Richmond, Inc., operates a chain of 44 department stores.

Two years ago, the board of directors

of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele.
Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant
controller, was asked to oversee the financial reporting for these test stores, and she and other
management personnel were offered bonuses based on the sales growth and profitability of these
stores. While completing the financial reports, Perlman discovered a sizable inventory of
outdated goods that should have been discounted for sale or returned to the manufacturer. She
discussed the situation with her management colleagues; the consensus was to ignore reporting
this inventory as obsolete because reporting it would diminish the financial results and their
bonuses.

1.
award:
1 out of
1 point

Requirement 1:
According to the IMA's Statement of Ethical Professional Practice, would it be ethical for
Perlman not to report the inventory as obsolete?
-2-2

Yes

No

Failure to report the obsolete nature of the inventory would violate the IMA's Statement of
Ethical Professional Practice as follows:

Competence
Perform duties in accordance with relevant technical standards. Generally accepted
accounting principles (GAAP) require the write-down of obsolete inventory.
Prepare decision support information that is accurate.

Integrity
Mitigate actual conflicts of interest and avoid apparent conflicts of interest.
Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Abstain from activities that would discredit the profession.

Members of the management team, of which Perlman is a part, are responsible for both
operations and recording the results of operations. Because the team will benefit from a bonus,
increasing earnings by ignoring the obsolete inventory is clearly a conflict of interest.
Furthermore, such behavior is a discredit to the profession.

Credibility
Communicate information fairly and objectively.
Disclose all relevant information.
Hiding the obsolete inventory impairs the objectivity and relevance of financial statements.

eBook Link
Yes / Difficulty: Learning Objective: 01-03 Understand the importance of upholding
No Easy ethical standards.

2.
award:
1 out of
1 point

Requirement 2:
Would it be easy for Perlman to take the ethical action in this situation?
-2-2

Yes

No

As discussed above, the ethical course of action would be for Perlman to insist on writing down
the obsolete inventory. This would not, however, be an easy thing to do. Apart from adversely
affecting her own compensation, the ethical action may anger her colleagues and make her very
unpopular. Taking the ethical action would require considerable courage and self-assurance.

eBook Link
[The following information applies to the questions displayed below.]

Bristow University is a large private school located in the Midwest. The university is headed by
a president who has five vice presidents reporting to him. These vice presidents are responsible
for, respectively, auxiliary services, admissions and records, academics, financial services
(controller), and the physical plant.
In addition, the university has managers over several areas who report to these vice
presidents. These include managers over central purchasing, the university press, and the
university bookstore, all of whom report to the vice president for auxiliary services; managers
over computer services and over accounting and finance, who report to the vice president for
financial services; and managers over grounds and custodial services and over plant and
maintenance, who report to the vice president for physical plant.
The university has four colleges—business, humanities, fine arts, and engineering and
quantitative methods—and a law school. Each of these units has a dean who is responsible to the
academic vice president. Each college has several departments.

3.
award:
1 out of
1 point

-2-2 http://ezto.mhhm.

Requirements 1 and 2:
Select whether each of these positions is a line position or a staff position.

a. University President Line position

b
Academic Vice President Line position
.
c. Managers reporting to Vice Presidents Staff position
d
Deans of the four colleges Line position
.

eBook Link
Difficulty: Learning Objective: 01-01 Understand the role of management
Worksheet
Easy accountants in an organization.
 -2-2

Requirements 1 and 2:
Select whether each of these positions is a line position or a staff position.

a. University President Line position

b
Academic Vice President Line position
.
c. Managers reporting to Vice Presidents Staff position
d
Deans of the four colleges Line position
.

Explanation:
Line positions include the university president, academic vice-president, the deans of the four
colleges, and the dean of the law school. In addition, the department heads (as well as the
faculty) are in line positions. The reason is that their positions are directly related to the basic
purpose of the university, which is education.

All other positions on the organization chart are staff positions. The reason is that these
positions are indirectly related to the educational process, and exist only to provide service or
support to the line positions.

4.
award:
1 out of
1 point

Requirement 3:
All positions would have a need for accounting information of some type.
-2-2

True

False

All positions would have need for accounting information of some type. For example, the
manager of central purchasing would need to know the level of current inventories and budgeted
allowances in various areas before doing any purchasing; the vice-president for admissions and
records would need to know the status of scholarship funds as students are admitted to the
university; the dean of the business college would need to know his/her budget allowances in
various areas, as well as information on cost per student credit hour; and so forth.
eBook Link
True / Difficulty: Learning Objective: 01-01 Understand the role of management
False Easy accountants in an organization.
5.
award:
0.89 out of
1 point

-2-2 http://ezto.mhhm.

The Dorilane Company specializes in producing a set of wood patio furniture consisting of a
table and four chairs. The set enjoys great popularity, and the company has ample orders to keep
production going at its full capacity of 4,100 sets per year. Annual cost data at full capacity
follow:

Factory labor, direct $91,000

Advertising $96,000
Factory supervision $72,000
Property taxes, factory building $23,000
Sales commissions $65,000
Insurance, factory $5,000
Depreciation, administrative office equipment $2,000
Lease cost, factory equipment $12,000
Indirect materials, factory $18,000
Depreciation, factory building $103,000
Administrative office supplies (billing) $4,000
Administrative office salaries $111,000
Direct materials used (wood, bolts, etc.) $434,000
Utilities, factory $46,000

Requirement 1:
Enter the dollar amount of each cost item under the appropriate headings. Note that each cost
item is classified in two ways: first, as variable or fixed with respect to the number of units
produced and sold; and second, as a selling and administrative cost or a product cost. (If the item
is a product cost, it should also be classified as either direct or indirect as shown.) (Leave no
cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your
response.)

Selling or
Cost behavior Administrative Product Cost
Cost item Variable Fixed Cost Direct Ind
Factory labor, direct $91,000 $0 $0 $91,000
 Advertising 0 96,000 96,000 0
Factory supervision 0 72,000 0 n/r 72
Property taxes, factory building n/r 23,000 n/r 0 23
Sales commissions 65,000 0 65,000 0
Insurance, factory 0 5,000 n/r 0 5
Depreciation, administrative office
equipment 0 2,000 2,000 0
Lease cost, factory equipment 0 12,000 0 n/r 12
Indirect materials, factory 18,000 0 n/r 0 18
Depreciation, factory building n/r 103,000 n/r n/r 103
Administrative office supplies 4,000 0 4,000 0
Administrative office salaries 0 111,000 111,000 0
Direct materials used 434,000 0 0 434,000

Utilities, factory 46,000 0 0 0 46

Total costs $658,000 $424,000 $278,000 $525,000 $279

Requirement 2:
Compute the average product cost of one patio set. (Round your answer to the nearest dollar
amount. Omit the "$" sign in your response.)

Average product per patio

cost $196 set

Requirement 3:
Assume that production drops to only 1,000 sets annually. Would you expect the average
product cost per set to increase, decrease, or remain unchanged?

Increase

Requirement 4:
Refer to the original data. The president's brother-in-law has considered making himself a patio
set and has priced the necessary materials at a building supply store. The brother-in-law has
asked the president if he could purchase a patio set from the Dorilane Company "at cost," and
the president agreed to let him do so.

(a
Would you expect any disagreement between the president and brother-in-law over the price?
)

Yes

(b)Because the company is operating at full capacity, what cost term used in the chapter might
be justification for the president to charge the full, regular price to the brother-in-law and still
be selling "at cost"?

Opportunity cost

eBook Links (3)

Learning Objective: 02-03 Distinguish Learning Objective: 02-07
Worksheet between product costs and period costs and Understand the differences between
give examples of each. direct and indirect costs.
Learning Objective: 02-06 Understand the
Difficulty:
differences between variable costs and
Medium
fixed costs
[The following information applies to the questions displayed below.]

Selected account balances for the year ended December 31 are provided below for Superior
Company:

Selling and administrative salaries $ 85,000

Purchases of raw materials $ 260,000
Direct labor ?
Advertising expense $ 215,000
Manufacturing overhead $ 341,000
Sales commissions $ 34,000

Inventory balances at the beginning and end of the year were as follows:

Beginning End of
of Year Year
Raw materials $ 51,000 $ 40,000
Work in process ? $ 33,000
Finished goods $ 31,000 ?

The total manufacturing costs for the year were $675,000; the goods available for sale totaled
$720,000; and the cost of goods sold totaled $634,000.

6.
award:
1 out of
1 point

-2-2 http://ezto.mhhm.

Requirement 1:
(a Prepare a schedule of cost of goods manufactured. (Input all amounts as positive values.
) Omit the "$" sign in your response.)

Superior Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Direct materials:
 Raw materials inventory, beginning $ 51,000

Add : Purchases of raw materials 260,000

Raw materials available for use 311,000

Deduct : Raw materials inventory, ending 40,000

Raw materials used in production $ 271,000

Direct labor 63,000

Manufacturing overhead 341,000

Total manufacturing costs 675,000

Add : Work in process inventory, beginning 47,000

722,000

Deduct : Work in process inventory, ending 33,000

Cost of goods manufactured $ 689,000

(b)Prepare the cost of goods sold section of the company's income statement for the year. (Input
all amounts as positive values. Omit the "$" sign in your response.)

Finished goods inventory, beginning $ 31,000

Add : Cost of goods manufactured 689,000

Goods available for sale 720,000

Deduct : Finished goods inventory, ending 86,000

Cost of goods sold $ 634,000

eBook Links (5)

Worksheet Learning Objective: 02-03 Learning Objective: 02-06
Distinguish between product Understand the differences
 costs and period costs and give between variable costs and
examples of each. fixed costs.
Learning Objective: 02-04
Prepare an income statement
Difficulty: Medium
including calculation of the cost
of goods sold.
Learning Objective: 02-02
Learning Objective: 02-05
Identify and give examples of
Prepare a schedule of cost of
each of the three basic
goods manufactured.
manufacturing cost categories.

-2-2

Requirement 1:
(a Prepare a schedule of cost of goods manufactured. (Input all amounts as positive values.
) Omit the "$" sign in your response.)

Superior Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Direct materials:
51,000
Raw materials inventory, beginning
$
260,000
Add : Purchases of raw materials

311,000
Raw materials available for use

40,000
Deduct : Raw materials inventory, ending

271,000
Raw materials used in production
$
63,000
Direct labor

341,000
Manufacturing overhead

675,000
Total manufacturing costs

47,000
Add : Work in process inventory, beginning
 722,000

33,000
Deduct : Work in process inventory, ending

689,000
Cost of goods manufactured
$

(b)Prepare the cost of goods sold section of the company's income statement for the year. (Input
all amounts as positive values. Omit the "$" sign in your response.)

31,000
Finished goods inventory, beginning
$
689,000
Add : Cost of goods manufactured

720,000
Goods available for sale
86,000
Deduct : Finished goods inventory, ending

634,000
Cost of goods sold
$

7.
award:
1 out of
1 point

-2-2 http://ezto.mhhm.

Requirement 2:
Assume that the dollar amounts given above are for the equivalent of 30,000 units produced
during the year. Compute the average cost per unit for direct materials used and the average cost
per unit for manufacturing overhead. (Round your answers to 2 decimal places. Omit the "$"
sign in your response.)
 Direct materials $ 9.03 per unit
Manufacturing
overhead $ 11.37 per unit

eBook Links (5)

Learning Objective: 02-03 Learning Objective: 02-06
Distinguish between product Understand the differences
Worksheet
costs and period costs and give between variable costs and
examples of each. fixed costs.
Learning Objective: 02-04
Prepare an income statement
Difficulty: Medium
including calculation of the cost
of goods sold.
Learning Objective: 02-02
Learning Objective: 02-05
Identify and give examples of
Prepare a schedule of cost of
each of the three basic
goods manufactured.
manufacturing cost categories.

-2-2

Requirement 2:
Assume that the dollar amounts given above are for the equivalent of 30,000 units produced
during the year. Compute the average cost per unit for direct materials used and the average cost
per unit for manufacturing overhead. (Round your answers to 2 decimal places. Omit the "$"
sign in your response.)

9.03
Direct materials
$ per unit
Manufacturing 11.37
overhead $ per unit

Explanation:
Direct materials: $271,000 ÷ 30,000 units = $9.03 per unit.
Manufacturing overhead: $341,000 ÷ 30,000 units = $11.37 per unit.

8.
award:
1 out of
1 point

-2-2 http://ezto.mhhm.

Requirement 3:
Assume that in the following year the company expects to produce 51,000 units and
manufacturing overhead is fixed. What average cost per unit and total cost would you expect to
be incurred for direct materials? For manufacturing overhead? (Assume that direct materials is a
variable cost.) (Round per unit to 2 decimal places. Omit the "$" sign in your response.)

Per unit Total

Direct materials $ 9.03 $ 460,530
Manufacturing overhead $ 6.69 $ 341,000

eBook Links (5)

Learning Objective: 02-03 Learning Objective: 02-06
Distinguish between product Understand the differences
Worksheet
costs and period costs and give between variable costs and
examples of each. fixed costs.
Learning Objective: 02-04
Prepare an income statement
Difficulty: Medium
including calculation of the cost
of goods sold.
Learning Objective: 02-02
Learning Objective: 02-05
Identify and give examples of
Prepare a schedule of cost of
each of the three basic
goods manufactured.
manufacturing cost categories.