Managerial Accounting

Section: 6
Total marks:30marks
Last Date of Submission:05/06/2020
Student Name: Student ID:
Answer the following questions:
Part A:
1. Inthe 1970s, one million college-bound students were surveyed and asked to compare
themselves to their peers. Some of the key findings of the survey were as follows:
a. 70% of the students rated themselves as above average in leadership ability,
while only 2% rated themselves as below average in this regard.

b. With respect to athletic skills, 60% of the students rated their skills as above the
median and only 6% of students rated themselves as below the median.

c. . 60% of the students rated themselves in the top 10% in terms of their ability to
get along with others, while 25% of the students felt that they were in the top
1% in terms of this interpersonal skill.
Required:
What type of cognitive bias reveals itself in the data mentioned above? How might this
cognitive
bias adversely influence a manager’s planning, controlling, and decision-making
activities? What steps could managers
7.50 marks

2 a. The PC Works assembles custom computers from components supplied by various

manufacturers. The company is very small and its assembly shop and retail sales store
are housed in a single facility
in a Redmond, Washington, industrial park. Listed below are some of the costs that are
incurred at the company.
Required:
For each cost, indicate whether it would most likely be classified as direct labor, direct
materials ,manufacturing overhead, selling, or an administrative cost.
1. The cost of a hard drive installed in a computer.
2. The cost of advertising in the Puget Sound Computer User newspaper.
 3. The wages of employees who assemble computers from components.
4. Sales commissions paid to the company’s salespeople.
5. The wages of the assembly shop’s supervisor.
6. The wages of the company’s accountant.
7. Depreciation on equipment used to test assembled computers before release to
customers.
8. Rent on the facility in the industrial park.
7.50 marks

3 a. Terri Ronsin had recently been transferred to the Home Security Systems Division of
National Home Products. Shortly after taking over her new position as divisional
controller, she was asked to develop the division’s predetermined overhead rate for the
upcoming year. The accuracy of the rate is important because it is used throughout the
year and any overapplied or underapplied overhead is closed out to Cost of Goods Sold
at the end of the year. National Home Products uses direct labor-hours in all of its
divisions as the allocation base for manufacturing overhead.
To compute the predetermined overhead rate, Terri divided her estimate of the total
manufacturing overhead for the coming year by the production manager’s estimate of
the total direct labor-hours for the coming year. She took her computations to the
division’s general manager for approval but was quite surprised when he suggested a
modification in the base. Her conversation with the general manager of the Home
Security Systems Division, Harry Irving, went like this:

Ronsin: Here are my calculations for next year’s predetermined overhead rate. If you
approve, we can enter the rate into the computer on January 1 and be up and running in
the job-order costing system right away this year.

Irving: Thanks for coming up with the calculations so quickly, and they look just fine.
There is, however, one slight modification I would like to see. Your estimate of the
total direct labor-hours for the year is 440,000 hours. How about cutting that to about
420,000 hours?

Ronsin: I don’t know if I can do that. The production manager says she will need about
440,000 direct labor-hours to meet the sales projections for the year. Besides, there are
going to be over 430,000 direct labor-hours during the current year and sales are
projected to be higher next year.

Irving: Teri, I know all of that. I would still like to reduce the direct labor-hours in the
base to something like 420,000 hours. You probably don’t know that I had an
agreement with your predecessor as divisional controller to shave 5% or so off the
estimated direct labor-hours every year. That way, we kept a reserve that usually
resulted in a big boost to net operating income at the end of the fiscal year in
December. We called it our Christmas bonus. Corporate headquarters always seemed
as pleased as punch that we could pull off such a miracle at the end of the year. This
system has worked well for many years, and I don’t want to change it now.
 Required:
1. Explain how shaving 5% off the estimated direct labor-hours in the base for the
predetermined overhead rate usually results in a big boost in net operating income at
the end of the fiscal year.
2. Should Terri Ronsin go along with the general manager’s request to reduce the direct
labor hours in the predetermined overhead rate computation to 420,000 direct labor-
hours?
7.50 marks

4 a. The following data (in thousands of dollars) have been taken from the accounting
records of Larop Corporation for the just completed year.
Sales ................................................................................ $870
Purchases of raw materials ............................................. $190
Direct labor ..................................................................... $200
Manufacturing overhead ................................................. $230
Administrative expenses ................................................. $150
Selling expenses .............................................................. $140
Raw materials inventory, beginning ............................... $10
Raw materials inventory, ending .................................... $40
Work in process inventory, beginning ............................ $20
Work in process inventory, ending ................................. $50
Finished goods inventory, beginning .............................. $90
Finished goods inventory, ending ................................... $130
Required:
a. Prepare a Schedule of Cost of Goods Manufactured in good form.
b. Compute the Cost of Goods Sold.
c. Using data from your answers above as needed, prepare an Income Statement in
good form
7.50 marks

Part A

Answer to the question no.1

The type of cognitive bias revealed by this data is called self-enhancement bias. This bias occurs when
people overstate their strengths and understate their weaknesses relative to others. This bias may cause
managers to be overly-optimistic when making plans for the future. This bias might also cause managers
to readily blame others if control data indicates unsatisfactory performance. It can also lead managers
to make poor decisions because they believe their managerial prowess can overcome any potential
obstacles revealed by an objective data analysis. Managers can help reduce the potential adverse
consequences of self enhancement bias by establishing a “devil’s advocate” team of managers that are
charged with challenging proposed courses of action.

Answer to the question no.2

1. The cost of a hard drive installed in a computer: direct materials.

2. The cost of advertising in the Puget Sound Computer User newspaper: selling.

3. The wages of employees who assemble computers from components: direct labor.

4. Sales commissions paid to the company’s salespeople: selling.

5. The wages of the assembly shop’s supervisor: manufacturing overhead.

6. The wages of the company’s accountant: administrative.

7. Depreciation on equipment used to test assembled computers before release to customers:

manufacturing overhead.

8. Rent on the facility in the industrial park: a combination of manufacturing overhead, selling, and
administrative. The rent would most likely be prorated on the basis of the amount of space occupied by
manufacturing, selling, and administrative operations.

Answer to the question no.3

1.Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an
artificially high overhead rate. The artificially high predetermined overhead rate is likely to result in
overapplied overhead for the year. The cumulative effect of overapplying the overhead throughout the
year is all recognized in December when the balance in the Manufacturing Overhead account is closed
out to Cost of Goods Sold. If the balance were closed out every month or every quarter, this effect
would be dissipated over the course of the year.

2. While individuals can certainly disagree about what Terri should do, some of the facts are
indisputable. First, understating direct labor-hours artificially inflates the overhead rate. This has the
effect of inflating the Cost of Goods Sold in all months prior to December and overstating the costs of
inventories. In December, the huge adjustment for over applied overhead provides a big boost to net
operating income. Therefore, the practice results in distortions in the pattern of net operating income
over the year. In addition, because all of the adjustment is taken to Cost of Goods Sold, inventories are
still overstated at year-end. This means, of course, that the net operating income for the entire year is
also overstated. While Terri is in an extremely difficult position, her responsibilities under the IMA’s
Statement of Ethical Professional Practice seem to be clear. The Credibility Standard states that
management accountants have a responsibility to “disclose all relevant information that could
reasonably be expected to influence an intended user’s understanding of the reports, analyses or
recommendations.” In our opinion, Terri should discuss this situation with her immediate supervisor in
the controller’s office at corporate headquarters. This step may bring her into direct conflict with the
general manager of the division, so it would be a very difficult decision for her to make.

Answer to the question no. 4