Wild and Shaw, Managerial Accounting, 7e Solutions Manual: Chapter 1
Chapter 1
Managerial Accounting
Concepts and Principles
QUESTIONS
1. The managerial accountant plays an important role in preparing the information
necessary for effective planning and control decisions. One example is the budget,
which is a quantitative expression of a company’s long-run and short-run plans.
The budget is used to compare actual results to planned performance. With this
type of information provided by the managerial accountant, management strives to
continuously improve a business.
2.
Financial Accounting Managerial Accounting
(a) Users and decision Investors, creditors, and Managers, employees, and
makers other users external to the decision makers internal to
organization the organization
(b) Purpose of Assist external users in Assist managers in making
information making investment, credit, planning and control
and other decisions decisions
(c) Flexibility of practice Structured and often Relatively flexible (no
controlled by GAAP GAAP)
(d) Time dimension Historical information with Many projections and
minimum predictions estimates; historical
information also presented
(e) Focus of information Emphasis on whole Emphasis on projects,
organization processes, and subdivision
of an organization
(f) Nature of Monetary information Mostly monetary; but also
information nonmonetary information
1
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Wild and Shaw, Managerial Accounting, 7e Solutions Manual: Chapter 1
3. A customer orientation has led companies to adopt the principles of the lean
business model in response to consumer demands. The essence of customer
orientation is that all managers and employees should be sensitive to the wants and
needs of customers, attempting to develop flexible product designs and production
processes that are responsive to changes in customer demands along with
minimization of defects. They are increasingly adopting management practices
such as total quality management (TQM), just-in-time (JIT) manufacturing, and
continuous improvement (CI).
4. Direct labor refers to the efforts of employees who physically convert materials to
finished product. Indirect labor refers to the efforts of factory employees who do not
work specifically on converting direct materials into finished products and whose
efforts are not clearly associated (or traceable) with specific units or batches of
product.
5. Factory overhead is limited to indirect costs that are incurred in the production
process. That is, it consists of activities that support the production process, such
as indirect material, indirect labor, heat, and related factory utilities. Selling and
administrative overhead costs do not pertain to the production process. Instead,
selling and administrative overhead are activities involved with selling the product
and running the business. Accordingly, selling and administrative overhead costs
are expensed as period costs.
6. Direct materials are raw materials that physically become part of the product and
can be clearly traced to specific units or batches of product. Indirect materials are
used in the production process but either do not become a part of the product or are
not easily traceable to units or batches of product. Some materials are identified as
indirect because they are of insignificant value or it is not cost beneficial to trace
them to finished products.
7. Direct labor is both a prime cost and a conversion cost.
8. Direct costs of iPhones include: costs of materials such as smartphone cameras,
memory chips, screens, and processors, as well as the labor of workers who
assemble the products.
Indirect costs include: cost of supervisors’ salaries, factory lighting, factory heat,
wages of maintenance workers, depreciation of factory equipment, insurance on the
factory buildings, and property taxes on the factory buildings. Note: Other answers
are possible as these lists are not comprehensive.
9. The production manager should likely not be evaluated on the basis of operating
expenses. Operating expenses are not under the influence of production managers,
and they should not be held accountable for them.
10. Management usually must be able to predict financial performance to be successful.
Therefore, understanding how costs behave under different market conditions and
production schedules enables them to better predict financial performance and to
plan accordingly.
11. Product costs are capitalized because they represent a future value (an asset) to the
business. Period costs are expensed because they are consumed in the current
period.
2
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Wild and Shaw, Managerial Accounting, 7e Solutions Manual: Chapter 1
12. A manufacturing business produces a product, whereas in a merchandising or
service business this is not the case. In making a product, the manufacturing
business must control and measure three types of inventories: raw materials, work
in process, and finished goods. A merchandising business, on the other hand, must
control and measure only merchandise inventory, and a service firm typically does
not control and measure any inventory.
13. To run a successful business, management must make predictions and estimates
about what will occur in the future. Thus, managerial accountants must project how
the numbers will look under different possibilities.
14. A manufacturing firm converts raw materials into finished products. A
manufacturing company would report three types of inventories on its balance
sheet: raw materials, work in process, and finished goods. The finished goods are
included on the income statement as part of cost of goods sold. A merchandising
company purchases inventories to resell. A merchandising company would report
only one inventory item (merchandise inventory) on its balance sheet, and would
include the merchandise inventory on the income statement as part of cost of goods
sold. (Note: The manufacturer would add cost of goods manufactured to the
beginning finished goods to determine the goods available for sale. The
merchandising firm adds purchases to its beginning merchandise inventory to
determine the goods available for sale.)
15. Manufacturers’ balance sheets usually include small tools, factory buildings, factory
machinery, and patents that are used to produce finished goods. For example, the
“Plant Assets” category will often include factory machinery and factory building. A
merchandising company would usually not own these assets.
16. Manufacturing firms have inventories at various stages of completion.
Manufacturing a product requires raw materials, which are converted to finished
goods. Manufacturing companies maintain raw materials inventory so that they have
materials available to produce goods. Any unfinished product is classified as work
in process. Work in process inventory may be maintained to keep the factory
running. Finished goods inventory is maintained to supply to customers when they
place orders. (Note: A JIT system attempts to minimize all three types of inventory.)
17. Manufacturing activities of a company are described in the Schedule of Cost of
Goods Manufactured. This schedule summarizes the types and amounts of costs
incurred in a company’s manufacturing process (or activities).
18. The three categories of manufacturing costs are: direct materials, direct labor, and
factory overhead.
19. Examples of factory overhead costs include: indirect materials, indirect labor,
depreciation of the factory equipment and plant, amortization of patents, the cost of
small tools used, factory utilities, insurance on the factory and equipment, property
taxes on plant and equipment, property taxes on materials and work in process
inventories, and repairs and maintenance on the factory building and equipment.
More generally, all costs associated with manufacturing a good that are not
classified as direct material or direct labor are included in overhead.
3
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Wild and Shaw, Managerial Accounting, 7e Solutions Manual: Chapter 1
20. Components of Schedule of COGM Apple Examples
Direct material ................................................................
Processors, chips, covers
Direct labor................................................................Wages of production employees
Factory overhead ..............................................................
Factory heat, factory lighting
Computation of cost of goods manufactured .................
Computation (see Exhibit 1.16)
21. Google
Schedule of Cost of Goods Manufactured
For Year Ended December 31, 2019
The date matches the period of the income statement. The “schedule of cost of
goods manufactured” supports the income statement in computing cost of goods
available for sale for the cost of goods sold section.
22. The income statement describes the revenues and expenses for the year. Included
in the calculation of the cost of goods sold is a line item identified as the cost of
goods manufactured. This amount is calculated and reported as the bottom line of
the schedule of cost of goods manufactured. The schedule often includes a
component line item showing only the total amount of factory overhead cost for the
period. When this is done, a table of factory overhead costs explains the details
underlying this single item on the schedule of cost of goods manufactured.
23. Raw materials inventory turnover and days’ sales in raw materials inventory can be
used to assess raw materials inventory management. Raw materials inventory
turnover is computed as raw materials used divided by average raw materials
inventory, and it measures how often a company turns over (sells) its raw materials
inventory during a period. Days’ sales in raw materials inventory is computed as
ending raw materials inventory divided by raw materials used, all multiplied by 365.
It measures how long (in days) it will take to use raw materials inventory in
production.
24. The triple bottom line reports on an organization’s financial, social, and
environmental performance.
25. Inventory Components ($ millions) 3M Co. (December 31, 2017)
Finished goods ................................................................ $1,915
Work in process ................................................................ 1,218
Raw materials and supplies ............................................. 901
Total inventories ............................................................... $4,034
4
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 1
Managerial Accounting
Concepts and Principles
QUESTIONS
1. The managerial accountant plays an important role in preparing the information
necessary for effective planning and control decisions. One example is the budget,
which is a quantitative expression of a company’s long-run and short-run plans.
The budget is used to compare actual results to planned performance. With this
type of information provided by the managerial accountant, management strives to
continuously improve a business.
2.
Financial Accounting Managerial Accounting
(a) Users and decision Investors, creditors, and Managers, employees, and
makers other users external to the decision makers internal to
organization the organization
(b) Purpose of Assist external users in Assist managers in making
information making investment, credit, planning and control
and other decisions decisions
(c) Flexibility of practice Structured and often Relatively flexible (no
controlled by GAAP GAAP)
(d) Time dimension Historical information with Many projections and
minimum predictions estimates; historical
information also presented
(e) Focus of information Emphasis on whole Emphasis on projects,
organization processes, and subdivision
of an organization
(f) Nature of Monetary information Mostly monetary; but also
information nonmonetary information
1
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Wild and Shaw, Managerial Accounting, 7e Solutions Manual: Chapter 1
3. A customer orientation has led companies to adopt the principles of the lean
business model in response to consumer demands. The essence of customer
orientation is that all managers and employees should be sensitive to the wants and
needs of customers, attempting to develop flexible product designs and production
processes that are responsive to changes in customer demands along with
minimization of defects. They are increasingly adopting management practices
such as total quality management (TQM), just-in-time (JIT) manufacturing, and
continuous improvement (CI).
4. Direct labor refers to the efforts of employees who physically convert materials to
finished product. Indirect labor refers to the efforts of factory employees who do not
work specifically on converting direct materials into finished products and whose
efforts are not clearly associated (or traceable) with specific units or batches of
product.
5. Factory overhead is limited to indirect costs that are incurred in the production
process. That is, it consists of activities that support the production process, such
as indirect material, indirect labor, heat, and related factory utilities. Selling and
administrative overhead costs do not pertain to the production process. Instead,
selling and administrative overhead are activities involved with selling the product
and running the business. Accordingly, selling and administrative overhead costs
are expensed as period costs.
6. Direct materials are raw materials that physically become part of the product and
can be clearly traced to specific units or batches of product. Indirect materials are
used in the production process but either do not become a part of the product or are
not easily traceable to units or batches of product. Some materials are identified as
indirect because they are of insignificant value or it is not cost beneficial to trace
them to finished products.
7. Direct labor is both a prime cost and a conversion cost.
8. Direct costs of iPhones include: costs of materials such as smartphone cameras,
memory chips, screens, and processors, as well as the labor of workers who
assemble the products.
Indirect costs include: cost of supervisors’ salaries, factory lighting, factory heat,
wages of maintenance workers, depreciation of factory equipment, insurance on the
factory buildings, and property taxes on the factory buildings. Note: Other answers
are possible as these lists are not comprehensive.
9. The production manager should likely not be evaluated on the basis of operating
expenses. Operating expenses are not under the influence of production managers,
and they should not be held accountable for them.
10. Management usually must be able to predict financial performance to be successful.
Therefore, understanding how costs behave under different market conditions and
production schedules enables them to better predict financial performance and to
plan accordingly.
11. Product costs are capitalized because they represent a future value (an asset) to the
business. Period costs are expensed because they are consumed in the current
period.
2
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Wild and Shaw, Managerial Accounting, 7e Solutions Manual: Chapter 1
12. A manufacturing business produces a product, whereas in a merchandising or
service business this is not the case. In making a product, the manufacturing
business must control and measure three types of inventories: raw materials, work
in process, and finished goods. A merchandising business, on the other hand, must
control and measure only merchandise inventory, and a service firm typically does
not control and measure any inventory.
13. To run a successful business, management must make predictions and estimates
about what will occur in the future. Thus, managerial accountants must project how
the numbers will look under different possibilities.
14. A manufacturing firm converts raw materials into finished products. A
manufacturing company would report three types of inventories on its balance
sheet: raw materials, work in process, and finished goods. The finished goods are
included on the income statement as part of cost of goods sold. A merchandising
company purchases inventories to resell. A merchandising company would report
only one inventory item (merchandise inventory) on its balance sheet, and would
include the merchandise inventory on the income statement as part of cost of goods
sold. (Note: The manufacturer would add cost of goods manufactured to the
beginning finished goods to determine the goods available for sale. The
merchandising firm adds purchases to its beginning merchandise inventory to
determine the goods available for sale.)
15. Manufacturers’ balance sheets usually include small tools, factory buildings, factory
machinery, and patents that are used to produce finished goods. For example, the
“Plant Assets” category will often include factory machinery and factory building. A
merchandising company would usually not own these assets.
16. Manufacturing firms have inventories at various stages of completion.
Manufacturing a product requires raw materials, which are converted to finished
goods. Manufacturing companies maintain raw materials inventory so that they have
materials available to produce goods. Any unfinished product is classified as work
in process. Work in process inventory may be maintained to keep the factory
running. Finished goods inventory is maintained to supply to customers when they
place orders. (Note: A JIT system attempts to minimize all three types of inventory.)
17. Manufacturing activities of a company are described in the Schedule of Cost of
Goods Manufactured. This schedule summarizes the types and amounts of costs
incurred in a company’s manufacturing process (or activities).
18. The three categories of manufacturing costs are: direct materials, direct labor, and
factory overhead.
19. Examples of factory overhead costs include: indirect materials, indirect labor,
depreciation of the factory equipment and plant, amortization of patents, the cost of
small tools used, factory utilities, insurance on the factory and equipment, property
taxes on plant and equipment, property taxes on materials and work in process
inventories, and repairs and maintenance on the factory building and equipment.
More generally, all costs associated with manufacturing a good that are not
classified as direct material or direct labor are included in overhead.
3
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Wild and Shaw, Managerial Accounting, 7e Solutions Manual: Chapter 1
20. Components of Schedule of COGM Apple Examples
Direct material ................................................................
Processors, chips, covers
Direct labor................................................................Wages of production employees
Factory overhead ..............................................................
Factory heat, factory lighting
Computation of cost of goods manufactured .................
Computation (see Exhibit 1.16)
21. Google
Schedule of Cost of Goods Manufactured
For Year Ended December 31, 2019
The date matches the period of the income statement. The “schedule of cost of
goods manufactured” supports the income statement in computing cost of goods
available for sale for the cost of goods sold section.
22. The income statement describes the revenues and expenses for the year. Included
in the calculation of the cost of goods sold is a line item identified as the cost of
goods manufactured. This amount is calculated and reported as the bottom line of
the schedule of cost of goods manufactured. The schedule often includes a
component line item showing only the total amount of factory overhead cost for the
period. When this is done, a table of factory overhead costs explains the details
underlying this single item on the schedule of cost of goods manufactured.
23. Raw materials inventory turnover and days’ sales in raw materials inventory can be
used to assess raw materials inventory management. Raw materials inventory
turnover is computed as raw materials used divided by average raw materials
inventory, and it measures how often a company turns over (sells) its raw materials
inventory during a period. Days’ sales in raw materials inventory is computed as
ending raw materials inventory divided by raw materials used, all multiplied by 365.
It measures how long (in days) it will take to use raw materials inventory in
production.
24. The triple bottom line reports on an organization’s financial, social, and
environmental performance.
25. Inventory Components ($ millions) 3M Co. (December 31, 2017)
Finished goods ................................................................ $1,915
Work in process ................................................................ 1,218
Raw materials and supplies ............................................. 901
Total inventories ............................................................... $4,034
4
Copyright © 2019 by McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
