Sample Chapter



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.

  1. 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.)

  1. 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.)

  1. 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,


  1. 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,”, July 19, 2007,



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.

  1. A corporate chef prepares a menu and shopping list for the upcoming board of directors


  1. The human resources manager reviews the monthly payroll report and identifies

departments that paid overtime to workers.

  1. The production supervisor notices that the pressure in a sauerkraut fermenting vat is

too high and opens the release valve to lower the pressure.

  1. The marketing director considers whether to offer a $0.50 coupon or a $0.75 coupon

through a direct mail campaign.

  1. 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.

  1. The sales manager prepares the sales forecast for the coming year.
  2. 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.

  1. The store manager of a Wendy’s in Austin, Texas
  2. The regional manager for all Wendy’s restaurants in the state of Texas
  3. 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.

  1. Training hours per employee
  2. Average time to answer a customer complaint
  3. Gross profit
  4. Number of new products in development
  5. Number of defective units produced
  6. Percentage of orders delivered on or before due date
  7. Employee turnover
  8. Number of new customers
  9. Market share
  10. 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.

  1. 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

week’s vacation.





Exercises             31





  1. 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.

  1. 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.

  1. 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.


  1. How can managerial accounting information be useful to John as he thinks about

growing his out-of-state business?

  1. What decisions might John need to make if he decides to grow his out-of-state business?
  2. 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

graphic artist.

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






  1. 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.

  1. 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.

  1. 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.

  1. 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:// Based on this opinion, do you believe that the clinic’s billing for lab tests

is an acceptable business practice? Discuss your reasoning.






  1. Institute of Management Accountants, Statement on Management Accounting No. 1A,

Definition of Management Accounting (Colorado Springs, CO: Shepard’s/McGraw-Hill,

1981), 4.

  1. Institute of Management Accountants, Statement on Management Accounting,

Definition of Management Accounting (Montvale, NJ: Institute of Management

Accountants, 2008), 1.

  1. Peter C. Brewer, “Redefining Management Accounting: Promoting the Four Pillars of

Our Profession,” Strategic Finance, 89, no. 9 (March 2008): 28.

  1. “Leading by Example: A CFO’s Role in Company Growth,”

newsletter/campus/dflanery.asp (accessed January 18, 2008).

  1. This section on Design Within Reach, Inc. adapted from the company’s 2004 Annual

Report; 2007 Form 10-K; 2008 Form 10-K; (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,”, March 24, 2010,


  1. 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

(accessed November 20, 2012).




Endnotes             33






  1. 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.

  1. See Michael Porter’s books Competitive Strategy and Competitive Advantage, both

published by The Free Press.

  1. 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.

  1. 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

  1. Robert S. Kaplan and David Norton, “The Balanced Scorecard—Measures That Drive

Performance,” Harvard Business Review, 70 (January–February 1992): 71–79.

  1. Darrell K. Rigby “Management Tools for 2011: An Executive’s Guide,” Bain &

Company, (accessed

November 19, 2012).

  1. 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.

  1. 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.

  1. “Allen-Edmonds Serves Customers Better with Lean Manufacturing System,” Allen-

Edmonds Shoe Corporation Press Release, March 1, 2005, http://www.allenedmonds.

com/wcsstore/AllenEdmonds/upload/press_releases/2005-1-11.pdf. (accessed

November 19, 2012).

  1. Available online at
  2. 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


  1. “Survey Documents State of Ethics in the Workplace,” Ethics Resource Center Press

Release, October 17, 2005,

documents-state-of-ethics-in-the-workplace/ (accessed on November 19, 2012).

  1. 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):








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.

  1. Vitamin C tablets
  2. President’s salary
  3. Sales commissions ($1.00 per case)
  4. Straight line depreciation on office equipment
  5. Shipping (billed in 100-pound increments)
  6. Advertising
  7. 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.

  1. The cost of coffee beans at a Starbucks shop
  2. Depreciation of airplanes at Southwest Airlines
  3. Nurses’ wages at M. D. Anderson Cancer Center, assuming a ratio of one nurse to every

five patients

  1. Electricity cost at a Krispy Kreme Doughnuts store
  2. The cost of hard drives installed in computers built by Dell
  3. Store managers’ salaries at Barnes and Noble bookstores
  4. Actors’ wages and salaries at Paramount Studios, when the star is paid a base amount

plus a percentage of box office receipts

  1. The cost of fabric used in making shirts at Lands’ End
  2. The cost of cookies provided to guests at check-in at Doubletree Hotels
  3. 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.


  1. 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?

  1. 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?

  1. 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.


Bouquets Sold

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.


  1. What effect would this change in accounting quantity have on the total fixed

infrastructure cost of the 737 Next-Generation plane?

  1. What effect would this change in accounting quantity have on the unit cost of the 737

Next-Generation plane?


2-8 Scattergraphs (LO 2) Usonic, Inc., has collected the following information on its

cost of electricity:

Machine              Total

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


  1. 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.

  1. What is the equation of the line you drew in part (a)?




Exercises             71





  1. What is the expected electricity cost when 425 machine hours are used?
  2. 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.


  1. Using the high-low method, compute the variable cost of electricity per machine hour.
  2. Compute the total fixed cost of electricity.
  3. Represent the electricity cost function in equation form.
  4. What is the expected electricity cost when 425 machine hours are used?
  5. 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


  1. What is the variable cost of sterilizing an instrument using the new equipment?
  2. What is the fixed cost of the autoclave equipment?
  3. What is the cost formula that Dr. Farish should use for estimating autoclave sterilization

costs for next year’s budget?

  1. 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


  1. Write the cost equations for the current compensation system and both alternative

compensation structures.


72           Chapter 2 Cost Behavior and Cost Estimation





  1. 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


  1. 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