Managerial Accounting 2nd Edition By Charles E. Davis – Solution Manual
Chapter 1 Accounting As A Tool of Management
1-1 Understanding how managers use managerial accounting information
(LO 1) Managerial accounting information is not just for accountants. All areas within an
organization can use the information to support decision making. Choose a position in an
organization that is appealing to you and identify several decisions that you might be asked
to make in that position. What kind of managerial accounting information would you need
to make those decisions?
1-2 Discriminating between managerial and financial accounting (LO 2) In
each of the following situations, identify whether the setting is primarily financial accounting
or managerial accounting.
- Volkswagen has experienced a decline in U.S. sales, which dropped 18% in 2005
and 24% between 2002 and 2004. Then chief executive, Bernd Pischetsrieder,
believed the biggest problem at Volkswagen was the cost incurred to produce a
car, which was not competitive with other automakers. The company tried to get
German workers to agree to pay cuts to reduce the cost. (Source: Stephen Power,
“Once Hot Volkswagen Attempts to Reverse U.S. Sales Decline,” The Wall Street
Journal, September 8, 2005.)
- In reporting a 2.1% drop in quarterly income from the previous year’s second quarter,
Oracle Corp. noted that a weaker dollar affected revenue in its database segment.
A weaker dollar makes Oracle’s products more expensive overseas and lowers the
company’s revenue after currency conversion. (Source: David P. Hamilton, “Oracle
Profit Slips 2.1% on Costs Tied to PeopleSoft Acquisition,” The Wall Street Journal,
December 16, 2005.)
- Cerner is a developer of information technology for the health care industry. As the
company incurs expenses to develop a software package, it capitalizes those costs as
an asset. Beginning in the year after the software is released, it then amortizes those
costs over a five-year period. Normal practice in the software industry is to amortize
these costs over a three-year period. (Source: Jesse Eisinger, “Cerner’s Growth Has Been
Healthy, But Its Accounting Could Be Ailing,” The Wall Street Journal, December 14,
- BNSF Railway was experiencing an increase in demand for information technology
resources even though, overall, the company’s business wasn’t growing. In an effort to
understand the technology group’s operations, Chief Information Officer Jeff Campbell
developed a balanced scorecard for the IT group. Among the measures he tracked were
monthly performance against operating budget, percentage of projects delivered on
time, employee absenteeism, and internal rate of return on IT projects. Now everyone
in the company understands how much it costs to provide the technology support for
a particular business application. (Source: Meredith Levinson, “Why You Keep Score,”
CIO.com, July 19, 2007, http://www.cio.com/article/124652/CASE_STUDY_3_Why_
30 Chapter 1 Accounting as a Tool for Management
1-3 Classifying managerial functions (LO 3) Classify each of the following activities
as planning, controlling, evaluating, or decision making.
- A corporate chef prepares a menu and shopping list for the upcoming board of directors
- The human resources manager reviews the monthly payroll report and identifies
departments that paid overtime to workers.
- The production supervisor notices that the pressure in a sauerkraut fermenting vat is
too high and opens the release valve to lower the pressure.
- The marketing director considers whether to offer a $0.50 coupon or a $0.75 coupon
through a direct mail campaign.
- At the end of the coupon campaign, the marketing director determines the number of
coupons redeemed and the additional unit sales achieved through the campaign.
- The sales manager prepares the sales forecast for the coming year.
- The divisional vice president determines which employees should receive a performance
1-4 Meeting managers’ need for information (LO 4) For each of the following man-
agers, identify the information that would be useful for monitoring strategic performance.
- The store manager of a Wendy’s in Austin, Texas
- The regional manager for all Wendy’s restaurants in the state of Texas
- Wendy’s executive vice president of operations
1-5 Understanding a supply chain (LO 4) Choose a company you are familiar with
and diagram its supply chain. For each entity in the supply chain, identify one or two specific
decisions that might affect other members of the supply chain.
1-6 Constructing a balanced scorecard (LO 4) For each of the following measures
that could be incorporated into a balanced scorecard, identify which of the four balanced
scorecard perspectives it would most likely belong to.
- Training hours per employee
- Average time to answer a customer complaint
- Gross profit
- Number of new products in development
- Number of defective units produced
- Percentage of orders delivered on or before due date
- Employee turnover
- Number of new customers
- Market share
- Return on investment
1-7 Applying the IMA’s Statement of Ethical Professional Practice (LO 5)
(Adapted from M. Elizabeth Haywood and Donald E. Wygal, “Corporate Greed vs. IMA’s
Ethics Code,” Strategic Finance, November 2004, 45–49).
The IMA’s Statement of Ethical Professional Practice was designed to help finance pro-
fessionals “to link ethical perspectives directly to their ongoing workplace responsibilities.”
Unfortunately, some individuals may choose to act unethically and perhaps cause great harm
to other individuals and organizations. In each of the following examples, determine which
of the four standards of ethical conduct has been violated. Some examples may violate more
than one standard.
- Douglas Faneuil was a Merrill Lynch brokerage assistant who was involved in Martha
Stewart’s sale of ImClone stock. During the investigation, he lied to federal investigators,
saying that there was a standing order to sell the stock if the share price fell below $60.
In return for lying, Mr. Faneuil reportedly received money, airplane tickets, and an extra
- The day after Sam Waksal, ImClone’s CEO, learned that the Food and Drug
Administration was not going to review ImClone’s application for approval of a new
cancer drug, family members sold $10 million in ImClone stock. Mr. Waksal reportedly
shared the information about the failed review with his family.
- Scott Sullivan, WorldCom’s chief financial officer, recorded billions of dollars of
operating expenses as capital assets. Depreciating these “assets” over time inflated the
company’s profits and hid the expenses from the company’s auditors.
- Adelphia co-signed loans of $3 billion with its founders, the Rigas family, who used
the proceeds of the loans to purchase shares of Adelphia stock and other personal
items. The family did not disclose the loans to the board of directors. When the
company’s auditors discovered the loans and asked the Rigases to report them to the
board, the family refused. The auditors did not report the issue to Adelphia’s audit
1-8 Using managerial accounting information (LO 1, 3, 4) John Dough’s bakery
in Waxahachie, Texas, specializes in chocolate chip cookies. While John’s business does not
yet have a national presence, like Mrs. Fields, he does have a strong statewide reputation.
Recently, John has been receiving some out-of-state orders through the company’s website.
He is beginning to think about the potential for growing his out-of-state business.
- How can managerial accounting information be useful to John as he thinks about
growing his out-of-state business?
- What decisions might John need to make if he decides to grow his out-of-state business?
- What managerial accounting information might John find useful as he decides how to
grow his out-of-state business?
1-9 Corporate codes of conduct (LO 5) Use the Internet to find a corporate code
of conduct. Compare the code you find to the list of typical components of a code of con-
duct in Exhibit 1-7. Does the code you examined cover all the components? If not, which
components are missing? What business problems could result from the omission of those
1-10 Management activities (LO 3) After working for three different companies in
ten years, Martin Long decided that he just wasn’t cut out to be someone else’s employee.
For the next four years, he saved 25% of his salary and then opened his own graphic design
firm. He intends to target small- and medium-sized businesses that need graphic design services
for their letterhead, brochures, and packaging but who cannot afford to employ a full-time
Martin plans to build customer relationships based on his design skills and advertising
expertise. Companies can hire him for design work only or for creating a comprehensive
print strategy that includes the design and production of print materials. Martin will out-
source the production of his print materials to a local printing company.
32 Chapter 1 Accounting as a Tool for Management
- Diagram a supply chain that shows how brochures would be created for a company
that cannot make them in house. Be sure to identify Martin’s place in the supply chain.
- Assume that Martin will operate his business out of his home. Identify the costs he will
incur in the first year to get the business up and running.
- Will Martin need to engage in planning, controlling, and evaluating even though he is
a sole proprietor with no employees? If so, identify several specific activities he might
perform. If not, explain why Martin will not need to perform these activities.
- Martin probably will not make a lot of money in the first few months of owning his
business. What other measures will signal that his business is becoming successful?
1-11 Making ethical decisions (LO 5) Joe Davidson recently began a new job as the
office manager for a prominent medical clinic. He has just received a bill from MedTestPros,
one of the labs that performs tests for the clinic. In reviewing the bill, Joe notices that the lab
has charged the clinic $25 for a complete blood count test. The clinic, however, bills patients
or their insurance companies $90 for the test, and that is the amount that most insurance
companies will pay on the patient’s behalf. Thus, the clinic is earning a $65 profit on each
blood test it orders. After a bit more investigation, Joe finds similar profit margins on a
number of other lab tests. He is concerned about the billing practice and suspects the clinic
may have selected the lab based on its low cost rather than on the lab’s qualifications and the
accuracy of its test results. He also wonders if the tests’ profit potential is driving doctors to
order unnecessary tests.
Read Opinion 8.09 of the American Medical Association’s Code of Medical Ethics (http://
opinion809.page?). Based on this opinion, do you believe that the clinic’s billing for lab tests
is an acceptable business practice? Discuss your reasoning.
- Institute of Management Accountants, Statement on Management Accounting No. 1A,
Definition of Management Accounting (Colorado Springs, CO: Shepard’s/McGraw-Hill,
- Institute of Management Accountants, Statement on Management Accounting,
Definition of Management Accounting (Montvale, NJ: Institute of Management
Accountants, 2008), 1.
- Peter C. Brewer, “Redefining Management Accounting: Promoting the Four Pillars of
Our Profession,” Strategic Finance, 89, no. 9 (March 2008): 28.
- “Leading by Example: A CFO’s Role in Company Growth,” http://www.imanet.org/
newsletter/campus/dflanery.asp (accessed January 18, 2008).
- This section on Design Within Reach, Inc. adapted from the company’s 2004 Annual
Report; 2007 Form 10-K; 2008 Form 10-K; dwrpress.com/about-dwr/ (accessed
November 18, 2012); Louise Lee, “Design Within Reach,” BusinessWeek, June 6,
2005, 78; Julie Sloane, “Designing,” FSB: Fortune Small Business, November
2003, 92; Stephanie Schomer, “Design Within Reach Will Close Its Tools for Living
Stores,” FastCompany.com, March 24, 2010, www.fastcompany.com/1596073/
- To learn more about click fraud, read Brian Grow, Ben Elgin, and Moira Herbst,
“Click Fraud: The Dark Side of Online Advertising,” BusinessWeek, October 2, 2006,
available online at http://www.businessweek.com/stories/2006-10-01/click-fraud.htm
(accessed November 20, 2012).
- To learn more about management accountants’ role in planning, see Jeffrey C.
Thomson, “Anatomy of a Plan: Better Practices for Management Accountants,”
Strategic Finance, 89, no. 4 (October 2007): 21–28.
- See Michael Porter’s books Competitive Strategy and Competitive Advantage, both
published by The Free Press.
- Anil K. Gupta and V. Govindarajan, “Business Unit Strategy, Managerial Characteristics,
and Business Unit Effectiveness at Strategy Implementation,” Academy of Management
Journal, 27 (1984): 25–41.
- Consulting firm Bain & Company conducts a survey of executives to explore the most
popular management tools. Results of their surveys can be found on their website at
- Robert S. Kaplan and David Norton, “The Balanced Scorecard—Measures That Drive
Performance,” Harvard Business Review, 70 (January–February 1992): 71–79.
- Darrell K. Rigby “Management Tools for 2011: An Executive’s Guide,” Bain &
Company, http://bain.com/Images/Bain_Management_Tools_2011.pdf (accessed
November 19, 2012).
- Hau L. Lee and Corey Billington, “The Evolution of Supply-Chain-Management Models
and Practice at Hewlett-Packard,” Interfaces, 25 (September–October 1995): 42–63.
- Barbara Marsh, “Allen-Edmonds Shoe Tries ‘Just-in-Time’ Production—But Company
Painfully Finds Approach Isn’t Perfect Fit for Small Concerns,” The Wall Street Journal,
March 4, 1993.
- “Allen-Edmonds Serves Customers Better with Lean Manufacturing System,” Allen-
Edmonds Shoe Corporation Press Release, March 1, 2005, http://www.allenedmonds.
November 19, 2012).
- Available online at http://www.ethics.org/nbes/.
- See Curtis Verschoor, “Do The Right Thing: IMA Issues New Ethics Guidance,”
Strategic Finance, 87, no. 5 (November 2005): 43–46 to learn more about the revision
- “Survey Documents State of Ethics in the Workplace,” Ethics Resource Center Press
Release, October 17, 2005, http://www.globalethics.org/newsline/2005/10/17/survey-
documents-state-of-ethics-in-the-workplace/ (accessed on November 19, 2012).
- Curtis Verschoor, “A Study of the Link between a Corporation’s Financial Performance
and Its Commitment to Ethics,” Journal of Business Ethics, 17 (October 1998):
Chapter 2 COST BEHAVIOR AND COST ESTIMATION
2-1 Identify cost behavior (LO 1) Macon Vitamins sells a variety of vitamins and
herbal supplements to small health food stores. Macon purchases the vitamins and supple-
ments from leading manufacturers. Identify each of the following costs incurred by Macon
Vitamins in terms of its cost behavior—variable, fixed, mixed, or step.
- Vitamin C tablets
- President’s salary
- Sales commissions ($1.00 per case)
- Straight line depreciation on office equipment
- Shipping (billed in 100-pound increments)
- Telephone charges (monthly fee of $35 plus long distance charges)
2-2 Identify cost behavior (LO 1) Identify each of the following costs in terms of its
cost behavior—variable, fixed, mixed, or step.
- The cost of coffee beans at a Starbucks shop
- Depreciation of airplanes at Southwest Airlines
- Nurses’ wages at M. D. Anderson Cancer Center, assuming a ratio of one nurse to every
- Electricity cost at a Krispy Kreme Doughnuts store
- The cost of hard drives installed in computers built by Dell
- Store managers’ salaries at Barnes and Noble bookstores
- Actors’ wages and salaries at Paramount Studios, when the star is paid a base amount
plus a percentage of box office receipts
- The cost of fabric used in making shirts at Lands’ End
- The cost of cookies provided to guests at check-in at Doubletree Hotels
- The cost of a national advertising campaign for Burger King
2-3 Estimate unit and total costs (LO 1) Will Jones, LLP is a small CPA firm that
focuses primarily on preparing tax returns for small businesses. The company pays a $500
annual fee plus $10 per tax return for a license to use Mega Tax software.
- What is the company’s total annual cost for the Mega Tax software if 300 returns are
filed? If 400 returns are filed? If 500 returns are filed?
- What is the company’s cost per return for the Mega Tax software if 300 returns are
filed? If 400 returns are filed? If 500 returns are filed?
- Why does the cost per return differ at each of the three volume levels?
2-4 Cost behavior (LO 1) Identify each of the following costs, incurred monthly by Baylor
Balloon Bouquets, as fixed, variable, or mixed. Explain your reasoning.
5,000 7,500 10,000
Balloons (10 per bouquet) $10,000 $15,000 $20,000
Insurance $ 5,000 $ 5,000 $ 5,000
Delivery $ 5,500 $ 8,000 $10,500
Employee compensation $10,000 $13,000 $16,000
Advertising $ 1,500 $ 1,500 $ 1,500
2-5 Identify cost behavior (LO 1) Marla Mason owns and operates a home health care
agency. She reported the following cost information for the first four months in 2013. Identify
each of the following costs as fixed, variable, or mixed and calculate the missing values.
70 Chapter 2 Cost Behavior and Cost Estimation
Home Visit Hours
10,000 12,500 15,000 17,500
Medical records automation
and storage $3,000 ? $4,250 $ 4,875
Medical testing supplies $7,500 $9,375 ? $13,125
Insurance filing services $4,000 $5,000 $6,000 ?
Communications system lease ? $2,000 ? $ 2,000
2-6 Cost behavior (LO 1) To calculate the unit cost of the MP3 players that he sells
at his mall kiosk, Joel Lawson added up all his costs and divided by the number of units he
sold during the year. He then used this unit cost to estimate total costs for the coming year.
Explain to Joel why this unit cost is not useful in predicting total costs for the coming year.
2-7 Cost behavior (LO 1) The Boeing Company produces commercial aircraft. The
following passage is taken from Management’s Discussion and Analysis, included in Boeing’s
2005 Annual Report.
“Commercial aircraft production costs include a significant amount of infrastructure
costs, a portion of which do not vary with production rates.”
As part of its accounting practices, Boeing spreads the fixed infrastructure costs over the “ac-
counting quantity” for each type of airplane. The accounting quantity is the estimated number
of planes that will eventually be produced. At the end of 2005, Boeing’s accounting quantity
for the 737 Next-Generation plane was 2,800. At the end of 2011, the accounting quantity for
this plane had risen to 6,200.
- What effect would this change in accounting quantity have on the total fixed
infrastructure cost of the 737 Next-Generation plane?
- What effect would this change in accounting quantity have on the unit cost of the 737
2-8 Scattergraphs (LO 2) Usonic, Inc., has collected the following information on its
cost of electricity:
Hours Electricity Costs
January 625 $280
February 700 $290
March 500 $265
April 425 $200
May 450 $248
June 300 $170
July 375 $180
August 550 $240
September 575 $260
October 280 $150
November 430 $215
December 200 $100
- Prepare a scattergraph of Usonic’s electricity costs for the year. Plot the total electricity
cost on the y-axis. Draw a line that you think best represents the electricity cost
function. Be sure that the line runs through at least one of the data points.
- What is the equation of the line you drew in part (a)?
- What is the expected electricity cost when 425 machine hours are used?
- Why does your answer to part (c) differ from the actual cost for the month of April,
when 425 machine hours were used?
2-9 High-low method (LO 2) Refer to the data in Exercise 2-8.
- Using the high-low method, compute the variable cost of electricity per machine hour.
- Compute the total fixed cost of electricity.
- Represent the electricity cost function in equation form.
- What is the expected electricity cost when 425 machine hours are used?
- Why does your answer to part (d) differ from the actual cost for the month of April,
when 425 machine hours were used?
2-10 High-low method (LO 2) After graduating from dental school two years ago,
Dr. Lauren Farish purchased the dental practice of a long-time dentist who was retiring. In
January of this year she had to replace the outdated autoclave equipment she inherited from
the previous dentist. Now as she is preparing her budget for next year, she is concerned about
understanding how her cost for sterilizing her dental instruments has changed. She has gath-
ered the following information from her records:
Month Number of Instruments Used Total Autoclave Cost
January 600 $ 7,400
February 500 6,500
March 700 7,000
April 900 9,000
May 800 7,600
June 1,000 8,500
July 1,200 10,000
August 1,100 9,800
- What is the variable cost of sterilizing an instrument using the new equipment?
- What is the fixed cost of the autoclave equipment?
- What is the cost formula that Dr. Farish should use for estimating autoclave sterilization
costs for next year’s budget?
- If Dr. Farish estimates she will use 1,150 instruments next month, what cost should she
include in her budget for instrument sterilization?
2-11 Estimated cost equation (LO 2) Refer to the data in Exercise 2.4. Using the
form y 5 mx 1 b, estimate the cost formula for each cost incurred by Baylor Balloon
2-12 Cost estimation (LO 2) Managers of Tom Brown Distributors are evaluating the
compensation system for the company’s sales personnel. Currently, the two salespeople have
a combined salary of $60,000 per year and earn a 3% sales commission.
The company is considering two alternatives to the current compensation system. The
first alternative is to reduce total salaries to $50,000 and increase the sales commission to
5%. The second alternative is to eliminate the salaries and pay a 12% sales commission.
Sales projections under each of the compensation systems are as follows:
Current system $1,000,000
Salary and 5% commission $1,120,000
12% commission $1,200,000
- Write the cost equations for the current compensation system and both alternative
72 Chapter 2 Cost Behavior and Cost Estimation
- Given Tom Brown’s sales projections, and assuming that the cost of goods sold is equal
to 30% of sales, which pay system would be the most profitable one for the company?
Ignore all other costs and show your calculations.
2-13 Contribution format income statement (LO 3) Restate the following income
statement for a retailer in contribution format.
Sales revenue ($100 per unit) $50,000
Less cost of goods sold ($60 per unit) 30,000
Gross margin 20,000
Less operating costs:
Commissions expense ($6 per unit) $3,000
Salaries expense 8,000
Advertising expense 6,000
Shipping expense ($2 per unit) 1,000 18,000
Operating income $ 2,000
2-14 Contribution format income statement: missing values (LO 3) Com-
plete each of the following contribution format income statements by supplying the missing
- b. c. d.
Sales revenue ? $450,000 ? $600,000
Variable expenses 210,000 ? 96,000 ?
Contribution margin 90,000 150,000 ? 400,000
Fixed expenses ? 90,000 120,000 ?
Operating income 15,000 ? ? ?
Income taxes ? 18,000 16,000 55,000
Net income $10,500 ? $48,000 $165,000