Richard Larkin has prepared the following list of statements about managerial accounting and
financial accounting.

Financial accounting focuses on providing information to internal users.

2. Analyzing cost-volume-profit relationships is part of managerial accounting.
3. Preparation of budgets is part of financial accounting.
4. Managerial accounting applies only to merchandising and manufacturing companies.
5. Both managerial accounting and financial accounting deal with many of the same
economic events
6. Managerial accounting reports are prepared only quarterly and annually.
7. Financial accounting reports are general –purpose reports.
8. Managerial accounting reports pertain to subunits of the business.
9. Managerial accounting reports must comply with generally accepted accounting
10. Although managerial accountants are expected to behave ethically, there is no code of
ethical standards for managerial accountants.
Identify each statement as true or false. If false, indicate how to correct the statement
Presented below is a list of costs and expenses usually incurred by Barnum Corporation, a
manufacturer of furniture, in its factory.

Salaries for assembly line inspectors

2. Insurance on factory machines
3. Property taxes on the factory building
4. Factory repairs
5. Upholstery used in manufacturing furniture
6. Wages paid to assembly line workers
7. Factory machinery depreciation

8. Glue, nails, paint, and other small parts used in production
9. Factory supervisor’s salaries
10. Wood used in manufacturing furniture
Classify the above items into the following categories (a) direct materials, (b) direct labor, and
(c) manufacturing overhead

Knight Company reports the following costs and expenses in May
Factory utilities
Depreciation on factory equipment
Depreciation on delivery trucks
Indirect factory labor
Indirect materials
Direct materials used
Factory manager’s salary
Direct labor
Sales salaries
Property taxes on factory building
Repairs to office equipment
Factory repairs
Office supplies used


From the information, determine the total amount of:
(a) Manufacturing overhead
(b) Product costs
(c) Period costs

Ikerd Company is a manufacturer of personal computers. Various costs and expenses
associated with its operations are as follows:

Property taxes on the factory building

2. Production superintendents salaries
3. Memory boards and chips used in assembling computers
4. Depreciation on the factory equipment
5. Salaries for assembly-line quality control inspectors
6. Sales commissions paid to sell personal computers
7. Electrical components used in assembling computers
8. Wages of workers assembling personal computers
9. Soldering materials used on factory assembly lines
10. Salaries for the night security guards for the factory building
The company intends to classify these costs and expenses into the following categories:
(a) Direct materials, (b) direct labor, (c) manufacturing overhead, and (d) period costs.
List the items 1 through 10. For each item, indicate the cost category to which it belongs.

Cepeda Corporation has the following cost records for June 2014

Indirect factory labor
Direct materials used
Work in process 6/1/2014
Work in process 6/30/2014
Finished goods 6/1/2014
Finished goods 6/30/2014
Factory utilities
Depreciation, factory equipment
Direct labor
Maintenance, factory equipment
Indirect materials
Factory manager’s salary

$ 4,500

(a) Prepare a cost of goods manufactured schedule for June 2014
(b) Prepare an income statement through gross profit for June 2014 assuming sales
revenue is $92,100
Lott Company specializes in manufacturing a unique model of bicycle helmet. The model is well
accepted by consumers, and the company has enough orders to keep the factory production at
10,000 helmets per month (80% of its full capacity). Lott’s monthly manufacturing cost and
other expense data are as follows.
Rent on factory equipment
Insurance on factory building
Raw materials (plastics, polystyrene, etc)
Utility costs for factory
Supplies for general office
Wages for assembly line workers
Depreciation on office equipment
Miscellaneous materials (glue, thread, etc)
Factory manager’s salary
Property taxes on factory building
Advertising for helmets
Sales commissions
Depreciation on factory building

$ 9,000

(a) Prepare an answer sheet with the following column headings
Cost Item

Direct Materials

Product Costs
Direct Labor


Period Costs

Enter each cost item on your answer sheet, placing the dollar amount under the appropriate
headings. Total the dollar amounts in each of the columns.
Hint: DM 75,000, DL 53,000, MO 20,100, PC 25,100
(b) Compute the cost to produce one helmet

The following data were taken from the records of Clarkson Company for the fiscal year ended
June 30, 2014
Raw Materials
Inventory 7/1/13
Raw Materials
Inventory 6/30/2014
Finished goods
Inventory 7/1/13
Finished goods
Inventory 6/30/14
Work in process
Inventory 7/1/13
Work in process
Inventory 6/30/14
Direct labor
Indirect labor
Accounts receivable
Factory insurance
Factory Machinery Depreciation
Factory utilities
Office Utilities Expense
Sales Revenue
Sales discounts
Plant Manager’s salary
Factory Property Taxes
Factory repairs
Raw Materials Purchases


(a) Prepare a cost of goods manufactured schedule. (Assume all raw materials used were
direct materials)
Hint: CGM $386,910
(b) Prepare an income statement through gross profit
Hint: Gross profit $122,790
(c) Prepare the current assets section of the balance sheet at June 30, 2014
Hint: Current assets $193,100

Remmington Shipping Inc. is contemplating the use of process costing to track the costs of its
operations. The operation consists of three segments (departments): receiving, shipping, and
delivery. Containers are received at Remington’s docs and sorted according to the ship they will
be carried on. The containers are loaded onto a ship, which carries them to the appropriate port
of destination. The containers are then off-loaded and delivered to the receiving company.
Remington Shipping wants to begin using process costing in the shipping department. Direct
materials represent the fuel costs to run the ship, and “containers in transit” represents work in
process. Listed below is information about the shipping department’s first month’s activity:
Containers in transit, April 1
Containers loaded



Containers in transit April 30

350, 40% of direct materials and 20% of conversion costs

(a) Determine the physical flow of containers for the month
(b) Calculate the equivalent units for direct materials and conversion costs

Royale Mortgage Company uses a process cost system to accumulate costs in its load
application department. When an application is complete, it is forwarded to the load department
for final processing. The following processing and cost data pertain to September:


Applications in process on Sep 1


2. Applications started in September


3. Completed applications during September


4. Applications still in process at Sep 30 were 100% complete as to materials (forms) and
60% complete as to conversion costs
5. Beginning WIP:
a. Direct materials


b. Conversion costs


6. September costs
a. Direct materials
b. Direct labor
c. Overhead



Materials are the forms used in the application process, and these costs are incurred at the
beginning of the process. Conversion costs are incurred uniformly during the process.
(a) Determine the equivalent units of service (production) for materials and conversion costs
(b) Compute the unit costs and prepare a cost reconciliation schedule

Turgro Company manufactures a single product. Annual production costs incurred in the
manufacturing process are shown below for two levels of production

(a) Define the terms variable costs, fixed costs, and mixed costs
(b) Classify each cost above as either variable, fixed, or mixed.

The controller of Furgee Industries has collected the following monthly expense data for use in
analyzing the cost behavior of maintenance costs:

(a) Determine the fixed and variable cost components using the high-low method
(b) Prepare a graph showing the behavior of maintenance costs, and identify the fixed and
variable cost elements. Use 100-hour increments and $1,000 cost increments
In 2013, Manhoff Company had a break-even point of $350,000 based on a selling price of $5
per unit and fixed costs of $112,000. In 2014, the selling price and the variable costs per unit
did not change, but the break-even point increased to $420,000.
(a) Compute the variable costs per unit and the contribution margin ratio for 2013
(b) Compute the increase in fixed costs for 2014

Telly Savalas owns the Bonita Barber Shop. He employs four barbers and pays each a base
rate of $1000 per month. One of the barbers serves as the manager and receives an extra
$500 per month. In addition to the base rate, each barber also receives a commission of $4.50
per haircut.
Other costs are as follows:

$200 per month

$1,100 per month

Barber Supplies

$0.30 per haircut

$175 per month plus $0.20 per haircut


$25 per month

Telly currently charges $10 per haircut
(a) Determine the variable costs per haircut and the total monthly fixed costs
Hint: VC $5

(b) Compute the break-even point in units and dollars
(c) Prepare a CVP graph, assuming a maximum of 1,800 haircuts in a month. Use
increments of 300 haircuts on the horizontal axis and $3,000 on the vertical axis
(d) Determine net income, assuming 1,700 haircuts are given in a month

Mozena Corporation has collected the following information after its first year of sales. Sales
were $1,500,000 on 100,000 units; selling expenses $250,000 (40% variable and 60% fixed);
direct materials $511,000; direct labor $290,000; administrative expenses $270,000 (20%
variable and 80% fixed); manufacturing overhead $350,000 (70% variable and 30% fixed). Top
management has asked you to do a CVP analysis so that it can make plans for the coming year.
It has projected that unit sales will increase by 10% next year.
(a) Compute (1) the contribution margin for the current year and the projected year, and (2)
the fixed costs for the current year. (Assume that fixed costs will remain the same in the
projected year.)
(b) Compute the break-even point in units and sales dollars for the current year.
Hint: 157,000 units
(c) The company has a target net income of $200,000. What is the required sales in
dollars for the company to meet its target?
(d) If the company meets its target net income number, by what percentage could its sales
fall before its is operating at a loss? That is, what is its margin of safety ratio?

The condensed income statement for the Peri and Paul partnership for 2014 is as follows:

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the
selling expenses are variable, and 40% of the administrative expenses are variable.
(Round to the nearest unit, dollar, and percentage, where necessary. Use the CVP income
statement format in computing profits)
(a) Compute the break-even point in total sales dollars and in units for 2014
(b) Peri has proposed a plan to get the partnership “out of the red” and improve its
profitability. She feels that the quality of the product could be substantially improved by
spending $0.25 more per unit on better raw materials. The selling price per unit could be
increased to only $5.25 because of competitive pressures. Peri estimates that sales
volume will increase by 25%. What effect would Peri’s plan have on the profits and the
break-even point in dollars of the partnership? (Round the contribution margin ratio to
two decimal places)
(c) Paul was a marketing major in college. He believes that sales volume can be increased
only by intensive advertising and promotional campaigns. He therefore proposed the
following plan as an alternative to Peri’s: (1) increase variable selling expenses to $0.59
per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling
expenses by $40,000. Paul quoted an old marking research report that said that sales
volume would increase by 60% if these changes were made. What effect would Paul’s
plan have on the profits and the break-even point in dollars of the partnership?

(d) Which plan should be accepted? Explain your answer

The West Division of Nieto Company reported the following data for the current year:
Sales revenue


Variable costs


Controllable fixed costs
Average operating assets


Top management is unhappy with the investment center’s return on investment (ROI). It asks
the manager of the West Division to submit plans to improve ROI in the next year. The
manager believes it is feasible to consider the following independent courses of action:

Increase sales by $320,000 with no change in the contribution margin percentage

2. Reduce variable costs by $150,000
3. Reduce average operating assets by 4%
(a) Compute the return on investment (ROI) for the current year
(b) Using the ROI formula, compute the ROI under each of the proposed courses of action
(Round to one decimal)

The Dindle and Frizell Dental Clinic performs both preventative and orthodontic dental services.
The two owners, Reese Dindle and Anita Frizell, operate the clinic as two separate investment
centers: Preventative Services and Orthodontic Services. Each of them is in charge of one of
the centers: Reese for Preventative Services and Anita for Orthodontic Services. Each month,
they prepare an income statement for the two centers to evaluate performance and make
decisions about how to improve the operational efficiency and profitability of the clinic.
Recently, they have been concerned about the profitability of the Preventative Service
operations. For several months, it has been reporting a loss. The responsibility report for the
month of May 2014 is shown here:

In addition, the owners know that the investment in operating assets at the beginning of the
month was $82,400, and it was $77,600 at the end of the month. They have asked for your
assistance in evaluating their current performance reporting system.
(a) Prepare a responsibility report for an investment center as illustrated in the chapter
(b) Write a memo to the owners discussing the deficiencies of their current reporting system

Hill Company uses budgets in controlling costs. The August 2014 budget report for the
company’s Assembling Department is as follows:

The monthly budget amounts in the report were based on an expected production of 60,000
units per month or 720,000 units per year. The Assembling Department manager is pleased
with the report and expects a raise, or at least praise for a job well done. The company
president, however, is unhappy with the results for August because only 58,000 units were
(a) State the total monthly budgeted cost formula
(b) Prepare a budget report for August using flexible budget data. Why does this report
provide a better basis for evaluating performance than the report based on static budget
Hint: Budget $194,000

(c) In September, 64,000 units were produced. Prepare the budget report using flexible
budget data, assuming (1) each variable cost was 10% higher than its actual cost in
August, and (2) fixed costs were the same in September as in August.
Hint: Budget $211,000
Actual $212,100

Guzman Inc. operates the Home Appliance Division as a profit center. Operating data for this
division for the year ended Dec 31, 2014, are shown below:
Sales revenue
Cost of goods sold
Controllable fixed
Selling and administrative
Controllable fixed
Noncontrollable fixed costs


Difference form Budget
$90,000 U


58,000 U
8,000 F


8,000 F
3,000 U
2,000 U

In addition, Guzman incurs $150,000 of indirect fixed costs that were budgeted at $155,000.
Twenty percent (20%) of these costs are allocated to the Home Appliance Division. None of
these costs are controllable by the division manager.
(a) Prepare a responsibility report for the Home Appliance Division (a profit center) for the
Hint: Contribution margin $140,000 U
Controllable margin $135,000 U
(b) Comment on the manger’s performance in controlling revenues and costs
(c) Identify any costs excluded from the responsibility report and explain why they were