? (See exercises 27, 31, and 35)
How to prepare a statement of cost of goods manufactured? (See exercises 28, 32, and
36)
Learning Objective 4: Describe the uses of managerial accounting information.
□
The various reasons that managerial accounting is used? (See exercises 37–39)
1
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Chapter 16
Fill-in-the-Blank Equations
1. Beginning merchandise inventory + Net purchases = _________________
2. Cost of merchandise available for sale – Ending merchandise inventory = ___________
3. Beginning finished goods inventory + _____________________ = Cost of finished goods
available for sale
4. Cost of finished goods available for sale – Ending finished goods inventory =
______________
Exercises
1. Determine if each description relates to financial or managerial accounting.
a. Reports are prepared according to inquiries made of management.
b. Reports focus on the company as a whole.
c. Management uses the report, along with parties outside of the company.
2. A company is looking to increase its gross profit by reducing costs for the upcoming
periods. To further investigate, the production manager pulls reports that detail costs in
the previous year. After discussions with the purchasing manager, he creates a budget
based on assumptions and estimates. Is the manager using managerial or financial
accounting?
3. An investor researching profitable companies pulls quarterly reports of various
corporations. The reports are prepared according to GAAP with objective information
and focus on the business as a whole. Are the reports prepared using managerial or
financial accounting?
4. To fund its expansion in the upcoming year, Deacon Corporation negotiates a
$4,000,000 loan with a local bank. The bank requires financial statements to ensure the
company’s ability to pay interest and repay the principal. Would Deacon Corporation
use managerial or financial accounting to create the reports for the bank?
5. During an audit, an agent looks to the company’s financial statements to verify that the
same accounting practices were used in the tax return for a certain expense. Would the
financial statements used by the agent be prepared using managerial or financial
accounting?
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Managerial Accounting Concepts and Principles 3
6. To prepare for an upcoming meeting with the production staff, a manager pulls a report
that gives a comparison of the last period’s budgeted expenses to the last period’s
actual expenses. Which type of accounting is the manager using?
7. To which phase of the management process does each activity relate?
a. Management compares the actual sales with the budgeted sales for the previous
period.
b. After discovering a large amount of rework costs from the use of a cheaper
material, the purchasing manager buys a higher quality material.
c. Top management discusses ideas to develop a new product line.
8. Determine to which phase of the management process each activity relates.
a. Discussing expenses to potentially reduce in the next period
b. Overseeing employees unloading supplies to ensure safe and efficient practices
are used
c. Identification of the recent increase in manufacturing costs to be from the use of
an outdated piece of equipment
9. To which phase of the management process does each activity relate?
a. Feedback from customers used to identify weaknesses in the company’s shipping
policy
b. Comparison of the previous period’s use of materials to the budgeted amount of
materials to use
c. Ensuring workers take the allotted break times with the use of time cards
10. A clothing manufacturer has the costs listed. Determine if each would be considered a
direct or indirect cost if the cost object is an individual shirt.
a. Cost of fabric
b. Salary of clothing designer
c. Cost of buttons
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Chapter 16
11. During the production of its new broom, a manufacturer incurs each of the following
costs. Would each cost be considered a direct or indirect cost if the cost object is an
individual broom?
a. Electricity in production plant
b. Cost of plastic for handle
c. Cost of labor by production employees, billed at an hourly rate
12. Would each of the following costs be considered a direct or indirect cost for an
individual lamp of a manufacturer?
a. Research and design on the materials used for the line of lamps
b. Cost of fabric for the lamp shade
c. Advertising expense for the line of lamps
13. When manufacturing 200 picture frames, Take A Picture spends the following on
materials: $1,000 for wood, $10 for glue, $400 for glass, $500 for backing, and $40 for
screws. Which of the materials used would be considered direct materials?
14. In its production facilities for picture frames, Take A Picture pays the following wages:
$1,750 to employees who repair production facility equipment, $5,000 paid to
employees who cut the glass used in the frames, $2,000 for daily cleaning services of
production facility, and $3,000 to employees that sand and stain wood used in the
frames. Which of the wages paid would be considered a direct labor cost?
15. When producing tables, a company incurs the following costs: $30 for screws, $6,500 for
wood, $80 for wood stain, $5,000 paid to janitors who clean the production facilities,
$2,100 paid to employees who saw and prepare wood for production, $1,600 for
depreciation on equipment. How much of factory overhead costs would need to be
allocated to the tables produced?
16. In its production of shirts, a company incurs the following costs: $15,000 for production
workers, $8,000 for fabric, $3,500 for electricity in production facilities, and $300 for
buttons. Calculate the following:
a. Prime costs
b. Conversion costs
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Managerial Accounting Concepts and Principles 5
17. Calculate the prime costs and conversion costs if a company incurs the following to
produce wine glasses: $4,000 for molten glass, $15,000 paid to employees who create
the glasses, and $2,000 paid to employees who repair equipment used in the production
facilities.
18. When manufacturing pillows, a company incurs the following costs: $6,000 for fabric,
$3,000 for feathers, $20 for thread, $12,000 for production employees, and $2,500 for
depreciation on production equipment. Determine the following:
a. Prime costs
b. Conversion costs
19. In the introduction of its new purses, Chic Diva incurs the following expenses: $3,000 for
direct materials, $1,700 for office supplies, $10,000 for sales salaries, $8,100 for
production wages, $1,200 for office depreciation, and $1,700 for production facility
utilities. How much does the company incur for product and period costs? Also,
distinguish the period costs by either selling or administrative expenses.
20. Would each of the following be considered a product or period cost? If it is a period
cost, would it be classified as a selling or administrative expense?
a. Advertising expenses
b. Salary of production supervisors
c. Depreciation for factory equipment
21. Would each expense be classified as a product or period cost? If it is a period cost,
would it be classified as a selling or administrative expense?
a. Rubber made to produce tires
b. Salaries of sales team
c. Office supplies expense
22. Which of the following would be found in the financial statements of a manufacturing
company?
a. Merchandise inventory
b. Cost of goods manufactured
c. Direct materials
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Chapter 16
23. Would each item be found in the financial statements of a manufacturing or
merchandising business? Which financial statement would include the line item?
a. Cost of finished goods available for sale
b. Raw materials
c. Finished goods
24. Determine if the following would be found in the financial statements of a
manufacturing or merchandising business. Which financial statement would include the
line item?
a. Work in process
b. Cost of goods sold
c. Cost of merchandise sold
25. As of January 1, 2015, Tippy Cup Co. had a balance of $15,000 for raw materials
inventory. The company’s ending balance of raw materials inventory totaled $13,900.
Every four months, the company purchases 250 pounds of raw materials at $25 a
pound. Calculate the cost of direct materials used for the year.
26. Tippy Cup Co. also incurred $10,550 for factory overhead and 250 hours of direct labor
at $10.30 per hour. Using the cost of direct materials used calculated in Exercise 25,
determine the total manufacturing costs incurred for the year.
27. As of January 1, 2015, Tippy Cup Co.’s work in process inventory had a beginning
balance of $98,750. The ending balance of work in process inventory totaled $92,350.
Using the information calculated in Exercise 26, calculate the cost of goods
manufactured for the year.
28. Using the information calculated in Exercises 25-27, prepare a statement of cost of
goods manufactured for Tippy Cup Co.
29. So Chic’s raw materials inventory had a beginning balance of $22,100 and ending
balance of $19,100. During the year, the company purchased 200 pounds of Product X
every two months for $15 a pound and 700 feet of Product Y every 6 months for $10 a
foot. Calculate the cost of direct materials used for the year.
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Managerial Accounting Concepts and Principles 7
30. During the year, So Chic incurred $50,000 of overhead, 75% of which should be
allocated to the factory. Production employees also worked 2,900 hours at a rate of
$9.75 per hour. Using the information calculated in Exercise 29, determine the total
manufacturing costs incurred during the year.
31. So Chic had a beginning balance of $94,800 in its work in process inventory and an
ending balance of $91,800. Using the manufacturing costs incurred during the year in
Exercise 30, determine the cost of goods manufactured for the year.
32. Use the information from Exercises 29-31 to prepare So Chic’s statement of cost of
goods manufactured for the 2015 calendar year-end.
33. Each finished product of Carolina Cup requires two pounds of Product A and five pounds
of product B. Throughout the year, the company purchases enough raw materials to
produce 500 finished products. Each pound of Product A costs $7, and each pound of
Product B costs $8. The beginning and ending balances of raw materials inventory
totaled $8,900 and $10,100, respectively. Calculate the cost of direct materials used for
the year.
34. Carolina Cup employs five production employees who are paid an hourly wage of $9 per
hour. Each employee works 800 hours a year. The company also incurred $42,000 of
overhead, half of which should be allocated to the factory. Using the cost of direct
materials calculated in Exercise 33, determine the total manufacturing costs for the
year.
35. Carolina Cup’s beginning work in process inventory had a balance of $45,750. The
ending work in process inventory was exactly ⅔ of the beginning balance. Using the
manufacturing costs incurred calculated in Exercise 34, determine the cost of goods
manufactured during the year.
36. Use the information found in Exercises 33-35 to prepare Carolina Cup’s statement of
cost of goods manufactured for the 2015 fiscal year ended September 30.
37. Determine when managerial accounting would be used for each of the following
situations.
a. Calculating the amount of depreciation of factory equipment to allocate to each
product line
b. Preparing financial statements for potential new investors to review
c. Finding deficiencies in the production line for a new product
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Chapter 16
38. Throughout the year, the accounting department of Cards by Shannon does the
following: prepares a budget for the year, determines the selling price of a new product,
produces quarterly reports, and prepares its tax return. Which of the activities would
require managerial accounting?
39. In its monthly meeting, the management of Beads Inc. discusses the following:
identification of an outdated piece of equipment that caused high production costs, the
effects of purchasing a new piece of equipment on the budget, and financing of the
budget through bank loans and new investors. Which activities discussed during the
meeting required or will require managerial accounting?
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