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2.E: Building Blocks of Managerial Accounting (Exercises)

  • Page ID
    11852
  • Multiple Choice

    1. Which of the following is the primary source of revenue for a service business?
      1. the production of products from raw materials
      2. the purchase and resale of finished products
      3. providing intangible goods and services
      4. the sale of raw materials to manufacturing firms
    Answer:

    c

    1. Which of the following is the primary source of revenue for a merchandising business?
      1. the production of products from raw materials
      2. the purchase and resale of finished products
      3. the provision of intangible goods and services
      4. the sale of raw materials to manufacturing firms
    2. Which of the following is the primary source of revenue for a manufacturing business?
      1. the production of products from raw materials
      2. the purchase and resale of finished products
      3. the provision of intangible goods and services
      4. both the provision of services and the sale of finished goods
    Answer:

    a

    1. Which of the following represents the components of the income statement for a service business?
      1. Sales Revenue – Cost of Goods Sold = gross profit
      2. Service Revenue – Operating Expenses = operating income
      3. Sales Revenue – Cost of Goods Manufactured = gross profit
      4. Service Revenue – Cost of Goods Purchased = gross profit
    2. Which of the following represents the components of the income statement for a manufacturing business?
      1. Sales Revenue – Cost of Goods Sold = gross profit
      2. Service Revenue – Operating Expenses = gross profit
      3. Service Revenue – Cost of Goods Manufactured = gross profit
      4. Sales Revenue – Cost of Goods Manufactured = gross profit
    Answer:

    a

    1. Which of the following represents the components of the income statement for a merchandising business?
      1. Sales Revenue – Cost of Goods Sold = gross profit
      2. Service Revenue – Operating Expenses = gross profit
      3. Sales Revenue – Cost of Goods Manufactured = gross profit
      4. Service Revenue – Cost of Goods Purchased = gross profit
    2. Conversion costs include all of the following except:
      1. wages of production workers
      2. depreciation on factory equipment
      3. factory utilities
      4. direct materials purchased
    Answer:

    d

    1. Which of the following is not considered a product cost?
      1. direct materials
      2. direct labor
      3. indirect materials
      4. selling expense
    2. Fixed costs are expenses that ________.
      1. vary in response to changes in activity level
      2. remain constant on a per-unit basis
      3. increase on a per-unit basis as activity increases
      4. remain constant as activity changes
    Answer:

    d

    1. Variable costs are expenses that ________.
      1. remain constant on a per-unit basis but change in total based on activity level
      2. remain constant on a per-unit basis and remain constant in total regardless of activity level
      3. decrease on a per-unit basis as activity level increases
      4. remain constant in total regardless of activity level within a relevant range
    2. Total costs for ABC Distributing are \(\$250,000\) when the activity level is \(10,000\) units. If variable costs are \(\$5\) per unit, what are their fixed costs?
      1. \(\$240,000\)
      2. \(\$200,000\)
      3. \(\$260,000\)
      4. Their fixed costs cannot be determined from the information presented.
    Answer:

    b

    1. Which of the following would not be classified as manufacturing overhead?
      1. indirect materials
      2. indirect labor
      3. direct labor
      4. property taxes on factory
    2. Which of the following are prime costs?
      1. indirect materials, indirect labor, and direct labor
      2. direct labor, indirect materials, and indirect labor
      3. direct labor and indirect labor
      4. direct labor and direct materials
    Answer:

    d

    1. Which of the following statements is true regarding average fixed costs?
      1. Average fixed costs per unit remain fixed regardless of level of activity.
      2. Average fixed costs per unit rise as the level of activity rises.
      3. Average fixed costs per unit fall as the level of activity rises.
      4. Average fixed costs per unit cannot be determined.
    2. The high-low method and least-squares regression are used by managers to ________.
      1. decide whether to make or buy a component part
      2. minimize corporate tax liability
      3. maximize output
      4. estimate costs
    Answer:

    d

    1. Which of the following methods of cost estimation relies on only two data points?
      1. the high-low method
      2. account analysis
      3. least-squares regression
      4. SWOT analysis.
    2. In the cost equation \(Y = a + bx\), \(Y\) represents which of the following?
      1. fixed costs
      2. variable costs
      3. total costs
      4. units of production
    Answer:

    c

    1. A scatter graph is used to test the assumption that the relationship between cost and activity level is ________.
      1. curvilinear
      2. cyclical
      3. unpredictable
      4. linear

    Questions

    1. Identify the three primary classifications of businesses and explain the differences among the three.
    Answer:

    Answers will vary but should include merchandising, service, and manufacturing businesses.

    1. Explain how the income statement of a manufacturing company differs from the income statement of a merchandising company.
    2. Walsh & Coggins, a professional accounting firm, collects cost information about the services they provide to their clients. Describe the types of cost data they would collect and explain the importance of analyzing this cost data.
    Answer:

    Answers will vary but should include a discussion of operating costs such as salaries and wages, advertising, rent, and office expenses.

    1. Lizzy’s is a retail clothing store, specializing in formal wear for weddings. They purchase their clothing for resale from specialty distributors and manufacturers. Recently the owners of Lizzy’s have noted an increased interest in costume jewelry and fashion accessories among their clientele. If the owners of Lizzy’s decide to expand their business to include these products, what cost data would they need to collect and analyze prior to expanding the business?
    2. Identify and describe the three types of product costs in a manufacturing firm.
    Answer:

    Answers will vary but must include direct materials, direct labor, and manufacturing overhead.

    1. Explain the difference between a period cost and a product cost.
    2. Explain the concept of relevant range and how it affects total fixed costs.
    Answer:

    Answers will vary but should include that fixed costs remain fixed in total across the relevant range, bounded by a minimum and maximum activity level.

    1. Explain the differences among fixed costs, variable costs, and mixed costs.
    2. Explain the difference between prime costs and conversion costs.
    Answer:

    Answers will vary but should include that prime costs are the direct material and direct labor costs, and conversion costs are direct labor and general factory overhead combined.

    1. Explain how a scatter graph is used to identify and measure cost behavior.
    2. Explain the components of the total cost equation and describe how each of the components can be used by management for decision-making.
    Answer:

    Answers will vary.

    1. Explain how the high-low method is used for cost estimation. What, if any, are the limitations of this approach to cost estimation?

    Exercise Set A

    1. Magio Company manufactures kitchen equipment used in hospitals. They distribute their products directly to the customer and, for the year ending 2019, they reported the following revenues and expenses. Use this information to construct an income statement for the year 2019.
    fig 2.E.1.jpg
    1. Park and West, LLC, provides consulting services to retail merchandisers in the Midwest. In 2019, they generated \(\$720,000\) in service revenue. Their total cost (fixed and variable) per client was \(\$2,500\) and they served \(115\) clients during the year. If operating expenses for the year were \(\$302,000\) what was their net income?
    2. Canine Couture is a specialty dog clothing boutique that sells clothing and clothing accessories for dogs. In 2019, they had gross revenue from sales totaling \(\$86,500\). Their operating expenses for this same period were \(\$27,500\). If their Cost of Goods Sold (COGS) was \(24\%\) of gross revenue, what was their net operating income for the year?
    3. Hicks Contracting collects and analyzes cost data in order to track the cost of installing decks on new home construction jobs. The following are some of the costs that they incur. Classify these costs as fixed or variable costs and as product or period costs.
      1. Lumber used to construct decks (\(\$12.00\) per square foot)
      2. Carpenter labor used to construct decks (\(\$10\) per hour)
      3. Construction supervisor salary (\(\$45,000\) per year)
      4. Depreciation on tools and equipment (\(\$6,000\) per year)
      5. Selling and administrative expenses (\(\$35,000\) per year)
      6. Rent on corporate office space (\(\$34,000\) per year)
      7. Nails, glue, and other materials required to construct deck (varies per job)
    4. Rose Company has a relevant range of production between \(10,000\) and \(25,000\) units. The following cost data represents average cost per unit for \(15,000\) units of production.
    fig 2.E.2.jpg

    Using the cost data from Rose Company, answer the following questions:

    1. If \(10,000\) units are produced, what is the variable cost per unit?
    2. If \(18,000\) units are produced, what is the variable cost per unit?
    3. If \(21,000\) units are produced, what are the total variable costs?
    4. If \(11,000\) units are produced, what are the total variable costs?
    5. If \(19,000\) units are produced, what are the total manufacturing overhead costs incurred?
    6. If \(23,000\) units are produced, what are the total manufacturing overhead costs incurred?
    7. If \(19,000\) units are produced, what are the per unit manufacturing overhead costs incurred?
    8. If \(25,000\) units are produced, what are the per unit manufacturing overhead costs incurred?
    1. Carr Company provides human resource consulting services to small- and medium-sized companies. Last year, Carr provided services to \(700\) clients. Total fixed costs were \(\$159,000\) with total variable costs of \(\$87,500\). Based on this information, complete this chart:
    fig 2.E.3.jpg
     
    1. Western Trucking operates a fleet of delivery trucks. The fixed expenses to operate the fleet are \(\$79,900\) in March and rose to \(\$93,120\) in April. It costs Western Trucking \(\$0.15\) per mile in variable costs. In March, the delivery trucks were driven a total of \(85,000\) miles, and in April, they were driven a total of \(96,000\) miles. Using this information, answer the following:
      1. What were the total costs to operate the fleet in March and April, respectively?
      2. What were the cost per mile to operate the fleet in March and April, respectively?
    2. Suppose that a company has fixed costs of \(\$18\) per unit and variable costs \(\$9\) per unit when \(15,000\) units are produced. What are the fixed costs per unit when \(12,000\) units are produced?
    3. The cost data for Evencoat Paint for the year 2019 is as follows:
    fig 2.E.4.jpg
     
    1. Using the high-low method, express the company’s maintenance costs as an equation where \(x\) represents the gallons of paint produced. Then estimate the fixed and variable costs.
    2. Predict the maintenance costs if \(90,000\) gallons of paint are produced.
    3. Predict the maintenance costs if \(81,000\) gallons of paint are produced.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between gallons of paint produced and equipment maintenance expenses
    1. This cost data from Hickory Furniture is for the year 2017.
    fig 2.E.5.jpg
    1. Using the high-low method, express the company’s utility costs as an equation where X represents number of tables produced.
    2. Predict the utility costs if \(800\) tables are produced.
    3. Predict the utility costs if \(600\) tables are produced.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between number of tables produced and utility expenses.
    1. Markson and Sons leases a copy machine with terms that include a fixed fee each month plus a charge for each copy made. Markson made \(9,000\) copies and paid a total of \(\$480\) in January. In April, they paid \(\$320\) for \(5,000\) copies. What is the variable cost per copy if Markson uses the high-low method to analyze costs?
    2. Markson and Sons leases a copy machine with terms that include a fixed fee each month of \(\$500\) plus a charge for each copy made. The company uses the high-low method to analyze costs. If Markson paid \(\$360\) for \(5,000\) copies and \(\$280\) for \(3,000\) copies, how much would Markson pay if it made \(7,500\) copies?

    Exercise Set B

    1. Winterfell Products manufactures electrical switches for the aerospace industry. For the year ending 2019, they reported these revenues and expenses. Use this information to construct an income statement for the year 2019.
    fig 2.E.6.jpg
    1. CPK & Associates is a mid-size legal firm, specializing in closings and real estate law in the south. In 2019, they generated \(\$945,000\) in sales revenue. Their expenses related to this year’s revenue are shown:
    fig 2.E.7.jpg

        Based on the information provided for the year, what was their net operating income?

    1. Flip or Flop is a retail shop selling a wide variety of sandals and beach footwear. In 2019, they had gross revenue from sales totaling \(\$93,200\). Their operating expenses for this same period were \(\$34,000\). If their Cost of Goods Sold (COGS) was \(21\%\) of gross revenue, what was their net operating income for the year?
    2. Roper Furniture manufactures office furniture and tracks cost data across their process. The following are some of the costs that they incur. Classify these costs as fixed or variable costs, and as product costs or period costs.
      1. Wood used to produce desks (\(\$125.00\) per desk)
      2. Production labor used to produce desks (\(\$15\) per hour)
      3. Production supervisor salary (\(\$45,000\) per year)
      4. Depreciation on factory equipment (\(\$60,000\) per year)
      5. Selling and administrative expenses (\(\$45,000\) per year)
      6. Rent on corporate office (\(\$44,000\) per year)
      7. Nails, glue, and other materials required to produce desks (varies per desk)
      8. Utilities expenses for production facility
      9. Sales staff commission (\(5\%\) of gross sales)
    3. Baxter Company has a relevant range of production between \(15,000\) and \(30,000\) units. The following cost data represents average variable costs per unit for \(25,000\) units of production.
    fig 2.E.8.jpg

        Using the costs data from Rose Company, answer the following questions:

    1. If \(15,000\) units are produced, what is the variable cost per unit?
    2. If \(28,000\) units are produced, what is the variable cost per unit?
    3. If \(21,000\) units are produced, what are the total variable costs?
    4. If \(29,000\) units are produced, what are the total variable costs?
    5. If \(17,000\) units are produced, what are the total manufacturing overhead costs incurred?
    6. If \(23,000\) units are produced, what are the total manufacturing overhead costs incurred?
    7. If \(30,000\) units are produced, what are the per unit manufacturing overhead costs incurred?
    8. If \(15,000\) units are produced, what are the per unit manufacturing overhead costs incurred?
    1. Sanchez & Vukmin, LLP, is a full-service accounting firm located near Chicago, Illinois. Last year, Sanchez provided tax preparation services to \(500\) clients. Total fixed costs were \(\$265,000\) with total variable costs of \(\$180,000\). Based on this information, complete this chart.
    fig 2.E.9.jpg
    1. Case Airlines provides charter airline services. The fixed expenses to operate the company’s aircraft are \(\$377,300\) in January and \(\$378,880\) in February. It costs Case Airlines \(\$0.45\) per mile in variable costs. In January, Case aircraft flew a total of \(385,000\) miles, and in February, Case aircraft flew a total of \(296,000\) miles. Using this information, answer the following:
      1. What were the total costs to operate the aircraft in January and February, respectively?
      2. What were the total costs per mile to operate the fleet in January and February, respectively?
    2. Suppose that a company has fixed costs of \(\$11\) per unit and variable costs \(\$6\) per unit when \(11,000\) units are produced. What are the fixed costs per unit when \(20,000\) units are produced?
    3. The cost data for BC Billing Solutions for the year 2020 is as follows:
    fig 2.E.10.jpg
    1. Using the high-low method, express the company’s overtime wages as an equation where \(x\) represents number of invoices processed. Assume BC has monthly fixed costs of \(\$3,800\).
    2. Predict the overtime wages if \(9,000\) invoices are processed.
    3. Predict the overtime wages if \(6,500\) invoices are processed.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between the number of invoices processed and overtime wage expense.
    1. This cost data from Hickory Furniture is for the year 2017.
    fig 2.E.11.jpg
    1. Using the high-low method, express the factory utility expenses as an equation where \(x\) represents number of chairs produced.
    2. Predict the utility costs if \(900\) chairs are produced.
    3. Predict the utility costs if \(750\) chairs are produced.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between number of chairs processed and utility expenses.
    1. Able Transport operates a tour bus that they lease with terms that involve a fixed fee each month plus a charge for each mile driven. Able Transport drove the tour bus \(4,000\) miles and paid a total of \(\$1,250\) in March. In April, they paid \(\$970\) for \(3,000\) miles. What is the variable cost per mile if Able Transport uses the high-low method to analyze costs?
    2. Able Transport operates a tour bus that they lease with terms that involve a fixed fee each month plus a charge for each mile driven. Able Transport drove the bus \(7,000\) miles and paid a total of \(\$1,360\) in June. In October, Able Transport paid \(\$1,280\) for the \(5,000\) miles driven. If Able Transport uses the high-low method to analyze costs, how much would Able Transport pay in December, if they drove \(6,000\) miles?

    Problem Set A

    1. Ballentine Manufacturing produces and sells lawnmowers through a national dealership network. They purchase raw materials from a variety of suppliers, and all manufacturing and assembly work is performed at their plant outside of Kansas City, Missouri. They recorded these costs for the year ending December 31, 2017. Construct an income statement for Ballentine Manufacturing to reflect their net income for 2017.
    fig 2.E.12.jpg
    1. Tom West is a land surveyor who operates a small surveying company, performing surveys for both residential and commercial clients. He has a staff of surveyors and engineers who are employed by the firm. For the year ending December 31, 2017, he reported these income and expenses. Using this information, construct an income statement to reflect his net income for 2017.
    fig 2.E.13.jpg
    1. Just Beachy is a retail business located on the coast of Florida where it sells a variety of beach apparel, T-shirts, and beach-related souvenir items. They purchase all of their inventory from wholesalers and distributors. For the year ending December 31, 2017, they reported these revenues and expenses. Using this information, prepare an income statement for Just Beachy for 2017.
    fig 2.E.14.jpg
    1. Listed as follows are various costs found in businesses. Classify each cost as a fixed or variable cost, and as a product and/or period cost.
      1. Wages of administrative staff
      2. Shipping costs on merchandise sold
      3. Wages of workers assembling computers
      4. Cost of lease on factory equipment
      5. Insurance on factory
      6. Direct materials used in production of lamps
      7. Supervisor salary, factory
      8. Advertising costs
      9. Property taxes, factory
      10. Health insurance cost for company executives
      11. Rent on factory
    2. Wachowski Company reported these cost data for the year 2017.
    fig 2.E.15.jpg

    Use the data to complete the following table.

    Total prime costs  
    Total manufacturing overhead costs  
    Total conversion costs  
    Total product costs  
    Total period costs  
    1. Carolina Yachts builds custom yachts in its production factory in South Carolina. Once complete, these yachts must be shipped to the dealership. They have collected this shipping cost data:
    fig 2.E.16.jpg
    1. Prepare a scatter graph of the shipping data. Plot cost on the vertical axis and yachts shipped on the horizontal axis. Is the relationship between shipping costs and unit shipped approximately linear? Draw a straight line through the scatter graph.
    2. Using the high-low method, create the cost formula for Carolina Yachts’ shipping costs.
    3. The least-squares regression method was used and the analysis resulted in this cost equation: \(Y = 4,000 + 1,275x\). Comment on the accuracy of your high-low method estimation.
    4. What would you estimate shipping costs to be if Carolina Yachts shipped \(10\) yachts in a single month? Use the cost formula you obtained in part B. Comment on how accurately this is reflected by the scatter graph you constructed.
    5. What factors other than number of yachts shipped do you think could affect Carolina Yachts’ shipping expense? Explain.

    Problem Set B

    1. Hicks Products produces and sells patio furniture through a national dealership network. They purchase raw materials from a variety of suppliers and all manufacturing, and assembly work is performed at their plant outside of Cleveland, Ohio. They recorded these costs for the year ending December 31, 2017. Construct an income statement for Hicks Products, to reflect their net income for 2017.
    fig 2.E.17.jpg
    1. Conner & Scheer, Attorneys at Law, provide a wide range of legal services for their clients. They employ several paralegal and administrative support staff in order to provide high-quality legal services at competitive prices. For the year ending December 31, 2017, the firm reported these income and expenses. Using this information, construct an income statement to reflect the firm’s net income for 2017.
    fig 2.E.18.jpg
    1. Puzzles, Pranks & Games is a retail business selling children’s toys and games as well as a wide selection of jigsaw puzzles and accessories. They purchase their inventory from local and national wholesale suppliers. For the year ending December 31, 2017, they reported these revenues and expenses. Using this information, prepare an income statement for Puzzles, Pranks & Games for 2017.
    fig 2.E.19.jpg
    1. Pocket Umbrella, Inc, is considering producing a new type of umbrella. This new pocket-sized umbrella would fit into a coat pocket or purse. Classify the following costs of this new product as direct materials, direct labor, manufacturing overhead, or selling and administrative.
      1. Cost of advertising the product
      2. Fabric used to make the umbrellas
      3. Maintenance of cutting machines used to cut the umbrella fabric so it will fit the umbrella frame
      4. Wages of workers who assemble the product
      5. President’s salary
      6. The salary of the supervisor of the people who assemble the product
      7. Wages of the product tester who stands in a shower to make sure the umbrellas do not leak
      8. Cost of market research survey
      9. Salary of the company’s sales managers
      10. Depreciation of administrative office building
    2. Using the costs listed in the previous problem, classify the costs as either product costs or period costs.
    3. Gadell Farms produces venison sausage that is distributed to grocery stores throughout the Southeast. They have collected this shipping cost data:
    fig 2.E.20.jpg
    1. Prepare a scatter graph of the shipping data. Plot cost on the vertical axis and tons produced on the horizontal axis. Is the relationship between packaging costs and tons produced approximately linear? Draw a straight line through the scatter graph.
    2. Using the high-low method, estimate the cost formula for Gadell Farms’ packaging costs.
    3. The least-squares regression method was used and the analysis resulted in this cost equation: \(Y = 1650 + 78.57x\). Comment on the accuracy of your high-low method estimation.
    4. What would you estimate packaging costs to be if Gadell Farms shipped \(10\) tons in a single month? Use the cost formula you obtained in part B. Comment on how accurately this is reflected by the scatter graph you constructed.
    5. What factors other than number of tons produced do you think could affect Gadell Farm’s packaging expense? Explain.

    Thought Provokers

    1. In a team of two or three students, interview the manager/owner of a local business. In this interview, ask the manager/owner the following questions:
      1. Does the business collect and use cost information to make decisions?
      2. Does it have a specialist in cost estimation who works with this cost data? If not, who is responsible for the collection of cost information? Be as specific as possible.
      3. What type of cost information does the business collect and how is each type of information used?
      4. How important does the owner/manager believe cost information is to the success of the business?

        Then, write a report to the instructor summarizing the results of the interview.

        Content of the memo must include

    • date of the interview,
    • the name and title of the person interviewed,
    • name and location of the business,
    • type of business (service, merchandising, manufacturing) and brief description of the goods/services provided by the business, and
    • responses to questions A–D.
    1. This list contains costs that various organizations incur; they fall into three categories: direct materials (DM), direct labor (DL), or overhead (OH).
      1. Classify each of these items as direct materials, direct labor, or overhead.
        1. Glue used to attach labels to bottles containing a patented medicine.
        2. Compressed air used in operating paint sprayers for Student Painters, a company that paints houses and apartments.
        3. Insurance on a factory building and equipment.
        4. A production department supervisor’s salary.
        5. Rent on factory machinery.
        6. Iron ore in a steel mill.
        7. Oil, gasoline, and grease for forklift trucks in a manufacturing company’s warehouse.
        8. Services of painters in building construction.
        9. Cutting oils used in machining operations.
        10. Cost of paper towels in a factory employees’ washroom.
        11. Payroll taxes and fringe benefits related to direct labor.
        12. The plant electricians’ salaries.
        13. Crude oil to an oil refinery.
        14. Copy editor’s salary in a book publishing company.
      2. Assume your classifications could be challenged in a court case. Indicate to your attorneys which of your answers for part a might be successfully disputed by the opposing attorneys and why. In which answers are you completely confident?