Solution Manual For Cost Accounting, 14th Edition
Solution Manual For Cost Accounting, 14th Edition makes solving textbook questions easier with expertly crafted solutions.
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1-1
CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
1-1 Management accounting measures, analyzes and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors,
government agencies, and banks. It measures and records business transactions and provides
financial statements that are based on generally accepted accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the
past), and (2) management accounting influences the behavior of managers and other employees
(rather than primarily reporting economic events).
1-2 Financial accounting is constrained by generally accepted accounting principles.
Management accounting is not restricted to these principles. The result is that
• management accounting allows managers to charge interest on owners’ capital to help
judge a division’s performance, even though such a charge is not allowed under
GAAP,
• management accounting can include assets or liabilities (such as “brand names”
developed internally) not recognized under GAAP, and
• management accounting can use asset or liability measurement rules (such as present
values or resale prices) not permitted under GAAP.
1-3 Management accountants can help to formulate strategy by providing information about
the sources of competitive advantage—for example, the cost, productivity, or efficiency
advantage of their company relative to competitors or the premium prices a company can charge
relative to the costs of adding features that make its products or services distinctive.
1-4 The business functions in the value chain are
• Research and development—generating and experimenting with ideas related to new
products, services, or processes.
• Design of products and processes—the detailed planning, engineering, and testing of
products and processes.
• Production—procuring, transporting, storing and assembling resources to produce a
product or deliver a service.
• Marketing—promoting and selling products or services to customers or prospective
customers.
• Distribution—processing orders and shipping products or services to customers.
• Customer service—providing after-sales service to customers.
CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
1-1 Management accounting measures, analyzes and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors,
government agencies, and banks. It measures and records business transactions and provides
financial statements that are based on generally accepted accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the
past), and (2) management accounting influences the behavior of managers and other employees
(rather than primarily reporting economic events).
1-2 Financial accounting is constrained by generally accepted accounting principles.
Management accounting is not restricted to these principles. The result is that
• management accounting allows managers to charge interest on owners’ capital to help
judge a division’s performance, even though such a charge is not allowed under
GAAP,
• management accounting can include assets or liabilities (such as “brand names”
developed internally) not recognized under GAAP, and
• management accounting can use asset or liability measurement rules (such as present
values or resale prices) not permitted under GAAP.
1-3 Management accountants can help to formulate strategy by providing information about
the sources of competitive advantage—for example, the cost, productivity, or efficiency
advantage of their company relative to competitors or the premium prices a company can charge
relative to the costs of adding features that make its products or services distinctive.
1-4 The business functions in the value chain are
• Research and development—generating and experimenting with ideas related to new
products, services, or processes.
• Design of products and processes—the detailed planning, engineering, and testing of
products and processes.
• Production—procuring, transporting, storing and assembling resources to produce a
product or deliver a service.
• Marketing—promoting and selling products or services to customers or prospective
customers.
• Distribution—processing orders and shipping products or services to customers.
• Customer service—providing after-sales service to customers.
1-1
CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
1-1 Management accounting measures, analyzes and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors,
government agencies, and banks. It measures and records business transactions and provides
financial statements that are based on generally accepted accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the
past), and (2) management accounting influences the behavior of managers and other employees
(rather than primarily reporting economic events).
1-2 Financial accounting is constrained by generally accepted accounting principles.
Management accounting is not restricted to these principles. The result is that
• management accounting allows managers to charge interest on owners’ capital to help
judge a division’s performance, even though such a charge is not allowed under
GAAP,
• management accounting can include assets or liabilities (such as “brand names”
developed internally) not recognized under GAAP, and
• management accounting can use asset or liability measurement rules (such as present
values or resale prices) not permitted under GAAP.
1-3 Management accountants can help to formulate strategy by providing information about
the sources of competitive advantage—for example, the cost, productivity, or efficiency
advantage of their company relative to competitors or the premium prices a company can charge
relative to the costs of adding features that make its products or services distinctive.
1-4 The business functions in the value chain are
• Research and development—generating and experimenting with ideas related to new
products, services, or processes.
• Design of products and processes—the detailed planning, engineering, and testing of
products and processes.
• Production—procuring, transporting, storing and assembling resources to produce a
product or deliver a service.
• Marketing—promoting and selling products or services to customers or prospective
customers.
• Distribution—processing orders and shipping products or services to customers.
• Customer service—providing after-sales service to customers.
CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
1-1 Management accounting measures, analyzes and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors,
government agencies, and banks. It measures and records business transactions and provides
financial statements that are based on generally accepted accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the
past), and (2) management accounting influences the behavior of managers and other employees
(rather than primarily reporting economic events).
1-2 Financial accounting is constrained by generally accepted accounting principles.
Management accounting is not restricted to these principles. The result is that
• management accounting allows managers to charge interest on owners’ capital to help
judge a division’s performance, even though such a charge is not allowed under
GAAP,
• management accounting can include assets or liabilities (such as “brand names”
developed internally) not recognized under GAAP, and
• management accounting can use asset or liability measurement rules (such as present
values or resale prices) not permitted under GAAP.
1-3 Management accountants can help to formulate strategy by providing information about
the sources of competitive advantage—for example, the cost, productivity, or efficiency
advantage of their company relative to competitors or the premium prices a company can charge
relative to the costs of adding features that make its products or services distinctive.
1-4 The business functions in the value chain are
• Research and development—generating and experimenting with ideas related to new
products, services, or processes.
• Design of products and processes—the detailed planning, engineering, and testing of
products and processes.
• Production—procuring, transporting, storing and assembling resources to produce a
product or deliver a service.
• Marketing—promoting and selling products or services to customers or prospective
customers.
• Distribution—processing orders and shipping products or services to customers.
• Customer service—providing after-sales service to customers.
1-2
1-5 Supply chain describes the flow of goods, services, and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
Cost management is most effective when it integrates and coordinates activities across all
companies in the supply chain as well as across each business function in an individual
company’s value chain. Attempts are made to restructure all cost areas to be more cost-effective.
1-6 “Management accounting deals only with costs.” This statement is misleading at best,
and wrong at worst. Management accounting measures, analyzes, and reports financial and non-
financial information that helps managers define the organization’s goals, and make decisions to
fulfill them. Management accounting also analyzes revenues from products and customers in
order to assess product and customer profitability. Therefore, while management accounting
does use cost information, it is only a part of the organization’s information recorded and
analyzed by management accountants.
1-7 Management accountants can help improve quality and achieve timely product deliveries
by recording and reporting an organization’s current quality and timeliness levels and by
analyzing and evaluating the costs and benefits—both financial and non-financial—of new
quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer
service.
1-8 The five-step decision-making process is (1) identify the problem and uncertainties (2)
obtain information (3) make predictions about the future (4) make decisions by choosing among
alternatives and (5) implement the decision, evaluate performance and learn.
1-9 Planning decisions focus on selecting organization goals and strategies, predicting results
under various alternative ways of achieving those goals, deciding how to attain the desired goals,
and communicating the goals and how to attain them to the entire organization.
Control decisions focus on taking actions that implement the planning decisions, deciding
how to evaluate performance, and providing feedback and learning to help future decision
making.
1-10 The three guidelines for management accountants are
1. Employ a cost-benefit approach.
2. Recognize behavioral and technical considerations.
3. Apply the notion of “different costs for different purposes”.
1-11 Agree. A successful management accountant requires general business skills (such as
understanding the strategy of an organization) and people skills (such as motivating other team
members) as well as technical skills (such as computer knowledge, calculating costs of products,
and supporting planning and control decisions).
1-5 Supply chain describes the flow of goods, services, and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
Cost management is most effective when it integrates and coordinates activities across all
companies in the supply chain as well as across each business function in an individual
company’s value chain. Attempts are made to restructure all cost areas to be more cost-effective.
1-6 “Management accounting deals only with costs.” This statement is misleading at best,
and wrong at worst. Management accounting measures, analyzes, and reports financial and non-
financial information that helps managers define the organization’s goals, and make decisions to
fulfill them. Management accounting also analyzes revenues from products and customers in
order to assess product and customer profitability. Therefore, while management accounting
does use cost information, it is only a part of the organization’s information recorded and
analyzed by management accountants.
1-7 Management accountants can help improve quality and achieve timely product deliveries
by recording and reporting an organization’s current quality and timeliness levels and by
analyzing and evaluating the costs and benefits—both financial and non-financial—of new
quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer
service.
1-8 The five-step decision-making process is (1) identify the problem and uncertainties (2)
obtain information (3) make predictions about the future (4) make decisions by choosing among
alternatives and (5) implement the decision, evaluate performance and learn.
1-9 Planning decisions focus on selecting organization goals and strategies, predicting results
under various alternative ways of achieving those goals, deciding how to attain the desired goals,
and communicating the goals and how to attain them to the entire organization.
Control decisions focus on taking actions that implement the planning decisions, deciding
how to evaluate performance, and providing feedback and learning to help future decision
making.
1-10 The three guidelines for management accountants are
1. Employ a cost-benefit approach.
2. Recognize behavioral and technical considerations.
3. Apply the notion of “different costs for different purposes”.
1-11 Agree. A successful management accountant requires general business skills (such as
understanding the strategy of an organization) and people skills (such as motivating other team
members) as well as technical skills (such as computer knowledge, calculating costs of products,
and supporting planning and control decisions).
1-2
1-5 Supply chain describes the flow of goods, services, and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
Cost management is most effective when it integrates and coordinates activities across all
companies in the supply chain as well as across each business function in an individual
company’s value chain. Attempts are made to restructure all cost areas to be more cost-effective.
1-6 “Management accounting deals only with costs.” This statement is misleading at best,
and wrong at worst. Management accounting measures, analyzes, and reports financial and non-
financial information that helps managers define the organization’s goals, and make decisions to
fulfill them. Management accounting also analyzes revenues from products and customers in
order to assess product and customer profitability. Therefore, while management accounting
does use cost information, it is only a part of the organization’s information recorded and
analyzed by management accountants.
1-7 Management accountants can help improve quality and achieve timely product deliveries
by recording and reporting an organization’s current quality and timeliness levels and by
analyzing and evaluating the costs and benefits—both financial and non-financial—of new
quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer
service.
1-8 The five-step decision-making process is (1) identify the problem and uncertainties (2)
obtain information (3) make predictions about the future (4) make decisions by choosing among
alternatives and (5) implement the decision, evaluate performance and learn.
1-9 Planning decisions focus on selecting organization goals and strategies, predicting results
under various alternative ways of achieving those goals, deciding how to attain the desired goals,
and communicating the goals and how to attain them to the entire organization.
Control decisions focus on taking actions that implement the planning decisions, deciding
how to evaluate performance, and providing feedback and learning to help future decision
making.
1-10 The three guidelines for management accountants are
1. Employ a cost-benefit approach.
2. Recognize behavioral and technical considerations.
3. Apply the notion of “different costs for different purposes”.
1-11 Agree. A successful management accountant requires general business skills (such as
understanding the strategy of an organization) and people skills (such as motivating other team
members) as well as technical skills (such as computer knowledge, calculating costs of products,
and supporting planning and control decisions).
1-5 Supply chain describes the flow of goods, services, and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
Cost management is most effective when it integrates and coordinates activities across all
companies in the supply chain as well as across each business function in an individual
company’s value chain. Attempts are made to restructure all cost areas to be more cost-effective.
1-6 “Management accounting deals only with costs.” This statement is misleading at best,
and wrong at worst. Management accounting measures, analyzes, and reports financial and non-
financial information that helps managers define the organization’s goals, and make decisions to
fulfill them. Management accounting also analyzes revenues from products and customers in
order to assess product and customer profitability. Therefore, while management accounting
does use cost information, it is only a part of the organization’s information recorded and
analyzed by management accountants.
1-7 Management accountants can help improve quality and achieve timely product deliveries
by recording and reporting an organization’s current quality and timeliness levels and by
analyzing and evaluating the costs and benefits—both financial and non-financial—of new
quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer
service.
1-8 The five-step decision-making process is (1) identify the problem and uncertainties (2)
obtain information (3) make predictions about the future (4) make decisions by choosing among
alternatives and (5) implement the decision, evaluate performance and learn.
1-9 Planning decisions focus on selecting organization goals and strategies, predicting results
under various alternative ways of achieving those goals, deciding how to attain the desired goals,
and communicating the goals and how to attain them to the entire organization.
Control decisions focus on taking actions that implement the planning decisions, deciding
how to evaluate performance, and providing feedback and learning to help future decision
making.
1-10 The three guidelines for management accountants are
1. Employ a cost-benefit approach.
2. Recognize behavioral and technical considerations.
3. Apply the notion of “different costs for different purposes”.
1-11 Agree. A successful management accountant requires general business skills (such as
understanding the strategy of an organization) and people skills (such as motivating other team
members) as well as technical skills (such as computer knowledge, calculating costs of products,
and supporting planning and control decisions).
1-3
1-12 The new controller could reply in one or more of the following ways:
(a) Demonstrate to the plant manager how he or she could make better decisions if the
plant controller was viewed as a resource rather than a deadweight. In a related way,
the plant controller could show how the plant manager’s time and resources could be
saved by viewing the new plant controller as a team member.
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the
plant. This approach may involve doing background reading. It certainly will involve
spending much time on the plant floor speaking to plant personnel.
(c) Show the plant manager examples of the new plant controller’s past successes in
working with line managers in other plants. Examples could include
• assistance in preparing the budget,
• assistance in analyzing problem situations and evaluating financial and
nonfinancial aspects of different alternatives, and
• assistance in submitting capital budget requests.
(d) Seek assistance from the corporate controller to highlight to the plant manager the
importance of many tasks undertaken by the new plant controller. This approach is a
last resort but may be necessary in some cases.
1-13 The controller is the chief management accounting executive. The corporate controller
reports to the chief financial officer, a staff function. Companies also have business unit
controllers who support business unit managers or regional controllers who support regional
managers in major geographic regions.
1-14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for
management accountants in the following four areas:
• Competence
• Confidentiality
• Integrity
• Credibility
1-15 Steps to take when established written policies provide insufficient guidance are
(a) Discuss the problem with the immediate superior (except when it appears that the
superior is involved).
(b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics
Counselor or other impartial advisor.
(c) Consult your own attorney as to legal obligations and rights concerning the ethical
conflicts.
1-12 The new controller could reply in one or more of the following ways:
(a) Demonstrate to the plant manager how he or she could make better decisions if the
plant controller was viewed as a resource rather than a deadweight. In a related way,
the plant controller could show how the plant manager’s time and resources could be
saved by viewing the new plant controller as a team member.
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the
plant. This approach may involve doing background reading. It certainly will involve
spending much time on the plant floor speaking to plant personnel.
(c) Show the plant manager examples of the new plant controller’s past successes in
working with line managers in other plants. Examples could include
• assistance in preparing the budget,
• assistance in analyzing problem situations and evaluating financial and
nonfinancial aspects of different alternatives, and
• assistance in submitting capital budget requests.
(d) Seek assistance from the corporate controller to highlight to the plant manager the
importance of many tasks undertaken by the new plant controller. This approach is a
last resort but may be necessary in some cases.
1-13 The controller is the chief management accounting executive. The corporate controller
reports to the chief financial officer, a staff function. Companies also have business unit
controllers who support business unit managers or regional controllers who support regional
managers in major geographic regions.
1-14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for
management accountants in the following four areas:
• Competence
• Confidentiality
• Integrity
• Credibility
1-15 Steps to take when established written policies provide insufficient guidance are
(a) Discuss the problem with the immediate superior (except when it appears that the
superior is involved).
(b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics
Counselor or other impartial advisor.
(c) Consult your own attorney as to legal obligations and rights concerning the ethical
conflicts.
1-4
1-16 (15 min.) Value chain and classification of costs, computer company.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Design of products and processes
Research and Development
Customer Service or Marketing
Design of products and processes
(or Research and Development)
Marketing
Production
1-17 (15 min.) Value chain and classification of costs, pharmaceutical company.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Design of products and processes
Marketing
Customer Service
Research and Development
Marketing
Production
Marketing
Distribution
1-18 (15 min.) Value chain and classification of costs, fast food restaurant.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Marketing
Marketing
Marketing
Production
Design of products and processes (or Research and Development)
Customer service
1-19 (15 min.) Key success factors.
Change in Operations/
Management Accounting Key Success Factor
a.
b.
c.
d.
e.
Innovation
Cost and Quality
Time
Time and Cost
Cost
1-16 (15 min.) Value chain and classification of costs, computer company.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Design of products and processes
Research and Development
Customer Service or Marketing
Design of products and processes
(or Research and Development)
Marketing
Production
1-17 (15 min.) Value chain and classification of costs, pharmaceutical company.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Design of products and processes
Marketing
Customer Service
Research and Development
Marketing
Production
Marketing
Distribution
1-18 (15 min.) Value chain and classification of costs, fast food restaurant.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Marketing
Marketing
Marketing
Production
Design of products and processes (or Research and Development)
Customer service
1-19 (15 min.) Key success factors.
Change in Operations/
Management Accounting Key Success Factor
a.
b.
c.
d.
e.
Innovation
Cost and Quality
Time
Time and Cost
Cost
1-5
1-20 (10-15 min.) Planning and control decisions.
Action Decision
a.
b.
c.
d.
e.
Planning
Control
Control
Planning
Planning
1-21 (15 min.) Five-step decision-making process, manufacturing.
Action Step in Decision-Making Process
a.
b.
c.
d.
e.
f.
g.
Obtain information
Make predictions about the future
Identify the problem and uncertainties
Implement the decision, evaluate performance, and learn
Make predictions about the future
Make decisions by choosing among alternatives
Obtain information
1-22 (15 min.) Five-step decision-making process, service firm.
Action Step in Decision-Making Process
a.
b.
c.
d.
e.
f.
Obtain information
Identify the problem and uncertainties
Obtain information and/or make predictions about the future
Make predictions about the future
Obtain information
Make decisions by choosing among alternatives
1-20 (10-15 min.) Planning and control decisions.
Action Decision
a.
b.
c.
d.
e.
Planning
Control
Control
Planning
Planning
1-21 (15 min.) Five-step decision-making process, manufacturing.
Action Step in Decision-Making Process
a.
b.
c.
d.
e.
f.
g.
Obtain information
Make predictions about the future
Identify the problem and uncertainties
Implement the decision, evaluate performance, and learn
Make predictions about the future
Make decisions by choosing among alternatives
Obtain information
1-22 (15 min.) Five-step decision-making process, service firm.
Action Step in Decision-Making Process
a.
b.
c.
d.
e.
f.
Obtain information
Identify the problem and uncertainties
Obtain information and/or make predictions about the future
Make predictions about the future
Obtain information
Make decisions by choosing among alternatives
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1-6
1-23 (10–15 min.) Professional ethics and reporting division performance.
1. Miller’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical
Conduct for Management Accountants” (Exhibit 1-7 of text). Areas of ethical responsibility
include the following:
• competence
• confidentiality
• integrity
• credibility
The ethical standards related to Miller’s current dilemma are integrity, competence and
credibility. Using the integrity standard, Miller should carry out duties ethically and
communicate unfavorable as well as favorable information and professional judgments or
opinions. Competence demands that Miller perform her professional duties in accordance with
relevant laws, regulations, and technical standards and provide decision support information that
is accurate. Credibility requires that Miller report information fairly and objectively and disclose
deficiencies in internal controls in conformance with organizational policy and/or applicable law.
Miller should refuse to book the $200,000 of sales until the goods are shipped. Both financial
accounting and management accounting principles maintain that sales are not complete until the
title is transferred to the buyer.
2. Miller should refuse to follow Maloney's orders. If Maloney persists, the incident should
be reported to the corporate controller. Support for line management should be wholehearted, but
it should not require unethical conduct.
1-24 (15 min.) Planning and control decisions, Internet company.
1. Planning decisions
a. Decision to raise monthly subscription fee
c. Decision to upgrade content of online services (later decision to inform subscribers
and upgrade online services is an implementation part of control)
e. Decision to decrease monthly subscription fee starting in November.
Control decisions
b. Decision to inform existing subscribers about the rate of increase—an implementation
part of control decisions
d. Dismissal of VP of Marketing—performance evaluation and feedback aspect of
control decisions
2. Other planning decisions that may be made at WebNews.com: decision to raise or lower
advertising fees; decision to charge a fee from on-line retailers when customers click-through
from WebNews.com to the retailers’ websites.
Other control decisions that may be made at WebNews.com: evaluating how customers
like the new format for the weather information, working with an outside vendor to redesign the
website, and evaluating whether the waiting time for customers to access the website has been
reduced.
1-23 (10–15 min.) Professional ethics and reporting division performance.
1. Miller’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical
Conduct for Management Accountants” (Exhibit 1-7 of text). Areas of ethical responsibility
include the following:
• competence
• confidentiality
• integrity
• credibility
The ethical standards related to Miller’s current dilemma are integrity, competence and
credibility. Using the integrity standard, Miller should carry out duties ethically and
communicate unfavorable as well as favorable information and professional judgments or
opinions. Competence demands that Miller perform her professional duties in accordance with
relevant laws, regulations, and technical standards and provide decision support information that
is accurate. Credibility requires that Miller report information fairly and objectively and disclose
deficiencies in internal controls in conformance with organizational policy and/or applicable law.
Miller should refuse to book the $200,000 of sales until the goods are shipped. Both financial
accounting and management accounting principles maintain that sales are not complete until the
title is transferred to the buyer.
2. Miller should refuse to follow Maloney's orders. If Maloney persists, the incident should
be reported to the corporate controller. Support for line management should be wholehearted, but
it should not require unethical conduct.
1-24 (15 min.) Planning and control decisions, Internet company.
1. Planning decisions
a. Decision to raise monthly subscription fee
c. Decision to upgrade content of online services (later decision to inform subscribers
and upgrade online services is an implementation part of control)
e. Decision to decrease monthly subscription fee starting in November.
Control decisions
b. Decision to inform existing subscribers about the rate of increase—an implementation
part of control decisions
d. Dismissal of VP of Marketing—performance evaluation and feedback aspect of
control decisions
2. Other planning decisions that may be made at WebNews.com: decision to raise or lower
advertising fees; decision to charge a fee from on-line retailers when customers click-through
from WebNews.com to the retailers’ websites.
Other control decisions that may be made at WebNews.com: evaluating how customers
like the new format for the weather information, working with an outside vendor to redesign the
website, and evaluating whether the waiting time for customers to access the website has been
reduced.
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1-7
1-25 (20 min.) Strategic decisions and management accounting.
1. The strategies the companies are following in each case are:
a.
b.
c.
d.
Low price strategy
Differentiated product strategy
Low price strategy
Differentiated product strategy
2. Examples of information the management accountant can provide for each strategic decision
follow.
a.
b.
c.
d.
Cost to manufacture and sell the cell phone
Productivity, efficiency and cost advantages relative to competition
Prices of competitive cell phones
Sensitivity of target customers to price and quality
The production capacity of Roger Phones and its competitors
Cost to develop, produce and sell new software
Premium price that customers would be willing to pay due to product uniqueness
Price of basic software
Price of closest competitive software
Cash needed to develop, produce and sell new software
Cost of producing the “store-brand” lip gloss
Productivity, efficiency and cost advantages relative to competition
Prices of competitive products
Sensitivity of target customers to price and quality
How the market for lip gloss is growing
Cost to produce and sell new line of gourmet bologna
Premium price that customers would be willing to pay due to product uniqueness
Price of basic meat product
Price of closest competitive product
1-26 (15 min.) Management accounting guidelines.
1. Cost-benefit approach
2. Behavioral and technical considerations
3. Different costs for different purposes
4. Cost-benefit approach
5. Behavioral and technical considerations
6. Cost-benefit approach
7. Behavioral and technical considerations
8. Different costs for different purposes
9. Behavioral and technical considerations
1-25 (20 min.) Strategic decisions and management accounting.
1. The strategies the companies are following in each case are:
a.
b.
c.
d.
Low price strategy
Differentiated product strategy
Low price strategy
Differentiated product strategy
2. Examples of information the management accountant can provide for each strategic decision
follow.
a.
b.
c.
d.
Cost to manufacture and sell the cell phone
Productivity, efficiency and cost advantages relative to competition
Prices of competitive cell phones
Sensitivity of target customers to price and quality
The production capacity of Roger Phones and its competitors
Cost to develop, produce and sell new software
Premium price that customers would be willing to pay due to product uniqueness
Price of basic software
Price of closest competitive software
Cash needed to develop, produce and sell new software
Cost of producing the “store-brand” lip gloss
Productivity, efficiency and cost advantages relative to competition
Prices of competitive products
Sensitivity of target customers to price and quality
How the market for lip gloss is growing
Cost to produce and sell new line of gourmet bologna
Premium price that customers would be willing to pay due to product uniqueness
Price of basic meat product
Price of closest competitive product
1-26 (15 min.) Management accounting guidelines.
1. Cost-benefit approach
2. Behavioral and technical considerations
3. Different costs for different purposes
4. Cost-benefit approach
5. Behavioral and technical considerations
6. Cost-benefit approach
7. Behavioral and technical considerations
8. Different costs for different purposes
9. Behavioral and technical considerations
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1-27 (15 min.) Role of controller, role of chief financial officer.
1.
Activity Controller CFO
Managing accounts payable X
Communicating with investors X
Strategic review of different lines of businesses X
Budgeting funds for a plant upgrade X
Managing the company’s short-term investments X
Negotiating fees with auditors X
Assessing profitability of various products X
Evaluating the costs and benefits of a new product design X
2. As CFO, Perez will be interacting much more with the senior management of the
company, the board of directors, auditors, and the external financial community. Any experience
he can get with these aspects will help him in his new role as CFO. George Perez can be better
positioned for his new role as CFO by participating in strategy discussions with senior
management, by preparing the external investor communications and press releases under the
guidance of the current CFO, by attending courses that focus on the interaction and negotiations
between the various business functions and outside parties such as auditors and, either formally
or on the job, getting training in issues related to investments and corporate finance.
1-27 (15 min.) Role of controller, role of chief financial officer.
1.
Activity Controller CFO
Managing accounts payable X
Communicating with investors X
Strategic review of different lines of businesses X
Budgeting funds for a plant upgrade X
Managing the company’s short-term investments X
Negotiating fees with auditors X
Assessing profitability of various products X
Evaluating the costs and benefits of a new product design X
2. As CFO, Perez will be interacting much more with the senior management of the
company, the board of directors, auditors, and the external financial community. Any experience
he can get with these aspects will help him in his new role as CFO. George Perez can be better
positioned for his new role as CFO by participating in strategy discussions with senior
management, by preparing the external investor communications and press releases under the
guidance of the current CFO, by attending courses that focus on the interaction and negotiations
between the various business functions and outside parties such as auditors and, either formally
or on the job, getting training in issues related to investments and corporate finance.
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1-28 (30 min.) Pharmaceutical company, budgeting, ethics.
1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
The idea of capitalizing some of the company’s R&D expenditures is a direct violation of the
IMA’s ethical standards above. This transaction would not be “in accordance with relevant laws,
regulations, and technical standards”. Generally Accepted Accounting Principles require
research and development costs to be expensed as incurred. Even if Johnson believes his
transaction is justifiable, it violates the profession’s technical standards and would be unethical.
The other “year-end” actions occur in many organizations and fall into the “gray” to
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
a. Stop all research and development efforts on the drug Lyricon until after year-end.
This change would delay the drug going to market by at least six months. It is also
possible that in the meantime a PharmaCor competitor could make it to market with a
similar drug. While this solution may solve the budget short-fall in this year, it could
result in a significant loss of future profits for PharmaCor in the long-run, especially
if a competitor is able to obtain a patent on a similar drug before PharmaCor.
b. Sell off rights to the drug, Markapro. The company had not planned on doing this
because, under current market conditions, it would get less than fair value. It would,
however, result in a onetime gain that could offset the budget short-fall. Of course, all
future profits from Markapro would be lost. Again, this solution may solve the
company’s short-term budget crisis; but could result in the loss of future profits for
PharmaCor in the long-run.
2. While it is not uncommon for companies to sacrifice long-term profits for short-term
gains, it may not be in the best interest of the company’s shareholders. In the case of
PharmaCor, the CFO is primarily concerned with “maximizing shareholder wealth” in the
immediate future (third quarter only), but not in the long-term. Because this executive’s
incentive pay and even employment may be based on his ability to meet short-term targets, he
may not be acting in the best interest of the shareholders in the long-run.
Johnson definitely faces an ethical dilemma. It is not unethical on Johnson’s part to want
to please his new boss, nor is it unethical that Johnson wants to make a good impression on his
first days at his new job; however, Johnson must still act within the ethical standards required by
1-28 (30 min.) Pharmaceutical company, budgeting, ethics.
1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
The idea of capitalizing some of the company’s R&D expenditures is a direct violation of the
IMA’s ethical standards above. This transaction would not be “in accordance with relevant laws,
regulations, and technical standards”. Generally Accepted Accounting Principles require
research and development costs to be expensed as incurred. Even if Johnson believes his
transaction is justifiable, it violates the profession’s technical standards and would be unethical.
The other “year-end” actions occur in many organizations and fall into the “gray” to
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
a. Stop all research and development efforts on the drug Lyricon until after year-end.
This change would delay the drug going to market by at least six months. It is also
possible that in the meantime a PharmaCor competitor could make it to market with a
similar drug. While this solution may solve the budget short-fall in this year, it could
result in a significant loss of future profits for PharmaCor in the long-run, especially
if a competitor is able to obtain a patent on a similar drug before PharmaCor.
b. Sell off rights to the drug, Markapro. The company had not planned on doing this
because, under current market conditions, it would get less than fair value. It would,
however, result in a onetime gain that could offset the budget short-fall. Of course, all
future profits from Markapro would be lost. Again, this solution may solve the
company’s short-term budget crisis; but could result in the loss of future profits for
PharmaCor in the long-run.
2. While it is not uncommon for companies to sacrifice long-term profits for short-term
gains, it may not be in the best interest of the company’s shareholders. In the case of
PharmaCor, the CFO is primarily concerned with “maximizing shareholder wealth” in the
immediate future (third quarter only), but not in the long-term. Because this executive’s
incentive pay and even employment may be based on his ability to meet short-term targets, he
may not be acting in the best interest of the shareholders in the long-run.
Johnson definitely faces an ethical dilemma. It is not unethical on Johnson’s part to want
to please his new boss, nor is it unethical that Johnson wants to make a good impression on his
first days at his new job; however, Johnson must still act within the ethical standards required by
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his profession. Taking illegal and/or unethical action by capitalizing R&D to satisfy the demands
of his new supervisor, James Clark, is unacceptable. Although not strictly unethical, I would
recommend that Johnson not agree to slow down the R&D efforts on Lyricon or sell off the
rights to Markapro. Each of these appears to sacrifice the overall economic interests of
PharmaCor for short-run gain. Johnson should argue against doing this but not resign if Clark
insists that these actions be taken. If, however, Clark asks Johnson to capitalize R&D, he should
raise this issue with the chair of the Audit Committee after informing Clark that he is doing so. If
the CFO still insists on Johnson capitalizing R&D, he should resign rather than engage in
unethical behavior.
his profession. Taking illegal and/or unethical action by capitalizing R&D to satisfy the demands
of his new supervisor, James Clark, is unacceptable. Although not strictly unethical, I would
recommend that Johnson not agree to slow down the R&D efforts on Lyricon or sell off the
rights to Markapro. Each of these appears to sacrifice the overall economic interests of
PharmaCor for short-run gain. Johnson should argue against doing this but not resign if Clark
insists that these actions be taken. If, however, Clark asks Johnson to capitalize R&D, he should
raise this issue with the chair of the Audit Committee after informing Clark that he is doing so. If
the CFO still insists on Johnson capitalizing R&D, he should resign rather than engage in
unethical behavior.
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1-29 (30–40 min.) Professional ethics and end-of-year actions.
1. The possible motivations for the snack foods division wanting to take end-of-year actions
include:
(a) Management incentives. Gourmet Foods may have a division bonus scheme based on
one-year reported division earnings. Efforts to front-end revenue into the current year
or transfer costs into the next year can increase this bonus.
(b) Promotion opportunities and job security. Top management of Gourmet Foods likely
will view those division managers that deliver high reported earnings growth rates as
being the best prospects for promotion. Division managers who deliver “unwelcome
surprises” may be viewed as less capable.
(c) Retain division autonomy. If top management of Gourmet Foods adopts a
“management by exception” approach, divisions that report sharp reductions in their
earnings growth rates may attract a sizable increase in top management supervision.
2. The “Standards of Ethical Conduct . . . ” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
Several of the “end-of-year actions” clearly are in conflict with these requirements and should be
viewed as unacceptable by Taylor.
(b) The fiscal year-end should be closed on midnight of December 31. “Extending” the
close falsely reports next year’s sales as this year’s sales.
(c) Altering shipping dates is falsification of the accounting reports.
(f) Advertisements run in December should be charged to the current year. The
advertising agency is facilitating falsification of the accounting records.
The other “end-of-year actions” occur in many organizations and fall into the “gray” to
“acceptable” area. However, much depends on the circumstances surrounding each one, such as
the following:
(a) If the independent contractor does not do maintenance work in December, there is no
transaction regarding maintenance to record. The responsibility for ensuring that
packaging equipment is well maintained is that of the plant manager. The division
controller probably can do little more than observe the absence of a December
maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal
year-end. If the double bonus is approved by the division marketing manager, the
division controller can do little more than observe the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December will be
reduced. There is no record falsification here.
(g) Much depends on the means of “persuading” carriers to accept the merchandise. For
example, if an under-the-table payment is involved, or if carriers are pressured to
accept merchandise, it is clearly unethical. If, however, the carrier receives no extra
consideration and willingly agrees to accept the assignment because it sees potential
sales opportunities in December, the transaction appears ethical.
1-29 (30–40 min.) Professional ethics and end-of-year actions.
1. The possible motivations for the snack foods division wanting to take end-of-year actions
include:
(a) Management incentives. Gourmet Foods may have a division bonus scheme based on
one-year reported division earnings. Efforts to front-end revenue into the current year
or transfer costs into the next year can increase this bonus.
(b) Promotion opportunities and job security. Top management of Gourmet Foods likely
will view those division managers that deliver high reported earnings growth rates as
being the best prospects for promotion. Division managers who deliver “unwelcome
surprises” may be viewed as less capable.
(c) Retain division autonomy. If top management of Gourmet Foods adopts a
“management by exception” approach, divisions that report sharp reductions in their
earnings growth rates may attract a sizable increase in top management supervision.
2. The “Standards of Ethical Conduct . . . ” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
Several of the “end-of-year actions” clearly are in conflict with these requirements and should be
viewed as unacceptable by Taylor.
(b) The fiscal year-end should be closed on midnight of December 31. “Extending” the
close falsely reports next year’s sales as this year’s sales.
(c) Altering shipping dates is falsification of the accounting reports.
(f) Advertisements run in December should be charged to the current year. The
advertising agency is facilitating falsification of the accounting records.
The other “end-of-year actions” occur in many organizations and fall into the “gray” to
“acceptable” area. However, much depends on the circumstances surrounding each one, such as
the following:
(a) If the independent contractor does not do maintenance work in December, there is no
transaction regarding maintenance to record. The responsibility for ensuring that
packaging equipment is well maintained is that of the plant manager. The division
controller probably can do little more than observe the absence of a December
maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal
year-end. If the double bonus is approved by the division marketing manager, the
division controller can do little more than observe the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December will be
reduced. There is no record falsification here.
(g) Much depends on the means of “persuading” carriers to accept the merchandise. For
example, if an under-the-table payment is involved, or if carriers are pressured to
accept merchandise, it is clearly unethical. If, however, the carrier receives no extra
consideration and willingly agrees to accept the assignment because it sees potential
sales opportunities in December, the transaction appears ethical.
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Each of the (a), (d), (e), and (g) “end-of-year actions” may well disadvantage Gourmet Foods in
the long run. For example, lack of routine maintenance may lead to subsequent equipment
failure. The divisional controller is well advised to raise such issues in meetings with the division
president. However, if Gourmet Foods has a rigid set of line/staff distinctions, the division
president is the one who bears primary responsibility for justifying division actions to senior
corporate officers.
3. If Taylor believes that Ryan wants her to engage in unethical behavior, she should first
directly raise her concerns with Ryan. If Ryan is unwilling to change his request, Taylor should
discuss her concerns with the Corporate Controller of Gourmet Foods. She could also initiate a
confidential discussion with an IMA Ethics Counselor, other impartial adviser, or her own
attorney. Taylor also may well ask for a transfer from the snack foods division if she perceives
Ryan is unwilling to listen to pressure brought by the Corporate Controller, CFO, or even
President of Gourmet Foods. In the extreme, she may want to resign if the corporate culture of
Gourmet Foods is to reward division managers who take “end-of-year actions” that Taylor views
as unethical and possibly illegal. It was precisely actions along the lines of (b), (c), and (f) that
caused Betty Vinson, an accountant at WorldCom to be indicted for falsifying WorldCom’s
books and misleading investors.
Each of the (a), (d), (e), and (g) “end-of-year actions” may well disadvantage Gourmet Foods in
the long run. For example, lack of routine maintenance may lead to subsequent equipment
failure. The divisional controller is well advised to raise such issues in meetings with the division
president. However, if Gourmet Foods has a rigid set of line/staff distinctions, the division
president is the one who bears primary responsibility for justifying division actions to senior
corporate officers.
3. If Taylor believes that Ryan wants her to engage in unethical behavior, she should first
directly raise her concerns with Ryan. If Ryan is unwilling to change his request, Taylor should
discuss her concerns with the Corporate Controller of Gourmet Foods. She could also initiate a
confidential discussion with an IMA Ethics Counselor, other impartial adviser, or her own
attorney. Taylor also may well ask for a transfer from the snack foods division if she perceives
Ryan is unwilling to listen to pressure brought by the Corporate Controller, CFO, or even
President of Gourmet Foods. In the extreme, she may want to resign if the corporate culture of
Gourmet Foods is to reward division managers who take “end-of-year actions” that Taylor views
as unethical and possibly illegal. It was precisely actions along the lines of (b), (c), and (f) that
caused Betty Vinson, an accountant at WorldCom to be indicted for falsifying WorldCom’s
books and misleading investors.
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1-30 (30 min.) Professional ethics and end-of-year actions.
1. The possible motivations for Controller, Todd Allen to modify the division’s year-end
earnings are:
(i) Job security and promotion. The company’s CFO will likely reward him for meeting the
company’s performance expectations. Alternately, the Allen may be penalized, perhaps
even by losing his job if the performance expectations are not met.
(ii) Management incentives. Allen’s bonus may be based on the division’s ability to meet
certain profit targets. If the Consumer Products division has already met its profit target
for the year, the Controller may personally benefit if new printing equipment is sold off
and replaced with the discarded equipment that no longer meets current safety standards,
or if operating income is manipulated by questionable revenue and/or expense
recognition.
2. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
Several of the “year-end” actions are clearly are in conflict with the statement’s principles and
required standards and should be viewed as unacceptable.
(c) Subscription revenue received in December in advance for magazines that will be sent
out in January is a liability. Showing it as revenue falsely reports next year’s revenue as
this year’s revenue.
(d) Reversing the division’s Allowance for Bad Debt Expense would violate Generally
Accepted Accounting Principles unless the bad debt allowance is currently overstated.
Recording this transaction would result in an overstatement of income and could
potentially mislead investors.
(e) Booking advertising revenues that relate to January in December falsely reports next
year’s revenue as this year’s revenue.
The other “year-end” actions occur in many organizations and fall into the “gray” to
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
(a) Cancelling two of the division’s least profitable magazines, resulting in the layoff of
twenty-five employees. While employee layoffs may be necessary for the business to
survive, the layoff decision could result in economic hardship for those employees who
lose their jobs, as well as result in employee morale problems for the rest of the division.
Most companies would prefer to avoid causing hardship for their existing employees due
to layoffs unless absolutely necessary for the survival of the business as a whole.
1-30 (30 min.) Professional ethics and end-of-year actions.
1. The possible motivations for Controller, Todd Allen to modify the division’s year-end
earnings are:
(i) Job security and promotion. The company’s CFO will likely reward him for meeting the
company’s performance expectations. Alternately, the Allen may be penalized, perhaps
even by losing his job if the performance expectations are not met.
(ii) Management incentives. Allen’s bonus may be based on the division’s ability to meet
certain profit targets. If the Consumer Products division has already met its profit target
for the year, the Controller may personally benefit if new printing equipment is sold off
and replaced with the discarded equipment that no longer meets current safety standards,
or if operating income is manipulated by questionable revenue and/or expense
recognition.
2. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
Several of the “year-end” actions are clearly are in conflict with the statement’s principles and
required standards and should be viewed as unacceptable.
(c) Subscription revenue received in December in advance for magazines that will be sent
out in January is a liability. Showing it as revenue falsely reports next year’s revenue as
this year’s revenue.
(d) Reversing the division’s Allowance for Bad Debt Expense would violate Generally
Accepted Accounting Principles unless the bad debt allowance is currently overstated.
Recording this transaction would result in an overstatement of income and could
potentially mislead investors.
(e) Booking advertising revenues that relate to January in December falsely reports next
year’s revenue as this year’s revenue.
The other “year-end” actions occur in many organizations and fall into the “gray” to
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
(a) Cancelling two of the division’s least profitable magazines, resulting in the layoff of
twenty-five employees. While employee layoffs may be necessary for the business to
survive, the layoff decision could result in economic hardship for those employees who
lose their jobs, as well as result in employee morale problems for the rest of the division.
Most companies would prefer to avoid causing hardship for their existing employees due
to layoffs unless absolutely necessary for the survival of the business as a whole.
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(b) Selling the new printing equipment that was purchased in January and replacing it with
discarded equipment from one of the company’s other divisions. The previously
discarded equipment no longer meets current safety standards. Again, while this method
may result in a short-term solution for the Controller and the Production Manager
personally, this decision may actually harm the corporation financially as a whole, not to
mention the potential resulting injuries to production workers from hazardous equipment.
This method would be also be ethically questionable and would likely violate the IMA’s
ethical standards of integrity and credibility.
(f) Switching from declining balance to straight line depreciation to reduce depreciation
expense in the current year. Many companies switch their depreciation policy from one
method to another. Deacon Publishing could argue that straight-line depreciation better
represents the decrease in the economic value of the asset compared to the declining
balance method. Straight-line depreciation may also be more in line with what its
competitors do. If, however, the company changes to straight-line depreciation with the
sole purpose of reducing expenses to meet its profit goals, such behavior would be
unacceptable. The Standards of Ethical Behavior require management accountants to
communicate information fairly and objectively and to carry out duties ethically.
3. Allen should directly raise his concerns first with the CFO, especially if the pressure from
the CFO is so great that the only course of action on the part of the controller is to otherwise
behave unethically. If the CFO refuses to change his direction, then the controller should raise
these issues with the CEO, and next to the Audit Committee and the Board of Directors, after
informing the CFO that he is doing so. The Controller could also initiate a confidential
discussion with an IMA Ethics Counselor, other impartial adviser, or his/her own attorney. In
the extreme, the Controller may want to resign if the corporate culture of Deacon Publishing is to
reward executives who take year-end actions that the Controller views as unethical and possibly
illegal. It was precisely actions along the lines of (c), (d) and (e) that caused Betty Vinson, an
accountant at WorldCom, to be indicted for falsifying WorldCom’s books and misleading
investors.
(b) Selling the new printing equipment that was purchased in January and replacing it with
discarded equipment from one of the company’s other divisions. The previously
discarded equipment no longer meets current safety standards. Again, while this method
may result in a short-term solution for the Controller and the Production Manager
personally, this decision may actually harm the corporation financially as a whole, not to
mention the potential resulting injuries to production workers from hazardous equipment.
This method would be also be ethically questionable and would likely violate the IMA’s
ethical standards of integrity and credibility.
(f) Switching from declining balance to straight line depreciation to reduce depreciation
expense in the current year. Many companies switch their depreciation policy from one
method to another. Deacon Publishing could argue that straight-line depreciation better
represents the decrease in the economic value of the asset compared to the declining
balance method. Straight-line depreciation may also be more in line with what its
competitors do. If, however, the company changes to straight-line depreciation with the
sole purpose of reducing expenses to meet its profit goals, such behavior would be
unacceptable. The Standards of Ethical Behavior require management accountants to
communicate information fairly and objectively and to carry out duties ethically.
3. Allen should directly raise his concerns first with the CFO, especially if the pressure from
the CFO is so great that the only course of action on the part of the controller is to otherwise
behave unethically. If the CFO refuses to change his direction, then the controller should raise
these issues with the CEO, and next to the Audit Committee and the Board of Directors, after
informing the CFO that he is doing so. The Controller could also initiate a confidential
discussion with an IMA Ethics Counselor, other impartial adviser, or his/her own attorney. In
the extreme, the Controller may want to resign if the corporate culture of Deacon Publishing is to
reward executives who take year-end actions that the Controller views as unethical and possibly
illegal. It was precisely actions along the lines of (c), (d) and (e) that caused Betty Vinson, an
accountant at WorldCom, to be indicted for falsifying WorldCom’s books and misleading
investors.
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1-31 (40 min.) Global company, ethical challenges.
1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
Several of the suggestions made by Hamsen’s staff are clearly in conflict with the statement’s
principles and required standards and should be viewed as unacceptable.
c. Pressure current customers to take early delivery of goods before the end of the year so
that more revenue can be reported on this year’s financial statements. This tactic,
commonly known as channel stuffing, merely results in shifting future period revenues
into the current period. The overstatement of revenue in the current period may mislead
investor’s to believe that the company’s financial well being is better than the actual
results achieved. This practice would violate the IMA’s standards of credibility and
integrity. Channel stuffing is frequently considered a fraudulent practice.
e. Record the executive year-end bonus compensation for the current year in the next year
when it is paid until after the December fiscal year-end. Generally Accepted
Accounting Principles requires expenses to be recorded (accrued) when incurred, not
when paid (cash basis accounting). Therefore, failure to record the executives’ year-
end bonus would violate the IMA’s standards of credibility and integrity.
f. Recognize sales revenues on orders received, but not shipped as of the end of the year.
Generally Accepted Accounting Principles requires income to be recorded (accrued)
when the four criteria of revenue recognition have been met:
1. The company has completed a significant portion of the production and sales
effort.
2. The amount of revenue can by objectively measured.
3. The major portion of the costs has been incurred, and the remaining costs can be
reasonably estimated.
4. The eventual collection of the cash is reasonably assured.
Because criteria 1 and 3 have not been met at the time the order is placed the revenue should not
be recognized until after year-end. Therefore, recording next year’s revenue in the current year
would be a violation of Generally Accepted Accounting Principles and would be falsifying
revenue. This would be a violation of the IMA’s standards of credibility and integrity and may
be considered fraudulent.
The other “year-end” actions occur in many organizations and fall into the “gray” to
1-31 (40 min.) Global company, ethical challenges.
1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
Several of the suggestions made by Hamsen’s staff are clearly in conflict with the statement’s
principles and required standards and should be viewed as unacceptable.
c. Pressure current customers to take early delivery of goods before the end of the year so
that more revenue can be reported on this year’s financial statements. This tactic,
commonly known as channel stuffing, merely results in shifting future period revenues
into the current period. The overstatement of revenue in the current period may mislead
investor’s to believe that the company’s financial well being is better than the actual
results achieved. This practice would violate the IMA’s standards of credibility and
integrity. Channel stuffing is frequently considered a fraudulent practice.
e. Record the executive year-end bonus compensation for the current year in the next year
when it is paid until after the December fiscal year-end. Generally Accepted
Accounting Principles requires expenses to be recorded (accrued) when incurred, not
when paid (cash basis accounting). Therefore, failure to record the executives’ year-
end bonus would violate the IMA’s standards of credibility and integrity.
f. Recognize sales revenues on orders received, but not shipped as of the end of the year.
Generally Accepted Accounting Principles requires income to be recorded (accrued)
when the four criteria of revenue recognition have been met:
1. The company has completed a significant portion of the production and sales
effort.
2. The amount of revenue can by objectively measured.
3. The major portion of the costs has been incurred, and the remaining costs can be
reasonably estimated.
4. The eventual collection of the cash is reasonably assured.
Because criteria 1 and 3 have not been met at the time the order is placed the revenue should not
be recognized until after year-end. Therefore, recording next year’s revenue in the current year
would be a violation of Generally Accepted Accounting Principles and would be falsifying
revenue. This would be a violation of the IMA’s standards of credibility and integrity and may
be considered fraudulent.
The other “year-end” actions occur in many organizations and fall into the “gray” to
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1-16
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
a. Stop all transatlantic shipping efforts. The start-up costs for the new operations are
hurting current profit margins. While this method may result in better short-term
financial results for Bredahl, it may do harm to the long-term financial condition of the
corporation as a whole.
b. Make deep cuts in pricing through the end of the year to generate additional revenue.
Again, this is only a short-term tactic to improve this year’s financial results. Investors
may be content in the short-run, but in the long run the new shipping company will see
reduced margins from these actions.
d. Sell-off distribution equipment prior to year-end. The sale would result in one-time
gains that could offset the company’s lagging profits. The owned equipment could be
replaced with leased equipment at a lower cost in the current year. While this course of
action does not necessarily violate the IMA’s code of ethical standards, it may be only a
short-term tactic to improve this year’s financial results. Hamsen will need to weigh
his options long-term to make the most cost effective decision for his company.
g. Establish corporate headquarters in Ireland before the end of the year, lowering the
company’s corporate tax rate from 28% to 12.5%. Hamsen may have other legitimate
reasons for relocating his company to Ireland, but doing so only to reduce his tax
liability would likely be considered an evasion of taxes in the company’s home country.
Hamsen should seek the advice of skilled consultants in the area of international tax
before making any such move. The company could face large fines and even criminal
charges for evading corporate income taxes of the home country.
2. It is possible that any of the “year-end” actions that fall into the “gray” area may be good
for investors, depending on the credible evidence which supports the management decision. For
example, replacing owned equipment with leased equipment may result in both short-term gains
for the company and long-term cost reduction. If so, this decision would be in the best interest of
the investors. If the decision only results in short-term gains, but higher costs in the long-run,
then the decision may not be in the best long-term interest of the company’s investors and should
not be implemented solely to prop up short-term earnings.
Those decisions that clearly violate the IMA code of ethical standards (c, e, and f) would
never be in the best interest of the investor. These options would result in misleading financial
statements and could result in the demise of the company or even in criminal charges, as was the
case with companies such as Enron and WorldCom. If Hamsen asks the management accountant
to take any of the actions that are clearly unethical, he should raise this issue with the chair of the
Audit Committee after informing Hamsen that he is doing so. If Hamsen still insists on the
management accountant taking these actions, he should resign rather than engage in unethical
behavior.
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
a. Stop all transatlantic shipping efforts. The start-up costs for the new operations are
hurting current profit margins. While this method may result in better short-term
financial results for Bredahl, it may do harm to the long-term financial condition of the
corporation as a whole.
b. Make deep cuts in pricing through the end of the year to generate additional revenue.
Again, this is only a short-term tactic to improve this year’s financial results. Investors
may be content in the short-run, but in the long run the new shipping company will see
reduced margins from these actions.
d. Sell-off distribution equipment prior to year-end. The sale would result in one-time
gains that could offset the company’s lagging profits. The owned equipment could be
replaced with leased equipment at a lower cost in the current year. While this course of
action does not necessarily violate the IMA’s code of ethical standards, it may be only a
short-term tactic to improve this year’s financial results. Hamsen will need to weigh
his options long-term to make the most cost effective decision for his company.
g. Establish corporate headquarters in Ireland before the end of the year, lowering the
company’s corporate tax rate from 28% to 12.5%. Hamsen may have other legitimate
reasons for relocating his company to Ireland, but doing so only to reduce his tax
liability would likely be considered an evasion of taxes in the company’s home country.
Hamsen should seek the advice of skilled consultants in the area of international tax
before making any such move. The company could face large fines and even criminal
charges for evading corporate income taxes of the home country.
2. It is possible that any of the “year-end” actions that fall into the “gray” area may be good
for investors, depending on the credible evidence which supports the management decision. For
example, replacing owned equipment with leased equipment may result in both short-term gains
for the company and long-term cost reduction. If so, this decision would be in the best interest of
the investors. If the decision only results in short-term gains, but higher costs in the long-run,
then the decision may not be in the best long-term interest of the company’s investors and should
not be implemented solely to prop up short-term earnings.
Those decisions that clearly violate the IMA code of ethical standards (c, e, and f) would
never be in the best interest of the investor. These options would result in misleading financial
statements and could result in the demise of the company or even in criminal charges, as was the
case with companies such as Enron and WorldCom. If Hamsen asks the management accountant
to take any of the actions that are clearly unethical, he should raise this issue with the chair of the
Audit Committee after informing Hamsen that he is doing so. If Hamsen still insists on the
management accountant taking these actions, he should resign rather than engage in unethical
behavior.
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2-1
CHAPTER 2
AN INTRODUCTION TO COST TERMS AND PURPOSES
2-1 A cost object is anything for which a separate measurement of costs is desired. Examples
include a product, a service, a project, a customer, a brand category, an activity, and a
department.
2-2 Direct costs of a cost object are related to the particular cost object and can be traced to
that cost object in an economically feasible (cost-effective) way.
Indirect costs of a cost object are related to the particular cost object but cannot be traced
to that cost object in an economically feasible (cost-effective) way.
Cost assignment is a general term that encompasses the assignment of both direct costs
and indirect costs to a cost object. Direct costs are traced to a cost object while indirect costs are
allocated to a cost object.
2-3 Managers believe that direct costs that are traced to a particular cost object are more
accurately assigned to that cost object than are indirect allocated costs. When costs are allocated,
managers are less certain whether the cost allocation base accurately measures the resources
demanded by a cost object. Managers prefer to use more accurate costs in their decisions.
2-4 Factors affecting the classification of a cost as direct or indirect include
• the materiality of the cost in question,
• available information-gathering technology,
• design of operations
2-5 A variable cost changes in total in proportion to changes in the related level of total
activity or volume. An example is a sales commission that is a percentage of each sales revenue
dollar.
A fixed cost remains unchanged in total for a given time period, despite wide changes in
the related level of total activity or volume. An example is the leasing cost of a machine that is
unchanged for a given time period (such as a year) regardless of the number of units of product
produced on the machine.
2-6 A cost driver is a variable, such as the level of activity or volume, that causally affects
total costs over a given time span. A change in the cost driver results in a change in the level of
total costs. For example, the number of vehicles assembled is a driver of the costs of steering
wheels on a motor-vehicle assembly line.
2-7 The relevant range is the band of normal activity level or volume in which there is a
specific relationship between the level of activity or volume and the cost in question. Costs are
described as variable or fixed with respect to a particular relevant range.
2-8 A unit cost is computed by dividing some amount of total costs (the numerator) by the
related number of units (the denominator). In many cases, the numerator will include a fixed cost
that will not change despite changes in the denominator. It is erroneous in those cases to multiply
the unit cost by activity or volume change to predict changes in total costs at different activity or
volume levels.
CHAPTER 2
AN INTRODUCTION TO COST TERMS AND PURPOSES
2-1 A cost object is anything for which a separate measurement of costs is desired. Examples
include a product, a service, a project, a customer, a brand category, an activity, and a
department.
2-2 Direct costs of a cost object are related to the particular cost object and can be traced to
that cost object in an economically feasible (cost-effective) way.
Indirect costs of a cost object are related to the particular cost object but cannot be traced
to that cost object in an economically feasible (cost-effective) way.
Cost assignment is a general term that encompasses the assignment of both direct costs
and indirect costs to a cost object. Direct costs are traced to a cost object while indirect costs are
allocated to a cost object.
2-3 Managers believe that direct costs that are traced to a particular cost object are more
accurately assigned to that cost object than are indirect allocated costs. When costs are allocated,
managers are less certain whether the cost allocation base accurately measures the resources
demanded by a cost object. Managers prefer to use more accurate costs in their decisions.
2-4 Factors affecting the classification of a cost as direct or indirect include
• the materiality of the cost in question,
• available information-gathering technology,
• design of operations
2-5 A variable cost changes in total in proportion to changes in the related level of total
activity or volume. An example is a sales commission that is a percentage of each sales revenue
dollar.
A fixed cost remains unchanged in total for a given time period, despite wide changes in
the related level of total activity or volume. An example is the leasing cost of a machine that is
unchanged for a given time period (such as a year) regardless of the number of units of product
produced on the machine.
2-6 A cost driver is a variable, such as the level of activity or volume, that causally affects
total costs over a given time span. A change in the cost driver results in a change in the level of
total costs. For example, the number of vehicles assembled is a driver of the costs of steering
wheels on a motor-vehicle assembly line.
2-7 The relevant range is the band of normal activity level or volume in which there is a
specific relationship between the level of activity or volume and the cost in question. Costs are
described as variable or fixed with respect to a particular relevant range.
2-8 A unit cost is computed by dividing some amount of total costs (the numerator) by the
related number of units (the denominator). In many cases, the numerator will include a fixed cost
that will not change despite changes in the denominator. It is erroneous in those cases to multiply
the unit cost by activity or volume change to predict changes in total costs at different activity or
volume levels.
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2-2
2-9 Manufacturing-sector companies purchase materials and Ashtonnents and convert them
into various finished goods, for example automotive and textile companies.
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form, for example retailing or distribution.
Service-sector companies provide services or intangible products to their customers, for
example, legal advice or audits.
2-10 Manufacturing companies have one or more of the following three types of inventory:
1. Direct materials inventory. Direct materials in stock and awaiting use in the
manufacturing process.
2. Work-in-process inventory. Goods partially worked on but not yet completed. Also
called work in progress.
3. Finished goods inventory. Goods completed but not yet sold.
2-11 Inventoriable costs are all costs of a product that are considered as assets in the balance
sheet when they are incurred and that become cost of goods sold when the product is sold. These
costs are included in work-in-process and finished goods inventory (they are “inventoried”) to
accumulate the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These
costs are treated as expenses of the accounting period in which they are incurred because they are
expected not to benefit future periods (because there is not sufficient evidence to conclude that
such benefit exists). Expensing these costs immediately best matches expenses to revenues.
2-12 Direct material costs are the acquisition costs of all materials that eventually become part
of the cost object (work in process and then finished goods), and can be traced to the cost object
in an economically feasible way.
Direct manufacturing labor costs include the compensation of all manufacturing labor
that can be traced to the cost object (work in process and then finished goods) in an economically
feasible way.
Manufacturing overhead costs are all manufacturing costs that are related to the cost
object (work in process and then finished goods), but cannot be traced to that cost object in an
economically feasible way.
Prime costs are all direct manufacturing costs (direct material and direct manufacturing
labor).
Conversion costs are all manufacturing costs other than direct material costs.
2-13 Overtime premium is the wage rate paid to workers (for both direct labor and indirect
labor) in excess of their straight-time wage rates.
Idle time is a subclassification of indirect labor that represents wages paid for
unproductive time caused by lack of orders, machine breakdowns, material shortages, poor
scheduling, and the like.
2-14 A product cost is the sum of the costs assigned to a product for a specific purpose.
Purposes for computing a product cost include
• pricing and product mix decisions,
• contracting with government agencies, and
• preparing financial statements for external reporting under generally accepted
accounting principles.
2-9 Manufacturing-sector companies purchase materials and Ashtonnents and convert them
into various finished goods, for example automotive and textile companies.
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form, for example retailing or distribution.
Service-sector companies provide services or intangible products to their customers, for
example, legal advice or audits.
2-10 Manufacturing companies have one or more of the following three types of inventory:
1. Direct materials inventory. Direct materials in stock and awaiting use in the
manufacturing process.
2. Work-in-process inventory. Goods partially worked on but not yet completed. Also
called work in progress.
3. Finished goods inventory. Goods completed but not yet sold.
2-11 Inventoriable costs are all costs of a product that are considered as assets in the balance
sheet when they are incurred and that become cost of goods sold when the product is sold. These
costs are included in work-in-process and finished goods inventory (they are “inventoried”) to
accumulate the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These
costs are treated as expenses of the accounting period in which they are incurred because they are
expected not to benefit future periods (because there is not sufficient evidence to conclude that
such benefit exists). Expensing these costs immediately best matches expenses to revenues.
2-12 Direct material costs are the acquisition costs of all materials that eventually become part
of the cost object (work in process and then finished goods), and can be traced to the cost object
in an economically feasible way.
Direct manufacturing labor costs include the compensation of all manufacturing labor
that can be traced to the cost object (work in process and then finished goods) in an economically
feasible way.
Manufacturing overhead costs are all manufacturing costs that are related to the cost
object (work in process and then finished goods), but cannot be traced to that cost object in an
economically feasible way.
Prime costs are all direct manufacturing costs (direct material and direct manufacturing
labor).
Conversion costs are all manufacturing costs other than direct material costs.
2-13 Overtime premium is the wage rate paid to workers (for both direct labor and indirect
labor) in excess of their straight-time wage rates.
Idle time is a subclassification of indirect labor that represents wages paid for
unproductive time caused by lack of orders, machine breakdowns, material shortages, poor
scheduling, and the like.
2-14 A product cost is the sum of the costs assigned to a product for a specific purpose.
Purposes for computing a product cost include
• pricing and product mix decisions,
• contracting with government agencies, and
• preparing financial statements for external reporting under generally accepted
accounting principles.
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2-3
2-15 Three common features of cost accounting and cost management are:
• calculating the costs of products, services, and other cost objects
• obtaining information for planning and control and performance evaluation
• analyzing the relevant information for making decisions
2-16 (15 min.) Computing and interpreting manufacturing unit costs.
1.
(in millions)
Supreme Deluxe Regular Total
Direct material cost $ 89.00 $ 57.00 $60.00 $206.00
Direct manuf. labor costs 16.00 26.00 8.00 50.00
Manufacturing overhead costs 48.00 78.00 24.00 150.00
Total manuf. costs 153.00 161.00 92.00 406.00
Fixed costs allocated at a rate
of $15M $50M (direct mfg.
labor) equal to $0.30 per
dir. manuf. labor dollar
(0.30 $16; 26; 8) 4.80 7.80 2.40 15.00
Variable costs $148.20 $153.20 $89.60 $391.00
Units produced (millions) 125 150 140
Cost per unit (Total manuf.
costs ÷ units produced) $1.2240 $1.0733 $0.6571
Variable manuf. cost per unit
(Variable manuf. costs
Units produced) $1.1856 $1.0213 $0.6400
(in millions)
Supreme Deluxe Regular Total
2. Based on total manuf. cost
per unit ($1.2240 150;
$1.0733 190; $0.6571 220) $183.60 $203.93 $144.56 $532.09
Correct total manuf. costs based
on variable manuf. costs plus
fixed costs equal
Variable costs ($1.1856 150; $177.84 $194.05 $140.80 $512.69
$1.0213 190; $0.64 220)
Fixed costs 15.00
Total costs $527.69
The total manufacturing cost per unit in requirement 1 includes $15 million of indirect
manufacturing costs that are fixed irrespective of changes in the volume of output per month,
while the remaining variable indirect manufacturing costs change with the production volume.
Given the unit volume changes for August 2011, the use of total manufacturing cost per unit
from the past month at a different unit volume level (both in aggregate and at the individual
product level) will overestimate total costs of $532.09 million in August 2011 relative to the
correct total manufacturing costs of $527.69 million calculated using variable manufacturing cost
per unit times units produced plus the fixed costs of $15 million.
2-15 Three common features of cost accounting and cost management are:
• calculating the costs of products, services, and other cost objects
• obtaining information for planning and control and performance evaluation
• analyzing the relevant information for making decisions
2-16 (15 min.) Computing and interpreting manufacturing unit costs.
1.
(in millions)
Supreme Deluxe Regular Total
Direct material cost $ 89.00 $ 57.00 $60.00 $206.00
Direct manuf. labor costs 16.00 26.00 8.00 50.00
Manufacturing overhead costs 48.00 78.00 24.00 150.00
Total manuf. costs 153.00 161.00 92.00 406.00
Fixed costs allocated at a rate
of $15M $50M (direct mfg.
labor) equal to $0.30 per
dir. manuf. labor dollar
(0.30 $16; 26; 8) 4.80 7.80 2.40 15.00
Variable costs $148.20 $153.20 $89.60 $391.00
Units produced (millions) 125 150 140
Cost per unit (Total manuf.
costs ÷ units produced) $1.2240 $1.0733 $0.6571
Variable manuf. cost per unit
(Variable manuf. costs
Units produced) $1.1856 $1.0213 $0.6400
(in millions)
Supreme Deluxe Regular Total
2. Based on total manuf. cost
per unit ($1.2240 150;
$1.0733 190; $0.6571 220) $183.60 $203.93 $144.56 $532.09
Correct total manuf. costs based
on variable manuf. costs plus
fixed costs equal
Variable costs ($1.1856 150; $177.84 $194.05 $140.80 $512.69
$1.0213 190; $0.64 220)
Fixed costs 15.00
Total costs $527.69
The total manufacturing cost per unit in requirement 1 includes $15 million of indirect
manufacturing costs that are fixed irrespective of changes in the volume of output per month,
while the remaining variable indirect manufacturing costs change with the production volume.
Given the unit volume changes for August 2011, the use of total manufacturing cost per unit
from the past month at a different unit volume level (both in aggregate and at the individual
product level) will overestimate total costs of $532.09 million in August 2011 relative to the
correct total manufacturing costs of $527.69 million calculated using variable manufacturing cost
per unit times units produced plus the fixed costs of $15 million.
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2-4
2-17 (15 min.) Direct, indirect, fixed and variable costs.
1. Yeast – direct, variable
Flour- direct, variable
Packaging materials –direct (or could be indirect if small and not traced to each unit), variable
Depreciation on ovens –indirect, fixed (unless “units of output” depreciation, which then
would be variable)
Depreciation on mixing machines–indirect, fixed (unless “units of output” depreciation, which
then would be variable)
Rent on factory building – indirect, fixed
Fire Insurance on factory building–indirect, fixed
Factory utilities – indirect, probably some variable and some fixed (e.g. electricity may be
variable but heating costs may be fixed)
Finishing department hourly laborers – direct, variable (or fixed if the laborers are under a
union contract)
Mixing department manager – indirect, fixed
Materials handlers –depends on how they are paid. If paid hourly and not under union
contract, then indirect, variable. If salaried or under union contract then indirect, fixed
Custodian in factory –indirect, fixed
Night guard in factory –indirect, fixed
Machinist (running the mixing machine) –depends on how they are paid. If paid hourly and
not under union contract, then indirect, variable. If salaried or under union contract
then indirect, fixed
Machine maintenance personnel – indirect, probably fixed, if salaried, but may be variable if
paid only for time worked and maintenance increases with increased production
Maintenance supplies – indirect, variable
Cleaning supplies – indirect, most likely fixed since the custodians probably do the same
amount of cleaning every night
2. If the cost object is Mixing Department, then anything directly associated with the Mixing
Department will be a direct cost. This will include:
• Depreciation on mixing machines
• Mixing Department manager
• Materials handlers (of the Mixing Department)
• Machinist (running the mixing machines)
• Machine Maintenance personnel (of the Mixing Department)
• Maintenance supplies (if separately identified for the Mixing Department)
Of course the yeast and flour will also be a direct cost of the Mixing Department, but it is already
a direct cost of each kind of bread produced.
2-17 (15 min.) Direct, indirect, fixed and variable costs.
1. Yeast – direct, variable
Flour- direct, variable
Packaging materials –direct (or could be indirect if small and not traced to each unit), variable
Depreciation on ovens –indirect, fixed (unless “units of output” depreciation, which then
would be variable)
Depreciation on mixing machines–indirect, fixed (unless “units of output” depreciation, which
then would be variable)
Rent on factory building – indirect, fixed
Fire Insurance on factory building–indirect, fixed
Factory utilities – indirect, probably some variable and some fixed (e.g. electricity may be
variable but heating costs may be fixed)
Finishing department hourly laborers – direct, variable (or fixed if the laborers are under a
union contract)
Mixing department manager – indirect, fixed
Materials handlers –depends on how they are paid. If paid hourly and not under union
contract, then indirect, variable. If salaried or under union contract then indirect, fixed
Custodian in factory –indirect, fixed
Night guard in factory –indirect, fixed
Machinist (running the mixing machine) –depends on how they are paid. If paid hourly and
not under union contract, then indirect, variable. If salaried or under union contract
then indirect, fixed
Machine maintenance personnel – indirect, probably fixed, if salaried, but may be variable if
paid only for time worked and maintenance increases with increased production
Maintenance supplies – indirect, variable
Cleaning supplies – indirect, most likely fixed since the custodians probably do the same
amount of cleaning every night
2. If the cost object is Mixing Department, then anything directly associated with the Mixing
Department will be a direct cost. This will include:
• Depreciation on mixing machines
• Mixing Department manager
• Materials handlers (of the Mixing Department)
• Machinist (running the mixing machines)
• Machine Maintenance personnel (of the Mixing Department)
• Maintenance supplies (if separately identified for the Mixing Department)
Of course the yeast and flour will also be a direct cost of the Mixing Department, but it is already
a direct cost of each kind of bread produced.
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2-5
2-18 (15–20 min.) Classification of costs, service sector.
Cost object: Each individual focus group
Cost variability: With respect to the number of focus groups
There may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item D or I V or F
A D V
B I F
C I Va
D I F
E D V
F I F
G D V
H I Vb
aSome students will note that phone call costs are variable when each call has a separate charge. It may be a fixed
cost if Consumer Focus has a flat monthly charge for a line, irrespective of the amount of usage.
bGasoline costs are likely to vary with the number of focus groups. However, vehicles likely serve multiple
purposes, and detailed records may be required to examine how costs vary with changes in one of the many
purposes served.
2-19 (15–20 min.) Classification of costs, merchandising sector.
Cost object: Videos sold in video section of store
Cost variability: With respect to changes in the number of videos sold
There may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item D or I V or F
A D F
B I F
C D V
D D F
E I F
F I V
G I F
H D V
2-18 (15–20 min.) Classification of costs, service sector.
Cost object: Each individual focus group
Cost variability: With respect to the number of focus groups
There may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item D or I V or F
A D V
B I F
C I Va
D I F
E D V
F I F
G D V
H I Vb
aSome students will note that phone call costs are variable when each call has a separate charge. It may be a fixed
cost if Consumer Focus has a flat monthly charge for a line, irrespective of the amount of usage.
bGasoline costs are likely to vary with the number of focus groups. However, vehicles likely serve multiple
purposes, and detailed records may be required to examine how costs vary with changes in one of the many
purposes served.
2-19 (15–20 min.) Classification of costs, merchandising sector.
Cost object: Videos sold in video section of store
Cost variability: With respect to changes in the number of videos sold
There may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item D or I V or F
A D F
B I F
C D V
D D F
E I F
F I V
G I F
H D V
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2-6
2-20 (15–20 min.) Classification of costs, manufacturing sector.
Cost object: Type of car assembled (Corolla or Geo Prism)
Cost variability: With respect to changes in the number of cars assembled
There may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item D or I V or F
A D V
B I F
C D F
D D F
E D V
F I V
G D V
H I F
2-21 (20 min.) Variable costs, fixed costs, total costs.
1.
Minutes/month 0 50 100 150 200 240 300 327.5 350 400 450 510 540 600 650
Plan A ($/month) 0 5 10 15 20 24 30 32.75 35 40 45 51 54 60 65
Plan B ($/month) 15 15 15 15 15 15 19.80 22 23.80 27.80 31.80 36.60 39 43.80 47.80
Plan C ($/month) 22 22 22 22 22 22 22 22 22 22 22 22 23.50 26.50 290
10
20
30
40
50
60
0 100 200 300 400 500 600
Total Cost
Number of long-distance minutes
Plan A
Plan B
Plan C
2. In each region, Ashton chooses the plan that has the lowest cost. From the graph (or from
calculations)*, we can see that if Ashton expects to use 0–150 minutes of long-distance each
month, she should buy Plan A; for 150–327.5 minutes, Plan B; and for over 327.5 minutes,
Plan C. If Ashton plans to make 100 minutes of long-distance calls each month, she should
choose Plan A; for 240 minutes, choose Plan B; for 540 minutes, choose Plan C.
*Let x be the number of minutes when Plan A and Plan B have equal cost
$0.10x = $15
x = $15 ÷ $0.10 per minute = 150 minutes.
Let y be the number of minutes when Plan B and Plan C have equal cost
$15 + $0.08 (y – 240) = $22
$0.08 (y – 240) = $22 – $15 = $7
y – 240 =$7 87.5
$0.08 =
y = 87.5 + 240 = 327.5 minutes
2-20 (15–20 min.) Classification of costs, manufacturing sector.
Cost object: Type of car assembled (Corolla or Geo Prism)
Cost variability: With respect to changes in the number of cars assembled
There may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item D or I V or F
A D V
B I F
C D F
D D F
E D V
F I V
G D V
H I F
2-21 (20 min.) Variable costs, fixed costs, total costs.
1.
Minutes/month 0 50 100 150 200 240 300 327.5 350 400 450 510 540 600 650
Plan A ($/month) 0 5 10 15 20 24 30 32.75 35 40 45 51 54 60 65
Plan B ($/month) 15 15 15 15 15 15 19.80 22 23.80 27.80 31.80 36.60 39 43.80 47.80
Plan C ($/month) 22 22 22 22 22 22 22 22 22 22 22 22 23.50 26.50 290
10
20
30
40
50
60
0 100 200 300 400 500 600
Total Cost
Number of long-distance minutes
Plan A
Plan B
Plan C
2. In each region, Ashton chooses the plan that has the lowest cost. From the graph (or from
calculations)*, we can see that if Ashton expects to use 0–150 minutes of long-distance each
month, she should buy Plan A; for 150–327.5 minutes, Plan B; and for over 327.5 minutes,
Plan C. If Ashton plans to make 100 minutes of long-distance calls each month, she should
choose Plan A; for 240 minutes, choose Plan B; for 540 minutes, choose Plan C.
*Let x be the number of minutes when Plan A and Plan B have equal cost
$0.10x = $15
x = $15 ÷ $0.10 per minute = 150 minutes.
Let y be the number of minutes when Plan B and Plan C have equal cost
$15 + $0.08 (y – 240) = $22
$0.08 (y – 240) = $22 – $15 = $7
y – 240 =$7 87.5
$0.08 =
y = 87.5 + 240 = 327.5 minutes
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2-7
2-22 (15–20 min.) Variable costs and fixed costs.
1. Variable cost per ton of beach sand mined
Subcontractor $ 80 per ton
Government tax 50 per ton
Total $130 per ton
Fixed costs per month
0 to 100 tons of capacity per day = $150,000
101 to 200 tons of capacity per day = $300,000
201 to 300 tons of capacity per day = $450,000
2.Tota l Fixed Costs
$450,000
$300,000
$150,000
100 200 300
Tons of Cap acity p er Day
$975,000
$650,000
$325,000
2,500 5,000 7,500
Tons Mine d
Tota l Variable Costs
The concept of relevant range is potentially relevant for both graphs. However, the question does
not place restrictions on the unit variable costs. The relevant range for the total fixed costs is
from 0 to 100 tons; 101 to 200 tons; 201 to 300 tons, and so on. Within these ranges, the total
fixed costs do not change in total.
3. Tons Mined
per Day
Tons Mined
per Month
Fixed Unit
Cost per Ton
Variable Unit
Cost per Ton
Total Unit
Cost per Ton
(1) (2) = (1) × 25 (3) = FC ÷ (2) (4) (5) = (3) + (4)
(a) 180 4,500 $300,000 ÷ 4,500 = $66.67 $130 $196.67
(b) 220 5,500 $450,000 ÷ 5,500 = $81.82 $130 $211.82
The unit cost for 220 tons mined per day is $211.82, while for 180 tons it is only $196.67. This
difference is caused by the fixed cost increment from 101 to 200 tons being spread over an
increment of 80 tons, while the fixed cost increment from 201 to 300 tons is spread over an
increment of only 20 tons.
2-22 (15–20 min.) Variable costs and fixed costs.
1. Variable cost per ton of beach sand mined
Subcontractor $ 80 per ton
Government tax 50 per ton
Total $130 per ton
Fixed costs per month
0 to 100 tons of capacity per day = $150,000
101 to 200 tons of capacity per day = $300,000
201 to 300 tons of capacity per day = $450,000
2.Tota l Fixed Costs
$450,000
$300,000
$150,000
100 200 300
Tons of Cap acity p er Day
$975,000
$650,000
$325,000
2,500 5,000 7,500
Tons Mine d
Tota l Variable Costs
The concept of relevant range is potentially relevant for both graphs. However, the question does
not place restrictions on the unit variable costs. The relevant range for the total fixed costs is
from 0 to 100 tons; 101 to 200 tons; 201 to 300 tons, and so on. Within these ranges, the total
fixed costs do not change in total.
3. Tons Mined
per Day
Tons Mined
per Month
Fixed Unit
Cost per Ton
Variable Unit
Cost per Ton
Total Unit
Cost per Ton
(1) (2) = (1) × 25 (3) = FC ÷ (2) (4) (5) = (3) + (4)
(a) 180 4,500 $300,000 ÷ 4,500 = $66.67 $130 $196.67
(b) 220 5,500 $450,000 ÷ 5,500 = $81.82 $130 $211.82
The unit cost for 220 tons mined per day is $211.82, while for 180 tons it is only $196.67. This
difference is caused by the fixed cost increment from 101 to 200 tons being spread over an
increment of 80 tons, while the fixed cost increment from 201 to 300 tons is spread over an
increment of only 20 tons.
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2-8
2-23 (20 min.) Variable costs, fixed costs, relevant range.
1. The production capacity is 4,100 jaw breakers per month. Therefore, the current annual
relevant range of output is 0 to 4,100 jaw breakers × 12 months = 0 to 49,200 jaw breakers.
2. Current annual fixed manufacturing costs within the relevant range are $1,200 × 12 =
$14,400 for rent and other overhead costs, plus $9,000 ÷ 10 = $900 for depreciation, totaling
$15,300.
The variable costs, the materials, are 30 cents per jaw breaker, or $13,680 ($0.30 per jaw
breaker × 3,800 jaw breakers per month × 12 months) for the year.
3. If demand changes from 3,800 to 7,600 jaw breakers per month, or from 3,800 × 12 =
45,600 to 7,600 × 12 = 91,200 jaw breakers per year, Sweetum will need a second machine.
Assuming Sweetum buys a second machine identical to the first machine, it will increase
capacity from 4,100 jaw breakers per month to 8,200. The annual relevant range will be between
4,100 × 12 = 49,200 and 8,200 × 12 = 98,400 jaw breakers.
Assume the second machine costs $9,000 and is depreciated using straight-line
depreciation over 10 years and zero residual value, just like the first machine. This will add
$900 of depreciation per year.
Fixed costs for next year will increase to $16,200 from $15,300 for the current year + $900
(because rent and other fixed overhead costs will remain the same at $14,400). That is, total
fixed costs for next year equal $900 (depreciation on first machine) + $900 (depreciation on
second machine) + $14,400 (rent and other fixed overhead costs).
The variable cost per jaw breaker next year will be 90% × $0.30 = $0.27. Total variable
costs equal $0.27 per jaw breaker × 91,200 jaw breakers = $24,624.
If Sweetum decides to not increase capacity and meet only that amount of demand for
which it has available capacity (4,100 jaw breakers per month or 4,100 × 12 = 49,200 jaw
breakers per year), the variable cost per unit will be the same at $0.30 per jaw breaker. Annual
total variable manufacturing costs will increase to $0.30 × 4,100 jaw breakers per month × 12
months = $14,760. Annual total fixed manufacturing costs will remain the same, $15,300.
2-23 (20 min.) Variable costs, fixed costs, relevant range.
1. The production capacity is 4,100 jaw breakers per month. Therefore, the current annual
relevant range of output is 0 to 4,100 jaw breakers × 12 months = 0 to 49,200 jaw breakers.
2. Current annual fixed manufacturing costs within the relevant range are $1,200 × 12 =
$14,400 for rent and other overhead costs, plus $9,000 ÷ 10 = $900 for depreciation, totaling
$15,300.
The variable costs, the materials, are 30 cents per jaw breaker, or $13,680 ($0.30 per jaw
breaker × 3,800 jaw breakers per month × 12 months) for the year.
3. If demand changes from 3,800 to 7,600 jaw breakers per month, or from 3,800 × 12 =
45,600 to 7,600 × 12 = 91,200 jaw breakers per year, Sweetum will need a second machine.
Assuming Sweetum buys a second machine identical to the first machine, it will increase
capacity from 4,100 jaw breakers per month to 8,200. The annual relevant range will be between
4,100 × 12 = 49,200 and 8,200 × 12 = 98,400 jaw breakers.
Assume the second machine costs $9,000 and is depreciated using straight-line
depreciation over 10 years and zero residual value, just like the first machine. This will add
$900 of depreciation per year.
Fixed costs for next year will increase to $16,200 from $15,300 for the current year + $900
(because rent and other fixed overhead costs will remain the same at $14,400). That is, total
fixed costs for next year equal $900 (depreciation on first machine) + $900 (depreciation on
second machine) + $14,400 (rent and other fixed overhead costs).
The variable cost per jaw breaker next year will be 90% × $0.30 = $0.27. Total variable
costs equal $0.27 per jaw breaker × 91,200 jaw breakers = $24,624.
If Sweetum decides to not increase capacity and meet only that amount of demand for
which it has available capacity (4,100 jaw breakers per month or 4,100 × 12 = 49,200 jaw
breakers per year), the variable cost per unit will be the same at $0.30 per jaw breaker. Annual
total variable manufacturing costs will increase to $0.30 × 4,100 jaw breakers per month × 12
months = $14,760. Annual total fixed manufacturing costs will remain the same, $15,300.
Loading page 25...
2-9
2-24 (20 min.) Cost drivers and value chain.
1. Identify customer needs (what do smartphone users want?) — Design of products and
processes
Perform market research on competing brands — Design of products and processes
Design a prototype of the HCP smartphone — Design of products and processes
Market the new design to cell phone companies — Marketing
Manufacture the HCP smartphone — Production
Process orders from cell phone companies — Distribution
Package the HCP smartphones — Production
Deliver the HCP smartphones to the cell phone companies — Distribution
Provide online assistance to cell phone users for use of the HCP smartphone — Customer
Service
Make design changes to the HCP smartphone based on customer feedback — Design of
products and processes
2.
Value Chain
Category Activity Cost driver
Design of
products and
processes
Identify customer needs Number of surveys returned and processed
from competing smartphone users
Perform market research on
competing brands
Hours spent researching competing market
brands
Number of surveys returned and processed
from competing smartphone users
Design a prototype of the HCP
smartphone
Engineering hours spent on initial product
design
Make design changes to the
smartphone based on
customer feedback
Number of design changes
Production Manufacture the HCP
smartphones
Machine hours required to run the
production equipment
Package the HCP smartphones Number of smartphones shipped by HCP
Marketing Market the new design to cell
phone companies
Number of cell phone companies purchasing
the HCP smartphone
Distribution Process orders from cell phone
companies
Number of smartphone orders processed
Number of deliveries made to cell phone
companies
Deliver the HCP smartphones
to cell phone companies
Number of deliveries made to cell phone
companies
Customer
Service
Provide on-line assistance to
cell phone users for use of
the HCP smartphone
Number of smartphones shipped by HCP
Customer Service hours
2-24 (20 min.) Cost drivers and value chain.
1. Identify customer needs (what do smartphone users want?) — Design of products and
processes
Perform market research on competing brands — Design of products and processes
Design a prototype of the HCP smartphone — Design of products and processes
Market the new design to cell phone companies — Marketing
Manufacture the HCP smartphone — Production
Process orders from cell phone companies — Distribution
Package the HCP smartphones — Production
Deliver the HCP smartphones to the cell phone companies — Distribution
Provide online assistance to cell phone users for use of the HCP smartphone — Customer
Service
Make design changes to the HCP smartphone based on customer feedback — Design of
products and processes
2.
Value Chain
Category Activity Cost driver
Design of
products and
processes
Identify customer needs Number of surveys returned and processed
from competing smartphone users
Perform market research on
competing brands
Hours spent researching competing market
brands
Number of surveys returned and processed
from competing smartphone users
Design a prototype of the HCP
smartphone
Engineering hours spent on initial product
design
Make design changes to the
smartphone based on
customer feedback
Number of design changes
Production Manufacture the HCP
smartphones
Machine hours required to run the
production equipment
Package the HCP smartphones Number of smartphones shipped by HCP
Marketing Market the new design to cell
phone companies
Number of cell phone companies purchasing
the HCP smartphone
Distribution Process orders from cell phone
companies
Number of smartphone orders processed
Number of deliveries made to cell phone
companies
Deliver the HCP smartphones
to cell phone companies
Number of deliveries made to cell phone
companies
Customer
Service
Provide on-line assistance to
cell phone users for use of
the HCP smartphone
Number of smartphones shipped by HCP
Customer Service hours
Loading page 26...
2-10
2-25 (10–15 min.) Cost drivers and functions.
1.
Function Representative Cost Driver
1. Accounting Number of transactions processed
2. Human Resources Number of employees
3. Data processing Hours of computer processing unit (CPU)
4. Research and development Number of research scientists
5. Purchasing Number of purchase orders
6. Distribution Number of deliveries made
7. Billing Number of invoices sent
2.
Function Representative Cost Driver
1. Accounting Number of journal entries made
2. Human Resources Salaries and wages of employees
3. Data Processing Number of computer transactions
4. Research and Development Number of new products being developed
5. Purchasing Number of different types of materials purchased
6. Distribution Distance traveled to make deliveries
7. Billing Number of credit sales transactions
2-25 (10–15 min.) Cost drivers and functions.
1.
Function Representative Cost Driver
1. Accounting Number of transactions processed
2. Human Resources Number of employees
3. Data processing Hours of computer processing unit (CPU)
4. Research and development Number of research scientists
5. Purchasing Number of purchase orders
6. Distribution Number of deliveries made
7. Billing Number of invoices sent
2.
Function Representative Cost Driver
1. Accounting Number of journal entries made
2. Human Resources Salaries and wages of employees
3. Data Processing Number of computer transactions
4. Research and Development Number of new products being developed
5. Purchasing Number of different types of materials purchased
6. Distribution Distance traveled to make deliveries
7. Billing Number of credit sales transactions
Loading page 27...
2-11
2-26 (20 min.) Total costs and unit costs
1.Fixed, Variable and Total Cost of Graduation Party
0
1000
2000
3000
4000
5000
0 100 200 300 400 500 600
Number of attendees
Costs ($)
Fixed costs
Variable costs
Total cost
2.
Number of attendees 0 100 200 300 400 500 600
Total costs
(fixed + variable) $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000
Costs per attendee (total
costs number of attendees) $20.00 $12.00 $9.33 $ 8.00 $ 7.20 $ 6.67
As shown in the table above, for 100 attendees the total cost will be $2,000 and the cost per
attendee will be $20.
3. As shown in the table in requirement 2, for 500 attendees the total cost will be $3,600 and
the cost per attendee will be $7.20.
Number of attendees 0 100 200 300 400 500 600
Variable cost per person
($9 caterer charge –
$5 student door fee) $4 $4 $4 $4 $4 $4 $4
Fixed Costs $1,600 $1,600 $1,600 $1,600 $1,600 $1,600 $1,600
Variable costs (number of
attendees × variable cost per
person) 0 400 800 1,200 1,600 2,000 2,400
Total costs (fixed + variable) $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000
2-26 (20 min.) Total costs and unit costs
1.Fixed, Variable and Total Cost of Graduation Party
0
1000
2000
3000
4000
5000
0 100 200 300 400 500 600
Number of attendees
Costs ($)
Fixed costs
Variable costs
Total cost
2.
Number of attendees 0 100 200 300 400 500 600
Total costs
(fixed + variable) $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000
Costs per attendee (total
costs number of attendees) $20.00 $12.00 $9.33 $ 8.00 $ 7.20 $ 6.67
As shown in the table above, for 100 attendees the total cost will be $2,000 and the cost per
attendee will be $20.
3. As shown in the table in requirement 2, for 500 attendees the total cost will be $3,600 and
the cost per attendee will be $7.20.
Number of attendees 0 100 200 300 400 500 600
Variable cost per person
($9 caterer charge –
$5 student door fee) $4 $4 $4 $4 $4 $4 $4
Fixed Costs $1,600 $1,600 $1,600 $1,600 $1,600 $1,600 $1,600
Variable costs (number of
attendees × variable cost per
person) 0 400 800 1,200 1,600 2,000 2,400
Total costs (fixed + variable) $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000
Loading page 28...
2-12
4. Using the calculations shown in the table in requirement 2, we can construct the cost-per-
attendee graph shown below:0
5
10
15
20
25
0 100 200 300 400 500 600 700
Number of Attendees
Cost per Attendee ($)
As president of the student association requesting a grant for the party, you should not use the
per unit calculations to make your case. The person making the grant may assume an attendance
of 500 students and use a low number like $7.20 per attendee to calculate the size of your grant.
Instead, you should emphasize the fixed cost of $1,600 that you will incur even if no students or
very few students attend the party, and try to get a grant to cover as much of the fixed costs as
possible as well as a variable portion to cover as much of the $4 variable cost to the student
association for each person attending the party.
2-27 (25 min.) Total and unit cost, decision making.
1.$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
0 5,000 10,000
Total Manufacturing Costs
Number of Flanges
Fixed Costs
Variable Costs
Total
Manufacturing
Costs
Note that the production costs include the $28,000 of fixed manufacturing costs but not the
$10,000 of period costs. The variable cost is $1 per flange for materials, and $2.80 per flange
($28 per hour divided by 10 flanges per hour) for direct manufacturing labor for a total of $3.80
per flange.
4. Using the calculations shown in the table in requirement 2, we can construct the cost-per-
attendee graph shown below:0
5
10
15
20
25
0 100 200 300 400 500 600 700
Number of Attendees
Cost per Attendee ($)
As president of the student association requesting a grant for the party, you should not use the
per unit calculations to make your case. The person making the grant may assume an attendance
of 500 students and use a low number like $7.20 per attendee to calculate the size of your grant.
Instead, you should emphasize the fixed cost of $1,600 that you will incur even if no students or
very few students attend the party, and try to get a grant to cover as much of the fixed costs as
possible as well as a variable portion to cover as much of the $4 variable cost to the student
association for each person attending the party.
2-27 (25 min.) Total and unit cost, decision making.
1.$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
0 5,000 10,000
Total Manufacturing Costs
Number of Flanges
Fixed Costs
Variable Costs
Total
Manufacturing
Costs
Note that the production costs include the $28,000 of fixed manufacturing costs but not the
$10,000 of period costs. The variable cost is $1 per flange for materials, and $2.80 per flange
($28 per hour divided by 10 flanges per hour) for direct manufacturing labor for a total of $3.80
per flange.
Loading page 29...
2-13
2. The inventoriable (manufacturing) cost per unit for 5,000 flanges is
$3.80 × 5,000 + $28,000 = $47,000
Average (unit) cost = $47,000 ÷ 5,000 units = $9.40 per unit.
This is below Flora’s selling price of $10 per flange. However, in order to make a profit,
Gayle’s Glassworks also needs to cover the period (non-manufacturing) costs of $10,000, or
$10,000 ÷ 5,000 = $2 per unit.
Thus total costs, both inventoriable (manufacturing) and period (non-manufacturing), for the
flanges is $9.40 + $2 = $11.40. Gayle’s Glassworks cannot sell below Flora’s price of $10 and
still make a profit on the flanges.
Alternatively,
At Flora’s price of $10 per flange:
Revenue $10 × 5,000 = $50,000
Variable costs $3.80 × 5,000 = 19,000
Fixed costs 38,000
Operating loss $ (7,000)
Gayle’s Glassworks cannot sell below $10 per flange and make a profit. At Flora’s price of $10
per flange, the company has an operating loss of $7,000.
3. If Gayle’s Glassworks produces 10,000 units, then total inventoriable cost will be:
Variable cost ($3.80 × 10,000) + fixed manufacturing costs, $28,000 = total manufacturing
costs, $66,000.Average (unit) inventoriable (manufacturing) cost will be $66,000 ÷ 10,000 units = $6.60 per flange
Unit total cost including both inventoriable and period costs will be
($66,000 +$10,000) ÷ 10,000 = $7.60 per flange, and Gayle’s Glassworks will be able to sell the
flanges for less than Flora and still make a profit.
Alternatively,
At Flora’s price of $10 per flange:
Revenue $10 × 10,000 = $100,000
Variable costs $3.80 × 10,000 = 38,000
Fixed costs 38,000
Operating income $ 24,000
Gayle’s Glassworks can sell at a price below $10 per flange and still make a profit. The
company earns operating income of $24,000 at a price of $10 per flange. The company will earn
operating income as long as the price exceeds $7.60 per flange.
The reason the unit cost decreases significantly is that inventoriable (manufacturing) fixed costs
and fixed period (nonmanufacturing) costs remain the same regardless of the number of units
produced. So, as Gayle’s Glassworks produces more units, fixed costs are spread over more
units, and cost per unit decreases. This means that if you use unit costs to make decisions about
pricing, and which product to produce, you must be aware that the unit cost only applies to a
particular level of output.
2. The inventoriable (manufacturing) cost per unit for 5,000 flanges is
$3.80 × 5,000 + $28,000 = $47,000
Average (unit) cost = $47,000 ÷ 5,000 units = $9.40 per unit.
This is below Flora’s selling price of $10 per flange. However, in order to make a profit,
Gayle’s Glassworks also needs to cover the period (non-manufacturing) costs of $10,000, or
$10,000 ÷ 5,000 = $2 per unit.
Thus total costs, both inventoriable (manufacturing) and period (non-manufacturing), for the
flanges is $9.40 + $2 = $11.40. Gayle’s Glassworks cannot sell below Flora’s price of $10 and
still make a profit on the flanges.
Alternatively,
At Flora’s price of $10 per flange:
Revenue $10 × 5,000 = $50,000
Variable costs $3.80 × 5,000 = 19,000
Fixed costs 38,000
Operating loss $ (7,000)
Gayle’s Glassworks cannot sell below $10 per flange and make a profit. At Flora’s price of $10
per flange, the company has an operating loss of $7,000.
3. If Gayle’s Glassworks produces 10,000 units, then total inventoriable cost will be:
Variable cost ($3.80 × 10,000) + fixed manufacturing costs, $28,000 = total manufacturing
costs, $66,000.Average (unit) inventoriable (manufacturing) cost will be $66,000 ÷ 10,000 units = $6.60 per flange
Unit total cost including both inventoriable and period costs will be
($66,000 +$10,000) ÷ 10,000 = $7.60 per flange, and Gayle’s Glassworks will be able to sell the
flanges for less than Flora and still make a profit.
Alternatively,
At Flora’s price of $10 per flange:
Revenue $10 × 10,000 = $100,000
Variable costs $3.80 × 10,000 = 38,000
Fixed costs 38,000
Operating income $ 24,000
Gayle’s Glassworks can sell at a price below $10 per flange and still make a profit. The
company earns operating income of $24,000 at a price of $10 per flange. The company will earn
operating income as long as the price exceeds $7.60 per flange.
The reason the unit cost decreases significantly is that inventoriable (manufacturing) fixed costs
and fixed period (nonmanufacturing) costs remain the same regardless of the number of units
produced. So, as Gayle’s Glassworks produces more units, fixed costs are spread over more
units, and cost per unit decreases. This means that if you use unit costs to make decisions about
pricing, and which product to produce, you must be aware that the unit cost only applies to a
particular level of output.
Loading page 30...
2-14
2-28 (20–30 min.) Inventoriable costs versus period costs.
1. Manufacturing-sector companies purchase materials and components and convert them
into different finished goods.
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form.
Service-sector companies provide services or intangible products to their customers—for
example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.
2. Inventoriable costs are all costs of a product that are regarded as an asset when they are
incurred and then become cost of goods sold when the product is sold. These costs for a
manufacturing company are included in work-in-process and finished goods inventory (they are
“inventoried”) to build up the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These
costs are treated as expenses of the period in which they are incurred because they are presumed
not to benefit future periods (or because there is not sufficient evidence to conclude that such
benefit exists). Expensing these costs immediately best matches expenses to revenues.
3. (a) Perrier mineral water purchased for resale by Safeway—inventoriable cost of a
merchandising company. It becomes part of cost of goods sold when the mineral water is sold.
(b) Electricity used for lighting at GE refrigerator assembly plant—inventoriable cost of
a manufacturing company. It is part of the manufacturing overhead that is included in the
manufacturing cost of a refrigerator finished good.
(c) Depreciation on Google’s computer equipment used to update directories of web
sites—period cost of a service company. Google has no inventory of goods for sale and, hence,
no inventoriable cost.
(d) Electricity used to provide lighting for Safeway’s store aisles—period cost of a
merchandising company. It is a cost that benefits the current period and it is not traceable to
goods purchased for resale.
(e) Depreciation on GE’s assembly testing equipment—inventoriable cost of a
manufacturing company. It is part of the manufacturing overhead that is included in the
manufacturing cost of a refrigerator finished good.
(f) Salaries of Safeway’s marketing personnel—period cost of a merchandising
company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to
benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future
benefits).
(g) Perrier mineral water consumed by Google’s software engineers—period cost of a
service company. Google has no inventory of goods for sale and, hence, no inventoriable cost.
(h) Salaries of Google’s marketing personnel—period cost of a service company. Google
has no inventory of goods for sale and, hence, no inventoriable cost.
2-28 (20–30 min.) Inventoriable costs versus period costs.
1. Manufacturing-sector companies purchase materials and components and convert them
into different finished goods.
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form.
Service-sector companies provide services or intangible products to their customers—for
example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.
2. Inventoriable costs are all costs of a product that are regarded as an asset when they are
incurred and then become cost of goods sold when the product is sold. These costs for a
manufacturing company are included in work-in-process and finished goods inventory (they are
“inventoried”) to build up the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These
costs are treated as expenses of the period in which they are incurred because they are presumed
not to benefit future periods (or because there is not sufficient evidence to conclude that such
benefit exists). Expensing these costs immediately best matches expenses to revenues.
3. (a) Perrier mineral water purchased for resale by Safeway—inventoriable cost of a
merchandising company. It becomes part of cost of goods sold when the mineral water is sold.
(b) Electricity used for lighting at GE refrigerator assembly plant—inventoriable cost of
a manufacturing company. It is part of the manufacturing overhead that is included in the
manufacturing cost of a refrigerator finished good.
(c) Depreciation on Google’s computer equipment used to update directories of web
sites—period cost of a service company. Google has no inventory of goods for sale and, hence,
no inventoriable cost.
(d) Electricity used to provide lighting for Safeway’s store aisles—period cost of a
merchandising company. It is a cost that benefits the current period and it is not traceable to
goods purchased for resale.
(e) Depreciation on GE’s assembly testing equipment—inventoriable cost of a
manufacturing company. It is part of the manufacturing overhead that is included in the
manufacturing cost of a refrigerator finished good.
(f) Salaries of Safeway’s marketing personnel—period cost of a merchandising
company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to
benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future
benefits).
(g) Perrier mineral water consumed by Google’s software engineers—period cost of a
service company. Google has no inventory of goods for sale and, hence, no inventoriable cost.
(h) Salaries of Google’s marketing personnel—period cost of a service company. Google
has no inventory of goods for sale and, hence, no inventoriable cost.
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Subject
Mathematics