Tutorial Questions for Week 2

Exercise 1-1A Identifying financial versus managerial accounting items

Required
Indicate whether each of the following items is representative of managerial or of financial
accounting:
a. Information is factual and is characterized by objectivity, reliability, consistency, and
accuracy.
b. Information is reported continuously and has a current or future orientation.
c. Information is provided to outsiders, including investors, creditors, government agencies,
analysts, and reporters.
d. Information is regulated by the SEC, FASB, and other sources of GAAP.
e. Information is based on estimates that are bounded by relevance and timeliness.
f. Information is historically based and usually reported annually.
g. Information is local and pertains to subunits of the organization.
h. Information includes economic and nonfinancial data as well as financial data.
i. Information is global and pertains to the company as a whole.
j. Information is provided to insiders, including executives, managers, and employees.

Exercise 1-3A Classifying costs: Product or SG&A cost; asset or expense

Required
Use the following table to classify each cost as a product cost or an SG&A cost. Also indicate whether
the cost would be recorded as an asset or an expense. Assume product cost is defined by generally
accepted accounting principles. The first item is shown as an example.
Exercise 1-8A Allocating product costs between ending inventory and cost of goods sold

Mustafa Manufacturing Company began operations on January 1. During the year, it started and com-
pleted 3,000 units of product. The financial statements are prepared in accordance with GAAP. The
company incurred the following costs:

1. Raw materials purchased and used—$6,200.

2. Wages of production workers—$7,400.

3. Salaries of administrative and sales personnel—$3,000.

4. Depreciation on manufacturing equipment—$4,400.

5. Depreciation on administrative equipment—$2,200.

Mustafa sold 2,400 units of product.

Required

a. Determine the total product cost for the year.

b. Determine the total cost of the ending inventory.

c. Determine the total of cost of goods sold.

Exercise 1-10A Identifying upstream and downstream costs

During 2017, Rooney Manufacturing Company incurred $8,000,000 of research and development
(R&D) costs to create a long-life battery to use in computers. In accordance with FASB standards, the
entire R&D cost was recognized as an expense in 2017. Manufacturing costs (direct materials, direct
labor, and overhead) are expected to be $45 per unit. Packaging, shipping, and sales commissions are
expected to be $8 per unit. Rooney expects to sell 2,000,000 batteries before new research renders
the battery design technologically obsolete. During 2017, Rooney made 440,000 batteries and sold
400,000 of them.
Required

a. Identify the upstream and downstream costs.

b. Determine the 2017 amount of cost of goods sold and the ending inventory balance that would
appear on the financial statements that are prepared in accordance with GAAP.
c. Determine the sales price assuming that Rooney desires to earn a profit margin that is equal to 25
percent of the total cost of developing, making, and distributing the batteries.

d. Prepare a GAAP-based income statement for 2017. Use the sales price developed in Requirement
c.

e. Given that the price was properly established using total cost (upstream, midstream, and down-
stream cost), why does the GAAP-based income statement prepared in Requirement d show a loss?
Exercise 1-14A Using JIT to minimize waste and lost opportunity

Becky Shelton, a teacher at Kemp Middle School, is in charge of ordering the T-shirts to be sold for the
school’s annual fund-raising project. The T-shirts are printed with a special Kemp School logo. In some
years, the supply of T-shirts has been insufficient to satisfy the number of sales orders. In other years,
T-shirts have been left over. Excess T-shirts are normally donated to some charitable organization. T-
shirts cost the school $5 each and are normally sold for $12 each. Ms. Shelton has decided to order
700 shirts.
Required

a. If the school receives actual sales orders for 600 shirts, what amount of profit will the school earn?
What is the cost of waste due to excess inventory?

b. If the school receives actual sales orders for 800 shirts, what amount of profit will the school earn?
What amount of opportunity cost will the school incur?

c. Explain how a JIT inventory system could maximize profitability by eliminating waste and
opportunity cost.

Problem 1-20A Product versus selling, general, and administrative (SG&A) costs
Stuart Manufacturing Company was started on January 1, 2018, when it acquired $89,000 cash by
issuing common stock. Stuart immediately purchased office furniture and manufacturing equip-ment
costing $32,000 and $40,000, respectively. The office furniture had an eight-year useful life and a zero
salvage value. The manufacturing equipment had a $4,000 salvage value and an ex-pected useful life
of six years. The company paid $12,000 for salaries of administrative personnel and $21,000 for wages
to production personnel. Finally, the company paid $26,000 for raw materi-als that were used to make
inventory. All inventory was started and completed during the year. Stuart completed production on
10,000 units of product and sold 8,000 units at a price of $9 each in 2018. (Assume that all transactions
are cash transactions and that product costs are computed in accordance with GAAP.)

Required
a. Determine the total product cost and the average cost per unit of the inventory produced in 2018.

b. Determine the amount of cost of goods sold that would appear on the 2018 income statement.

c. Determine the amount of the ending inventory balance that would appear on the December 31,
2018, balance sheet.

d. Determine the amount of net income that would appear on the 2018 income statement.

e. Determine the amount of retained earnings that would appear on the December 31, 2018, balance
sheet.
f. Determine the amount of total assets that would appear on the December 31, 2018, balance sheet.
Problem 1-27A Importance of cost classification

Campbell Manufacturing Company (CMC) was started when it acquired $80,000 by issuing common
stock. During the first year of operations, the company incurred specifically identifiable product costs
(materials, labor, and overhead) amounting to $75,000. CMC also incurred $60,000 of engineering
design and planning costs. There was a debate regarding how the design and planning costs should be
classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and
administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and
planning costs as product costs. During the year, CMC made 5,000 units of product and sold 4,000
units at a price of $35 each. All transactions were cash transactions.

Required
a. Prepare a GAAP-based income statement and balance sheet under each of the two options.

b. Identify the option that results in financial statements that are more likely to leave a favorable
impression on investors and creditors.

c. Assume that CMC provides an incentive bonus to the company president equal to 20 percent of net
income. Compute the amount of the bonus under each of the two options. Identify the option that
provides the president with the higher bonus.
d. Assume a 30 percent income tax rate. Determine the amount of income tax expense under each of
the two options. Identify the option that minimizes the amount of the company’s income tax expense.

e. Comment on the conflict of interest between the company president as determined in Requirement
c and the owners of the company as indicated in Requirement d. Describe an incentive compensation
plan that would avoid a conflict of interest between the president and the owners.