Homework One

Managerial Accounting

Name: Joana Correia

Exercise 1 (2 pts)
Product differentiation vs. Cost leadership strategy
Maxwell Legacy Oil was the U.S. marketing and refining division of a large global petroleum company. It operated
five refineries and had more than 7,000 branded gasoline stations around the United States, which sold about 25
million gallons of gasoline per day. After considerable discussion, Maxwell Legacy Oil decided on a strategy to offer
a superior buying experience to the three top-tier consumer segments. Also, it would no longer seek to attract
price- sensitive consumers by lowering prices to compete with discount gasoline stations.

Requirement:
Why did Maxwell Legacy Oil, a company following a differentiation strategy, have so many process objectives and
measures relating to cost reduction and productivity? Make sure to substantiate your answer.

Maxwell Legacy Oil’s decision to pursue a differentiation strategy while having so may objectives and measures
relating to cost reduction and productivity can be attributed to several reasons. Among them the most important
are:
1. Operational efficiency – the company can optimize its internal processes, minimize waste and streamline
operations, allowing the company to allocate resources more effectively and ensure that the value-added
activities are carried out efficiently.
2. Cost control – Ensuring that the expenses associated with refining, marketing and distribution are kept in
check, which is crucial for maintaining profitability.
3. Profit margin enhancement – efficiently managing costs leads to improvement of profit margins, proving
financial flexibility to invest in other activities that support their differentiation strategy.

Exercise 2 (2 pts)
Planning and control decisions
Indicate whether the following tasks are examples of a) planning, or b) control decisions

Decision Answer

Assess the cost of potential new products or services Planning

Estimate the cost and profit consequences from a course of action Planning

Market, sell, and deliver products and services to customers Control decisions

Operate and improve processes Control decisions

Determine business unit financial and nonfinancial performance Control decisions

Determine costs of serving customers Planning
Modify product mix
Planning
Reward (and occasionally punish) employees Control decisions

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 Homework One
Managerial Accounting

Name: Joana Correia

Exercise 3 (0.2 pts)

Planning and control decisions
What does control refer to in the context of a management accounting and control system?

Control in the context of a management accounting and control system refers to the act of implementing the
planning decisions, evaluating past performance, and providing feedback and learning to help future decision
making.

Exercise 4 (2 pts)
Direct, indirect, fixed, variable, product, and period costs
Dragon Motors manufactures various types of light, recreational, or heavy-duty vehicles which it commercializes
directly to individual and corporate clients through its own distribution channels. The manufacturing process for
producing vehicles includes two main steps. The first one is called mainframe process: it helps build the vehicles’
chassis and assemble the main components such as doors and engine. The second step is called ignition
process: it focuses on vehicles interior equipment, and electronics, as well as testing of vehicles.

Requirement 1:
Costs involved in the different processes are listed below. For each cost item, indicate whether it is a direct variable,
direct fixed, indirect variable, or indirect fixed cost, assuming that the units of production of vehicle is the cost object.

Decision Answer

Aluminium and glass components Direct variable

Lubricating materials for wielding machinery Indirect variable
Wages for workers assigned to the mainframe process Direct variable
Depreciation on machineries Direct fixed
Depreciation on factory building Indirect fixed
Insurance on head office building Indirect fixed
Consumable stores and dies Indirect variable
Wages for machine operators Direct variable
Power used at the head office Indirect variable
R&D costs allocated to the mainframe process Indirect variable
Quality control Direct variable
Repairs to machines Indirect variable
Normal wastages and spoilages Indirect variable
Store-keeper’s salary Direct variable
Vehicle testing Indirect variable
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 Homework One
Managerial Accounting

Name: Joana Correia

Materials used during the ignition process Direct variable

Factory general utilities Indirect variable
Fuel for factory generator Indirect variable
Supervisors’ salaries Direct fixed
Sales commissions Indirect variable

Requirement 2:
Use the same cost items listed above and indicate whether each item is a product or period cost

Decision Answer

Aluminium and glass components Product

Lubricating materials for wielding machinery Product
Wages for workers assigned to the mainframe process Product
Depreciation on machineries Product
Depreciation on factory building Period cost
Insurance on head office building Product
Consumable stores and dies Product
Wages for machine operators Product
Power used at the head office Period cost
R&D costs allocated to the mainframe process Period cost
Quality control Product
Repairs to machines Period cost
Normal wastages and spoilages Product
Store-keeper’s salary Product
Vehicle testing Period cost
Materials used during the ignition process Product
Factory general utilities Period cost
Fuel for factory generator Product
Supervisors’ salaries Product
Sales commissions Period cost

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 Homework One
Managerial Accounting

Name: Joana Correia

Requirement 3:
If the cost object is the Ignition process, then anything directly associated with this production step will be a direct cost.
This will include:

All vehicles interior equipment, and electronics, as well as testing of vehicles.

Exercise 5 (2 pts)
Variable or fixed cost
Classify each of the following as a variable or fixed cost with respect to a unit of production:

Fixed cost
Salaries of production supervisors
Variable cost
Steel used in automobile production
Variable cost
Wood used in furniture production
Variable cost
Salaries for factory custodial staff
Fixed cost
Depreciation of factory equipment
Variable cost
Lubricants for machines
Variable cost
Electricity used to operate a specific machine.
Variable cost
Wages of production workers (production workers do not vary in the
short run)
Fixed cost
Rent for a factory building
Variable cost
Glue used in furniture production
Fixed cost
Maintenance for production equipment, performed every month.
Variable cost
Paper used in newspaper production

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Homework One
Managerial Accounting

Name: Joana Correia

Exercise 6 (1.8 pts)

Inventoriable (or product) vs. period cost
Each of the following cost items pertains to one of these companies: Home Depot (a merchandising-sector company),
Apple (a manufacturing-sector company) and Rent a Nanny (a service-sector company).
Classify each of the below cost items as an inventoriable (also called product) cost or a period cost.
Provide a brief explanation for each of your answers:

Lumber at Home Depot Product cost – cost of purchasing the goods that are resold in the
same form

Electricity in an Apple manufacturing plant Product cost – All manufacturing costs (direct materials, direct
manufacturing labor and manufacturing overheads) are product
costs for manufacturing-sector companies

Depreciation on the shelving at Home Depot Product cost - cost of purchasing the goods that are resold in the
same form

Mileage for Rent a Nanny Period cost – Service-sector companies do not have any product
costs.

Wages for quality testing for Apple products Product cost - All manufacturing costs (direct materials, direct
during production manufacturing labor and manufacturing overheads) are product
costs for manufacturing-sector companies

Salaries of the advertising personnel for Rent a Period cost – Service-sector companies do not have any product
Nanny costs.

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 Homework One
Managerial Accounting

Name: Joana Correia

Lunches provided by Rent a Nanny Period cost – Service-sector companies do not have any product
costs.

Wages of the employees at Home Depot Period cost – Cost not related to the cost of goods purchased for
resale.

Shipping costs for Apple to send products to Period cost – Non-manufacturing cost
retail stores

Exercise 7 (5pts)
Cost of goods purchased, cost of goods sold, and income statement
The following data are for CuaWong Retail Outlet Stores. The account balances (in thousands) are for 2018.

Marketing and advertising costs $53,000

Merchandise inventory, January 1, 2018 103,500
Shipping of merchandise to customers 4,600
Depreciation on store fixtures 8,000
Purchases 524,000
General and administrative costs 62,000

Merchandise inventory, December 31, 2018 108,000

Merchandise freight-in 26,000
Purchase returns and allowances 20,000
Purchase discounts 25,000
Revenues 700,000

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Homework One
Managerial Accounting

Name: Joana Correia

Requirements:
1. Compute (a) the cost of goods purchased and (b) the cost of goods sold.

(a) Cost of Goods Purchased (COGP):

COGP = Merchandise Inventory, January 1, 2018 + Purchases + Merchandise Freight-In - Purchase
Returns and Allowances - Purchase Discounts
COGP = $103,500 + $524,000 + $26,000 - $20,000 - $25,000
COGP = $608,500

(b) Cost of Goods Sold (COGS):

COGS = COGP + Merchandise Inventory, January 1, 2018 - Merchandise Inventory, December 31, 2018
COGS = $608,500 + $103,500 - $108,000
COGS = $604,000

Answer (a) 608500; (b)

60400
2. Prepare the income statement for 2018.

Revenues $700,000
Cost of Goods Sold (COGS) $604,000
Gross Profit $96,000

Operating Expenses:
Marketing and Advertising Costs $53,000
Depreciation on Store Fixtures $8,000
General and Administrative Costs $62,000
Shipping of Merchandise to Customers $4,600
Total Operating Expenses $127,600

Net Income (Loss) -$31,600

Answer -31600

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Homework One
Managerial Accounting

Name: Joana Correia

Exercice 8 (5 pts)
Flow of Inventoriable Costs
Roover’s Heating selected data for December 2020 are presented here (in millions):

Direct materials inventory 12/1/2020 $100

Direct materials purchased 330
Direct materials used 395
Total manufacturing overhead costs 495
Variable manufacturing overhead costs 240
Total manufacturing costs incurred during December 1,630
2020
Work-in-process inventory 12/1/2020 210
Cost of goods manufactured 1,660
Finished-goods inventory 12/1/2020 145
Cost of goods sold 1,730

Requirements:
1. Direct materials inventory 12/31/2020
Direct materials inventory 12/31/2020 = Direct materials inventory 12/1/2020 + Direct materials
purchased - Direct materials used
Direct materials inventory 12/31/2020 = $100 + $330 - $395
Direct materials inventory 12/31/2020 = $35

Answer $35

2. Fixed manufacturing overhead costs for December 2020

Total manufacturing overhead costs = Variable manufacturing overhead costs + Fixed manufacturing
overhead costs
Fixed manufacturing overhead costs = Total manufacturing overhead costs - Variable manufacturing
overhead costs
Fixed manufacturing overhead costs = $495 - $240
Fixed manufacturing overhead costs = $255

Answer $255

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Homework One
Managerial Accounting

Name: Joana Correia

3. Direct manufacturing labor costs for December 2020

Total manufacturing costs incurred during December 2020 = Direct materials used + Direct
manufacturing labor costs + Total manufacturing overhead costs
Direct manufacturing labor costs = Total manufacturing costs incurred during December 2020 - Direct
materials used - Total manufacturing overhead costs
Direct manufacturing labor costs = $1,630 - $395 - $495
Direct manufacturing labor costs = $740

Answer $740

4. Work-in-process inventory 12/31/2020

Work-in-process inventory 12/31/2020 = Work-in-process inventory 12/1/2020 + Total manufacturing

costs incurred during December 2020 - Cost of goods manufactured
Work-in-process inventory 12/31/2020 = $210 + $1,630 - $1,660
Work-in-process inventory 12/31/2020 = $180

Answer $180

5. Cost of finished goods available for sale in December 2020

Cost of finished goods available for sale = Cost of goods manufactured + Work-in-process inventory
12/1/2020 - Finished-goods inventory 12/1/2020
Cost of finished goods available for sale = $1,660 + $210 - $145
Cost of finished goods available for sale = $1,725

Answer $1,725

6. Finished goods inventory 12/31/2020

Finished goods inventory 12/31/2020 = Finished-goods inventory 12/1/2020 + Cost of finished goods
available for sale - Cost of goods sold
Finished goods inventory 12/31/2020 =$145+ $1,725 - $1,730
Finished goods inventory 12/31/2020 = $140

Answer $140