Introduction to Managerial Accounting

Determining the flow of costs through a manufacturer’s inventory accounts 

True Fit Shoe Company makes loafers. During the most recent year, True Fit incurred total manufacturing costs of \(21,900,000. Of this amount, \)2,600,000 was direct materials used and \(14,800,000 was direct labor. Beginning balances for the year were Direct Materials, \)700,000; Work-in-Process Inventory, \(1,500,000; and Finished Goods Inventory, \)1,100,000. At the end of the year, balances were Direct Materials, \(800,000; Work-in-Process Inventory, \)2,000,000; and Finished Goods Inventory, $1,080,000. 

Requirements Analyze the inventory accounts to determine: 

1. Cost of direct materials purchased during the year. 

2. Cost of goods manufactured for the year. 

3. Cost of goods sold for the year.

Preparing an income statement and calculating unit cost for a service company 

The Glass Doctors repair chips in car windshields. The company incurred the following operating costs for the month of July 2018: 

Salaries and wages \( 10,000

Windshield repair materials 4,100 

Depreciation on truck 500 

Depreciation on building and equipment 900 

Supplies used 450 

Utilities 4,550 

The Glass Doctors earned \)25,000 in service revenues for the month of July by repairing 250 windshields. All costs shown are considered to be directly related to the repair service. 

Requirements 

1. Prepare an income statement for the month of July. 

2. Compute the cost per unit of repairing one windshield, rounded to the nearest cent. 

3. The manager of The Glass Doctors must keep unit operating cost below $80 per windshield in order to get his bonus. Did he meet the goal?

Preparing an income statement and calculating unit cost for a service company 

The Glass Doctors repair chips in car windshields. The company incurred the following operating costs for the month of July 2018: 

Salaries and wages \( 10,000

Windshield repair materials 4,100 

Depreciation on truck 500 

Depreciation on building and equipment 900 

Supplies used 450 

Utilities 4,550 

The Glass Doctors earned \)25,000 in service revenues for the month of July by repairing 250 windshields. All costs shown are considered to be directly related to the repair service. 

Requirements 

1. Prepare an income statement for the month of July. 

2. Compute the cost per unit of repairing one windshield, rounded to the nearest cent. 

3. The manager of The Glass Doctors must keep unit operating cost below $80 per windshield in order to get his bonus. Did he meet the goal?

Preparing an income statement and calculating unit cost for a merchandising company

 Dillon Young owns Dillon’s Pets, a small retail shop selling pet supplies. On December 31, 2018, the accounting records for Dillon’s Pets showed the following: 

Merchandise Inventory on December 31, 2018 $ 10,500 

Merchandise Inventory on January 1, 2018 16,000 

Net Sales Revenue 56,000 

Utilities Expense for the shop 3,200

 Rent for the shop 4,100 

Sales Commissions 2,750 

Purchases of Merchandise Inventory 25,000 

Requirements 

1. Prepare an income statement for Dillon’s Pets for the year ended December 31, 2018. 

2. Dillon’s Pets sold 5,550 units. Determine the unit cost of the merchandise sold, rounded to the nearest cent.

Question: Preparing an income statement and calculating unit cost for a merchandising company

 Dillon Young owns Dillon’s Pets, a small retail shop selling pet supplies. On December 31, 2018, the accounting records for Dillon’s Pets showed the following: 

Merchandise Inventory on December 31, 2018 $ 10,500 

Merchandise Inventory on January 1, 2018 16,000 

Net Sales Revenue 56,000 

Utilities Expense for the shop 3,200

 Rent for the shop 4,100 

Sales Commissions 2,750 

Purchases of Merchandise Inventory 25,000 

Requirements 

1. Prepare an income statement for Dillon’s Pets for the year ended December 31, 2018. 

2. Dillon’s Pets sold 5,550 units. Determine the unit cost of the merchandise sold, rounded to the nearest cent.

This is the first problem in a sequence of problems for Piedmont Computer Company, a manufacturer of personal computers and tablets. During its first month of manufacturing, Piedmont Computer Company incurred the following manufacturing costs: 

Balances: Beginning Ending 

Direct Materials \( 10,500 \) 9,700 

Work-in-Process Inventory 0 17,000 

Finished Goods Inventory 0 31,000 

Other information: 

Direct materials purchases $ 16,000 

Plant janitorial services 500 

Sales salaries expense 10,000 

Delivery expense 1,600 

Sales revenue 1,100,000

 Utilities for plant 16,000 

Rent on plant 9,000 

Customer service hotline costs 19,000 

Direct labor 210,000 

Prepare a schedule of cost of goods manufactured for Piedmont Computer Company for the month ended January 31, 2020.

Power Switch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected Power Switch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed. 

Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant. 

“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?” 

“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last year’s annual report. We need first-quarter cost data.” 

“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report is still in my desk drawer. All I can make out is that for the first quarter, direct material purchases were \(476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were \)505,000, \(245,000, and \)1,425,000, respectively. Wait! Cost of goods available for sale was \(1,340,000.”

 “Great,” says Stephen. “I remember that sales for the period were approximately \)1,700,000. Given our gross profit of 30%, that’s all you should need.” 

Paul is not sure about that but decides to see what he can do with this information. The beginning inventory numbers were: 

• Direct Materials, \(113,000 

• Work-in-Process, \)229,000 

• Finished Goods, $154,000

Requirements

1. Prepare a schedule showing each inventory account and the increases and decreases to each account. Use it to determine the ending inventories of Direct Materials, Work-in-Process, and Finished Goods. 

2. Itemize a list of the cost of inventory lost.

Winnebago Industries, Inc. is a leading manufacturer of recreational vehicles (RVs), including motorized and towable products. The company designs, develops, manufactures, and markets RVs as well as supporting products and services. The RVs are sold to consumers through a dealer network. On the August 29, 2015, balance sheet, Winnebago reported inventory of approximately \(112 million. Of this amount, approximately \)12 million, about 11%, was Finished Goods Inventory (Notes to Consolidated Financial Statements, Note 3). Suppose Winnebago motor homes have an average sales price of $96,000 and cost of goods sold is 89% of sales. Thor Industries, Inc., a major competitor, has an average cost of goods sold of 86% of sales. For year ending August 29, 2015, Winnebago sold 9,097 motor homes (Form 10-K, Item 1 Business). 

Requirements 

1. Why would the Finished Goods Inventory be such a relatively small portion of total inventory? 

2. What is the average cost of goods sold (in dollars) for a Winnebago motor home? What is the average gross profit? 

3. If Winnebago could reduce production costs so that the average cost of goods sold is equal to their competitor’s average cost of goods sold, how much more profit would Winnebago earn on each motor home sold? 

4. Based on 2015 sales, how much would operating income increase if the company reduced the average cost of goods sold to equal their competitor’s average cost of goods sold? 

5. How could managers at Winnebago use managerial accounting to reduce costs and increase profits?

Question: Suppose you manage Campbell Appliance. The store’s summarized financial statements for 2019, the most recent year, follow:

Assume that you need to double net income. To accomplish your goal, it will be very difficult to raise the sales prices you charge because there is a discount appliance store nearby. Also, you have little control over your cost of goods sold because the appliance manufacturers set the amount you must pay.

Identify several strategies for doubling net income.

In 100 words or fewer, explain the difference between product costs and period costs. In your explanation, explain the inventory accounts of a manufacturer.

Becky Knauer recently resigned from her position as controller for Shamalay Automotive, a small, struggling foreign car dealer in Upper Saddle River, New Jersey. Becky has just started a new job as controller for Mueller Imports, a much larger dealer for the same car manufacturer. Demand for this particular make of car is exploding, and the manufacturer cannot produce enough to satisfy demand. The manufacturer’s regional sales managers are each given a certain number of cars. Each sales manager then decides how to divide the cars among the independently owned dealerships in the region. Because of high demand for these cars, dealerships all want to receive as many cars as they can from the regional sales manager. 

Becky’s former employer, Shamalay Automotive, receives only about 25 cars each month. Consequently, Shamalay is not very profitable. 

Becky is surprised to learn that her new employer, Mueller Imports, receives more than 200 cars each month. Becky soon gets another surprise. Every couple of months, a local jeweler bills the dealer $5,000 for “miscellaneous services.” Franz Mueller, the owner of the dealership, personally approves payment of these invoices, noting that each invoice is a “selling expense.” From casual conversations with a salesperson, Becky learns that Mueller frequently gives Rolex watches to the manufacturer’s regional sales manager and other sales executives. Before talking to anyone about this, Becky decides to work through her ethical dilemma. Put yourself in Becky’s place.

Requirements 

1. What is the ethical issue? 

2. What are your options? 

3. What are the possible consequences? 

4. What should you do?