Quick Check Questions

Chapter 2 Building Blocks of Managerial Accounting Copyright © 2018 Pearson Education, Inc. 2-1 Chapter 2

Building Blocks of Managerial Accounting

Quick Check Questions

Answers:

QC2-1. c QC2-3. c QC2-5. b QC2-7. b QC2-9. c QC2-2. d QC2-4. b QC2-6. a QC2-8. b QC2-10. c

Short Exercises

(10 min.) S2-1

• Manufacturing companies report three types of inventory on the balance sheet.
• Inventory (merchandise) for a company such as Best Buy (consumer electronics) includes all the costs

necessary to purchase products and get them onto the store shelves.

• Most for-profit organizations can be described as belonging to one (or more) of three categories:

merchandising companies, service companies, and manufacturing companies.

• Work in process inventory is composed of goods partially through the manufacturing process (not finished

yet).

• Forever 21, Target, and Kohl’s are all examples of merchandising companies.
• Service companies typically do not have an inventory account.
• Johnson & Johnson, a personal care products manufacturer, converts raw materials inventory into finished

products.

• A law office, an advertising agency, and a hospital are all examples of service companies
• Wholesalers buy products in bulk from producers, mark them up, and resell them to retailers.

(5 min.) S2-2

Madison Co. is a manufacturer, because it has three kinds of inventory: Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory.

Dean Co. is a merchandiser, because it has a single inventory account.

Anderson Co. is a service company, because it has no inventory.

Managerial Accounting 5th Edition Braun Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Managerial Accounting 5e Solutions Manual Copyright © 2018 Pearson Education, Inc. 2-2 (5-10 min.) S2-3

• Marketing
• Design
• Production
• Distribution
• Distribution
• Customer service
• Production
• Production
• Research and Development (R&D)

(5-10 min.) S2-4

Cost Direct or Indirect cost?

• Juniors department sales clerks Direct
• Cost of Juniors clothing Direct
• Cost of hangers used to display the clothing in the store Indirect
• Electricity for the building Indirect
• Cost of radio advertising for the store Indirect
• Juniors clothing buyers’ salaries (these buyers buy for all Juniors Departments of

Kohl’s stores) Indirect

• Depreciation of the building Indirect
• Cost of costume jewelry on the mannequins in the Juniors Department Direct
• Cost of bags used to package customer purchases at the main registers for the

store Indirect

• The Stow Kohl’s store manager’s salary Indirect
• Cost of security staff at the Stow store Indirect
• Manager of Juniors Department Direct

(10 min.) S2-5

• Conversion costs are the costs of transforming direct materials into finished goods.
• Period costs include R&D, marketing, distribution, and customer service costs.
• Direct material plus direct labor equals prime costs.
• Steel, tires, engines, upholstery, carpet, and dashboard instruments are used in the assembly of a car. Because

the manufacturer can trace the cost of these materials (including freight-in and import duties) to specific units or batches of vehicles, they are considered direct costs of the vehicles.

• Costs that can be traced directly to a(n) cost object are called direct costs.
• Product costs are initially treated as assets on the balance sheet.
• The allocation process results in a less precise cost figure being assigned to the cost objects.
• Indirect costs cannot be directly traced to a(n) cost object.
• Total costs include the costs of all resources used throughout the value chain.
• U.S. GAAP requires companies to use only product costs for inventory reported on external financial

statements.

• Company-paid fringe benefits may include health insurance, retirement plan contributions, payroll taxes, and

paid vacations.

• When manufacturing companies sell their finished products, the costs of those finished products are removed

from inventory and expensed as cost of goods sold.

Chapter 2 Building Blocks of Managerial Accounting Copyright © 2018 Pearson Education, Inc. 2-3

(5-10 min.) S2-6

• Product cost, Product cost
• Product cost
• Product cost, Product cost
• Period cost, Period cost
• Period cost, Period cost
• Period cost, Period cost

(5-10 min.) S2-7

• Product cost
• Period cost
• Product cost
• Product cost
• Period cost
• Product cost
• Period cost
• Product cost
• Period cost

(5-10 min.) S2-8

COST Period Cost or Product Cost?

If a Product Cost: Is

it DM, DL, or MOH?

• Property taxes – 30% of building is used for sales,

marketing, and administrative offices; 70% of building is used for manufacturing 30% Period; 70% Product -- MOH

• Wages and benefits paid to assembly-line workers in the

manufacturing plant Product DL

• Depreciation on automated production equipment Product MOH
• Salaries paid to quality control inspectors in the plant Product MOH
• Repairs and maintenance on factory equipment Product MOH
• Standard packaging materials used to package individual

units of product for sale (e.g., cereal boxes in which cereal is packaged) Product DM

• Lease payment on administrative headquarters Period
• Telecommunications costs for the customer service call

center Period

Managerial Accounting 5e Solutions Manual Copyright © 2018 Pearson Education, Inc. 2-4 (5-10 min.) S2-9

COST

Period Cost or Product Cost?

If a Product Cost: Is

it DM, DL, or MOH?

• Television advertisements for Bailey’s products Period
• Lubricants used in running bottling machines Product MOH
• Research and Development related to elimination of

antibiotic residues in milk Period

• Gasoline used to operate refrigerated trucks delivering

finished dairy products to grocery stores Period

• Company president’s annual bonus Period
• Depreciation on refrigerated trucks used to collect raw milk

from dairy farmers Product MOH

• Plastic gallon containers in which milk is packaged Product DM
• Property insurance on dairy processing plant Product MOH
• Cost of milk purchased from local dairy farmers Product DM
• Depreciation on tablets used by sales staff Period
• Wages and salaries paid to machine operators at dairy

processing plant Product DL

(5 min.) S2-10

McKay Frames Computation of Total Manufacturing Overhead

Manufacturing overhead:

Plant depreciation expense $ 6,000 Plant supervisor’s salary 3,100 Plant janitor’s salary 1,800 Glue for picture frames* 400 Oil for manufacturing equipment 250 Total manufacturing overhead $11,550

*Assuming that it is not cost-effective to trace the low-cost glue to individual frames.The following explanation is provided for instructional purposes, but it is not required.Depreciation on company cars used by the sales force is a marketing expense, interest expense is a financing expense, and the company president’s salary is an administrative expense. None of these expenses is incurred in the manufacturing plant, so they are not part of manufacturing overhead.The wood for frames is a direct material, not part of manufacturing overhead.