NOTE: This is a password-protected course handout put together by Dr. Ahiarah, who has neither sold nor put it up for sale

Bus.313: Managerial Accounting Spring 2017Sol. Ahiarah, PhD., CPA., CGMA

INTRODUCTION TO MANAGERIAL OR MANAGEMENT ACCOUNTING

1. Define the concept of Accounting in general or broadly speaking, and identify its subfields.

If we are to make our first foray into what, to us, is an unknown Managerial Accounting territory, it would be helpful to set forth a definition of accounting in general, or broadly speaking, and identify its sub-areas; this way, we would get a sense of the general accounting world and of the place of managerial accounting, the territory hitherto unexplored by us, within that general land mass of accounting. Then, we could chart and set out on our course of adventurous exploration. The term, Accounting, can be used to convey different meanings. What does the term, accounting, mean in each of the following?

1. Some worried parent demanding of a little child who disappeared for a while without permission or explanation, “C’mon here, give account (provide ‘accounting’) of yourself…now!!”

2. Accounting is actually in the social sciences. 3. Dr. Kennedy is an accounting teacher. 4. The Clarion firm specializes in providing accounting consultation to retailers and manufacturers. 5. My CPA does my accounting for me. 6. Accounting is the language of business 7. Did you want to see Quickbooks—my accounting software?8. My brother, Spencer, works in the accounting department at Citicorp9. I am an accounting major10. Mr. Butler does research in accounting11. My professor is a member of the American Accounting Association

For our purposes here, accounting in general or broadly speaking,, is viewed as a dynamic, accreting, body of specialized knowledge1 and practices (like a well-spring) which can be mastered to some degree, and from which to not only learn, but to also contribute, and from which those versed in it are able to draw, as the AICPA suggests, in “the development and analysis of data, the testing of their validity and relevance, and the interpretation and communication of the resulting information to intended users. The data may be expressed in monetary or other quantitative terms, or in symbolic or verbal forms. Some of the data with which accounting is concerned are not precisely measurable, but necessarily involve assumptions and estimates as to the present effect of future events and other uncertainties. Accordingly, accounting requires not only technical knowledge and skill, but even more important, disciplined judgment, perception, and objectivity.” See http://www.aicpa.org/About/Governance/Bylaws/Pages/bl_921.aspx (accessed 12-11-2012).

Financial

Managerial

CostTax

AuditingGovernmental

NFPOs

International

Info. Systems

The Accounting World

Dr. Ahiarah/’13

1 i.e., body of knowledge of specialized skills, abilities, services, activities, practices, processes, tools, techniques, systems, devices, theories, assumptions, patterns of data gathering, processing, and of analysis, interpretation and communication of an organization’s information to interested parties; body of knowledge that encompasses, amalgamates or subsumes the other identified connotations of accounting.

2

Areas/Branches/Sub-fields of accounting: The accounting body of specialized knowledge has the following major sub-divisions or branches: Financial, Managerial/Management, Cost, Tax, Auditing, Governmental, Not-For-Profit Organizations, International and Information Systems.2. Define and Distinguish between financial and managerial accounting.Financial Accounting : The branch of accounting which focuses on the informational needs of stakeholders or decision makers (such as, stockholders, labor organizations, suppliers, creditors, credit rating agencies) external 2 to the organization, and produces for them general purpose financial statements (such as, Income statement, Statement of Owners’ Equity, Balance Sheet, and Statement of Cash Flow) intended to satisfy their needs. Financial accounting does this by tracking (identifying, collecting, processing) and communicating historically valued information in accordance with generally accepted accounting principles.

Management or Managerial Accounting : The branch of accounting which focuses on the informational needs of decision makers (such as, top executives, administrators or managers) within organizations. Management accounting may be simply defined as a body of accounting knowledge and information primarily consisting of concepts3, models and techniques (tools) useful to management for making better decisions in their planning, organizing, evaluating, controlling performance, and generally, directing the affairs of an entity entrusted to them. According to the American Accounting Association (AAA), management accounting involves, “the application of appropriate techniques and concepts in processing the historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making or rational decisions with a view toward achieving these objectives.” AAA, A Statement of Basic Accounting Theory, 1966, p.37. FINANCIAL VS. MANAGEMENT ACCOUNTING: The major distinction between the two sub-fields is the users of the information: financial accounting serves external users, whereas management accounting serves internal users. Exh. 1-2 in the ETO 8th edition, p.6, summarizes significant differences between financial and managerial accounting. While financial accounting is characterized by its objectivity, reliability, consistency, and historical nature; managerial accounting is more concerned with relevance and timeliness. Managerial accounting uses more estimates and fewer historical facts than financial accounting. Financial accounting information is reported periodically—monthly, quarterly, or no less than once at the end of the 2 Although governmental agencies, such as the SEC and the IRS are external to most accounting entities, the agencies have the power to compel the private entities to produce whatever information the governmental bodies require, and as such, are not the primary targets of these general purpose financial statements.3 Many managerial accounting theorists and writers would agree that the following concepts and tools represent the foundation of management accounting: (adapted from Goosen, K. Management Accounting, A Venture Into Decision Making. (Little Rock, AR: Micro Business Publications), 2008, p.2.

Decisionmaking Tools Concepts1. Cost-volume-profit analysis 1. Fixed,variable and mixed costs2. Comprehensive budgeting 2. Avoidable and Unavoidable costs3. Flexible budgeting 3. Relevant costs4. Incremental analysis 4. Incremental costs5. Return on investment or Residual Income 5. Sunk (Stuck-with) costs6. Full--absorption--costing 6. Opportunity costs7. Direct/Variable costing 7. Common costs8. Capital budgeting 8. Direct and indirect cost9. Inventory models 9. Contribution margin10. Cost analysis for marketing, production, and finance 10. Planning11. Segmental income statements 11. Control12. Financial statement ratio analysis 12. Standards13. Balanced Scorecard and Benchmarking 13. Cost/Revenue, Profit and Investment

centers

3

year (fiscal or calendar). Management cannot wait until the end of the year to discover problems. Therefore, management accounting information is delivered on a continuous basis.

3. Briefly recount the historical beginnings of managerial accounting and how that influenced its presentation in traditional Managerial Accounting textbooks. Although Fra Luca Pacioli is considered by many, in the West, as the “Father of Accounting,” because of his book, Summa de arithmetica, geometria, proportioni et proportionalità, published in 1494,4 (two years after Columbus reached the Americas), the history of Accounting has been traced as far back as 10,000 years ago (around 8,000 B.C.) by one writer5; another researcher traces it back to 4500 B.C., when the taxes levied and collected in the Babylonian Empire were managed with accounting information, and 3400 B.C., when early systems of numbering were developed in ancient Egypt and Chaldea6. “It’s said that accountants’ predecessors were the scribes of ancient Egypt, who kept the pharaohs’ books. They inventoried grain, gold, and other assets. Unfortunately, some fell victim to temptation and stole from their leader, as did other employees of the king. The solution was to have two scribes independently record each transaction (the first internal control (if not double-entry bookkeeping)). As long as the scribes’ totals agreed exactly, there was no problem. But if the totals were materially different, both scribes would be put to death.” Source: Joseph T. Wells, “So That’s Why It’s Called a Pyramid Scheme,” Journal of Accountancy (October 2000), p.91. Although bookkeeping (in the West) can be traced back to fifteenth century Italy, accounting historians place the origin of management accounting around 1812, or, around the period of the Industrial Revolution . About this time, textile mills began to perform ”many processes inside the organization that had previously been performed outside the company by independent craftsmen. This internalization of processes such as carding, spinning, weaving and assembly created a need for determining the cost of performing these activities inside the company.” (see Martin, J. http://maaw.info/MAAWTextbookMain.htm (accessed 01-23-16). Managerial Accounting in the USA was developed largely to provide management with cost information . Andrew Carnegie, founder of US Steel, is said to have developed by, 1900, detailed unit cost figures for material and labor on a daily and weekly basis for tight control of operations and product pricing decisions. The origin of management accounting is, thus, closely associated with manufacturing organizations , which explains why many of its ideas, applications or examples seem to be linked mostly to manufacturing entities. Managerial accounting’s early development was also influenced by the need to provide

4 Friar Luca Pacioli’s book included, “ the first published description of the method of bookkeeping that Venetian merchants used during the Italian Renaissance, known as the double-entry accounting system.The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equalled the credits. His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organization's balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. He is widely considered the "Father of Accounting". Also, his treatise touches on a wide range of related topics from accounting ethics to cost accounting.” See: http://en.wikipedia.org/wiki/Luca_Pacioli (accessed 01-23-16).5 See C. Patrick Fort, “Accounting: The Oldest Profession,” in NEW ACCOUNTANT, Issue #765 (Chicago, Ill.: Real Estate New Corp.), 2015, pp.4 and 27. According to the paper, “Archaeologists, and specifically Dinise Schmandt-Bessarat, have discovered through their excavations a clay token accounting system in the Fertile Crescent of what is present-day Iraq. The first tokens, which date back 10,000 years, were small simple molded pieces of clay which took the form of cones, discs, spheres, and cylinders. These tokens, which were the first clay objects to be hardened by fire, represented things like grain, oil, or wool, and were used primarily in an agrarian society. Raw materials inventory if you will. Tokens from later periods, like those dated 5500 years ago, were more complex with multiple shapes and markings. They represented finished products: bread, rope, clothes and the like. These more complex tokens were the product of a more diversified urban economy and, in the modern vernacular, they would be more like finished goods inventory. This evolution of accounting information represented an increasing need for accuracy in recording information. What were once sheep were now rams, ewes, or lambs. Just like with modern accounting, change was fostered by the increased need for more accurate reporting.”6 See George Abs, et al: “Historical Dates in Accounting,” in The Accounting Review, Vol. 29, No. 3 (Jul., 1954), pp. 486-493

4

management with data to meet tax and financial reporting requirements. As organizations have increasingly faced rapid advances in technology and global competition, their managers have also sought for ways to sustain or even improve superior performance. Today, managerial accounting responds to the informational needs of managers of all types of organizations including manufacturing, merchandising or service, and managers still need cost information (generated by managerial accounting) for cost-plus pricing, assessment of manufacturing/operational efficiency, and comparative assessment and operational control. Managing in modern business environment is requiring new techniques, such as, total quality management (TQM), just in time (JIT)—pull production as opposed to push production, continuous improvement, guided by theory of constraints, and including, process reengineering when necessitated. These techniques “have been developed to satisfy the customers’ demand for quality, flexibility, timely delivery and value. Managerial Accounting played a key role in achieving these goals. Managerial Accounting developed to provide useful information to management and other internal decision makers. Using both financial and non-financial information, managerial accounting provides timely data including estimates and projections to support planning and decision making. The importance of this information has increased as competition has intensified. As a result, corporations have come to rely more heavily on managerial accountants. To meet managements’ expectations, managerial accountants must now develop an in-depth understanding of all aspects of a business—become a data hog for the company, apply analytical skills to spot trends, and provide forecasts, and provide insightful advice to top management. In short, managerial accountants today and in the future must be more than accomplished technicians: they must be agents of change!” (Source: “The Need for Managerial Accounting Information.” Video. McGraw-Hill/Irwin, 1999).

4. Explain the concept of management (the principal consumer of managerial accounting), managerial functions and informational needs, and the role of accounting in management. The term, MANAGEMENT7 can be construed as:--“The use of human and other resources in a manner that best achieves the organization’s objectives” (Madura, Introduction to Business, 3rd Ed., 2004: p.199). --The group charged with responsibility to direct the affairs of an entity. The hierarchical structure and authority relationships of management in an organization can be deciphered from its org. chart8. --Management can also be viewed in terms of those who perform functions involved in directing the affairs of an organization. Such functions might include, planning, organizing, directing, supervising, delegating, representing, deciding, evaluating and controlling performance.

MANAGERIAL INFO. NEEDS & MANAGERIAL ACCOUNTING: Exh. 1-1 in ETO 8th edition, p.4, summarizes the informational needs of different user groups. Those outside the entity, such as investors and creditors, use economic data (e.g., unemployment rate, inflation rate, state of the economy—recession or advancement) and financial data to make decisions. As you move up the organizational

7 The student that is planning a professional career in accounting must develop an appreciation and understanding of management. It is management that guides the business and makes the decisions which determine the success or failure of a business. The accountant serves in a staff or advisory function under management. On the other hand, those students planning a professional career as managers need to understand and appreciate that a knowledge of accounting is critically important. Although accountants use technical accounting expertise to prepare financial statements, it is management that receives and uses financial statements. Management, not accountants, has the need and responsibility to read and understand financial statements. Financial statements, in one sense, are summary reports of how well management has performed (made decisions) for a given period of time. For management to have a negative attitude towards accounting is tantamount to being negative towards their own responsibilities and accomplishments. Certain concepts of management are essential to a study of management accounting. (see Goosen, K. Management Accounting, A Venture Into Decision Making. (Little Rock, AR: Micro Business Publications), 2008, p.3

8 See the organizational chart, Figure I, at the end of this paper. Management accounting is frequently associated with fairly large corporate businesses; however, it is equally useful to small businesses. When a business reaches a certain size, then the accounting activity is of such a volume that the accounting activity must be organized and managed. Consequently, accounting in larger businesses can be thought of as a departmentalized function appearing on the organization chart as a staff function. While the term management accounting applies to individuals possessing specialized knowledge of management and accounting, the term can also be applied to the accounting department as a whole. (Goosen, K. p.3)

5

ladder inside an organization, financial information becomes increasingly important. For example, senior executives make extensive use of the company's financial information while other (operating) employees deal mostly with non-financial data, such as store layout, credit policies, customer return policies, and the types of merchandise sold. Managerial information needs often relate also to costs and benefits of decision alternatives. (Wizards of the Coast Video around here)

COST-BENEFIT CRITERION FOR ACCOUNTING INFORMATION5. Explain how cost-benefit considerations might function as constraints to managerial demand for managerial accounting information.In this course you will learn about the types of accounting information used by those internal in a company. Much of the information generated by management accounting systems is proprietary information not available to the public. Since this information is not distributed to the public, it need not be regulated to protect the public interest. Management accounting is restricted only by the value-added principle. “Value-added,” means that the benefit of the information the managerial accountant has to spend time gathering must exceed the cost of gathering that information. Management accountants are free to engage in any information gathering and reporting activity so long as the activity adds value in excess of its cost.

6. Identify the key issues of corporate governance, and legislative guidelines through the 2002 SOX Act.

CORPORATE GOVERNANCE is a set of relationships between the board of directors, management, shareholders, auditors, and other stakeholders that determine how a company is operated.

Management accountants are at the forefront of corporate governance. They are the guardians of the information used to report on the financial condition of their companies. Scandals usually begin with schemes to manipulate a company's financial reports and end when the falsification is so great it becomes obvious the reports no longer represent reality. The appropriate management of the information function is a highly effective force against corrupt governance. It is little wonder why recent legislation (2002 SOX Act) requires the chief financial officer along with the chief executive officer to personally certify that the company's annual report does not contain false statements nor omit significant facts.

While extensive coverage of the Sarbanes-Oxley Act of 2002 is beyond the scope of this course, every management accountant should be aware of the following:

i). Sarbanes-Oxley holds the chief executive officer (CEO) and the chief financial officer (CFO) responsible for the establishment and enforcement of a strong set of internal controls. Along with their annual report, companies are required to report on the effectiveness of their internal controls.

ii) Sarbanes-Oxley charges the CEO and the CFO with the ultimate responsibility for the accuracy of the company's financial statements and the accompanying footnotes. The CEO and CFO are required to certify that they have reviewed the report and that, to their knowledge, the report does not contain false statements or significant omissions. An intentional misrepresentation is punishable by a fine up to $5 million and imprisonment of up to 20 years.

iii). Sarbanes-Oxley requires management to establish a code of ethics and to file reports on the code in the company's annual 10K report filed with the Securities and Exchange Commission.

6

iv). Sarbanes-Oxley demands that management establish a hotline and other mechanisms for the anonymous reporting of fraudulent activities. Further, companies are prohibited from punishing whistleblowers, employees who legally report corporate misconduct.

7. Explain Ethical challenges faced in managerial accounting, and identify components of the Institute of Management Accountants’ “Statement of Ethical Professional Practice”.Managers are judged on their companies' financial statements or their companies' stock price which is determined in part by the financial statements. Managers are rewarded for strong financial statements with promotions, pay raises, bonuses, and stock options. Weak financials can result in a manager being passed over for promotions, demoted, or even fired. It is little wonder that some executives are tempted to manipulate financial statements.

IMA Ethical Standards: Management accountants must be prepared not only to make difficult choices between legitimate alternatives but also to face conflicts of a more troubling nature, such as pressure to:

-- perform duties with lack of training -- disclose confidential information -- compromise their integrity, and -- issue biased, misleading or incomplete reports.

Yielding to these temptations can have disastrous consequences. This exhibit (Exh.1-17 (p22), ETO 8th Ed.): summarizes standards found in the Institute of Management Accountants Statement of Ethical Professional Practice. Failure to adhere to professional and organizational ethical standards can lead to disciplinary action.

People who engage in unethical or criminal behavior usually do so unexpectedly. The following three elements are typically present when fraud occurs: The availability of an opportunity. The existence of some form of pressure leading to an incentive. The capacity to rationalize.

DEFINING, ACCUMULATING AND ASSIGNING COST FOR MANAGERIAL INTERNAL AND EXTERNAL PURPOSES8. Describe how “Cost” definition, accumulation and assignment depend on managerial objective.Business organizations that managers manage can be described as doing the following: they take inputs, process same (according to their unique production approaches) and produce outputs (goods or services) which they disseminate to their customers. This process of creating value (procure, transform/process inputs to produce outputs for delivery to customers) costs money. Organizations incur the costs of value creation in expectation of capturing value through price they will charge that is greater than their cost. The outputs of organizations represent one of their most important cost objects (where a cost object is anything it is desired to know its cost) To effectively manage an organization, a manager needs to know the cost of his/her organization’s outputs for profitability analysis/assessment, strategic decisions concerning product continuance or discontinuance, product mix, pricing, financial reporting, operational control… How then do managerial accountants produce product cost information to satisfy managerial need for that information? How managerial accountants compile, compute, assign costs (i.e., link accumulated organizational cost to products as cost objects) depends on just how the product costs are defined.

We need to understand the objective that management is seeking to achieve when it demands

7

product cost information, because different managerial objectives will lead to different definitions and computations/compilations of product cost. The objective served dictates what is included in product cost vs. what is excluded. The table below lists different managerial objectives, associated product cost definitions and the types of costs aggregated to produce the cost information.

Managerial Objective

Pricing decisions. Product mix decisions. Strategic profitability analysis Objectives

Strategic design decisions. Tactical profitability analysis(Special Order; Accept or Reject; Make or Buy) Objective

External financial reporting Objective

Product Cost Definition

Value chain product cost Operating product costUS-GAAP Product or Inventoriable costs

Examples of Costs included

Research & Development costProduction cost. Marketing cost.Delivery cost.Customer service cost

Production costMarketing costCustomer service

Production or manufacturing costs

9. Identify, compile and illustrate the cost components, for financial reporting objective, of a product made by a manufacturing company: the cost of materials, labor, and overhead. (Illustrations in class!)Costs for managerial external reporting purposes can be classified as product or period costs. Product Costs (materials, labor, and overhead) are costs incurred in the manufacturing process. Exh.1-11 (p.13) in ETO, 8th edition summarizes relevant information about the three components of product costs. These costs have not yet been used to help earn revenue. Rather, they are used to produce inventory, an asset. (Because of this, they are also called INVENTORIABLE costs). So long as the inventory remains on hand, all product costs remain in an inventory account. When the inventory is sold, revenue will be earned and the cost of the asset sold is transferred from the asset account to the cost of goods sold account, which is an expense account. Costs such as depreciation on machinery, a manufacturing supervisor's salary, and utilities cannot be easily traced to products. Costs that cannot be traced to products and services in a cost-effective manner are called indirect costs or overhead costs or manufacturing overhead costs if incurred in mfg. dept. to make products.

10. Identify, calculate and explain the effects on financial statements of product costs versus general, selling, and administrative costs. (Illustrations and Calculations in class!)

Period Costs are incurred to help earn revenue and, thus, are expensed in the period the associated revenue is reported. Period costs generally include general operating costs, selling and administrative costs, interest costs, and the cost of income taxes.

Illustrate Flow of Product Costs (Material, Labor & OH) through the accounting records

11. Distinguish product costs from upstream and downstream costs in a “value chain” display of costs. Upstream costs occur before the manufacturing process begins. For example, most car manufacturers incur significant research and development costs prior to mass producing a new car model. Downstream costs occur after the manufacturing process begins. Examples of downstream costs include transportation, advertising, sales commissions, and bad debts. While upstream and downstream costs are not considered to be product costs for financial reporting purposes, profitability analysis requires that they be considered in cost-plus pricing decisions. To be profitable, a company must recover the total cost of developing, producing, and delivering its products to customers.

8

12. Explain how product costing differs in service, merchandising, and manufacturing companies.Companies are frequently classified as being service, merchandising, or manufacturing businesses. As the name implies, service organizations provide services rather than physical products to consumers. Examples of service organizations are accountants, lawyers, restaurants, dry cleaning establishments, and lawn care companies. Merchandising businesses are sometimes called retail or wholesale companies; they sell goods other companies make. Manufacturing companies make the goods they sell. Like manufacturing companies, service and merchandising companies also incur materials, labor and overhead costs. However, for service and merchandising companies, these costs are normally treated as period (general, selling and administrative) expenses rather than accumulated in inventory accounts.

Use the following information to answer Questions Q1 to Q4 below:Duncan Manufacturing Company began operations on January 1, 2015. During the year, it started and completed 50 units. The company has the following transactions: 1. Acquired $30,000 cash by issuing common stock.

2. Paid $10,000 for materials. 3. Paid $6,000 for administrative salaries. 4. Paid $8,000 for wages of production workers.5. Depreciation of office furniture $2,500. 6. Depreciation of manufacturing equipment $3,500.7. Collected $28,000 in cash for sales of 45 units.

Required:Q1: If 50 units were completed and 5 units were in ending inventory, what is the cost of Ending Inventory? Q2: If 50 units were completed and 5 units were in ending inventory, and the remainder were sold, what is the cost of goods sold?Q3: If 50 units were completed and 5 units were in ending inventory, and the remainder were sold, what is the gross margin?Q4: If 50 units were completed and 5 units were in ending inventory, and the remainder were sold, what is the net income?Q5: Johnson Manufacturing incurred the following costs: $5,000 for materials, $4,000 for production labor, $3,500 depreciation of manufacturing equipment, $2,500 depreciation of office furniture, and $5,000 for sales salaries. Fifty units were produced. What is the average cost per unit?

VALUE CHAIN FUNCTIONAL COSTSDuring 20XX, DJ Inc., borrowed $9 million, invested $8 million in facilities and equipment, and incurred the following costs in making 138,000 units of product PXT. DJ Inc. sold 120,000 units of PXT.

1. Materials and Supplies used in production, $$560,000.2. Salaries paid to product and process engineers for R&D, $350,0003. Salaries of product and process design engineers for PXT design, $200,0004. Labor Wages paid to production/manufacturing personnel, $340,0005. Production supervisors’ pay, $100,0006. Advertising expenses paid, $20,0007. Paid the following for R&D: Supplies, $50,000; facility costs (taxes, utilities, security…) $75,000; equipment depreciation, $40,000; AND Cost to do surveys $30,0008. Production or manufacturing Maintenance wages, $55,0009. Salaries of marketing personnel and their travel costs, entertainment expenses, $150,000

9

10. Salaries of customer service personnel, $48,00011. Depreciation of production plant and machinery$46,00012. Production facility property taxes, insurance, $24,00013. Wages paid to distribution shipping personnel for, $50,00014. Depreciation of Marketing department equipment (Computers), $15,00015. Depreciation of computer-aided design equipment used to develop prototypes for testing $35,00016. Production Utility costs, $48,00017. Cost of Supplies and facility used in design $25,00018. Marketing department utilities, taxes, insurance, $20,00019. Distribution Transportation costs and depreciation of equipment, $25,00020. Customer Service: Warranty costs, $80,000; and, Costs of supplies, travel, equipment, utilities, $36,00021. Administrative, Financing (interest), Info. System, legal, HRM expenses (which are not from the Production Dept.) totaled, $480,000. for external financial reporting purpose.

REQUIRED: Based on the above information, answer the following:

(A) The total product costs for external financial reporting purposes, in the period are: $___________________(B) The total period costs for external financial reporting purposes, in the period are: $____________________ (C) The balance in the Fin. Goods inventory account shown on DJC’s 12/31/XX balance sheet is $___________ (D) The total expenses shown on DJC’s 12/31/XX income statement is, $______________________________

Bus. 313: Managerial AccountingDr. Ahiarah Chapter 1 BankThe three potential sources of questions for a comprehensive exam on ETO 8th ed. Chapter 1, will include the questions below as edited, the ones in Ch1FreePrct in CONNECT, and those in the WEB Quiz, as also edited.

D1.Which of the following is a characteristic of managerial accounting?a. Users of the data are insiders such an managers and employees.b. Includes physical information about subunits of an organization.c. Is regulated only by the cost / benefit rule.d. all of the above are characteristics of managerial accounting.

B2.Phil Carter is a stockbroker. In this capacity, Phil is interested in which of the following kinds of information.a. information that pertains to the operations of a business such as time cards and work schedules.b. information that is global and pertains to the business as a wholec. information that pertains to the subunits of a business organization.d. both a and c

C3.Which of the following is not a product cost?a. The cost of ordering production supplies.b. The cost of rent on the manufacturing facility.c. The cost of commissions paid to sales staff.d. a and c.

A4.Which of the following statements concerning product versus general, selling, and administrative (GS&A) costs is true?a. Product costs are usually spread between the balance sheet and the income statement.b. GS&A costs never appear on the balance sheet.c. Product costs appear only on the income statement.d. GS&A costs are accumulated in an inventory account before appearing on the income statement.

The following information applies to the next two questions:

Newman Industries (NI) makes baby diapers. During the most recent accounting period, NI paid $90,000 for raw materials, $78,000 for labor, and $82,000 for overhead costs that were incurred to start and complete 125,000 boxes of diapers. GS&A Expenses amounted to $120,000.

D5. Assuming NI desires to earn a gross profit that is equal to 60% of product (inventoriable for financial reporting purposes) cost. The selling price per box of diapers should be:a. $2.00b. $2.60c. $3.00d. $3.20 (Note: The value-chain based price would be $4.74. Illustrate!)

A6.If NI sells 110,000 boxes of diapers, the amount of net income will be:a. $12,000b. $13,200c. $22,000d. none of the above. (Note: Were value-chain based selling price to be used, “D” would be the answer)

A7.Which of the following statements is true?

11

a. A cost can be recognized as an expense immediately or accumulated in an asset account.b. A cost and an expense are different terms used to describe the same thing.c. An expense can be recognized immediately or accumulated in an asset account.d. Costs incurred for wages of production workers are expensed before they are accumulated in an

inventory account.

The following information applies to the next two questions:

During 2001, Gary Manufacturing Company (GMC) incurred $280,000 of manufacturing costs and $84,000 of GS&A expenses. GMC made 14,000 units of product and sold 12,000 units.

B8.Based on the above information, the balance in the inventory account shown on GMC’s 12/31/X1 balance sheet is:a. $220,000b. $40,000c. $280,000d. $24,000

C9.Based on the above information, the amount of expense shown on GMC’s 12/31/X1 income statement is:a $240,000b. $84,000c. $324,000d. none of the above

B10. Beverly Industries paid cash for the rental of manufacturing equipment. Select the answer that shows the effect that this event would have on the financial statements.

Assets = Liab. + Equity

Rev. ─ Exp. = Net Inc.

Cash Flow

a. - n/a - n/a - - n/ab - + n/a n/a n/a n/a n/a - OAc. - n/a - n/a n/a n/a - OAd. + - n/a n/a n/a n/a n/a n/a

The following information applies to the next three questions:

The accounting records of the Areo Manufacturing Company (AMC) contained the following information:

Raw Materials Used $40,000 Sales Revenue $192,000Sales Salaries 12,000 Indirect Manufacturing Costs 68,000Depreciation on Admin. Equip. 8,000 Depreciation on Production Equip. 14,000Wages Paid to Production Workers 60,000 Miscellaneous GS&A Expenses 18,000

AMC made 5,000 units of product and sold 4,000 units during the accounting period. There was no beginning inventory.

D11. AMC average product cost per unit is: a. $33.60b. $16.40c. $20.00d. $36.40

12

A12. The balance in AMC’s inventory account as of December 31 is:a. $36,400b. $145,600c. $33,600d. $182,000

C13. The amount of net income appearing on AMC’s December 31 income statement is:a. $26,400b. $34,400c. $8,400d. $46,400

D14. The president of Beatty Manufacturing Company is paid an incentive bonus that is equal to 5% of net income. During the current accounting period, Beatty expects to make 10,000 units of product and to sell 9,000 units. Beatty recently incurred a $1,000,000 manufacturing design cost. There is a debate regarding whether this cost should be classified as a product cost or as an upstream cost. Beatty is in a 30% tax bracket. Based on this information, select the true answer from the following choices. a. The company president will be motivated to classify the cost as a product cost because her bonus will be

$50,000 higher than it will be if the cost is classified as an upstream cost.b. Beatty’s income taxes expense will be $70,000 more if the design cost is classified as a product cost

than it will be if it is classified as an upstream cost.c. Beatty’s financial statements will portray a more favorable financial position if the design cost is

classified as an upstream cost rather than a product cost. d. None of the statements is true.

D15. The accountant for Sandy Manufacturing mistakenly classified a selling expense as a product cost during an accounting period in which the company sold more inventory than it produced. Sandy uses a LIFO cost flow system. As a result of this error,a. assets and net income will be overstated.b. assets will be overstated and net income will be understated.c. assets and net income will be understated.d. assets and net income will be unaffected.

C16. Which of the following practices is not considered to be an emerging trend in managerial accounting?a. Benchmarkingb. Value-added assessmentc. Stereotypingd. Activity-based management

D17. Which of the following cost is not incurred by service companies?a. raw materials cost (A restaurant (food service Co, for example, incurs raw materials cost)b. labor costc. overhead costd. service companies incur all of the above costs.

D18. The following balance sheet information is provided for Santana Company for 2014:

13

What is the company's debt to equity ratio?

A. 42%B. 130%C. 43%D. 77%

C19. The following partial balance sheet is provided for Groome Company:

What is the company's debt to assets ratio?

A. 49%B. 16%C. 33%D. Cannot be determined with the information given.

A20. The Fortune Company reported the following income for 2014:

What is the company's number of times interest is earned ratio?

14

A. 7 timesB. 6 timesC. 4 timesD. None of these answers is correct.

B21. Alpha Company provided the following balance sheet for 2014:

What is the company's plant assets to long-term liabilities ratio?

A. 2.5B. 4.5C. 1.7D. None of these answers is correct.

A22. You are considering an investment in Frontier Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except:

A. Average days to collect receivables.B. Asset turnover.C. Return on investment.D. Net margin.

C23. The Poole Company reported the following income for 2014:

15

What is the company's net margin? A. 73%B. 40%C. 18%D. 27%

D24. Select the incorrect statement regarding net margin.

A. Net margin refers to the average amount of each sales dollar remaining after all expenses are subtracted.B. Net margin may be calculated in several ways.C. The amount of net margin is affected by a company's choices of accounting principles.D. The smaller the net margin the better.

C25. The Miller Company reported gross sales of $850,000, sales returns and allowances of $15,000 and sales discounts of $5,000. The company has total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?

A. 3.32 timesB. 1.67 timesC. 1.66 timesD. 1.7 times

B26. The Martin Company reported net income of $15,000 on gross sales of $80,000. The company has total assets of $135,000, of which $102,000 is property, plant and equipment. What is the company's return on investment?

A. 18.8%B. 11.1%C. 14.7%D. 12.5%

D27. Select the incorrect statement regarding the return on equity (ROE) measure.

A. ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.B. ROE equals net income divided by average total stockholders' equity.C. ROE is affected by a company's use of leverage.D. A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt.

C28. The Dennis Company reported net income of $50,000 on sales of $300,000. The company has total assets of $500,000 and total liabilities of $100,000. What is the company's return on equity ratio?

A. 10.0%B. 16.7%C. 12.5%D. 50.0%

D29. The return on investment measure is also referred to as: A. Net margin.B. Return on equity.C. Return on debt.

16

D. Return on assets.

C30. You are considering an investment in Facebook stock and wish to assess the company's position in the stock market. All of the following ratios can be used except:

A. Dividend yield.B. Earnings per share.C. Working capital.D. Price-earnings ratio.

C31. The Abel Company provided the following information from its financial records:

What is the amount of the company's earnings per share? A. $0.82B. $1.00C. $0.90D. $0.75

B32. The Bernard Company provided the following information from its financial records:

What is the company's book value per share? A. $0.50B. $5.50C. $6.67D. $1.67

A33. The Crestar Company reported net income of $112,000 on 20,000 outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $95. What is this company's current price-earnings ratio?

A. 19B. 17C. 20D. None of these answers is correct.

D34. The Phibbs Company paid total cash dividends of $200,000 on 25,000 outstanding common shares. On the most recent trading day, the common shares sold at $80. What is this company's dividend yield? A. 25%B. 6.4%C. 16.9%D. 10% A35. Which of the following statements is generally incorrect from an investor's perspective? A. A 1:1 current ratio is generally preferred over a 2:1 current ratio.

17

B. A 20-day average collection period for accounts receivable is generally preferred over a 30-day average collection period.C. A 5% dividend yield is generally preferred over a 3% dividend yield.D. A 10% net margin is generally preferred over an 8% net margin.Learning Objective: 13-05 Calculate ratios for assessing a company's position in the stock market.

During 20XX, DJ Inc., borrowed $9 million, invested $8 million in facilities and equipment, and incurred the following costs in making 138,000 units of product PXT. DJ Inc. sold 120,000 units of PXT. T, DesJardin Co. (DJC) incurred the following value chain function costs

Research and Development (R&D): Salaries of product and process engineers $350,000

R&D Supplies, $50,000; facility costs (taxes, utilities, insurance…) $75,000, equipment depreciation, $40,000Cost to do surveys $30,000

Design of products, services, and processes:Salaries of product design engineers $200,000Depreciation of computer-aided design equipment used to develop prototypes for testing $35,000Cost of Supplies and facility used $25,000

Production or Manufacturing (ONLY THESE OR OTHER COSTS FROM THIS (Production) DEPT. ARE CLASSIFIED AS PRODUCT/INVENTORIABLE OR MANUFACTURING COSTS FOR EXTERNAL FINANCIAL REPORTING PURPOSES) Materials and Supplies used, $$560,000 Labor Wages, $340,000 Production supervisors’ pay, $100,000 Maintenance wages, $55,000 Depreciation of plant and machinery$46,000 Production facility property taxes, insurance, $24,000

Utility costs, $48,000Every other Value Chain or Administrative cost not from the Production Dept., is classified as PERIOD cost for external or financial reporting purposes

Marketing Advertising expenses, $20,000 Salaries of marketing personnel and travel costs, entertainment expenses, $150,000 Depreciation of Marketing department equipment (e.g. Computers), $15,000 Marketing department utilities, taxes, insurance, $20,000

Distribution Wages of shipping personnel, $50,000 Transportation costs and depreciation of equipment, $25,000

Customer Service Salaries of service personnel, $48,000 Warranty costs, $80,000 Costs of supplies, travel, equipment, utilities, $36,000

Also, Administrative, Financing (e.g., interest), Info. System, legal, HRM expenses (which are not from the Production Dept.) are Period costs for external financial reporting purpose. These costs totalled, $480,000. DesJardin Co. made 138,000 units of the product and sold 120,000 units. Based on the above information, the balance in the inventory account shown on DJC’s 12/31/XX balance sheet is $_____________? And the total expenses shown on DJC’s 12/31/XX income statement are: $____________________?

18

During 20XX, DJ Inc., borrowed $9 million, invested $8 million in facilities and equipment, and incurred the following costs in making 138,000 units of product PXT. DJ Inc. sold 120,000 units of PXT.

VALUE CHAIN FUNCTIONAL COSTSResearch and Development (R&D): ($545,000)

Salaries of product and process engineers $350,000 R&D Supplies, $50,000; facility costs (taxes, utilities, insurance…) $75,000, equipment depreciation, $40,000

Cost to do surveys $30,000Design of products, services, and processes: ($260,000)

Salaries of product design engineers $200,000Depreciation of computer-aided design equipment used to develop prototypes for testing $35,000Cost of Supplies and facility used $25,000

Production or Manufacturing (ONLY THESE OR OTHER COSTS FROM THIS (Production) DEPT. ARE CLASSIFIED AS PRODUCT/INVENTORIABLE OR MANUFACTURING COSTS FOR EXTERNAL FINANCIAL REPORTING PURPOSES) Materials and Supplies used, $560,000 Labor Wages, $340,000 Production supervisors’ pay, $100,000 Maintenance wages, $55,000 Depreciation of plant and machinery$46,000 Production facility property taxes, insurance, $24,000

Utility costs, $48,000 ($560,000+$340,000+$100,000+$55,000+$46,000+$24,000+$48,000) =$1,173,000Every other Value Chain or Administrative cost not from the Production Dept., is classified as PERIOD cost for external or financial reporting purposesMarketing ($205,000) Advertising expenses, $20,000 Salaries of marketing personnel and travel costs, entertainment expenses, $150,000 Depreciation of Marketing department equipment (e.g. Computers), $15,000 Marketing department utilities, taxes, insurance, $20,000Distribution ($75,000) Wages of shipping personnel, $50,000 Transportation costs and depreciation of equipment, $25,000Customer Service ($164,000) Salaries of service personnel, $48,000 Warranty costs, $80,000 Costs of supplies, travel, equipment, utilities, $36,000 ($545,000)+ ($260,000)+ ($205,000)+ ($75,000)+ ($164,000)=$1,249,000Also, Administrative, Financing (e.g., interest), Info. System, legal, HRM expenses (which are not from the Production Dept.) are Period costs for external financial reporting purpose. These costs totalled, $480,000. DesJardin Co. made 138,000 units of the product and sold 120,000 units. Based on the above information, the balance in the inventory account shown on DJC’s 12/31/XX balance sheet is $_ 153,000 _ ? And the total expenses shown on DJC’s 12/31/XX income statement are: $____________________? REQUIRED: Based on the above information, answer the following:

(A) The total product costs for external financial reporting purposes, in the period are: $_1,173,000_(B) The total period costs for external financial reporting purposes, in the period are: $_1,729,000_ (C) The balance in the Fin. Goods inventory account shown on DJC’s 12/31/XX balance sheet is $_ 153,000 _ (D) The total expenses shown on DJC’s 12/31/XX income statement are, COGS $1,020,000 + Total Period Costs of $1,729,000 = $2,749,000__

19

20