Chapter 1

Managerial Accounting and

Cost Concepts
Exercises and Problems

Iqra Arshad
Outline

Exercise: 1-2, 1-3, 1-6, 1-12

Problem: 1-21, 1-22

Exercise 1-2
Item Cost
1. The cost of a hard drive installed in a computer.
2. The cost of advertising in the Puget Sound Computer User newspaper.
3. The wages of employees who assemble computers from components.
4. Sales commissions paid to the company’s salespeople.
5. The salary of the assembly shop’s supervisor.
6. The salary of the company’s accountant.
7. Depreciation on equipment used to test assembled computers before
release to customers.
Rent on the facility in the industrial park
Exercise 1-3
Issac Aircams manufactures sophisticated spy cameras for remote-
controlled military reconnaissance aircraft. It has approached a bank for
a loan to finance its growth. The bank requires financial statements
before approving the loan.
Required:
Classify each cost listed below as either a product cost or a period cost
for the purpose of preparing financial statements.
 Product Cost or Period
Costs Cost
1. Depreciation on salespersons’ cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods
warehouse.
5. Soap and paper towels used by factory workers at the end
of a shift.
6. Factory supervisors’ salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas.
(Units are not normally boxed.)
9. Advertising costs.

10. Workers’ compensation insurance for factory employees.

11. Depreciation on chairs and tables in the factory lunchroom.

12. The wages of the receptionist in the administrative offices.

13. Cost of leasing the corporate jet used by the company’s

executives.

14. The cost of renting rooms at a Florida resort for the annual
sales conference.

15. The cost of packaging the company’s product.

Exercise 1-6
Cherokee Incorporated is a merchandiser that provided the following information:

Amount
Number of units sold 20,000
Selling price per unit $ 30
Variable selling expense per unit $4
Variable administrative expense per unit $2
Total fixed selling expense $ 40,000
Total fixed administrative expense $ 30,000
Beginning merchandise inventory $ 24,000
Ending merchandise inventory $ 44,000
Merchandise purchases $ 180,000

Required:
1.Prepare a traditional income statement.
2.Prepare a contribution format income statement.
 Cherokee, Incorporated
Traditional Income Statement
Sales 1.Sales:
Cost of goods sold
Gross margin 2. Cost of goods sold:
Selling and administrative
expenses:
Selling expenses
Administrative expenses

Net operating income

3. Selling expenses:
4. Administrative expenses:
 Cherokee, Incorporated
Contribution Format Income Statement 1.Selling expenses:
Sales 2.Administrative expenses:
Variable expenses:
Cost of goods sold
Selling expenses
Administrative expenses
Contribution margin
Fixed expenses:
Selling expenses
Administrative expenses
Net operating income
Exercise 1-12
The Devon Motor Company produces automobiles. On April 1, the company had no
beginning inventories, and it purchased 8,000 batteries at a cost of $80 per battery. It
withdrew 7,600 batteries from the storeroom during the month. Of these, 100 were used
to replace batteries in cars used by the company’s traveling sales staff. The remaining
7,500 batteries withdrawn from the storeroom were placed in cars being produced by the
company. Of the cars in production during April, 90 percent were completed and
transferred from work in process to finished goods. Of the cars completed during the
month, 30 percent were unsold at April 30.

Required:
1. and 2. Determine the cost of batteries appearing in each of the following
accounts on April 30 and select whether each of the accounts would appear on the
balance sheet or on the income statement.
 Name of the Account Cost Appears on:
Raw Materials
Work in Process
Finished Goods
Cost of Goods Sold
Selling Expense
1a.
The cost of batteries in Raw Materials:
Beginning raw materials inventory
Plus: Battery purchases
Batteries available
Minus: Batteries withdrawn
Ending raw materials inventory (a)
Cost per battery (b)
Raw materials on April 30th (a) × (b)
1b. The cost of batteries in Work in Process:

Beginning work in process inventory

Plus: Batteries withdrawn for production
Batteries available
Minus: Batteries transferred to finished goods (???? × 90%)
Ending work in process inventory (a)
Cost per battery (b)
Work in process on April 30th (a) × (b)

1c.The cost of batteries in Finished Goods:

Beginning finished goods inventory
Plus: Batteries transferred in from work in process (see requirement b)
Batteries available
Minus: Batteries transferred out to cost of goods sold (6,750 × (100% − 30%))
Ending finished goods inventory (a)
Cost per battery (b)
Finished goods on April 30th (a) × (b)
1d. The cost of batteries in Cost of Goods Sold:

Number of batteries (see requirement c) (a)

Cost per battery (b)
Cost of goods sold for April (a) × (b)

1e. The cost of batteries included in selling expense:

Number of batteries (a)

Cost per battery (b)
Selling expense for April (a) × (b)
 Problem 1-21
Marwick’s Pianos, Incorporated, purchases pianos from a manufacturer for an average cost of
$2,450 per unit and then sells them to retail customers for an average price of $3,125 each.
The company’s selling and administrative costs for a typical month are presented below:
Costs Cost Formula During August, Marwick’s Pianos,
Selling: Incorporated, sold and delivered 40
Advertising $700 per month
$950 per month, plus 8%
pianos.
Sales salaries and commissions
of sales Required:
Delivery of pianos to customers $30 per piano sold
1.Prepare a traditional format
Utilities $350 per month
Depreciation of sales facilities $800 per month
income statement for August.
Administrative:
Executive salaries $2,500 per month 1.Prepare a contribution format
Insurance $400 per month income statement for August. Show
$1,000 per month, plus costs and revenues on both a total
Clerical
$20 per piano sold
and a per-unit basis down through
Depreciation of office equipment $300 per month
contribution margin.
 Marwick's Pianos, Incorporated
Traditional Income Statement
For the Month of August 1.Sales:
Sales 2.Cost of goods sold:
Cost of goods sold 3.Sales salaries and commissions:
Gross margin
4.Delivery of pianos:
Selling and administrative expenses:
Selling expenses:
5.Clerical:
Advertising
Sales salaries and commissions
Delivery of pianos
Utilities
Depreciation of sales facilities
Total selling expenses
Administrative expenses:
Executive salaries
Insurance
Clerical
Depreciation of office equipment
Total administrative expenses
Total selling and administrative
expenses
Net operating income
 Marwick's Pianos, Incorporated
Contribution Format Income Statement 1.Sales:
For the Month of August
Total Per Piano 2.Cost of goods sold:
Sales 3.Sales salaries and commissions:
Variable expenses:
Cost of goods sold 4.Delivery of pianos:
Sales salaries and commissions
5.Clerical:
Delivery of pianos
Clerical
Total variable expenses
Contribution margin
Fixed expenses:
Advertising
Sales salaries and commissions
Utilities
Depreciation of sales facilities
Executive salaries
Insurance
Clerical
Depreciation of office equipment
Total fixed expenses
Net operating income
Problem 1-22
Miller Company’s total sales are $120,000. The company’s direct labor cost is $15,000, which
represents 30% of its total conversion cost and 40% of its total prime cost. Its total selling and
administrative expense is $18,000 and its only variable selling and administrative expense is a
sales commission of 5% of sales. The company maintains no beginning or ending inventories
and its manufacturing overhead costs are entirely fixed costs.

Required:
1.What is the total manufacturing overhead cost?
2.What is the total direct materials cost?
3.What is the total manufacturing cost?
4.What is the total variable selling and administrative
cost?
5.What is the total variable cost?
6.What is the total fixed cost?
7.What is the total contribution margin?
1.The total manufacturing overhead cost is computed as follows:
Direct labor cost (a)
Direct labor as a percentage of total conversion costs (b)
Total conversion cost (a) ÷ (b)

Total conversion cost (a)

Direct labor cost (b)
Total manufacturing overhead cost (a) − (b)

2. The total direct materials cost is computed as follows:

Direct labor cost (a)

Direct labor as a percentage of total prime costs (b)
Total prime cost (a) ÷ (b)

Total prime cost (a)

Direct labor cost (b)
Total direct materials cost (a) − (b)
3. The total amount of manufacturing cost is computed as follows:

Direct materials cost

Direct labor cost
Manufacturing overhead cost
Total manufacturing cost

4.The total variable selling and administrative cost is computed as follows:

Total sales (a)

Sales commission percentage (b)
Total variable selling and administrative cost (a) × (b)
 5. The total variable cost is computed as follows:
Direct materials cost
Direct labor cost
Sales commissions
Total variable cost

6. The total fixed cost is computed as follows:

Total selling and administrative expenses (a)
Sales commissions (b)
Total fixed selling and administrative expense (a) − (b)
Total fixed manufacturing overhead
Total fixed cost

7. The total contribution margin is calculated as follows:

Sales (a)
Variable costs (b)
Contribution margin (a) − (b)
END