SEMINAR 1: Introduction to Management Accounting

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

16. Period costs include direct labor and direct materials.F

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

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

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

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

MULTIPLE CHOICE
1. Inventory accounts for a manufacturer include:
a) work in process, direct labor, and finished goods

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 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
9. A period cost is:
a) shown on the balance sheet
b) expensed in the period in which it is incurred

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 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:$175,000

2. Refer to Table 1. Tudor Inc.’s inventoriable product costs for 20X2 amount to:$975,000
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? $540,000

4. Refer to Table 2. What is cost of goods sold for Welch Company for 20X3? $360,000

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:
$19,200
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

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 goods manufactured was $220,000 in 20X4. The balance in work in process inventory on December
31, 20X4, is:
$24,000

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? $38,000

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?
$139,800

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? $41,700
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? $130,700

11. Refer to Table 4. What is the amount of direct labor incurred by Harrison Company in August?
$61,944

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: $229,000

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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

$731,000 and $684,000

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

$67,000

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

$288,000

Table 5
Selected data from User Corporation for 20X3 is as follows:
Inventories
Beginning Ending
Materials $ 34,000 $ 40,000

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 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: $46,000

17. Refer to Table 5. The cost of goods manufactured and cost of goods sold are, respectively:
$244,000 and $252,000

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: $165

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? $275,750

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? $288,000

21. Work in process inventory increased $18,000 during 20X2. Cost of goods manufactured was
$280,000. Total manufacturing costs incurred in 20X2 are: $298,000

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: $225,600

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MATCHING

1. direct labor _____________ The compensation of employees who physically convert materials into the
company’s product
2. direct materials ___________ Materials that become a physical part of a finished product and whose costs are
separately and conveniently traceable to the finished product
3. period costs ______________ Operating costs that are expensed in the period in which they are incurred
4. work in process inventory ___ Goods that are in the manufacturing process but are not yet complete
5. cost-benefit analysis _______ Weighing costs against benefits to help make decisions
6. finished goods inventory ____ Completed goods that have not yet been sold
7. inventoriable product costs __ Product costs that are initially regarded as an asset for external financial
reporting and are not expensed until the product is sold
8. just-in-time ______________ A system where materials are purchased and finished goods completed only as
needed to satisfy customer orders
9. materials inventory ________ Raw materials on hand for use in the manufacturing process
10. value chain ______________ 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 ______ indirect materials used

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

2. Differentiate between:
a) direct materials versus indirect materials
b) direct labor versus indirect labor
Give an example of each.
Solution:

Student responses will vary but should include the following points:

a) Direct materials must become a physical part of the finished product and their costs must be
separately and conveniently traceable through the manufacturing process to finished goods
inventory. Examples include wood, leather, steel, etc.

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 Indirect materials become part of the finished product but their minor costs cannot
conveniently be traced directly to particular finished products. They are included as part of
manufacturing overhead. Examples include thread, glue, snaps, etc.

b) Direct labor cost is the compensation of employees who physically convert materials into the
company’s products and whose effort can be traced directly to finished goods inventory.
Examples include machine operators and assemblers.

Indirect labor is factory labor that is difficult to trace to specific products. Instead, the cost is
included in manufacturing overhead. Examples include forklift operators, janitors, and plant
managers.

3. Use the correct number to designate each item below:

1) direct labor
2) direct materials
3) manufacturing overhead
4) selling and general expenses

3________ a) rent expense on factory building -MO

4________ b) sales supplies used -S&G
3________ c) factory supplies used -MO
3________ d) indirect materials used -MO
1________ e) wages of assembly line personnel -DL
2________ f) cost of primary material used to make product -DM
4________ g) depreciation on office equipment - S&G
4________ h) rent on office facilities - S&G
3________ i) insurance expired on factory equipment -MO
4________ j) utilities incurred in the office- S&G
4________ k) advertising expense-S&G
3________ l) taxes paid on factory building - MO

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

Sales $66,600
Direct materials used 5,300
Depreciation on factory equipment 4,500 Compute:
Indirect labor 5,600 a) inventoriable product costs
Direct labor 10,300 b) period costs
Factory rent 3,200 c) full product costs
Factory utilities 1,800
Sales salary expense 14,500
Office salary expense 8,700
Indirect materials 1,400
Solution:
a) $5,300 + $4,500 + $5,600 + $10,300 + $3,200 + $1,800 + $1,400 = $32,100
b) $14,500 + $8,700 = $23,200
c) $32,100 + $23,200 = $55,300

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5. Indicate whether each of the following costs is an product cost or a period cost:

period ________ a) salespersons’ commissions

product _______ b) factory utilities
product _______ c) direct materials used
product _______ d) indirect labor incurred
product _______ e) indirect materials used
period ________ f) depreciation on store equipment
product _______ g) salary of plant manager
product _______ h) factory machinery repairs and maintenance
product _______ i) direct labor incurred
period ________ j) advertising expense
product _______ k) plant insurance expired
period ________ l) store supplies used
product _______ m) depreciation on factory machinery

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.

Solution:
North State Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 20X6
Beginning work in process inventory $ 6,000
Add:
Direct materials used $75,000
Direct labor 32,000
Manufacturing overhead:
Indirect labor $2,700
Indirect materials 1,400
Utilities 3,100
Maintenance 4,300
Supplies 1,800
Depreciation 7,900
Property taxes 2,600 23,800
Total manufacturing costs incurred during the year 130,800
Total manufacturing costs to account for 136,800
Less: Ending work in process inventory (8,200)
Cost of goods manufactured $128,600

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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.

Solution:
South State Manufacturing Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 20X5

Beginning work in process inventory $ 54,300

Add: Direct materials used:
Beginning materials inventory $30,400
Purchases of direct materials 40,500
Available for use 70,900
Ending materials inventory (10,600)
Direct materials used $60,300
Direct labor 20,500
Manufacturing overhead:
Insurance $ 7,500
Indirect labor 15,600
Depreciation-factory equipment 9,800
Indirect materials used 5,400
Factory utilities 4,300 42,600
Total manufacturing costs incurred during the year 123,400
Total manufacturing costs to account for 177,700
Less: Ending work in process inventory (23,200)
Cost of goods manufactured $154,500

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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.

Solution:
a) cost of goods sold = $246,400 + $150,000 = $396,400
$396,400 + $65,000 – $308,000 = $153,400
b) cost of goods manufactured = $246,400/.80 = $308,000
$246,400 + $140,000 – $308,000 = $78,400
c) $154,000/2.5 = $61,600
d) $61,600 X .5 = $30,800
e) $8,000 + $150,000 – $4,000 = $154,000
f) X = January 1, 20X3 materials inventory
$4,000 = .5X
X = $8,000
g) $8,000 – $4,000 = $4,000

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

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 e) direct materials used
f) manufacturing overhead incurred
Note to students: The solutions to this problem are not necessarily calculated in alphabetical order.

Solution:
a) $33,000 + $609,000 – $27,000 = $615,000
b) $615,000 X .62 = $381,300
c) $15,000 + $381,300 – $3,000 = $393,300
d) $393,300 + $48,000 – $70,200 = $371,100 total manufacturing costs
$371,100 – $96,500 = $274,600
$274,600 = manufacturing overhead + direct labor
Let X = direct labor
3X + X = $274,600
4X = $274,600
X = $68,650
e) $22,500 + $80,000 – $6,000 = $96,500
f) $68,650 X 3 = $205,950

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

Solution:

a) $15,000 + $22,000 – $28,000 = $9,000

b) $135,000 + $12,000 = $147,000 total manufacturing costs
$147,000 – $22,000 = $125,000 direct labor and manufacturing overhead
Let X = direct labor cost
X + 1.5X = $125,000
2.5X = $125,000
X = $50,000
c) $50,000 X 1.5 = $75,000
d) $135,000 + $17,000 = $152,000

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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.
Solution:
Seagrove Corporation
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 20X3

Beginning work in process inventory $140,000

Add: Direct materials used:
Beginning materials inventory $ 8,000
Purchases of direct materials 150,000
Available for use 158,000
Ending materials inventory (4,000)
Direct materials used $154,000
Direct labor 61,600
Manufacturing overhead 30,800
Total manufacturing costs incurred during the year 246,400
Total manufacturing costs to account for 386,400
Less: Ending work in process inventory (78,400)
Cost of goods manufactured $308,000

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

Solution:
In a just-in-time system, an organization purchases materials and produces products just when they
are needed in the production process. Goods are not produced until it is time for them to be
shipped to a customer. The goal is to have zero inventory, because holding inventory does not add
value to the product. Reducing inventory and speeding the production process reduces throughput
time, the time between buying raw materials and selling the finished products.

Manufacturers adopting just-in-time depend on their suppliers to make on-time deliveries of

perfect-quality raw materials. JIT requires close communication with suppliers.

Companies that adopt JIT must strive for perfect quality. Defects stop production lines. To avoid
disrupting production, defects must be rare.

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