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Managerial accounting garrison 15th edition solutions manual pdf

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X Note: Mixed cost: Nonetheless, within a narrow band of activity known as the relevant range, a curvilinear cost can be satisfactorily approximated by a straight line. Fixed costs Period costs: Machine-Hours Maintenance Cost High activity level……………..

Analysis of the mixed expenses: Shipping expense: Fixed expenses: Advertising expense Maintenance cost at the 75, direct labor-hour level of activity can be isolated as follows: High-low analysis of maintenance cost: Total cost at the high level of activity Total factory overhead cost at 70, direct labor-hours is: 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-On- Wheels van 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 Selling expenses: Executive salaries Fixed costs remain constant in total but vary on a per unit basis inversely with changes in the activity level.

As the activity level increases, for example, the fixed costs will decrease on a per unit basis. Showing fixed costs on a per unit basis on the income statement might mislead management into thinking that the fixed costs behave in the same way as the variable costs. That is, management might be misled into thinking that the per unit fixed costs would be the same regardless of how many pianos were sold during the month.

For this reason, fixed costs generally are shown only in totals on a contribution format income statement. Maintenance cost at the 90, machine-hour level of activity can be isolated as follows: Machine- Hours Maintenance Cost High activity level Total maintenance cost at the high activity level.. Solutions Manual, Chapter 2 35 Problem continued 3. Total overhead cost at an activity level of 75, machine-hours: Fixed costs Solutions Manual, Chapter 2 35 produced by the company Depreciation, executive autos Wages of workers assembling computers Insurance, finished goods warehouses Lubricants for production equipment Microchips used in producing calculators Shipping costs on merchandise sold Magazine subscriptions, factory lunchroom Thread in a garment factory Billing costs Executive life insurance F X Problem 30 minutes Note to the Instructor: There may be some exceptions to the answers below.

The purpose of this problem is to get the student to start thinking about cost behavior and cost purposes; try to avoid lengthy discussions about how a particular cost is classified. Property taxes, factory Boxes used for packaging detergent Ink used in textbook production Fringe benefits, assembly-line workers Yarn used in sweater production Wages of receptionist, executive offices Therefore, the cost formula is: The scattergraph plot appears as follows: Problem 45 minutes 1.

High-low method: Number of Scans Utilities Cost High level of activity. Total cost at high level of activity Units Shipping Sold Expense High activity level A cost that is classified as a period cost will be recognized on the income statement as an expense in the current period.

A cost that is classified as a product cost will be recognized on the income statement as an expense i. If some units are unsold at the end of the period, the costs of those unsold units are treated as assets.

Therefore, by reclassifying period costs as product costs, the company is able to carry some costs forward in inventories that would have been treated as current expenses.

The decision to postpone expenditures is questionable. It is one thing to postpone expenditures due to a cash bind; it is quite another to postpone expenditures in order to hit a profit target. Postponing these expenditures may have the effect of ultimately increasing future costs and reducing future profits.

Postponing maintenance on equipment is particularly questionable. Such a reclassification would be a violation of the principle of consistency in financial reporting and is a clear attempt to mislead readers of the financial reports.

Hopefully, the auditors would discover any such attempt to manipulate annual earnings and would refuse to issue an unqualified opinion due to the lack of consistency.

However, recent accounting scandals may lead to some skepticism about how forceful auditors have been in enforcing tight accounting standards. The average product cost for one patio set would be: The average product cost per set would increase if the production drops. This is because the fixed costs would be spread over fewer units, causing the average cost per unit to rise.

He might expect a price even higher than this to cover a portion of the administrative costs as well. The brother-in-law probably is thinking of cost as including only direct materials, or, at most, direct materials and direct labor. The term is opportunity cost. The full, regular price of a set might be appropriate here, because the company is operating at full capacity, and this is the amount that must be given up benefit forgone to sell a set to the brother-in-law.

High level of activity Total cost—25, DLH The scattergraph is shown below: The change in equipment lease cost from a fixed fee to an hourly rate causes the slope of the regression line to be steeper above 19, DLH, and to be discontinuous between the fixed fee and hourly rate points.

The cost formulas computed with the high-low and regression methods are faulty since they are based on the assumption that a single straight line provides the best fit to the data. Creating two data sets related to the two relevant ranges will enable more accurate cost estimates. Hours Cost High level of activity The scattergraph of direct labor cost versus the number of units produced is presented below: The scattergraph of the direct labor cost versus the number of paid days is presented below: The number of paid days should be used as the activity base rather than the number of units produced.

The scattergraphs reveal a much stronger relation i. Variations in the direct labor costs apparently occur because of the number of paid days in the month and have little to do with the number of units that are produced.

It appears that the direct labor costs are basically fixed with respect to how many units are produced in a month. This would happen if the direct labor workers are treated as full-time employees who are paid even if there is insufficient work to keep them busy. Moreover, for planning purposes, the company is likely to be able to predict the number of paid days in the month with much greater accuracy than the number of units that will be produced.

The scattergraph plot and least-squares regression estimates of fixed and variable costs using Microsoft Excel are shown below: Note that the R2 is approximately 0. The scattergraph plot and regression estimates of fixed and variable costs using Microsoft Excel are shown below: This is a very high R2 which indicates a very good fit.

Total expected etching cost if 5 units are processed: This is a very high R2 which is an indication of a very good fit. The company should probably use direct labor-hours as the activity base, since the fit of the regression line to the data is much tighter than it is with tons mined. The R2 for the regression using direct labor-hours as the activity base is twice as large as for the regression using tons mined as the activity base. However, managers should look more closely at the costs and try to determine why utilities costs are more closely tied to direct labor-hours than to the number of tons mined.

Expected total cost would be: These approximations appear to be reasonably accurate within the range of 2 to 6 sections, but they may be invalid outside this range. The scattergraph reveals three interesting findings.

First, it indicates the relation between overhead expense and labor hours is approximated reasonably well by a straight line. However, there appears to be a slight downward bend in the plot as the labor-hours increase—evidence of increasing returns to scale. This is a common occurrence in practice. Second, the data points are all fairly close to the straight line. This indicates that most of the variation in overhead expenses is explained by labor hours.

Third, most of the overhead expense appears to be fixed. Maria should ask herself if this is reasonable. Does the company have large fixed expenses such as rent, depreciation, and salaries? Using the least-squares regression estimate of the variable overhead cost, the total variable cost per guest is computed as follows: Food and beverages If additional fixed costs were incurred, they should also be subtracted from revenue.

However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete on price or service is a delicate issue that Maria will have to decide after getting to know the personality and preferences of the customer.

Quality of conformance 2. Quality costs 3. Quality circles 4.

Garrison managerial edition pdf manual accounting 15th solutions

Prevention costs, appraisal costs 5. This indicates that most of the variation in overhead expenses is explained by labor hours. Third, most of the overhead expense appears to be fixed. Maria should ask herself if this is reasonable. Does the company have large fixed expenses such as rent, depreciation, and salaries? Using the least-squares regression estimate of the variable overhead cost, the total variable cost per guest is computed as follows: Food and beverages…………………….

If additional fixed costs were incurred, they should also be subtracted from revenue. CASE 2A-5 continued 5. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer.

Whether to compete on price or service is a delicate issue that Maria will have to decide after getting to know the personality and preferences of the customer. Quality of conformance 2. Quality costs 3. Quality circles 4. Prevention costs, appraisal costs 5. Internal failure costs, external failure costs 6. External failure costs 7. Appraisal costs 8. Prevention costs 9. Internal failure costs External failure costs Prevention costs, appraisal costs Quality cost report Exercise 2B-2 15 minutes 1.

Product testing…………….. Product recalls…………….. Rework labor and overhead X d. Quality circles………………. X Downtime caused by e. Cost of field servicing…….. Inspection of goods………. Quality engineering……….. Warranty repairs………….. Statistical process control.. Net cost of scrap………….. X Depreciation of test l.

X Disposal of defective n. X Technical support to o. Systems development……. Warranty replacements…..

X Field testing at customer r. Product design…………….. Prevention costs and appraisal costs are incurred in an effort to keep poor quality of conformance from occurring.

Internal and external failure costs are incurred because poor quality of conformance has occurred. Problem 2B-3 60 minutes 1.

Incoming inspection.. Warranty repairs…… 90 2. Problem 2B-3 continued From the above analysis it would appear that Mercury, Inc. These declines in warranty repairs and customer returns should result in increased sales in the future.

This increase has probably resulted from the increase in appraisal activities. Defective units are now being spotted more frequently before they are shipped to customers. The initial effect of emphasizing prevention and appraisal was to reduce external failure costs and increase internal failure costs. The increase in appraisal activities resulted in catching more defective units before they were shipped to customers.

As a consequence, rework and scrap costs increased. In the future, an increased emphasis on prevention should result in a decrease in internal failure costs. And as defect rates are reduced, resources devoted to appraisal can be reduced. To measure the cost of not implementing the quality program, management could assume that sales and market share would continue to decline and then calculate the lost profit.

Or, management might assume that the company will have to cut its prices to hang on to its market share. The impact on profits of lowering prices could be estimated. Problem 2B-4 60 minutes Florex Company 1. Quality engineering……. Net cost of scrap………. Cost of field servicing….

Problem 2B-4 continued 3. Despite this improvement, the company still has a poor distribution of quality costs. The bulk of the quality costs in both years is traceable to internal and external failure, rather than to prevention and appraisal.

Although the distribution of these costs is poor, the trend this year is toward more prevention and appraisal as the company has given more emphasis on quality. The reason internal failure costs have gone up is that, through increased appraisal activity, defects are being caught and corrected before products are shipped to customers. Thus, the company is incurring more cost for scrap, rework, and so forth, but it is saving huge amounts in field servicing, warranty repairs, and product recalls.

If the company continues its emphasis on prevention and appraisal—and particularly on prevention—its total quality costs should continue to decrease in future years. Although internal failure costs are increasing for the moment, these costs should decrease in time as better quality is designed into products.

Appraisal costs should also decrease as the need for inspection, testing, and so forth decreases as a result of better engineering and tighter process control. This chapter explains how managers need to rely on different cost classifications for different purposes.

The four main purposes emphasized in this chapter includeassigning costs to cost objects,preparing external financial reports, predicting cost behavior, and decision making. Cost classifications for assigningcosts to cost objects 3 Learning Objective 1: Understand cost classifications used for assigning costs to cost objects: Indirect costs-Costs that cannot be easily and conveniently traced to a specified cost object.

These costs cannot be traced to any individual cost object. Cost classifications for manufacturing companiesManufacturing companies separate their costs into two broad categories—manufacturing and nonmanufacturing costs. Identify and give examples of each of the three basic manufacturing cost categories. Classifications of manufacturingcosts 7 Direct materials— Raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it.

These costs cannot be easily traced to specific units produced also called indirect manufacturing cost, factory overhead, and factory burden. Includes indirect materials that are part of the finished product, but that cannot be easily traced to it. Includes indirect labor costs that cannot be conveniently traced to the creation of products.

Classifications of nonmanufacturing costs also called selling and administrative costs.

Managerial accounting 15th edition garrison solutions manual

Selling costs can be either direct or indirect costs. Administrative costs — Includes all costs associated with the general management of an organization. Administrative costs can be either direct or indirect costs. Understand cost classifications used to prepare financial statements: More specifically, it includes direct materials, direct labor, and manufacturing overhead. Product costs are expensed in the income statement when the products are sold.

These costs are expensed in the income statement in the period incurred. Conversion cost — Direct labor cost plus manufacturing overhead costs.

Understand cost classifications used to predict cost behavior: However, variable cost per unit is constant. As the level of the activity base increases, the total variable cost increases proportionally. However, if expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity. Discretionary fixed costs usually arise from annual decisions by management and they can be easily reduced in the short term.

Helpful Hint: To illustrate fixed costs, ask students for the cost of a large pizza. Then ask: What would be the cost per student if two students buy a pizza?

What if four students buy a pizza? This makes it clear why average fixed costs change on a per unit basis. The cost per beverage remains the same, but the total cost depends on the number of people ordering a beverage.

Nonetheless, within a narrow band of activity known as the relevant range, a curvilinear cost can be satisfactorily approximated by a straight line. The relevant range is that range of activity within which the assumptions made about cost behavior are valid.

The relevant range of activity pertains to fixed cost as well as variable costs. For example, utility bills often contain fixed and variable cost components.

This cost represents the minimum cost that is incurred to have the service ready and available for use. The variable portion of the bill varies in direct proportion to the consumption of kilowatt hours. An equation can be used to express the relationship between mixed costs and the level of the activity. This equation can be used to calculate what the total mixed cost would be for any level of activity. Account analysis and the engineering approach 1.

This approach is particularly useful when no past experience is available concerning activity and costs. Analyze a mixed cost using a scattergraph plot and the high-low method. For illustrative purposes, assume the following information,which would be plotted as follows: The maintenance cost, which is known as the dependent variable, is plotted on the Y vertical axis. The activity hours of maintenance , which is known as the independent variable, is plotted on the X horizontal axis.

If the dots are not linear, do not analyze the data any further. Instead, search for another independent variable that bears a stronger linear relationship with the dependent variable. In this example, the dots are linear so we can proceed to the high-low method. The high-low method 1. This method can be used to analyze mixed costs if a scattergraph plot reveals a linear relationship between the X and Y variables.

Notice, this method relies on two data points to estimate the fixed and variable portions of a mixed cost. Emphasize that the high and low points are identified by the level of activity and not by the level of the cost.

The least-squares regression method 1. This method can be used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables.

This method is superior to the high-low method that uses only two data points to estimate the fixed and variable cost components of a mixed cost.

The regression errors are the vertical deviations from the data points to the regression line. Fortunately, computers can perform the calculations quickly. The observed values of the X and Y variables are entered into the computer and the software does the rest.

The output from the regression analysis can be used to create an equation that enables you to estimate total costs at any activity level. This is to be expected because each method uses differing amounts of the data points to provide estimates. Least-squares regression provides the most accurate estimates because it uses all of the data points. Traditional andcontribution format income statements 47 Learning Objective 6: Prepare income statementsfor a merchandising company using the traditional and contribution formats.

Problem 2A-4 30 minutes 1. This is a very high R2which indicates a very good fit. Problem 2A-4 continued 3. Expected total cost would be: Fixed cost…………………………………………..

These approximations appear to be reasonably accurate within the range of 2 to 6 sections, but they may be invalid outside this range. CASE 2A-5 45 minutes 1. The scattergraph reveals three interesting findings. First, it indicates the relation between overhead expense and labor hours is approximated reasonably well by a straight line.

However, there appears to be a slight downward bend in the plot as the labor-hours increase—evidence of increasing returns to scale. Second, the data points are all fairly close to the straight line. This indicates that most of the variation in overhead expenses is explained by labor hours. Third, most of the overhead expense appears to be fixed. Maria should ask herself if this is reasonable.

Does the company have large fixed expenses such as rent, depreciation, and salaries? Using the least-squares regression estimate of the variable overhead cost, the total variable cost per guest is computed as follows: Food and beverages……………………. If additional fixed costs were incurred, they should also be subtracted from revenue. CASE 2A-5 continued 5. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event.

Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete on price or service is a delicate issue that Maria will have to decide after getting to know the personality and preferences of the customer. Quality of conformance 2.

Quality costs 3. Quality circles 4. Prevention costs, appraisal costs 5. Internal failure costs, external failure costs 6. External failure costs 7. Appraisal costs 8. Prevention costs 9. Internal failure costs External failure costs Prevention costs, appraisal costs Quality cost report Exercise 2B-2 15 minutes 1.

Product testing…………….. Product recalls…………….. Rework labor and overhead X d. Quality circles………………. X Downtime caused by e. Cost of field servicing…….. Inspection of goods………. Quality engineering……….. Warranty repairs………….. Statistical process control.. Net cost of scrap………….. X Depreciation of test l. X Disposal of defective n. X Technical support to o. Systems development……. Warranty replacements…..

X Field testing at customer r. Product design…………….. Prevention costs and appraisal costs are incurred in an effort to keep poor quality of conformance from occurring. Internal and external failure costs are incurred because poor quality of conformance has occurred. Problem 2B-3 60 minutes 1. Incoming inspection.. Warranty repairs…… 90 2. Problem 2B-3 continued From the above analysis it would appear that Mercury, Inc.

These declines in warranty repairs and customer returns should result in increased sales in the future. This increase has probably resulted from the increase in appraisal activities.

Defective units are now being spotted more frequently before they are shipped to customers. The initial effect of emphasizing prevention and appraisal was to reduce external failure costs and increase internal failure costs. The increase in appraisal activities resulted in catching more defective units before they were shipped to customers. As a consequence, rework and scrap costs increased.

In the future, an increased emphasis on prevention should result in a decrease in internal failure costs. And as defect rates are reduced, resources devoted to appraisal can be reduced. To measure the cost of not implementing the quality program, management could assume that sales and market share would continue to decline and then calculate the lost profit. Or, management might assume that the company will have to cut its prices to hang on to its market share.

The impact on profits of lowering prices could be estimated. Problem 2B-4 60 minutes Florex Company 1.

Managerial Accounting Solutions Manual

Quality engineering……. Net cost of scrap………. Cost of field servicing…. Problem 2B-4 continued 3. Despite this improvement, the company still has a poor distribution of quality costs. The bulk of the quality costs in both years is traceable to internal and external failure, rather than to prevention and appraisal.

Although the distribution of these costs is poor, the trend this year is toward more prevention and appraisal as the company has given more emphasis on quality. The reason internal failure costs have gone up is that, through increased appraisal activity, defects are being caught and corrected before products are shipped to customers.

Thus, the company is incurring more cost for scrap, rework, and so forth, but it is saving huge amounts in field servicing, warranty repairs, and product recalls. If the company continues its emphasis on prevention and appraisal—and particularly on prevention—its total quality costs should continue to decrease in future years. Although internal failure costs are increasing for the moment, these costs should decrease in time as better quality is designed into products. Appraisal costs should also decrease as the need for inspection, testing, and so forth decreases as a result of better engineering and tighter process control.

This chapter explains how managers need to rely on different cost classifications for different purposes. The four main purposes emphasized in this chapter includeassigning costs to cost objects,preparing external financial reports, predicting cost behavior, and decision making.

Cost classifications for assigningcosts to cost objects 3 Learning Objective 1: Understand cost classifications used for assigning costs to cost objects: Indirect costs-Costs that cannot be easily and conveniently traced to a specified cost object.

These costs cannot be traced to any individual cost object. Cost classifications for manufacturing companiesManufacturing companies separate their costs into two broad categories—manufacturing and nonmanufacturing costs.

Identify and give examples of each of the three basic manufacturing cost categories. Classifications of manufacturingcosts 7 Direct materials— Raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it.

These costs cannot be easily traced to specific units produced also called indirect manufacturing cost, factory overhead, and factory burden. Includes indirect materials that are part of the finished product, but that cannot be easily traced to it. Includes indirect labor costs that cannot be conveniently traced to the creation of products. Classifications of nonmanufacturing costs also called selling and administrative costs.

Accounting solutions edition pdf managerial 15th garrison manual

Selling costs can be either direct or indirect costs. Administrative costs — Includes all costs associated with the general management of an organization. Administrative costs can be either direct or indirect costs. Understand cost classifications used to prepare financial statements: More specifically, it includes direct materials, direct labor, and manufacturing overhead.

Product costs are expensed in the income statement when the products are sold. These costs are expensed in the income statement in the period incurred. Conversion cost — Direct labor cost plus manufacturing overhead costs.

Understand cost classifications used to predict cost behavior: However, variable cost per unit is constant. As the level of the activity base increases, the total variable cost increases proportionally. However, if expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity.

Discretionary fixed costs usually arise from annual decisions by management and they can be easily reduced in the short term. Helpful Hint: To illustrate fixed costs, ask students for the cost of a large pizza. Then ask: What would be the cost per student if two students buy a pizza? What if four students buy a pizza?

This makes it clear why average fixed costs change on a per unit basis. The cost per beverage remains the same, but the total cost depends on the number of people ordering a beverage. Nonetheless, within a narrow band of activity known as the relevant range, a curvilinear cost can be satisfactorily approximated by a straight line.

The relevant range is that range of activity within which the assumptions made about cost behavior are valid. The relevant range of activity pertains to fixed cost as well as variable costs. For example, utility bills often contain fixed and variable cost components. This cost represents the minimum cost that is incurred to have the service ready and available for use.

The variable portion of the bill varies in direct proportion to the consumption of kilowatt hours. An equation can be used to express the relationship between mixed costs and the level of the activity. This equation can be used to calculate what the total mixed cost would be for any level of activity.

Account analysis and the engineering approach 1. This approach is particularly useful when no past experience is available concerning activity and costs. Analyze a mixed cost using a scattergraph plot and the high-low method. For illustrative purposes, assume the following information,which would be plotted as follows: The maintenance cost, which is known as the dependent variable, is plotted on the Y vertical axis.

The activity hours of maintenance , which is known as the independent variable, is plotted on the X horizontal axis. If the dots are not linear, do not analyze the data any further. Instead, search for another independent variable that bears a stronger linear relationship with the dependent variable. In this example, the dots are linear so we can proceed to the high-low method. The high-low method 1. This method can be used to analyze mixed costs if a scattergraph plot reveals a linear relationship between the X and Y variables.

Notice, this method relies on two data points to estimate the fixed and variable portions of a mixed cost. Emphasize that the high and low points are identified by the level of activity and not by the level of the cost.