Solution Manual For
Horngren's Accounting, The Managerial Chapters,
14th edition Nobles
Chapter 1-9
Chapter M:1
Introduction to Managerial Accounting
Review Questions
1. What is the primary purpose of managerial accounting?
The primary purpose of managerial accounting is to provide information to help managers plan,
direct, control, and make decisions.
2. List six differences between financial accounting and managerial accounting.
Financial accounting and managerial accounting differ on the following 6 dimensions: (1) primary
users, (2) purpose of information, (3) focus and time dimension of the information, (4) rules and re-
strictions, (5) scope of information, and (6) behavioral.
3. Explain the difference between line positions and staff positions.
Line positions are directly involved in providing goods or services to customers. Staff positions
support line positions.
4. Explain the differences between planning, directing, and controlling.
Planning means choosing goals and deciding how to achieve them. Directing involves running the
day-to-day operations of a business. Controlling is the process of monitoring operations and keeping
the company on track.
5. List the four IMA standards of ethical practice and briefly describe each.
The four IMA standards of ethical practice and a description of each follow.
I. Competence.
Maintain an appropriate level of professional leadership and expertise by enhancing
knowledge and skills.
Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
Provide decision support information and recommendations that are accurate, clear, concise,
, and timely.
Recognise and help mange risk.
II. Confidentiality.
Keep information confidential except when disclosure is authorized or legally required.
Inform all relevant parties regarding appropriate use of confidential information. Monitor to
ensure compliance.
Refrain from using confidential information for unethical or illegal advantage.
III. Integrity.
Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid
apparent conflicts of interest. Advise all parties of any potential conflicts.
Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Abstain from engaging in or supporting any activity that might discredit the profession.
Contribute to a positive ethical culture and place integrity of the profession above personal
interest.
5, cont.
IV. Credibility.
Communicate information fairly and objectively.
Provide all relevant information that could reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or recommendations.
Report any delays or deficiencies in information, timeliness, processing, or internal controls
in conformance with organization policy and/or applicable law.
Communicate any professional limitations or other constraints that would preclude responsi-
ble judgment or successful performance of an activity.
6. Describe a service company and give an example.
Service companies sell time, skills, and knowledge. Examples of service companies include phone
service companies, banks, cleaning service companies, accounting firms, law firms, medical physi-
cians, and online auction services.
7. Describe a merchandising company and give an example.
Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory
of products, and managers are accountable for the purchasing, storage, and sale of the products. Ex-
amples of merchandising companies include toy stores, grocery stores, and clothing stores.
8. How do manufacturing companies differ from merchandising companies?
,9. List the three inventory accounts used by manufacturing companies and describe each.
The three inventory accounts used by manufacturing companies are Raw Materials Inventory, Work-
in-Process Inventory, and Finished Goods Inventory.
Raw Materials Inventory includes materials used to manufacture a product. Work-in-Process Inven-
tory includes goods that have been started in the manufacturing process but are not yet complete.
Finished Goods Inventory includes completed goods that have not yet been sold.
10. Explain the difference between a direct cost and an indirect cost.
A direct cost is a cost that can be easily and cost-effectively traced to a cost object (which is any-
thing for which managers want a separate measurement of cost). An indirect cost is a cost that can-
not be easily or cost-effectively traced to a cost object.
11. What are the three manufacturing costs for a manufacturing company? Describe each.
The three manufacturing costs for a manufacturing company are direct materials, direct labor, and
manufacturing overhead. Direct materials are materials that become a physical part of a finished
product and whose costs are easily traceable to the finished product. Direct labor is the labor cost of
the employees who convert materials into finished products. Manufacturing overhead includes all
manufacturing costs except direct materials and direct labor, such as indirect materials, indirect la-
bor, factory depreciation, factory rent, and factory property taxes.
12. Give five examples of manufacturing overhead.
Examples of manufacturing overhead include costs of indirect materials, indirect labor, repair and
maintenance in factory, factory utilities, factory rent, factory insurance, factory property taxes, man-
ufacturing plant managers’ salaries, and depreciation on manufacturing buildings and equipment.
13. What are prime costs? Conversion costs?
Prime costs are direct materials plus direct labor. Conversion costs are direct labor plus manufactur-
ing overhead. Note that direct labor is classified as both a prime cost and a conversion cost.
14. What are product costs for a manufacturing company?
Product costs are the cost of purchasing or making a product. These costs are recorded as an asset
and not expensed until the product is sold. Product costs for a manufacturing company include direct
materials, direct labor, and manufacturing overhead.
, Period costs for a manufacturing company are non-manufacturing costs that are expensed in the
same accounting period in which they are incurred, whereas product costs are recorded as an asset
and not expensed until the accounting period in which the product is sold.
16. How is cost of goods manufactured calculated?
Cost of Goods Manufactured is calculated as Beginning Work-in-Process Inventory + Total Manu-
facturing Costs Incurred during the Year – Ending Work-in-Process Inventory. Total Manufacturing
Costs Incurred during the Year = Direct Materials Used + Direct Labor + Manufacturing Overhead.
17. How does a manufacturing company calculate cost of goods sold? How is this different from a mer-
chandising company?
For a manufacturing company, the activity in the Finished Goods Inventory account provides the in-
formation for determining Cost of Goods Sold. A manufacturing company calculates Cost of Goods
Sold as Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending Finished
Good Inventory. In addition, a manufacturing company must track costs from Raw Materials Inven-
tory and Work-in-Process Inventory in order to compute Cost of Goods Manufactured used in the
previous equation.
For a merchandising company, the activity in the Merchandise Inventory account provides the in-
formation for determining Cost of Goods Sold. A merchandising company calculates Cost of Goods
Sold as Beginning Merchandise Inventory + Purchases and Freight In – Ending Merchandise Inven-
tory.
18. How does a manufacturing company calculate unit product cost?
A manufacturing company calculates unit product cost as Cost of Goods Manufactured / Total num-
ber of units produced.
19. How does a service company calculate unit cost per service provided?
A service company calculates unit cost per service provided as Total operating costs / Total number
of services provided.
20. How does a merchandising company calculate unit cost per item sold?
A merchandising company calculates unit cost per item sold as Total cost of goods sold / Total num-
ber of items sold.
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