Tutorial 1: Introduction to Management Accounting

Section A
1. Planning and controlling are two broad functions of management.

2. Financial and management accounting both use the accrual basis and both reflect the same
underlying economic transactions.

3. Weighing costs against benefits to help make decisions is called verification analysis.

4. Goods that are partway through the manufacturing process, but not yet complete, are referred
to as work in process inventory.

5. Managers need and use accounting information for the same reasons as investors and
creditors.

6. Merchandisers use labor, plant, and equipment to convert raw materials into new finished
products.

7. The sequence of events that add value to a firm’s products or services is called a product
chain.

8. Research and development is the first function in the value chain.

9. The value chain applies to service, merchandising, and manufacturing firms.

10. Cost objects are anything for which managers want a separate measurement of costs.

11. The plant manager's salary in a manufacturing business would be considered a direct cost.

12. Full product costs include the costs of all resources that are used throughout the value chain.

13. Period costs are operating costs that are expensed in the period in which the goods are sold.

14. Labor costs that are directly traceable to the product are part of manufacturing overhead.

15. Manufacturing overhead includes all manufacturing costs except direct materials.

16. Period costs include direct labor and direct materials.

17. Indirect labor and indirect materials would be part of manufacturing overhead.

18. Inventoriable costs for a merchandiser would include the purchases of inventory plus freight-
in.

19. Trends in the modern business environment include the shift to a service economy and the
rise of the global marketplace.

20. Communicating information fairly and objectively is an example of competence based on the
IMA Standards of Ethical Conduct for Management Accountants.

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MULTIPLE CHOICE
1. Inventory accounts for a manufacturer include:
a) work in process, direct labor, and finished goods
b) merchandise, materials, and finished goods
c) materials, work in process, and finished goods
d) work in process, materials, and manufacturing overhead

2. Inventory accounts for a merchandiser include:

a) merchandise inventory
b) work in process inventory
c) manufacturing overhead inventory
d) none of the above

3. Goods that are partially completed by a manufacturer are referred to as:

a) work in process inventory
b) merchandise inventory
c) finished goods inventory
d) materials inventory

4. Collectively, a business’s activities of research and development, product design,

manufacturing, marketing, distribution, and customer service are referred to as:
a) downstream activities
b) the value chain
c) manufacturing costs
d) full costs

5. A plant manager’s salary may be referred to as:

a) either a direct cost or an indirect cost
b) an indirect cost
c) a direct cost
d) none of the above

6. Full product costs:

a) consist of direct materials, direct labor, and manufacturing overhead
b) include the costs of all resources that are used throughout the value chain
c) are narrower in scope than inventoriable product costs
d) both b and c are correct

7. Inventoriable product costs:

a) include marketing costs and research and development costs
b) include only the costs of direct materials and direct labor used to produce a product
c) include the costs of direct materials, direct labor, and manufacturing overhead used to
produce a product
d) both a and b are correct

8. Period costs include:

a) direct materials and direct labor
b) direct labor and manufacturing overhead
c) operating costs that are shown on the income statement when the products are sold
d) operating costs that are shown on the income statement in the period in which they
are incurred

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9. A period cost is:
a) shown on the balance sheet
b) expensed in the period in which it is incurred
c) accumulated in work in process inventory
d) identified with a product and regarded as an asset

10. Manufacturing overhead is a:

a) product cost
b) period cost
c) indirect cost
d) both a and c are correct

Section C: Calculation

Table 1
Tudor, Inc., reports production costs for 20X2 as follows:

Direct materials used $350,000

Direct labor incurred 225,000
Manufacturing overhead incurred 400,000
Operating expenses 175,000

1. Refer to Table 1. Tudor Inc.’s period costs for 20X2 amount to:
2. Refer to Table 1. Tudor Inc.’s inventoriable product costs for 20X2 amount to:

Table 2
Welch Company reports the following data for 20X3, its first year
of operations:

Cost of goods manufactured $420,000

Work in process inventory, Dec. 31, 20X3 120,000
Direct materials used 110,000
Manufacturing overhead incurred 150,000
Finished goods inventory, Dec. 31, 20X3 60,000

3. Refer to Table 2. What are the total manufacturing costs to account for by Welch Company
for 20X3?
4. Refer to Table 2. What is cost of goods sold for Welch Company for 20X3?

5. Bluebell Company reports the following data for 20X3:

Cost of goods manufactured $69,300

Direct materials used 27,000
Direct labor incurred 30,000
Work in process inventory, Jan. 1, 20X3 9,000

Manufacturing overhead is 75% of the cost of direct labor.

Work in process inventory on December 31, 20X3, is:

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6. At the beginning of 20X4, the Redbird Company’s work in process inventory account had a
balance of $30,000. During 20X4, $58,000 of direct materials were used in production, and
$66,000 of direct labor costs were incurred. Manufacturing overhead in 20X4 amounted to
$90,000. The cost of goods manufactured was $220,000 in 20X4. The balance in work in
process inventory on December 31, 20X4, is:

7. Selected data for the Allgood Company for 20X5 is presented below:

Direct labor incurred $30,000

Indirect labor incurred 21,000
Factory depreciation 5,000
Factory utilities 7,000
Indirect materials used 2,000
Direct materials used 12,000
Property taxes on factory building 3,000
Sales commissions 8,000

What is the manufacturing overhead incurred during 20X5?

Table 3

Tinseltowne Company’s selected cost data for 20X5 is shown

below:

Cost of goods manufactured $ 135,800

Work in process inventory, Jan. 1, 20X5 18,500
Work in process inventory, Dec. 31, 20X5 22,500
Direct materials used 14,700

8. Refer to Table 3. What are total manufacturing costs incurred by Tinseltowne Company in
20X5?

9. Refer to Table 3. Assuming direct labor is 50% of manufacturing overhead, what is the
amount of direct labor incurred by Tinseltowne Company in 20X5?

Table 4

Harrison Company reports the following cost information for August:

Cost of goods manufactured $135,800

Finished goods inventory, August 1 30,200
Finished goods inventory, August 31 35,300
Work in process inventory, August 1 22,500
Work in process inventory, August 31 18,500
Direct materials used 20,300
Direct labor incurred in August amounted to 125% of manufacturing
overhead in August.

10. Refer to Table 4. What is cost of goods sold for August?

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11. Refer to Table 4. What is the amount of direct labor incurred by Harrison Company in
August?

12. A company used $35,000 of direct materials, incurred $73,000 in direct labor cost, and
$114,000 in manufacturing overhead costs during the period. If beginning and ending work
in process inventories were $28,000 and $21,000 respectively, the cost of goods
manufactured was:

13. Given the following information, determine the cost of goods manufactured and the cost of
goods sold for Dean’s Manufacturing for 20X9.

Direct labor incurred $126,000

Manufacturing overhead incurred 359,000
Direct materials used 271,000
Finished goods inventory, January 1, 20X9 395,000
Finished goods inventory, December 31, 20X9 442,000
Work in process inventory, January 1, 20X9 193,000
Work in process inventory, December 31, 20X9 218,000

14. Given the following information, calculate the direct materials purchased in 20X3.

Materials inventory, January 1, 20X3 $ 42,000

Materials inventory, December 31, 20X3 29,000
Work in process inventory, January 1, 20X3 53,000
Work in process inventory, December 31, 20X3 61,000
Finished goods inventory, January 1, 20X3 84,000
Finished goods inventory, December 31, 20X3 97,000
Cost of goods sold 395,000
Cost of goods manufactured 408,000
Direct labor 156,000
Manufacturing overhead costs 180,000

15. Given the following information for 20X5, calculate the direct materials purchased.

Cost of goods sold $610,000

Cost of goods manufactured 589,000
Direct labor 124,000
Manufacturing overhead costs 153,000
Finished goods inventory, January 1, 20X5 217,000
Finished goods inventory, December 31, 20X5 196,000
Work in process inventory, January 1, 20X5 81,000
Work in process inventory, December 31, 20X5 70,000
Materials inventory, January 1, 20X5 35,000
Materials inventory, December 31, 20X5 22,000

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Table 5

Selected data from User Corporation for 20X3 is as follows:

Inventories
Beginning Ending
Materials $ 34,000 $ 40,000
Work in process 140,000 150,000
Finished goods 110,000 102,000

Costs incurred during 20X3 are as follows:

Direct materials used $ 40,000

Total manufacturing costs incurred 254,000
Manufacturing overhead 60,000
Cost of goods available for sale 354,000

16. Refer to Table 5. The amount of materials purchased during 20X3 amount to:

17. Refer to Table 5. The cost of goods manufactured and cost of goods sold are, respectively:

18. Cost of goods manufactured during 20X3 is $240, work in process inventory on December
31, 20X3, is $50. Work in process inventory during 20X3 decreased 60%. Total
manufacturing costs incurred during 20X3 amount to:

19. Work in process inventory on December 31, 20X4, is $42,000. Work in process inventory
increased 60% during 20X4. Cost of goods manufactured for 20X4 amounts to $260,000.
What are the total manufacturing costs incurred in 20X4?

20. Work in process inventory on December 31, 20X4, is $42,000. Work in process inventory
decreased 40% during 20X4. Total manufacturing costs incurred in 20X4 amount to
$260,000. What is cost of goods manufactured?

21. Work in process inventory increased $18,000 during 20X2. Cost of goods manufactured
was $280,000. Total manufacturing costs incurred in 20X2 are:

22. The cost of goods sold for Frye Manufacturing in 20X3 was $233,000. The January 1, 20X3,
finished goods inventory balance was $31,600, and the December 31, 20X3, finished goods
inventory balance was $24,200. Cost of goods manufactured during the period was:

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MATCHING
a) direct labor
b) direct materials
c) inventoriable product costs
d) cost-benefit analysis
e) work in process inventory
f) just-in-time
g) period costs
h) materials inventory
i) value chain
j) finished goods inventory

1. __________ The compensation of employees who physically convert materials into the
company’s product
2. __________ Materials that become a physical part of a finished product and whose
costs are separately and conveniently traceable to the finished product
3. __________ Operating costs that are expensed in the period in which they are incurred
4. __________ Goods that are in the manufacturing process but are not yet complete
5. __________ Weighing costs against benefits to help make decisions
6. __________ Completed goods that have not yet been sold
7. __________ Product costs that are initially regarded as an asset for external financial
reporting and are not expensed until the product is sold
8. __________ A system where materials are purchased and finished goods completed
only as needed to satisfy customer orders
9. __________ Raw materials on hand for use in the manufacturing process
10. __________ The sequence of activities that adds value to a firm's products or services

PROBLEMS AND CRITICAL THINKING EXERCISES

1. Classify the following costs as direct, indirect, or neither:

a) __________ indirect materials used

b) __________ factory equipment depreciation
c) __________ indirect labor incurred
d) __________ rent on factory building
e) __________ direct materials used
f) __________ insurance expired on administrative facilities
g) __________ direct labor incurred
h) __________ insurance expired on factory building
i) __________ plant manager’s salary
j) __________ utilities on factory building
k) __________ utilities on administrative facilities
l) __________ salespersons’ salaries

2. Differentiate between:
a) direct materials versus indirect materials
b) direct labor versus indirect labor
Give an example of each.
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3. Use the correct number to designate each item below:
1) direct labor
2) direct materials
3) manufacturing overhead
4) selling and general expenses

____________ a) rent expense on factory building

____________ b) sales supplies used
____________ c) factory supplies used
____________ d) indirect materials used
____________ e) wages of assembly line personnel
____________ f) cost of primary material used to make product
____________ g) depreciation on office equipment
____________ h) rent on office facilities
____________ i) insurance expired on factory equipment
____________ j) utilities incurred in the office
____________ k) advertising expense
____________ l) taxes paid on factory building

4. The Colonial Company reports the following information for 20X5:

Sales $66,600
Direct materials used 5,300
Depreciation on factory equipment 4,500
Indirect labor 5,600
Direct labor 10,300
Factory rent 3,200
Factory utilities 1,800
Sales salary expense 14,500
Office salary expense 8,700
Indirect materials 1,400
Compute:
a) inventoriable product costs
b) period costs
c) full product costs

5. Indicate whether each of the following costs is an product cost or a period cost:
____________ a) salespersons’ commissions
____________ b) factory utilities
____________ c) direct materials used
____________ d) indirect labor incurred
____________ e) indirect materials used
____________ f) depreciation on store equipment
____________ g) salary of plant manager
____________ h) factory machinery repairs and maintenance
____________ i) direct labor incurred
____________ j) advertising expense
____________ k) plant insurance expired
____________ l) store supplies used
____________ m) depreciation on factory machinery

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6. North State Company used $75,000 of direct materials and incurred $32,000 of direct labor
costs during 20X6. Indirect labor amounted to $2,700 while indirect materials used totaled
$1,400. Other operating costs pertaining to the factory included utilities of $3,100;
maintenance of $4,300; supplies of $1,800; depreciation of $7,900; and property taxes of
$2,600. There was no beginning or ending finished goods inventory, but work in process
inventory began the year with a $6,000 balance and ended the year with an $8,200
balance.
Prepare a schedule of cost of goods manufactured for the North State Company for the year
ending December 31, 20X6.

7. Listed below are selected data for South State Company for 20X5:
Selling expenses $ 55,200
General expenses 45,600
Sales revenue 300,400
Work in process inventory, Jan. 1, 20X5 54,300
Materials inventory, January 1, 20X5 30,400
Finished goods inventory, January 1, 20X5 20,300
Direct materials purchased 40,500
Materials inventory, December 31, 20X5 10,600
Work in process inventory, December 31, 20X5 23,200
Finished goods inventory, December 31, 20X5 15,200
Insurance expired (75% factory) 10,000
Direct labor incurred 20,500
Indirect labor incurred 15,600
Depreciation-factory equipment 9,800
Indirect materials used 5,400
Factory utilities 4,300
Prepare a schedule of cost of goods manufactured for South State Company for the year
ended December 31, 20X5.

8. The following information is available for the Blizzard Corporation for 20X3:
 Materials inventory decreased $4,000 during 20X3.
 Materials inventory on December 31, 20X3, was 50% of materials inventory on January 1,
20X3.
 Beginning work in process inventory was $140,000.
 Ending finished goods inventory was $65,000.
 Purchases of direct materials were $150,000.
 Direct materials used were 2.5 times the cost of direct labor.
 Manufacturing overhead was 50% of the cost of direct labor.
 Total manufacturing costs incurred were $246,400, 80% of cost of goods manufactured
and $150,000 less than cost of goods sold.
Compute:
a) finished goods inventory on January 1, 20X3
b) work in process inventory on December 31, 20X3
c) direct labor incurred
d) manufacturing overhead incurred
e) direct materials used
f) materials inventory on January 1, 20X3
g) materials inventory on December 31, 20X3
Note to students: The solutions to this problem are not necessarily calculated in alphabetical order.

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9. Orlando Manufacturing Company had the following account balances for 20X5:
January 1 December 31
Accounts receivable $27,000 $33,000
Materials inventory 22,500 6,000
Work in process inventory 70,200 48,000
Finished goods inventory 3,000 15,000

Collections on account were $609,000 in 20X5.

Cost of goods sold was 62% of sales.
Manufacturing overhead was 300% of the cost of direct labor.
Direct materials purchased amounted to $80,000.
Compute:
a) sales revenue (all sales were on account)
b) cost of goods sold
c) cost of goods manufactured
d) direct labor incurred
e) direct materials used
f) manufacturing overhead incurred
Note to students: The solutions to this problem are not necessarily calculated in alphabetical order.

10. Norris Industries had a fire and some of its accounting records were destroyed. Available
information is presented below for the year ended December 31, 20X2.
Materials inventory, Dec. 31, 20X2 $ 15,000
Direct materials purchased 28,000
Direct materials used 22,000
Cost of goods manufactured 135,000
Additional information is as follows:
 Manufacturing overhead is 150% of direct labor cost.
 Finished goods inventory decreased by $17,000 during the year.
 Work in process inventory increased by $12,000 during the year.
Calculate:
a) materials inventory, January 1, 20X2
b) direct labor cost
c) manufacturing overhead incurred
d) cost of goods sold

11. The following information is available for the Seagrove Corporation for 20X3:
 Materials inventory decreased $4,000 during 20X3.
 Materials inventory on December 31, 20X3, was 50% of materials inventory on January 1,
20X3.
 Beginning work in process inventory was $140,000.
 Ending finished goods inventory was $65,000.
 Purchases of direct materials were $150,000.
 Direct materials used were 2.5 times the cost of direct labor.
 Manufacturing overhead was 50% of the cost of direct labor.
 Total manufacturing costs incurred were $246,400, 80% of cost of goods manufactured
and $150,000 less than cost of goods sold.
Prepare a schedule of cost of goods manufactured for the year ended December 31, 20X3.

12. Briefly describe a just-in-time management philosophy.

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