Solution Manual for
Horngren's Managerial Chapters Accounting, 7th Edition by Tracie
Chapter 1-11
Chapter 1
Introduction to Managerial Accounting
Review Questions
1. The primary purpose of managerial accounting is to provide information to help managers plan,
direct, control, and make decisions.
2. 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
restrictions, (5) scope of information, and (6) behavioral.
3. Line positions are directly involved in providing goods or services to customers. Staff positions
support line positions.
4. 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.
, 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. Service companies sell time, skills, and knowledge. Examples of service companies include phone
service companies, banks, cleaning service companies, accounting firms, law firms, medical
physicians, and online auction services.
7. 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.
Examples of merchandising companies include toy stores, grocery stores, and clothing stores.
8. Merchandising companies resell products they previously bought from suppliers, whereas
manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into
new finished products. In contrast to merchandising companies, manufacturing companies have a
broad range of production activities that require tracking costs on three kinds of inventory.
9. 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
Inventory 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. A direct cost is a cost that can be easily and cost-effectively traced to a cost object (which is
anything for which managers want a separate measurement of cost). An indirect cost is a cost that
cannot be easily or cost-effectively traced to a cost object.
11. 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
labor, factory depreciation, factory rent, and factory property taxes.
12. 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,
manufacturing plant managers’ salaries, and depreciation on manufacturing buildings and
equipment.
13. Prime costs are direct materials plus direct labor. Conversion costs are direct labor plus
manufacturing overhead. Note that direct labor is classified as both a prime cost and a conversion
cost.
14. 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 include direct materials, direct labor, and
manufacturing overhead.
15. Period costs 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. Cost of Goods Manufactured is calculated as Beginning Work-in-Process Inventory + Total
Manufacturing 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. For a manufacturing company, the activity in the Finished Goods Inventory account provides the
information 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 Inventory 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
information for determining Cost of Goods Sold. A merchandising company calculates Cost of
Goods Sold as Beginning Merchandise Inventory + Purchases and Freight In – Ending Merchandise
Inventory.
18. A manufacturing company calculates unit product cost as Cost of Goods Manufactured / Total
number of units produced.
19. A service company calculates unit cost per service as Total operating costs / Total number of
services provided.
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