Management and Cost Accounting, 10th Edition Solution Manual

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SOLUTIONS TO REAL WORLD VIEWS QUESTIONSREAL WORLD VIEWS 1.1Chartered institute of management accountants (CIMA)–activities andskillsQuestion1.Provide more detailed illustrations for each of the first four items in the firstcategory of the above list of how the management accountant can be ofassistance in an organization with which you are familiar.Outline answer1.Advise managers about the financial implications of projectsManagement accountants aim to provide information to help managersmake better decisions by providing financial information on the profitabilityand risks to be considered when evaluating alternative projects. The finaldecision will be taken by senior managers based on the information providedand the advice given by the management accountant. The role of themanagement accountant tends to be as an information provider rather thana decision-maker, although the management accountant is likely to have avery significant influence on the decisions made by senior management.Explain the financial consequences of business decisionsBesides providing written reports on the financial consequences of thealternatives decisions being considered the management accountant shouldalso verbally explain and interpret the information provided to seniormanagers. In particular, the management accountant acts as an advisor byproviding business support to mangers relating to the financial and the non-financial consequences of alternatives being considered.Formulate business strategyA business strategy relates to the courses of action that must be taken toachieve an organization’s overall objectives. Management accountants arefrequently members of the senior management team that identify thosestrategic options that have the greatest potential for achieving the company’sobjectives. In order to make an informed choice regarding the alternativestrategies management accountants generate data relating to alternativestrategies. For example, information may be generated relating to:•The projected growth rates of the alternatives being considered•The market share the company is likely to achieve•The profits for each alterative being considered.Monitor spending and financial controlTo monitor performance, the management accountant provides feedbackinformation in the form of performance reports relating to activities forwhich managers are responsible. These performance reports compare actual

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spending with planned spending at regular intervals so that managers cantake corrective action to ensure that future spending/outcomes conformwith planned spending/outcomes. Alternatively, the plans may requiremodification if the comparisons indicate that the plans are no longerattainable.REAL WORLD VIEWS 1.2The internet of things–new products andservicesQuestion1.Can you think of any barriers to entry for a business entering the market forIoT sensors or similar?Outline answer1.One potential barrier to entry to the development of IoT sensors is know-howand/or access to research and developmentfacilities. Another barrier may beaccess to a suitable network (such as a low-power Wide Area Network) onwhich to transmit data. Capital required to invest in sensor manufacture mayalso be an issue, although manufacturing could be outsourced.REAL WORLD VIEWS 1.3Changing product life cycles: Consumer medical devicesQuestions1.Do you think the costs of the electronic components in an iPod/iPad are moreor less than those in a medical device like a blood pressure monitor?2.Would decreasing the product life cycle of medical devices, or medicaldevices being more like consumer electronics pose any risks formanufacturers?Outline answers1.The costs of components in a typical consumer electronic device (like aniPod) are likely to be much less than those of medical devices, as they arelikely to be produced in larger volumes and are subject to less rigoroustesting and development.2.One possible risk could be less time to full test components for fitness ofpurpose. Another risk could be the productis not matched to patient needs,as less time may be available for testing/ prototyping. There may also be lesstime to building adequate fault tolerance, redundancy and user interfaces.These risks need to be weighed-up against the benefits of a faster time tomarket and/or the improved patient benefits.

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REAL WORLD VIEWS 1.4A look at a key feature of easyJet’s businessQuestion1.How can the management accounting function provide information tosupport a low cost strategy?Outline answer1.The following lists some examples of how the management accountingfunction could provide useful information to support a low-cost strategy:•Regular and detailed information on all costs–e.g. fuels, staff, landingcharges.•Ensuring managers fully understand the cost structure of thebusiness. For example, clearly informing managers on what aredefined as fixed costs and variable costs.•Provide managers with information on how changes in cost elementse.g. fuel, travel taxes, may affect the profit margin and, in turn, fareprices.•Assess risks of price rises in key costs components, e.g. fuel, and takeactions to minimize risk e.g. forward-buying of fuel.•Assess various strategic options e.g. buy or lease aircraft.•Provide a detailed analysis of revenues, so that managers can identifywhere profits are best made.REAL WORLD VIEWS 2.1Industry cost structuresQuestions1.How might performance measurement and management vary betweendifferent industries?2.Provide examples of direct labour, direct materials and indirectcosts for thedifferent industries mentioned above.Outline answers1.A firm’s choice of a performance measurement system and the emphasisgiven to performance measures will be influenced by the strategy that itadopts. For example, a firm that competes onthe basis of price will focus onminimizing costs and emphasize cost-based and efficiency measures in itsperformance measurement system whereas a firm that focuses on product orservice quality will give greater emphasis to quality measures. Some firmsfocus on developing innovative new products and such firms will tend toemphasize marketing measures such as percentage of market share,

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percentage of sales from new products/markets and time from developingnew products to introducing them to the market.The cost structure will also influence the emphasis given to differentperformance measures. The proportion and magnitude of costs relating todirect labour, direct materials and various indirect costs will determine theemphasis given in the reporting system to the different cost categories.2.Cost classification depends on the cost objective. A transport company(distribution) delivers goods to different customers. Where the customer isthe cost objective the driver’s wages will represent direct labour andthepetrol costs direct materials/supplies. Administration costs representoverhead costs.In a departmental store (retailing) where the different departments are thecost objective the purchased goods displayed in a particular departmentrepresent directmaterials whereas staff assigned to a particular departmentare direct labour costs. The salaries paid to the administrative staff areindirect/overhead costs.In a firm of accountants (service organization) clients may represent the costobjective. Labourcosts based on the amount of time an accountant devotesto a particular client are direct labour costs. Material costs will be minimaland may include stationery required to service a particular client. Officelighting and heating would represent indirectcosts.REAL WORLD VIEWS 2.2Cost structures in the airline sectorQuestions1.Do you agree that the variable cost associated with a passenger can be zero?Can this be said for both low-cost and traditional carriers2.What options do more traditional carriers have to improve their fixed costbase?Outline answers1.The view that the variable cost is zero is most likely not true. However, a viewcould be formed that the variable cost is negligible or close to zero. It couldbe argued that traditional airlines who offer services such as free meals topassengers incur more variable costs as passenger numbers increase on aflight.2.A greater proportion of fixed costs for all airlines is likely to lie in aircraftpurchase costs and aircraft operating costs (such as regular maintenance).Other fixed costs include the typical fixed costs of any business, such asadministration costs. If a more traditional airline wishes to decrease its fixedcost base without impacting on service, it could for example lease rather thanpurchase aircraft. This may imply that some elements of maintenance and/or

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re-fitting of aircraft may be suffered by the ultimate owner of the aircraft.Another possible option is to increase the use of technology. For example,carriers like American Airlines send a bar-coded boarding pass to smartphones–cutting out check in costs such as staff and printing cost.REAL WORLD VIEWS 2.3We must stop falling into the ‘sunk costs’ fallacyQuestions1.What are the relevant costs and benefits relating to the Garden Bridge?2.Why might managers be reluctant to abandon loss-making projects?Outline answers1.The relevant costs and benefits are the future costs and benefits of going aheadin the construction of the bridge. Costs that have already been incurred, such asthe design costs, are sunk costs and not relevant to the decision. It is importantthat qualitative factors, such as the time saved by users of the bridge, and theaesthetic aspects are considered as relevant benefits.2.Managers may be reluctant to abandon loss-making projects because they wishto defer the highlighting of the outcomes of bad decisions which are likely to bereported in the near future. In other words they wish to defer or hide the badpublicity arising from poor decisions.REAL WORLD VIEWS 2.4Opportunity costs and auto bail-outsQuestions1.Why might opportunity costs not be considered when making decisions?2.Provide examples of opportunity costs that you might incur.Outline answers1.Opportunity costs are not recorded in the accounting system since they donot involve cash outlays or commitments to future expenditure. To ascertainthe opportunity cost of a course of action it is necessary to consider the lostopportunities from pursuing the course of action. Because opportunity costsare not recorded in the accounting system and can be difficult to identifythere is a danger that they are not taken into account.2.Examples are provided in Chapter 2 of opportunity costs that might beincurred at the individual non-business level. Another example is the interestforegone by not pursuing an investment because the funds are used for otherpurposes.

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REAL WORLD VIEWS 2.5Incremental and marginal costs: Marginal costs of downloadableproductsQuestions1.Do you agree the marginalcost of downloaded software or music is nil?2.What marginal costs, if any, might be incurred by the provider of the serverswhere software/music is downloaded from?Outline answers1.It could be argued that the cost of software support is a marginal cost.Thismay be the case particularly in the case of telephone support available withsome software products.2.It could be argued that each download increases the internet bandwidth andserver processing capacity and these are marginal costs that could be passedon to customer (i.e. software developers, music firms etc). Arguably, thesecosts might also be construed as marginal for each individual purchaser too.However, the marginal cost is so small, it is likely to be immaterial and henceignored.REAL WORLD VIEWS 3.1Absorption costing used in practiceQuestions1.Why do you think absorption costing is more likely to be used by largerbusinesses?2.What difficulties might be faced by smaller firms who may want to utilizeabsorption costing?Outline answers1.Arguably, larger businesseshave more complex cost structures and will wantto ensure all costs, both fixed and variable, are included in product costs.Larger firms are more likely to complex management accounting systems tocapture costs.2.In smallerfirms, there may befewermanagement accounting staff, or evennone. There may also be less formal management accounting systems whichare not readily able to capture.

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REAL WORLD VIEWS 3.2Three cost allocation mythsQuestions1.Explain how applying each of the above three myths can lead to baddecisions.2.What changes should be made to cost allocations to avoid the bad decisions?Outline answers1.In the article Allan Stratton provides the following illustrations:Myth 1–In one company I worked for, we produced and sold millionsof small, inexpensive parts as well as thousands of complete,expensive assemblies. Had we allocated cost based of volume as someadvocate, the small parts would have been very unprofitable. Yet theycontributed a healthy partof our bottom line. A decision based oninaccurate information would have been a disaster.The use ofarbitrary allocations (see Chapter 3) should be avoided since they willlead to misleading decisions.Myth 2–Consider the costs of employing company executives such asthe CEO and CFO. For a multiproduct company, whether or not thecompany offers one particular product or not will not affect thesecosts–They will neither increase nor decrease. So why allocate thesecosts at all. A better approach would be to hold these separate asbusiness sustaining costs. Then the portfolio of products and servicesneeds to cover these costs and to provide the expected profit.Myth 3–When asked to pay higher prices with no added value,customers take their ordersto competitors. As order volume drops,there is more idle capacity causing even higher products costs. Thenwith higher costs, the company again raises prices. And so on untilthey company is bankrupt. Much better to identify idle capacity, holdthis costseparate and deal with it. Idle capacity is not theresponsibility of the product produced. Rather, management musttake full responsibility to find new opportunities to sell or to disposeof this capacity.2.Only cause-and-effect allocations should be used.Costs where cause-and-effect allocations cannot be established should be regarded as businesssustaining costs and charged as a lump sum against the contributions ofallproducts that benefit from these business sustaining costs.

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REAL WORLD VIEWS 3.3Product diversity and costing system design choiceQuestions1.Why might increasing the number of cost centres (pools) result in thereporting of more accurate product costs?2.What other factors, besides product diversity, might enable a simplisticproduct costing system to report reasonably accurate product costs?Outline answers1.Increasing the number of cost centres automatically increases the likelihoodthat costs of performing each activity/task of a cost centre is more accuratelycaptured. For example, labour, material and all other costs centre costs canbe identified, whereas this may not have previously occurred in afunctional/departmental setup. In turn, when the costs of a cost centre aremore accurate, it may be possible to more accurately attribute the runningcosts of the cost centre to products/services, which may result in a moreaccurate product/service cost.2.The case presented in REAL WORLD VIEWS 3.3 has low product diversity.Other instances where a simplistic costing system may sufficemay include:•An industry or sector where one cost element makes up a largecomponent of cost. For example, in some electronics firms, the cost ofmetals such as copper comprise the vast majority of cost (in somecases 70-80%). Thus, other cost elements receive less attention in costestimates and reporting.•A business makes only a single product, where costs are relativelystable.•A business has few, mainly fixed costs, and instead revenues are themain focus. Many online businesses fall into this category.REAL WORLD VIEWS 3.4Overheads in cafésQuestions1.Can you think of some examples of overhead costs that might be incurred bycafés such as those described above?2.How would these overheads affect profit if sales declined?Outline answers1.Typicaloverhead costs of a franchise type café might include rent of thepremises, light and heat, franchise fees (depending on the franchisingagreement), advertising and promotion and salaries of a café manager.

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2.If sales decline, then assuming fixed costs cannot be altered, profits willdecline. Some fixed costs may be subject to negotiation or change e.g. alowermanager'ssalary, but other fixed costs (e.g. rent) may be subject to alonger term agreement and difficult to change. Thus, business owners andmanagers need to consider the level of fixed costs they are committing to.REAL WORLD VIEWS 4.1Commercial Metals changes the method it uses to value inventoriesQuestions1.Why did the company apply the change in valuation method retrospectivelyfor someof its segments but did not make retrospective changes to itsInternational Marketing and Distribution segment?2.What do you think is meant by the term ‘specific identification method’ oftracking inventories?Outline answers1.Presumably the change in method resulted in significant differences inreported profits and inventories.Therefore the company applied all of thechanges to prior accounting periods so that appropriate comparisons withpast accounting periods could be made.Where the change did not result insignificant changes to reported profits and inventories changes to prioraccounting periods were not made.2.The websitewww.accountingtools.com/articles/2017/5/8/specific-identification-methodstates that the specific identification method refersto the tracking and costing ofinventorybased on the movement ofspecific, identifiable inventory items in and out of stock. This method isapplicable when individual items can be clearly identified, such as with aserial number, stamped receipt date, or RFID tag.The principle requirements of a specific identification tracking systemare:•Be able to track each inventory item individually. The easiestmethodis a durable metal or paper label that contains a serialnumber. Alternatively, a radio frequency identification tag cancontain a unique number that identifies the product.•Be able to track the cost of each item individually. The accountingsystem shouldclearly identify the cost of each purchased item, andassociate it with a unique identification number.•Be able to relieve inventory for the specific cost associated with aninventory item when it is sold.These requirements can be achieved with a simple accounting system,possibly just an electronic spreadsheet, which makes the specific

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identification method applicable to smaller businesses (especially whenunit volumes are low).REAL WORLD VIEWS 4.2Accounting procedure for labour costs–recording labour time onconstruction projectsQuestions1.If your business were using the Job Clock, would you pay all employees by theminute worked?2.Do you think smartphones could be used to track time worked by mobileemployees?Outline answers1.Typically a graceperiod is allowable, whereby employees could be up to 5minutes late without deductions of pay. Any such policy can be set by abusiness and should be controlled to maintainpayroll costs and employeeefficiency.2.It would be possible. GPS applications are available and could be used totrack the location of staff. Equally, applications could be installed on asmartphone whereby employee could record their work time/locations. TheExaktime company actually offers a time-tracking app for the iPhone andother smart phones.REAL WORLD VIEWS 4.3Cost tracking using ERPS softwareQuestions1.Can you think of any reason why management accounting data and financialaccounting data might be separated in a business?2.Would you expect accounting software to storemore detailed informationfor management accounting purposes than for external reporting? Can youthink of any examples?Outline answers1.With integrated accounting software, and converging international financialreporting standards, the separation of management accounting and financialaccounting data is increasingly less likely. Some countries may still have acomplex taxation system which drives financial reporting (e.g. Germany). Thismay result in management accounting systems still being quite separate.

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Even in such cases however, more convergence of the two branches isoccurring.2.Yes, typically. As an example, financial accounting might need to only have atotal labour cost figure to be displayed on an income statement report. Incontrast, managersmight need labour costs analysed by cost centre, processor product for example. With integrated accounting software, these differentlevels of cost detail are readily provided however.REAL WORLD VIEWS 5.1The brewing process at SAB MillerQuestions1.When does the ‘product’ materialize in the brewing process describedabove?2.Would you imaginethere is any wastein the brewing process?Outline answers1.The beer ‘product’ is not recognizable until the end of the brewing process.As suggested in the RWV,the product–be it in a bottle, can or keg–is at thevery end of the brewing process.2.The website provides some really useful ways brewing by-products are re-used–in baking, as animal feed, compost and even waste-to-energy.REAL WORLD VIEWS 5.2Producing a world-famous whiskeyQuestions1.Why is job costing not appropriate to a process such as whiskey production?2.Do you think losses of spirit might occur during the maturation process?Outline answers1.As described above, the making of whiskey isa process and the final product(i.e. the saleable bottle) only emerges at the end of the process.2.The Bushmills web site refers to the‘angels share’, which is a portion of thespirit which is lost to evaporation through the wood barrels during thematuration process.

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REAL WORLD VIEWS 5.3Losses in processes–reducing process waste in UHT milk productionQuestions1.Do you think waste which is regarded as ‘normal’ in a process should remainunchallenged?2.How would you value waste in the UHT milk production described above?Outline answers1.While most processes have some level of normally acceptable waste,technologies change constantly which may eliminate or reduce waste thatwas previously acceptable. In addition, as waste disposal costs increase understricter environmental protection legislation, waste reduction programmesmay be a worthwhile exercise for a business.2.Normally, any expected process losses are included in the cost of goodoutput and valued at the equivalent unit cost. In this scenario describedabove, if the losses are due to equipment cleaning, this might be treated asan abnormal loss as arguably cleaning times could be scheduled to avoidlosses of product.REAL WORLD VIEWS 6.1Accounting for by-products–by-products of gold miningQuestions1.Assuming the uranium by-product of a gold mine could be sold, how wouldan accountant consider whether or not it is worthwhile financially?2.What factors apart from cost might be considered in the decision?Outline answers1.The market price of the uranium is one factor. Another factor is the volumeof uranium available for sale. All costs should be considered in the decisione.g. shipping costs, further processing costs, cost of storage if unsold, costs ofsecuring the product etc.2.One factor which might be considered is environmental effects. If theuranium is stored, how will this affect the local environment e.g. watersupply, health of local citizens, radiation levels etc. Long term, these factorsmight affect the reputation of the firm in terms of any sustainable orenvironmentally

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REAL WORLD VIEWS 6.2Environmentally friendly products from paper mill sludgeQuestions1.Assuming paper mills decide to sell their sludge for a small fee, how mightthey account for the revenue generated?2.Can you think of any other ‘waste’ by-products that are re-used rather thandisposed of?Outline answers1.Given the fact that the sludge is a waste by-product, and the fee is small, it islikely that the paper mill might simply credit any revenue from sludgecollection into a materials account or cost of production account.2.There are many possible answers to this question. Two example are givenbelow:a.Old tyres from garages can be used to make rubber mats/tiles forplaygrounds.b.Waste oil from industrial processing, garages and even fast foodoutlets can be'cleaned'and re-used/sold for heating purposes.REAL WORLD VIEWS 7.1Variable costing–use of variable costingQuestions1.Do you think variable costing is more likely to be used by manufacturing orservice sector firms?2.Do you think integrated accounting information system would be able toproduce internal profitstatements using variable costing?Outline answers1.Service sector firms (e.g. financial institutions, web hosting firms) are morelikely to have a greater degree of fixed costs and may be less likely to adoptvariable costing as a method to report internally.2.An integrated accounting system should have no issue with any format ofprofit provided cost information has been classified correctly.

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REAL WORLD VIEWS 7.2Maintaining and improving profits at M-realQuestions1.If your business wanted to improve profits by focusing on first fixed costs andthen variable costs, what form of profit report might you use internally: onebasedon absorption costing or one based on variable costing?2.What do you think would be the main variable cost for a paper company likeM-real? Are there any ways in which a paper company might control thisvariable cost? Do some internet research on other paper companies to helpyou decide.Outline answers1.It might be best to separate out fixed costs so they are more readilyidentifiable, thus a variable costing profit statement might be more suitable.2.The main cost is the paper raw material–assuming thepaper is bought in.Labour costs are likely to be treated as a fixed cost, as the level of automationin the industry is high. If a paper company owns land, it can plant and harvestits own lumber to make paper, which would help control the price. If paper isbought in, this may not be possible.REAL WORLD VIEWS 8.1Airbus A380 likely to breakeven in 2015Questions1.Is it true to say that any A380 aircraft sold before break even has beenachieved is making a loss?2.Can you think of some major fixed costs likely to be incurred on the A380 byAirbus?Outline answers1.Any aircraft sold before breakeven has been reached does not recover allfixed costs incurred–breakeven is when contribution = fixed costs. Thus, allsuch aircraft are essentially loss making.2.A major fixed cost is likely to be the research, design and developmentbehind such an aircraft. FlightGlobal suggests development costs could be asmuch as $12.2 billion. While we cannot be sure what would be included insuch development costs, it mayor may not include other fixed costs such asthe construction of new manufacturing facilities. One could also argue thatany staff associated with the on-going support of the A380 are likely to be

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highly specialized, and may be considered a fixed cost. This is likely to besubstantially less than the other two mentioned above however.REAL WORLD VIEWS 8.2Why is the break-even price of crude oil so important?Questions1.Why will a decline in production have a positive impact on oil prices?2.Why does thebreak-even price in the above chart differ according to thelocation of the oil wells?3.Is the break-even price of crude oil more important than the break-evenvolume?Outline answers1.A decline in the production of crude oil will result in a decline in total supplyand, based on supply and demand relationships, demand may exceed supplyresulting in pressures for an increase in prices in the longer term.2.The break-even price of crude oil includes production cost, exploring orfinding cost, oil well development cost, transportation cost and selling andgeneral administration expenses. Most of the costs incurred by oil producersare fixed and sunk costs and will differ according to the location of the oilfields arising from the different terrain (e.g. land-based or sea-based, ease ofdrilling etc.). Thus significant differences in fixed and variable costs will applyresulting in major differences in break-even oil prices. For example,petroleum extraction in the Arctic region shows the highest breakeven priceof $75 per barrel. On the other hand, Middle Eastern countries have thelowest price at $27 per barrel. US shale oil producers have a breakeven priceof $65 per barrel.3.For oil production the break-even price is likely to be more important sincethe break-even volume is required to determine the break-even price.Because the price of oil fluctuates and is subject to uncertainty then knowingthe break-even price is important to determine whether production shouldbe undertaken at the market-determined price.REAL WORLD VIEWS 8.3Airlines struggling to break even will make ‘less than £4 profit perpassenger’Questions1.Is break even a good performance monitor over the longer term?

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