Microbiology: Basic and Clinical Principles, 1st Edition Test Bank

Chapter 2 Cost Terms, Concepts, and Classifications Solution to Discussion Case Possible reasons for disagreeing with the statement:  Distinguishing between product and period costs will still be important, even for small single-product companies. For companies in competitive markets knowing product costs will help them manage profitability more successfully. Knowing product costs is also important for companies that are able to set their own prices as it will provide an indication of the price needed to cover the costs of production.  Understanding how costs behave (variable versus fixed) is still important even for small companies as it will help them predict how costs will change in response to changes in activity levels. This knowledge will be helpful when developing budgets (more on this in chapter 9), which based on the authors’ research, is a tool used by a large majority of companies, small and large.  Understanding concepts such as opportunity costs and sunk costs is still important in smaller companies because they will still arise. For example a company that devotes its production equipment to producing one product is still incurring an opportunity cost that is equal to the benefits that would arise from using the invested capital in something else. Periodically owners of small companies should still evaluate whether the benefits of the status quo exceed the opportunity costs being incurred related to the next best alternative for using the company’s resources. Sunk costs also arise in small companies and should be ignored. Possible reasons for agreeing with the statement:  Students who agree will likely take the view that, as per the question wording, many of the concepts in Chapter 2 take on more importance as the complexity of operations increases. For example, understanding product versus period costs is arguably more important in a multiproduct setting where managers have to allocate resources across multiple products in an effort to maximize profitability. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 1 Solutions to Questions 2-1 No. Only costs related to operating the production facilities are included as manufacturing overhead. Costs related to the administrative building would be an administrative expense. 2-2 a. Direct materials are an integral part of a finished product and their costs can be conveniently traced to it. b. Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. Indirect materials are ordinarily classified as manufacturing overhead. c. Direct labour includes those labour costs that can be easily traced to individual units of products. Direct labour is also called ―touch labour.‖ d. Indirect labour includes the labour costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced directly to particular products. These labour costs are incurred to support production, but the workers involved do not directly work on the product. e. Manufacturing overhead includes all manufacturing costs except direct materials and direct labour. 2-3 Not always. Product costs are expensed in the same period in which the related products are sold. For example, if product costs were incurred in December but the products weren’t sold until January, the costs would not be expensed as part of cost of goods sold until January. In this example, the product costs would be included on the December balance sheet as finished goods inventory. 2-4 Administrative costs are those costs with the general management of the company such as accounting, legal, human resources, executive compensation, etc. They are always treated as period costs on the income statement. As a result, they are expensed in the period incurred. 2-5 Raw materials inventory includes direct and indirect materials that have not yet been placed into production. Conversely work in process inventory includes costs related to direct and indirect materials, direct and indirect labour and overhead that have been placed into production but the goods are not yet complete. Both raw materials and work in process inventories are included on the balance sheet. Only when goods are finished and sold do the associated costs get transferred from the balance sheet inventory account(s) to cost of goods sold on the income statement. 2-6 Prime costs consist of direct materials and direct labour. Conversion costs consist of manufacturing overhead and direct labour. 2-7 Total manufacturing costs are the total costs of direct materials, direct labour and manufacturing overhead incurred in the current period for products that are both complete and partially complete at the end of the period. Cost of goods manufactured represents the direct materials, direct labour and manufacturing overhead costs for goods completed during the period. Cost of goods manufactured = Total manufacturing costs + beginning WIP – ending WIP. 2-8 Yes, costs such as salaries and depreciation can end up as assets on the balance sheet if these are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, if some units are still in inventory, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of a period. 2-9 Wages are a mixed cost for this company since it contains both a fixed portion (weekly salary based on 40 hours) and a variable portion based on overtime hours at $20 per hour. 2-10 As activity levels increase, variable costs per unit do not change within the relevant range. However, as activity levels increase, fixed costs per unit decrease. This decrease happens because total fixed costs remain unchanged (the numerator in the calculation of fixed costs per unit) even though the activity levels are increasing (the denominator in the calculation of fixed costs per unit). © McGraw-Hill Education Ltd., 2018. All rights reserved. 2 Managerial Accounting, 11th Canadian Edition 2-11 The relevant range is the range of activity within which assumptions about variable and fixed costs are valid. The relevant range is important when predicting costs because cost behaviour may change when activity levels are well below or well above the normal range of activity. For example, if the relevant range of production activity is 10,000 to 20,000 units and next year, 30,000 units of production are expected, both variable and fixed costs may change. Fixed costs will likely increase as the result of needing to expand production capacity; depreciation, insurance, rent, taxes and so on will rise. Variable costs per unit may also change as production volume increases to 30,000 units. Buying raw materials in larger quantities may drive down unit costs but hiring additional employees could result in higher hourly wages if there is a shortage of available labour. Thus, managers will have to estimate the effects of production exceeding the relevant range on both variable and fixed cost behaviour. 2-12 Manufacturing overhead is an indirect cost since these costs cannot be easily and conveniently traced to particular units of products. 2-13 No. The original cost of the existing machine is a sunk cost that is not relevant to the decision as to whether the new machine should be purchased. The original cost has already been incurred and cannot be undone at this point. Thus it is irrelevant for decision-making purposes. 2-14 No; differential costs can be either variable or fixed. For example, the alternatives might consist of purchasing one machine rather than another to make a product. The difference in the fixed costs of purchasing the two machines would be a differential cost. 2-15 Typically when overtime can be isolated to a particular job or product, it should be treated as direct labour rather than included as overhead and charged to all jobs and products. The rationale is that treating it as direct labour results in a more accurate picture of the total cost of completing jobs on a rush-order basis. 2-16 It is possible if the company had $100,000 in beginning finished goods inventory and sold it all during the period, but did not complete the production of any new units. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 3 Foundational Exercises 1. Direct materials ………………………………………………. $ 6.00 Direct labor …………………………………………………….3.50 Variable manufacturing overhead ………………………..1.50 Variable manufacturing cost per unit …………………… $11.00 Variable manufacturing cost per unit (a) ………………. $11.00 Number of units produced (b) ……………………………. 10,000 Total variable manufacturing cost (a) × (b) …………… $110,000 Average fixed manufacturing overhead per unit (c)……………………………………………………….. $4.00 Number of units produced (d) ……………………………. 10,000 Total fixed manufacturing cost (c) × (d) ………………. 40,000 Total product (manufacturing) cost ……………………… $150,000 Note: The average fixed manufacturing overhead cost per unit of $4.00 is valid for only one level of activity—10,000 units produced. 2. Sales commissions…………………………………………… $1.00 Variable administrative expense ………………………….0.50 Variable selling and administrative per unit …………… $1.50 Variable selling and admin. per unit (a)………………… $1.50 Number of units sold (b) …………………………………… 10,000 Total variable selling and admin. expense (a) × (b) ………………………………………………….. $15,000 Average fixed selling and administrative expense per unit ($3 fixed selling + $2 fixed admin.) (c) ………………………………………………….. $5.00 Number of units sold (d) …………………………………… 10,000 Total fixed selling and administrative expense (c) × (d)…………………………………………….. 50,000 Total period (nonmanufacturing) cost ………………….. $65,000 Note: The average fixed selling and administrative expense per unit of $5.00 is valid for only one level of activity—10,000 units sold. © McGraw-Hill Education Ltd., 2018. All rights reserved. 4 Managerial Accounting, 11th edition Foundational Exercises (continued) 3. Direct materials ………………………………………………. $ 6.00 Direct labor ……………………………………………………. 3.50 Variable manufacturing overhead ……………………….. 1.50 Sales commissions …………………………………………… 1.00 Variable administrative expense ………………………….. 0.50 Variable cost per unit sold …………………………………. $12.50 4. Direct materials ………………………………………………. $ 6.00 Direct labor ……………………………………………………. 3.50 Variable manufacturing overhead ……………………….. 1.50 Sales commissions …………………………………………… 1.00 Variable administrative expense………………………….. 0.50 Variable cost per unit sold …………………………………. $12.50 5. Variable cost per unit sold (a)…………………………….. $12.50 Number of units sold (b) …………………………………… 8,000 Total variable costs (a) × (b) ……………………………… $100,000 6. Variable cost per unit sold (a)…………………………….. $12.50 Number of units sold (b) …………………………………… 12,500 Total variable costs (a) × (b) ……………………………… $156,250 7. Total fixed manufacturing cost (see requirement 1) (a) ………………………………….. $40,000 Number of units produced (b) ……………………………. 8,000 Average fixed manufacturing cost per unit produced (a) ÷ (b) ……………………………………….. $5.00 8. Total fixed manufacturing cost (see requirement 1) (a) ………………………………….. $40,000 Number of units produced (b) ……………………………. 12,500 Average fixed manufacturing cost per unit produced (a) ÷ (b) ……………………………………….. $3.20 9. Total fixed manufacturing cost (see requirement 1) ………………………………………. $40,000 © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 5 Foundational Exercises (continued) 10. Total fixed manufacturing cost (see requirement 1) ………………………………………. $40,000 11. Variable overhead per unit (a) ……………………………. $1.50 Number of units produced (b) ……………………………. 8,000 Total variable overhead cost (a) × (b) ………………….. $12,000 Total fixed overhead (see requirement 1) ……………… 40,000 Total manufacturing overhead cost ……………………… $52,000 Total manufacturing overhead cost (a) …………….. Number of units produced (b) ……………………….. Manufacturing overhead per unit (a) ÷ (b) ……….. $52,000 8,000 $6.50 12. Variable overhead per unit (a) ……………………………. $1.50 Number of units produced (b) ……………………………. 12,500 Total variable overhead cost (a) × (b) ………………….. $18,750 Total fixed overhead (see requirement 1) ……………… 40,000 Total manufacturing overhead cost ……………………… $58,750 Total manufacturing overhead cost (a) …………….. Number of units produced (b) ……………………….. Manufacturing overhead per unit (a) ÷ (b) ……….. $58,750 12,500 $4.70 © McGraw-Hill Education Ltd., 2018. All rights reserved. 6 Managerial Accounting, 11th edition Foundational Exercises (continued) 13. Direct materials per unit …………………………………… $6.00 Direct labor per unit ………………………………………… 3.50 Direct manufacturing cost per unit (a) …………………. $9.50 Number of units produced (b) ……………………………. 11,000 Total direct manufacturing cost (a) × (b) ……………… $104,500 Variable overhead per unit (a) ……………………….. $1.50 Number of units produced (b) ………………………..11,000 Total variable overhead cost (a) × (b) ……………… Total fixed overhead (see requirement 1) …………. Total indirect manufacturing cost ……………………. $16,500 40,000 $56,500 14. Direct materials per unit …………………………………… $6.00 Direct labor per unit ………………………………………… 3.50 Variable manufacturing overhead per unit …………….. 1.50 Incremental cost per unit produced …………………….. $11.00 Note: Variable selling and administrative expenses are variable with respect to the number of units sold, not the number of units produced. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 7 Exercise 2-1 (15 minutes) 1. Manufacturing overhead cost. 2. Administrative and marketing and selling costs. The rent would be allocated based on the amount of space in the building used by the administrative (accounting, human resources) and marketing and selling activities. 3. Direct labour cost. 4. Manufacturing overhead cost. Because the cost of glue would likely be very low per speaker, it would be considered an indirect material and thus included with manufacturing overhead. 5. Marketing and selling cost. 6. Administrative cost. 7. Manufacturing overhead. 8. Direct material cost. 9. Marketing and selling cost. 10. Administrative cost. © McGraw-Hill Education Ltd., 2018. All rights reserved. 8 Managerial Accounting, 11th edition Exercise 2-2 (15 minutes) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Depreciation on salespersons’ cars ……………. Rent on equipment used in the factory ………. Lubricants used for machine maintenance ….. Salaries of personnel who work in the finished goods warehouse ……………………….. Soap and paper towels used by factory workers at the end of a shift …………………. Factory supervisors’ salaries ……………………. Heat, water, and power consumed in the factory ……………………………………………… Materials used for boxing products for shipment overseas (units are not normally boxed) ……………………………………………… Advertising costs …………………………………… Workers’ compensation insurance for factory employees…………………………………… Depreciation on chairs and tables in the factory lunchroom ………………………………. The wages of the receptionist in the administrative offices …………………………………… Cost of leasing the corporate jet used by the company’s executives …………………….. The cost of renting rooms at a British Columbia resort for the annual sales conference ………………………………………………… The cost of packaging the company’s product…………………………………………………… Product (Inventoriable) Cost X X Period Cost X X X X X X X X X X X X X © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 9 Exercise 2-3 (15 minutes) Home Entertainment Income Statement For the month ended xxx Sales ……………………………………………………. Cost of goods sold: Beginning merchandise inventory …………….. Add: Purchases ……………………………………. Goods available for sale …………………………. Deduct: Ending merchandise inventory ……… Gross margin …………………………………………. Selling and administrative expenses: Selling expense ……………………………………. Administrative expense ………………………….. Operating income …………………………………… $150,000 $ 12,000 90,000 102,000 22,000 40,000 25,000 80,000 70,000 65,000 $ 5,000 © McGraw-Hill Education Ltd., 2018. All rights reserved. 10 Managerial Accounting, 11th edition Exercise 2-4 (15 minutes) 1. Classic Sound Schedule of Cost of Goods Manufactured For the quarter ended xxx Direct materials: Beginning raw materials inventory ……….. Add: Purchases of raw materials …………. Raw materials available for use …………… Deduct:Endingrawmaterialsinventory ……. Raw materials used in production ………… Direct labour …………………………………….. Manufacturing overhead ………………………. Total manufacturing costs ……………………. Add:Beginningworkinprocessinventory ……. $0 50,000 50,000 25,000 Deduct:Endingworkinprocessinventory ……. Cost of goods manufactured ………………… 2. $ 25,000 40,000 30,000 95,000 0 95,000 5,000 $90,000 Items likely included in manufacturing overhead:      Rent for the production facility Depreciation on the production equipment Insurance on the production equipment Indirect materials used in producing records Indirect labour related to the CEO’s supervision of the production process (20% of her time). © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 11 Exercise 2-5 (30 minutes) 1. Per unit amounts: Item Variable expenses: Direct materials Direct labour Indirect materials Fixed expenses: Installation supervisor’s wages Installation scheduler’s wages Warehouse expenses Amount $200,000 $30,000 $10,000 July Activity Per Unit 1,000 $200 1,000 $30 1,000 $10 $4,000 $2,000 $5,000 1,000 1,000 1,000 (1) (2) $4 $2 $5 2. a & b Item Variable expenses: Direct materials Direct labour Indirect materials Fixed expenses: Installation supervisor’s wages Installation scheduler’s wages Warehouse expenses August July Activity Per Unit 1,200 $200 1,200 $30 1,200 $10 1,200 1,200 1,200 n/a n/a n/a (3) (3) ÷ (1) August Total August Cost Per Unit $240,000 $200 $36,000 $30 $12,000 $10 $4,000 $2,000 $5,000 $3.33 $1.67 $4.17  Variable expenses per unit do not change within the relevant range of activity so the July and August amounts should not differ.  Fixed expenses per unit decrease in August because the total fixed expenses are being spread over a higher activity base (1,200 installations versus 1,000). © McGraw-Hill Education Ltd., 2018. All rights reserved. 12 Managerial Accounting, 11th edition Exercise 2-5 continued 3. Factors that could cause variable costs per unit to change when activity levels fall outside the relevant range:  Direct material costs per unit could decrease if quantity discounts are received from the manufacturer for larger order quantities.  Direct material costs could increase if quantity discounts currently being received are lost if order quantities decrease significantly.  Direct labour costs per unit could increase if activity levels increase and installations have to be completed using more expensive overtime hours.  Direct labour costs per unit could increase if activity levels decrease and less experienced, and lower paid, installers are laid off.  Direct labour costs per unit could decrease as the number of installations increases due to the effects of learning (i.e., the time required for each installation may decrease with experience). Note: requirement three may be a stretch for many students given that the factors affecting cost behaviour outside the relevant range are not discussed in detail in Chapter 2. Accordingly, providing some hints to generate ideas may be warranted. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 13 Exercise 2-6 (15 minutes) 1. 2. 3. 4. 5. 6. 7. 8. Cost The wages of pediatric nurses Prescription drugs Heating the hospital The salary of the head of pediatrics The salary of the head of pediatrics Hospital chaplain’s salary Lab tests by outside contractor Lab tests by outside contractor Cost Object The pediatric department A particular patient The pediatric department The pediatric department A particular pediatric patient A particular patient A particular patient A particular department Direct Cost Indirect Cost X X X X X X X X © McGraw-Hill Education Ltd., 2018. All rights reserved. 14 Managerial Accounting, 11th edition Exercise 2-7 (15 minutes) Item Differential Revenue Ex. Cost of electricity for the warehouse ……………. 1. Sublet revenue for X the new warehouse ……………………………. 2. Lease payments for the new warehouse ……………………………. 3. Net book value of the existing warehouse ……………………………. 4. Sales proceeds from selling the X existing warehouse ……………………………. 5. Warehouse maintenance costs ………………….. 6. Warehouse staff wages ……………………………. 7. Paving costs for the parking lot at existing warehouse ……………… 8. Parking lot revenues for existing X warehouse* Differential Cost X Opportunity Cost Sunk Cost X X X X X X *The revenue foregone by moving to the new warehouse can be considered either differential revenue or an opportunity cost. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 15 Exercise 2-8 (15 minutes) Opportunity versus Sunk Costs: Opportunity Costs The $1,000,000 offered for the building, land and equipment is an opportunity cost since it represents a benefit that the company would give up if it continues to manufacture the product. The$20,000 is also an opportunity cost since it represents another benefit that the company would have to forego if it continues to manufacture the product. Sunk Costs The original cost of the land ($500,000), building ($1,500,000), and manufacturing equipment ($300,000), the net book value of the building ($1,375,000) and equipment ($150,000), and the insurance and taxes recently paid on the building ($30,000), are all sunk costs. In each case they have already been incurred and there is nothing management can do at this point to change that fact. Note: students could argue that some portion of the insurance and taxes may be recoverable if the building is sold and thus are not sunk cost. © McGraw-Hill Education Ltd., 2018. All rights reserved. 16 Managerial Accounting, 11th edition Exercise 2-9 (30 minutes) 1. a. Discs purchased Discs drawn from inventory Discs remaining in inventory Cost per disc Cost in Raw Materials Inventory at February 1,000 200 800 × $2 $1,600 b. Discs used in production (200-20) Units completed and transferred to Finished Goods (75% × 180) Units still in Work in Process at February 28 Cost per disc Cost in Work in Process Inventory at February 28 135 45 × $2 $ 90 c. Units completed and transferred to Finished Goods (above) Units sold during the month (60% × 135) Units still in Finished Goods at February 28 Cost per disc Cost in Finished Goods Inventory at May 31 135 81 54 × $2 $108 d. Units sold during the month (above) Cost per disc Cost in Cost of Goods Sold at February 28 81 × $2 $162 e. Discs used in advertising Cost per disc Cost in Advertising Expense for February 20 × $2 $ 40 2. Raw Materials Inventory—balance sheet Work in Process Inventory—balance sheet Finished Goods Inventory—balance sheet Cost of Goods Sold—income statement Advertising Expense—income statement $2,000 162 180 $1,600 90 108 40 Note: the $2,000 above reconciles to the total amount spent on the discs in February: 1,000 x $2 per unit = $2,000. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 17 Exercise 2-10 (30 minutes) 1. Tiessen Limited Schedule of Cost of Goods Manufactured For the year ended December 31 Direct materials: Raw materials inventory, beginning………….. $ 24,000 Add: Purchases of raw materials ……………… 396,000 Raw materials available for use ……………….. 420,000 Deduct: Raw materials inventory, ending ….. 30,000 Raw materials used in production ……………. $390,000 Direct labour …………………………………………. 270,000 Manufacturing overhead: Rent, manufacturing building ………………….. $ 240,000 Indirect labour …………………………………….. 168,900 Utilities, manufacturing …………………………. 27,000 Depreciation, manufacturing equipment ……. 72,000 Supplies, manufacturing ………………………… 2,100 Repairs, manufacturing equipment …………… 120,000 Total manufacturing overhead costs …………. 630,000 Total manufacturing costs ………………………… 1,290,000 Add: Work in process, beginning ……………….. 15,000 1,305,000 Deduct: Work in process, ending ……………….. 60,000 Cost of goods manufactured …………………….. $1,245,000 2. The cost of goods sold section would be: Finished goods inventory, beginning …………… Add: Cost of goods manufactured ……………… Goods available for sale …………………………… Deduct: Finished goods inventory, ending ……. Cost of goods sold ………………………………….. $ 210,000 1,245,000 1,455,000 75,000 $1,380,000 © McGraw-Hill Education Ltd., 2018. All rights reserved. 18 Managerial Accounting, 11th edition Exercise 2-11 (15 minutes) Cost Item 1. The costs of turn signal switches used at a General Motors plant …………………… 2. Salary of production manager at Blackberry ………………….. 3. Salesperson’s commissions at Avon Products ………………… 4. Insurance on one of Bombardier’s factory buildings ……… 5. The costs of shipping brass fittings to customers in California ……………………………. 6. Depreciation on the bookshelves at Reston Bookstore …………………………….. 7. The costs of X-ray film at the Toronto General’s radiology lab …………………………. 8. The cost of leasing a toll-free telephone number at Staples Canada …………………… 9. The depreciation on the playground equipment at a McDonald’s outlet ……………. 10. The cost of the mozzarella cheese used at a Pizza Hut outlet ……………………………. Cost Behaviour Variable Fixed Selling and Administrative Cost X X X X X X X X X X X X X X Product Cost X X X X X X © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 19 Exercise 2-12 (15 minutes) 1. Direct labour cost: 48 hours × $24 per hour Manufacturing overhead cost: 8 hours × $12 per hour Total wages earned $1152 96 $1248 2. Had the overtime been incurred to meet a rush order for a particular client then all of the wages ($1248) would have been treated as a direct labour. 3. Direct labour cost: 35 hours × $24 per hour Manufacturing overhead cost: 5 hours × $24 per hour Total wages earned $ 840 120 $ 960 © McGraw-Hill Education Ltd., 2018. All rights reserved. 20 Managerial Accounting, 11th edition Problem 2-13 (30 minutes) 1. a-e Item Direct/ Behaviour Type Indirect Leather used for the bicycle seats Variable Manufacturing Direct Production manager’s salary Fixed Manufacturing Indirect Life insurance for the company president Electricity used in the production facilities* Administrative Variable/fixed Manufacturing Indirect Sales commissions Selling Internet advertising Selling Employee benefits for the production workers Variable Manufacturing Indirect Property taxes on the production facilities Manufacturing Indirect Fixed Shipping costs Administrative Salary of the chief financial officer Administrative *There is a fixed and variable component to this cost. The base charge of $100 represents a fixed cost with the remainder varying with the level of production activity. © McGraw-Hill Education Ltd. 2018. All rights reserved. Solutions Manual, Chapter 2 21 Problem 2-13 continued 2. Unit costs for variable manufacturing expenses based on November (October) amounts: Leather used in seats: $30,000 ($27,000) ÷ 1,000 (900) = $30/bike Electricity: $1,000* ($900*) ÷ 1,000 (900) = $1/bike Employee benefits: $20,000 ($18,000) ÷ 1,000 (900) = $20/bike *$1,100 ($1,000) – $100 basic charge = $1,000 ($900). December manufacturing costs: Per unit Item Amount Activity Cost Leather in seats (variable) $30 1,200 $36,000 Electricity (variable) $1 1,200 $1,200 Employee benefits (variable) $20 1,200 $24,000 Production manager’s salary (fixed) n/a 1,200 $6,000 Electricity (fixed) n/a 1,200 $100 Property taxes (fixed) n/a 1,200 $1,000 © McGraw-Hill Education Ltd. 2018. All rights reserved. 22 Managerial Accounting, 11th Canadian Edition Problem 2-14 (30 minutes) 1. Total wages for the week: Regular time: 40 hours × $30 per hour ……………… Overtime: 10 hours × $45 per hour ………………….. Total wages …………………………………………………… Allocation of total wages: Direct labour: 50 hours × $30 per hour ……………… Manufacturing overhead: 10 hours × $15 per hour . Total wages …………………………………………………… $ 1,200 450 $1,650 $1,500 150 $1,650 2. Total wages for the week: Regular time: 40 hours × $30 per hour ……………… $ 1,200 Overtime: 5 hours × $45 per hour ……………………. 225 Total wages …………………………………………………… $1,425 Allocation of total wages: Direct labour: 42 hours × $30 per hour ……………… $1,260 Manufacturing overhead: Idle time: 3 hours × $30 per hour ………………….. $ 90 Overtime premium: 5 hours × $15 per hour …….. 75 165 Total wages …………………………………………………… $1,425 3. Total wages and employee benefits for the week: Regular time: 40 hours × $30 per hour ……………… $ 1,200 Overtime: 12 hours × $45 per hour ………………….. 540 Fringe benefits: 52 hours × $9 per hour…………….. 468 Total wages and fringe benefits …………………………. $2,208 Allocation of wages and employee benefits: Direct labour: 46 hours × $30 per hour ……………… $1,380 Manufacturing overhead: Idle time: 6 hours × $30 per hour ………………….. $ 180 Overtime premium: 12 hours × $15 per hour……. 180 Employee benefits: 52 hours × $9 per hour ……… 468 828 Total wages and employee benefits …………………….. $2,208 © McGraw-Hill Education Ltd. 2018. All rights reserved. Solutions Manual, Chapter 2 23 Problem 2-14 (continued) 4. Allocation of wages and employee benefits: Direct labour: Wage cost: 46 hours × $30 per hour ……………. $1,380 Employee benefits: 46 hours × $9 per hour …… 414 $1,794 Manufacturing overhead: Idle time: 6 hours × $30 per hour ……………….. 180 Overtime premium: 12 hours × $15 per hour…. 180 Employee benefits: 6 hours × $9 per hour …….. 54 414 Total wages and employee benefits ……………….. $2,208 © McGraw-Hill Education Ltd. 2018. All rights reserved. 24 Managerial Accounting, 11th Canadian Edition Problem 2-15 (30 minutes) Product Cost Name of the Cost Rental revenue forgone, $35,000 per year ……………………………… Direct materials cost, $50 per unit … Supervisor’s salary, $3,000 per month ………………………………… Direct labour cost, $22 per unit …… Rental cost of warehouse, $1,500 per month …………………………… Rental cost of equipment, $2,200 per month …………………………… Depreciation of the building, $7,000 per year ……………………. Advertising cost, $28,000 per year …………………………………… Shipping cost, $7 per unit ………….. Electrical costs, $4 per unit ………… Return earned on investments, $5,000 per year ……………………. Variable Cost Fixed Cost Direct Direct Materials Labour Period Mfg. (Selling and Opportunity Sunk Overhead Admin.) Cost Cost Cost X X X X X X X X X X X X X X X X X X X X X © McGraw-Hill Education Ltd. 2018. All rights reserved. Solutions Manual, Chapter 2 25 Problem 2-16 (20 minutes) Note to the Instructor:Some of the answers below are debatable. Cost Item 1. Depreciation, executive jet …………………………………….. 2. Costs of shipping finished goods to customers ……………. 3. Wood used in manufacturing furniture ……………………… 4. Sales manager’s salary …………………………………………. 5. Electricity used in manufacturing furniture …………………. 6. Salary of secretary to the company president …………….. 7. Aerosol attachment placed on a spray can produced by the company ……………………………………………………. 8. Billing costs ……………………………………………………….. 9. Packing supplies for shipping products overseas …………. 10. Sand used in manufacturing concrete ………………………. 11. Supervisor’s salary, factory ……………………………………. 12. Executive life insurance ………………………………………… 13. Sales commissions……………………………………………….. 14. Employee benefits, assembly line workers …………………. 15. Advertising costs …………………………………………………. 16. Property taxes on finished goods warehouses …………….. 17. Lubricants for production equipment ………………………… *Could be an administrative cost. **Could be an indirect cost. Variable or Fixed F V V F V F V V V V F F V V F F V Selling Cost AdminisProduct Cost trative Cost Direct Indirect X X X X X X X X* X X X X X X** X X X © McGraw-Hill Education Ltd. 2018. All rights reserved. 26 Managerial Accounting, 11th Canadian Edition Problem 2-17 (60 minutes) 1. Precious Production Schedule of Cost of Goods Manufactured For the quarter ended xxxx Direct materials: Raw materials inventory, beginning……………. $ 40,000 Add: Purchases of raw materials ……………….. 360,000 Raw materials available for use …………………. 400,000 Deduct: Raw materials inventory, ending ……. 68,000 Raw materials used in production ……………… $ 332,000 Direct labour …………………………………………… 240,000 Manufacturing overhead: Depreciation, factory ………………………………. 168,000 Insurance, factory ………………………………….. 20,000 Maintenance, factory ………………………………. 120,000 Utilities, factory……………………………………… 108,000 Supplies, factory ……………………………………. 4,000 Indirect labour ………………………………………. 260,000 Total overhead costs ………………………………… 680,000 Total manufacturing costs ………………………….. 1,252,000 Add: Work in process inventory, beginning ……. 28,000 1,280,000 Deduct: Work in process inventory, ending ……. 120,000 Cost of goods manufactured ………………………. $1,160,000 © McGraw-Hill Education Ltd. 2018. All rights reserved. Solutions Manual, Chapter 2 27 Problem 2-17 (continued) 2. Precious Production Limited Income Statement For the quarter ended xxxx Sales …………………………………………………………. $1,800,000 Cost of goods sold: Finished goods inventory, beginning ………………. $ 40,000 Add: Cost of goods manufactured ………………….. 1,160,000 Goods available for sale……………………………….. 1,200,000 Deduct: Finished goods inventory, ending ……….. 160,000 1,040,000 Gross margin……………………………………………….. 760,000 Selling and administrative expenses: Selling expenses ………………………………………… 320,000 Administrative expenses ………………………………. 280,000 600,000 Operating income …………………………………………. $ 160,000 3. Direct labour: $240,000 ÷ 10,000 units = $24.00 per unit. Insurance: $20,000 ÷ 10,000 units = $2.00 per unit. 4. Direct materials: Unit cost: 332,000/10000= $33.20 Total cost: 12,000 units × $33.20 per unit = $398,400. Insurance: Unit cost: $20,000 ÷ 12,000 units = $1.67 per unit (rounded). Total cost: $20,000 (unchanged) 5. Unit cost for insurance dropped from $2.00 to $1.67, because of the increase in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a unit basis as the activity level rises. 6. If the company produced 20,000 units then the following costs would appear in inventory: Direct materials ($332,000/20,000)*4,000 units = $ 66,400 Direct labour ($240,000/20,000)* 4,000 units = 48,000 Manufacturing overhead ($680,000/20,000) * 4,000 units = 136,000 © McGraw-Hill Education Ltd. 2018. All rights reserved. 28 Managerial Accounting, 11th Canadian Edition Total $ 250,400 © McGraw-Hill Education Ltd. 2018. All rights reserved. Solutions Manual, Chapter 2 29 Problem 2-18 (15 minutes) 1. The controller is correct that the salary cost should be classified as a selling (marketing) cost. The duties described in the problem have nothing to do with manufacturing the product, but rather deal with ordertaking and shipping finished goods to customers. As stated in the text, selling costs include all costs necessary to secure customer orders and get the finished product into the hands of customers. 2. No, the president is not correct; how the salary cost is classified can affect the reported operating income for the year. If the salary cost is classified as a selling expense all of it will appear on the income statement as a period cost. However, if the salary cost is classified as a manufacturing (product) cost, then it will be added to Work in Process Inventory along with other manufacturing costs for the period. To the extent that goods are still in process at the end of the period, part of the salary cost will remain with these goods in the Work in Process Inventory account. Only that portion of the salary cost that has been assigned to finished units will leave the Work in Process Inventory account and be transferred into the Finished Goods Inventory account. In like manner, to the extent that goods are unsold at the end of the period, part of the salary cost will remain with these goods in the Finished Goods Inventory account. Only that portion of the salary that has been assigned to finished units that are sold during the period will appear on the income statement as an expense (part of Cost of Goods Sold) for the period. © McGraw-Hill Education Ltd. 2018. All rights reserved. 30 Managerial Accounting, 11th Canadian Edition Problem 2-19 (30 minutes) 1. Period Name of the Cost Todd’s present salary of $2,000 per month …………………………………….. Rentonthe production building,$1,500permonth …………………… Rent of production equipment, $550 per month ……………………………….. Materials for producing brooms, at $11.50 each …………………………….. Labour cost of producing brooms, at $4.25 each ………………………………. Rent of room for a sales office, $250 per month ……………………………….. Voice mail, $5 per month ………………. Interest lost on savings account, $1,100 per year ………………………… Advertising cost, $450 per month ……. Sales commission, at $0.80 per broom …………………………………….. Legal and filing fees, $1,500 …………… Product Cost Variable Fixed Direct Direct Mfg. Cost Cost Materials Labour Overhead (Selling and Admin.) Cost X Sunk Cost X X X X X X Opportunity Cost X X X X X X X X X X X X X X X © McGraw-Hill Education Ltd. 2018. All rights reserved. Solutions Manual, Chapter 2 31 Problem 2-19 (continued) 2. The $1,500 legal and filing fees are not a differential cost. These legal and filing fees have already been paid and are a sunk cost. Sunk costs are never differential costs. Thus, the cost will not differ depending on whether Todd decides to produce brooms or to stay with the janitorial service. All other costs listed above are differential costs since they will be incurred only if Todd leaves the janitorial service and produces the brooms. © McGraw-Hill Education Ltd. 2018. All rights reserved. 32 Managerial Accounting, 11th Canadian Edition Problem 2-20 (45 minutes) 1. Cost Item Direct labour ……………………….. Advertising ………………………….. Factory supervision ……………….. Property taxes, factory building .. Sales commissions ………………… Insurance, factory ………………… Depreciation, administrative office equipment …………………… Lease cost, factory equipment …. Indirect materials, factory ………. Depreciation, factory building ….. Administrative office supplies ….. Direct materials used …………….. Utilities, factory ……………………. Total costs ………………………….. Cost Behavior Variable Fixed $118,000 80,000 6,000 3,000 94,000 20,000 $321,000 $50,000 40,000 3,500 2,500 4,000 12,000 10,000 $122000 Selling or Administrative Cost $50,000 Product Cost Direct Indirect $118,000 $40,000 3,500 80,000 2,500 4,000 3,000 $137000 12,000 6,000 10,000 94,000 $212,000 20,000 $94,000 © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 33 Problem 2-20 (continued) 2. Only the product costs will be included in the cost of a patio set. The cost per set will be: Direct product costs …………. $212,000 Indirect product costs ………. 94,000 Total product costs ………….. $306,000 $306,000 ÷ 2,000 sets = $153 per set 3. The cost per set would increase. This is because the fixed costs would be spread over fewer units, causing the cost per unit to rise. 4. a. Yes, there probably would be a disagreement. The president is likely to want a price of at least $153, which is the average cost per unit to manufacture 2,000 patio sets. He mayexpect an even higher price than this to cover a portion of the administrative costs as well. Hissister will probably be thinking of cost as including only materials used, or perhaps materials and direct labour. b. The term is opportunity cost. Since the company is operating at full capacity, the president must give up the full, regular price of a set to sell a patio set to hissister. Therefore, the president’s cost is really the full, regular price of a set. © McGraw-Hill Education Ltd., 2018. All rights reserved. 34 Managerial Accounting, 11th Canadian Edition Problem 2-21 (15 minutes) Item Description a. b. The cost of leasing the Meals-On-Wheels van….. The cost of incidental supplies such as salt, pepper, napkins, and so on …………………………… The cost of gasoline consumed by the Meals-OnWheels van …………………………………………… The rent on the facility that houses Madison Seniors Care Center, including the Meals-OnWheels program …………………………………….. The salary of the part-time manager of the Meals-On-Wheels program ……………………….. Depreciation on the kitchen equipment used in the Meals-On-Wheels program ………………….. The hourly wages of the caregiver who drives the van and delivers the meals ………………….. The costs of complying with health safety regulations in the kitchen ………………………………. The costs of mailing letters soliciting donations to the Meals-On-Wheels program ………………. c. d. e. f. g. h. i. Direct or Indirect Cost of the MealsOn-Wheels Program Direct Indirect Direct or Indirect Cost of Particular Seniors Served by the Meals-OnWheels Program Direct Indirect Variable or Fixed with Respect to the Number of Seniors Served by the Meals-On-Wheels Program Variable Fixed X X X X* X X X X X X X* X X X X X X X X X X X X X X X X * These costs could be direct costs of serving particular seniors. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 35 Problem 2-22 (60 minutes) 1. Veekay Company Schedule of Cost of Goods Manufactured For the Month Ended June 30 Direct materials: Raw materials inventory, June 1 ……………….. $ 19,000 Add: Purchases of raw materials ……………….. 209,000 Raw materials available for use …………………. 228,000 Deduct: Raw materials inventory, June 46,000 30 ……………………………………………………. Raw materials used in production ……………… Direct labour …………………………………………… Manufacturing overhead: Rent on facilities (85% × $40,000) …………… 34,000 Insurance (90% × $10,000) ……………………. 9,000 Utilities (80% × $55,000) ……………………….. 44,000 Indirect labour ………………………………………. 119,000 Maintenance, factory ………………………………. 8,000 Depreciation, factory equipment ……………….. 13,000 Total overhead costs ………………………………… Total manufacturing costs ………………………….. Add: Work in process inventory, June 1 ………… Deduct: Work in process inventory, June 30 ………………………………………………………. Cost of goods manufactured ………………………. $182,000 99,000 227,000 508,000 77,000 585,000 94,000 $491,000 © McGraw-Hill Education Ltd., 2018. All rights reserved. 36 Managerial Accounting, 11th Canadian Edition Problem 2-22 (continued) 2. Veekay Company Income Statement For the Month Ended June 30 Sales …………………………………………………….. Cost of goods sold: Finished goods inventory, June 1 ………………. Add: Cost of goods manufactured ……………… Goods available for sale…………………………… Deduct: Finished goods inventory, June 30 ….. Gross margin…………………………………………… Selling and administrative expenses: Selling and administrative salaries ……………… Rent on facilities (15% × $40,000) ……………. Depreciation, sales equipment ………………….. Insurance (10% × $10,000) …………………….. Utilities (20% × $55,000) ………………………… Advertising …………………………………………… Operating income …………………………………….. $660,000 $ 22,000 491,000 513,000 66,000 39,000 6,000 11,000 1,000 11,000 88,000 447,000 213,000 156,000 $ 57,000 Note: the $88,000 difference between the operating income shown above and the operating loss ($31,000) shown on the June income statement can be reconciled as follows: Operating loss………………..$(31,000) Less opening inventories…..(118,000) ($19,000 + $77,000 + $22,000) Add closing inventories……..206,000 ($46,000 + $94,000 + $66,000) Operating income…………….$57,000 © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 37 Problem 2-22 (continued) 3. In preparing the income statement shown in the text, the accountant failed to distinguish between product costs and period costs, and also failed to recognize the change in inventories between the beginning and end of the month. Once these errors have been corrected, the financial condition of the company looks much better and continuing operations appears more attractive. © McGraw-Hill Education Ltd., 2018. All rights reserved. 38 Managerial Accounting, 11th Canadian Edition Problem 2-23 (30 minutes) 1. Mr. Richart’s first action was to direct that discretionary expenditures be delayed until the first of the new year. Providing that these ―discretionary expenditures‖ can be delayed without hampering operations, this is a good business decision. By delaying expenditures, the company can keep its cash a bit longer and thereby earn a bit more interest. There is nothing unethical about such an action. The second action was to ask that the order for the parts be cancelled. Since the clerk’s order was a mistake, there is nothing unethical about this action either. The third action was to ask the accounting department to delay recognition of the delivery until the bill is paid in January. This action is dubious. Asking the accounting department to ignore transactions strikes at the heart of the integrity of the accounting system. If the accounting system cannot be trusted, it is very difficult to run a business or obtain funds from outsiders. However, in Mr. Richart’s defense, the purchase of the raw materials really shouldn’t be recorded as an expense. He has been placed in an extremely awkward position because the company’s accounting policy is flawed. 2. The company’s accounting policy with respect to raw materials is incorrect. Raw materials should be recorded as an asset when delivered rather than as an expense. If the correct accounting policy were followed, there would be no reason for Mr. Richart to ask the accounting department to delay recognition of the delivery of the raw materials. This flawed accounting policy creates incentives for managers to delay deliveries of raw materials until after the end of the fiscal year. This could lead to raw materials shortages and poor relations with suppliers who would like to record their sales before the end of the year. The company’s ―manage-by-the-numbers‖ approach does not foster ethical behaviour—particularly when managers are told to ―do anything so long as you hit the target profits for the year.‖ Such ―no excuses‖ pressure from the top too often leads to unethical behaviour when managers have difficulty meeting target profits. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 39 Problem 2-24 (60 minutes) 1. Carlton Manufacturing Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning………. $ 25,000 Add: Purchases of raw materials ………….. 130,000 Raw materials available for use ……………. 155,000 Deduct: Raw materials inventory, ending . 20,000 * Raw materials used in production ………… $135,000 (given) Direct labour ……………………………………… 32,500 Manufacturing overhead: Insurance, factory …………………………….. 4,000 Rent, factory building ………………………… 45,000 * Utilities, factory………………………………… 26,000 Indirect materials, factory ………………….. 3,000 Depreciation, factory equipment ………….. 55,000 Maintenance, factory …………………………. 37,000 Total overhead costs …………………………… 170,000 (given) Total manufacturing costs …………………….. 337,500 Add: Work in process inventory, beginning . 24,000 361,500 Deduct: Work in process inventory, ending… 16,500 * Cost of goods manufactured …………………. $345,000 ** ** computed in Cost of Goods Sold section next page © McGraw-Hill Education Ltd., 2018. All rights reserved. 40 Managerial Accounting, 11th Canadian Edition Problem 2-24 (continued) The cost of goods sold section of the income statement follows: Finished goods inventory, beginning ………………… $ 15,000 Add: Cost of goods manufactured ……………………. 345,000 * Goods available for sale …………………………………. 360,000 (given) Deduct: Finished goods inventory, ending …………. 42,500 * Cost of goods sold ……………………………………….. $317,500 (given) *These items must be computed by working backwards up through the statements. An effective way of doing this is to place the form and known balances on the paper, and then work toward the unknown figures. 2. Direct materials: $135,000 ÷ 15,000 units = $9.00 per unit. Rent, factory building: $45,000 ÷ 15,000 units = $3.00 per unit. 3. Direct materials: Per unit: $9.00 (unchanged) Total: 20,000 units × $9.00 per unit = $180,000. Rent, factory building: Per unit: $45,000 ÷ 20,000 units = $2.25 per unit. Total: $45,000 (unchanged). 4. The average cost per unit for rent dropped from $3.00 to $2.25, because of the increase in production between the two years. Since fixed costs do not change in total as the activity level changes, the average unit cost will decrease as the activity level rises. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 41 Problem 2-25 (60 minutes) Direct materials Direct labour Manufacturing overhead Total manufacturing costs Beginning work in process inventory Ending work in process inventory Cost of goods manufactured Case 1 $ 5,600 1,600 8,000 15,200* 2,400* (3,200) $14,400 Case 2 $10,400 4,600 13,800* 28,800 1,200 (4,000) $26,000* Case 3 $ 6,600 5,500* 7,700 19,800 2,200 (4,400) * $17,600 Case 4 $ 7,600 2,900 20,000 30,500* 1,300* (1,900) $29,900 Sales Beginning finished goods inventory Cost of goods manufactured Goods available for sale Ending finished goods inventory Cost of goods sold Gross margin Selling and administrative expenses Operating income $20,000 4,800 14,400 19,200* 7,200 12,000* 8,000* 4,800 $ 3,200* $46,000 9,100* 26,000* 35,100* 4,600 30,500 15,500* 9,200* $ 6,300 $33,000 7,700 17,600 25,300* 5,500* 19,800 13,200* 9,900* $ 3,300 $47,500 8,600 29,900 38,500* 6,700 31,800* 15,700* 9,500 $ 6,200* *Missing data in the problem. © McGraw-Hill Education Ltd., 2018. All rights reserved. 42 Managerial Accounting, 11th Canadian Edition Problem 2-26 (45 minutes) 1. MITCHELL COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, January 1 ……….. Add: Purchases of raw materials ……………. Raw materials available for use …………….. Deduct: Raw materials inventory, December 31……………………………………………… Raw materials used in production ………….. Direct labour …………………………………….. Manufacturing overhead: …………………….. Utilities, factory …………………………………. Depreciation, factory ………………………….. Insurance, factory ……………………………… Supplies, factory ………………………………… Indirect labour…………………………………… Maintenance, factory ………………………….. Total overhead costs…………………………… Total manufacturing costs ……………………. Add: Work in process inventory, January 1 . Deduct: Work in process inventory, December 31………………………………………… Cost of goods manufactured…………………. $ 90,000 750,000 840,000 60,000 $ 780,000 150,000 36,000 162,000 40,000 15,000 300,000 87,000 640,000 1,570,000 180,000 1,750,000 100,000 $1,650,000 © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 43 Problem 2-26 (continued) 2. The cost of goods sold would be computed as follows: 3. Finished goods inventory, January 1 ………. Add: Cost of goods manufactured ………….. Goods available for sale ………………………. Deduct: Finished goods inventory, December 31……………………………………………… Cost of goods sold ……………………………… MITCHELL COMPANY Income Statement For the Year Ended December 31 Sales ………………………………………………. Less cost of goods sold (above) …………….. Gross margin …………………………………….. Less selling and administrative expenses: .. Selling expenses ………………………………. $140,000 Administrative expenses…………………….. 270,000 Total expenses ………………………………… Operating income ………………………………. $ 260,000 1,650,000 1,910,000 210,000 $1,700,000 $2,500,000 1,700,000 800,000 410,000 $ 390,000 4. Ending finished good inventory: Direct materials ($780,000/412,500 = $1.8909) $104,332 $1.8909  55,176 ……………………………………………… 20,062* Direct labour ($150,000/412,500 = $0.3636) $0.3636  55,176 ……………………………………………………………. Manufacturing overhead ($640,000/412,500 = 85,606 $1.5515) $1.5515  55,176 ………………………………… Total cost ……………………………………………………… $210,000 * Rounding down is undertaken to account for unit cost rounding. © McGraw-Hill Education Ltd., 2018. All rights reserved. 44 Managerial Accounting, 11th Canadian Edition Problem 2-27(30 minutes) 1. Keep Old Mowers $0 Lease New Mowers $400 Difference ($400) $0 $25 ($ 25) $200 $0 $200 Foregone revenue $0 $75 ($75) Salvage value – old mowers (2 x $40) $0 $80 $80 Gas expense savings* $0 $240 $360 Lease costs(2 x $200) Lease administration fee Oil change changes & blade sharpening (2 x $100) Net difference $140 *(2,400 x $1 x 7.5%) x 2 = $360 The above analysis shows that Lilly will be $140 better off by selling her old mowers and leasing the two new mowers for the fifth-year of operations. The biggest factor driving the advantage of leasing the mowers is the gas savings of $360. It would be worthwhile to point out to students that if Lilly’s estimate of the efficiency gains is off by as little as 2.5% (i.e., only 5% savings are achieved) then the differential savings are only about $20. 2. Items excluded from the analysis and rationale:  Cost ($1,000) and net book value ($240) of existing mowers since these are sunk costs.  Wage increase of $1,200 for Lilly’s brother since it does not differ under the keep versus replace alternatives.  Total repair costs of $300 per year as they are not estimated to differ under the two alternatives.  Total costs of $200 ($100 x 2) to replace the wheels and starter cords at the end of the fourth season since this is a sunk cost.  Additional revenue of $2,400 since it will not differ between the two alternatives. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 45 Case 2-28 (30 minutes) 1. The error made by Ranton when calculating the 2018 expected operating income was to treat all expenses as if they were variable. This is incorrect since the case indicates that advertising and the salaries of the website administrator and the bookkeeper are fixed costs. By including these costs in the calculation of 2017 operating expenses on a per unit basis, Ranton is effectively treating them as if they will vary in direct proportion with unit activity. This will lead to an overstatement of the expected amount of these expenses because they will not increase proportionately with sales activity. 2. The expected results for 2018, along with the 2017 actual results for comparison, are shown below. Actual 2017 Sales (units) ………………………………… 8,000 Expected 2018 10,000 Sales ……………………………………………… $800,000 $1,000,000 Cost of goods sold: ………………………… 640,000 800,000 Gross margin ………………………………… 160,000 200,000 Operating expenses Advertising ………………………………… 8,000 8,000 Salaries …………………………………….. 92,000 92,000 Commissions* …………………………….. 8,000 10,000 Total operating expenses………………. 108,000 110,000 Operating income …………………………… $52,000 $90,000 The above shows that expected results for 2018 should have been $90,000. This assumes, as per the case, that advertising and salaries remain fixed at respectively, $8,000 and $92,000 per year. The only variable operating expense is the commission paid to the website designer/administrator based on 1% of total sales. Compared to the recalculated expected 2018 results, the actual operating income of $75,000 no longer looks as good since it is $15,000 below the anticipated level. © McGraw-Hill Education Ltd., 2018. All rights reserved. 46 Managerial Accounting, 11th Canadian Edition Case 2-28 (continued) 3. Comparison of expected and actual operating expenses in 2018: Expected expenses (per part 2 above) Actual expenses Difference $110,000 $125,000 $ 15,000 Assuming no mistakes were made by the bookkeeper in preparing the 2018 financial statements Ranton needs to focus on the only variable operating expense – sales commissions paid to the website designer. If salaries ($92,000) and advertising ($8,000) truly are both fixed costs and did not change in 2018, the $15,000 difference between expected and actual operating expenses must be attributable to an increase in the amount of commissions actually paid. Perhaps a mistake was made in calculating the amount of the sales commissions but Ranton will want to get an answer. © McGraw-Hill Education Ltd., 2018. All rights reserved. Solutions Manual, Chapter 2 47 Case 2-29(30 minutes) 1. Differential revenues:  The rental revenue that will be received from sub-letting 15% of the new warehouse.  Sales proceeds (less real estate commissions, legal fees, etc.) received from selling old warehouse.  Revenues from existing parking lot. Differential costs:  Monthly lease payments for the new warehouse.  Utility costs (expected to be lower at new warehouse).  Property taxes (none paid at new building).  Building insurance (none paid at new building).  Maintenance and repair costs (likely lower at new building).  Salary of current maintenance manager (won’t be needed if PE moves to the new building).  Cost of maintaining the existing parking lot. Note: some students may want to also include the inventory insurance costs and the security personnel costs as differential costs. However, the facts of the case indicate that Reg does not believe these costs will change if the new warehouse is rented. As a result, these are not differential costs. 2. An opportunity cost is a potential benefit given up when one alternative is chosen over another. If PE sells the old warehouse they will incur an opportunity cost equal to the operating income currently being earned on the small parking lot set up on one corner of the property. 3. The depreciation expense represents a sunk cost because it represents the allocation to reporting periods of the original depreciable cost of the old warehouse. It should not be considered in deciding whether to lease the new warehouse. Because that original cost cannot be changed it is a sunk cost, and thus so too is the depreciation of that original cost. © McGraw-Hill Education Ltd., 2018. All rights reserved. 48 Managerial Accounting, 11th Canadian Edition