Exam (elaborations) TEST BANK FOR Management for Cost Accounting 5th Edition By Michael Maher (Solution Manual)

Exam (elaborations) TEST BANK FOR Management for Cost Accounting 5th Edition By Michael Maher (Solution Manual) Solutions Manual for COST ACCOUNTING Creating Value for Management Fifth Edition MICHAEL MAHER University of California, Davis Table of Contents Chapter 1 Cost Accounting: How Managers User Cost Accounting Information Chapter 2 Cost Concepts and Behaviour Chapter 3 Cost System Design: An Overview Chapter 4 Job Costing Chapter 5 Process Costing Chapter 6 Spoilage and Quality Management Chapter 7 Allocating Costs to Departments Chapter 8 Activity-Based Costing Chapter 9 Activity-Based Management Chapter 10 Allocating Joint Costs Chapter 11 Variable Costing Chapter 12 Cost Estimation Chapter 13 Cost-Volume-Profit Analysis Chapter 14 Differential Cost and Revenue Analysis Chapter 15 Using Differential Analysis for Production Decisions Chapter 16 Managing Quality and Time Chapter 17 Planning and Budgeting Chapter 18 Flexible Budgeting and Performance Evaluation Chapter 19 Performance Evaluation: Cost Variances Chapter 20 Performance Evaluation in Decentralized Organizations Chapter 21 Transfer Pricing Chapter 22 Nonfinancial Performance Measures Chapter 23 Capital Investmenet Decisions Chapter 24 Inventory Management Chapter 25 Management Ethics and Financial Fraud Chapter 26 Revenue, Mix and ield Variances © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 1 Chapter 1 Cost Accounting: How Managers Use Cost Accounting Information Solutions to Review Questions 1–1. C Analysis of divisional performance A Costing for income tax purposes B Determining how many units to produce in the coming week 1–2. Descriptions of the six business functions in the value chain are as follows: 1. Research and development: the creation and development of ideas related to new products, services, or processes. 2. Design: the detailed development and engineering of products, services, or processes. 3. Production: the collection and assembly of resources to produce a product or deliver a service. 4. Marketing: the process that informs potential customers about the attributes of products or services, and leads to the sale of those products or services. 5. Distribution: the process established to deliver products or services to customers. 6. Customer Service: product or service support activities provided to customers. 1–3. Value-added activities are activities that customers perceive as adding utility to the goods or services they purchase. Nonvalue-added activities do not add value to the goods or services. 1–4. Differential costs are important for managerial decision making, but other cost data can provide management with additional important information. For example, inventory values and costs of goods sold are important for income tax and financial reporting purposes as well as for most bonus and cost-plus contracting purposes. Costs for performance evaluation are not necessarily differential costs. Companies try to recover all costs, hence some estimate of total costs is needed. (This could be an opportunity to discuss short-run and long-run costs with students, noting that in the long run, all costs must be covered.) © The McGraw-Hill Companies, Inc., 1997 2 Cost Accounting, 5/e 1–5. Costs that could be shared among housemates might include a share of the rent, food, utilities, and other related costs. Costs that would differ with the addition of another person are the differential costs. These differential costs might include food. It would be necessary to negotiate an agreement between you and the other person considering all factors. For example, should you split the total costs or charge only the differential costs of the additional person. Businesses are often faced with similar decisions on finding the appropriate cost base for splitting costs. There are no generally accepted accounting rules for determining appropriate shared costs in either situation. Hence, it is important to specify arrangements about costs precisely when agreements are made. 1–6. Performance evaluation systems are designed for a specific company’s needs. The systems should be flexible to adapt to the circumstances which exist in that company. A common set of accounting principles would tend to reduce flexibility and usefulness of these systems. As long as all parties know the accounting basis used by the system, the exact rules can be designed in whatever manner the parties deem appropriate. 1–7. Most utilities are characterized by the need to install a substantial amount of equipment to meet peak loads. The peak load for the telephone company is during business hours, particularly in the mid-morning. At other times this equipment is operating at less than capacity. That is, there are lines available for use. By encouraging users to shift their usage from the peak times to such off-peak hours as evenings, nights and weekends, less equipment is required and the existing equipment is utilized more heavily. The considerations in the decision would include: (a) the savings from not having to purchase more equipment; (b) the revenues that could be generated on off-peak hours when existing equipment would be sufficient; (c) the revenues that could be generated from telephone calls that would not be made at all at the higher prices; and (d) the costs of operating the telephone system in off-peak hours. Offsetting these benefits would be the reduction in revenues from calls that would be made during off-peak hours even if full rates were in effect. Apparently the telephone company has found that the benefits outweigh the loss in revenues from using off-peak rates. 1–8. While a manager, and not the controller, has the business expertise to make management decisions, the decisions will not be good ones if the manager does not understand the data used to make them. For example, the manager may be working with the costs of a product, and not realize which costs are fixed and which are variable. The controller understands the types of data that are available, the rules used to accumulate the data, and the limitations that exist on the data. Therefore, the manager and the controller need to interact in the decision-making process. The controller can provide the manager with the relevant data, and an explanation of its suitable uses. The manager then can make better decisions. © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 3 1–9. In decision making, managers or supervisors may wish to take actions that are not economically justifiable. In most cases, upon receipt of a well-developed cost analysis, a production manager is satisfied whether an action is feasible. If the action is not economically justifiable, the matter is dropped without conflict. In a few cases, however, managers may wish to pursue a project because of personal reasons, and hope to have an economic analysis to support it. In these situations, care must be taken to ascertain the economic merits of the plan, and, if the plan cannot be justified on economic grounds, the manager must make the case for the project on another basis. The final responsibility for the decision rests with the manager. Therefore, plans that cannot be justified on a cost analysis basis may still be adopted at the discretion of management. In the control area, the accountant is charged with the responsibility of making certain that plans are executed in an optimal and efficient manner. In some cases this may be viewed as placing restrictions on management actions. Under these circumstances the manager may view the accounting function as placing too great a constraint on the manager while the accountant may view the manager as attempting to circumvent the rules. 1–10. The marketing people at Lever Bros. rely on accounting information for decisions. For example, accounting provides information about distribution costs, and helps marketing people determine the cost of materials and packaging if management decides to change a product. 1–11. The nonvalue-added activity—the amount of time employees are idle during normal trash pickups as a result of their trucks breaking down—occurred because workers did not inspect their trucks at the end of shifts for maintenance and repairs needs. So trucks broke down during normal trash pickups. The threat of privatization created incentives probably because workers thought they would not be hired by private trash collectors (or their working conditions would be worse or their wages would be lower). 1–12. The answer is simple—you get what you motivate. © The McGraw-Hill Companies, Inc., 1997 4 Cost Accounting, 5/e Solutions to Exercises 1–13. (20 min.) Cost data for managerial purposes. a. Differential costs are costs that would change; that is, the materials costs in this situation. Other costs would presumably not be affected by the change in materials. Other issues include the quality and availability of the new materials. Differential costs next year are $.90 (= $6.00 – $5.10) calculated as follows: Cost Old Materials New Materials Next year $6.00 $5.10 (85% x $6.00) b. Management would use the information to help decide whether to use the new materials. Management would also want to know the quality of materials and the reliability of the vendor. 1–14. (20 min.) Cost data for managerial purposes: Technology, Inc. This exercise demonstrates the importance of determining what is differential, and not being misled by the “bottom line.” All costs except corporate administration would be differential. Here is the calculation of the lost contribution: Revenue lost ...................................................... $430,000 Costs saved (excluding corporate admin.)......... 393,000 Contribution lost, before taxes ........................... 37,000 Taxes saved (40% of the lost contribution) ........ 14,800 Net contribution lost ........................................... $ 22,200 Management must decide whether the contribution toward corporate administrative costs and profits is sufficient to justify continuing operations, or whether it should seek a more profitable line of business. Unless there is a better alternative use of corporate resources, the division should not be closed in the short run, despite the reported loss on the financial statement. © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 5 1–15. Cost Value Chain Classification Transportation distribution Utilities production Salaries research and development Visits to customer customer service Packaging design design Advertising marketing 1–16. Cost Value Chain Classification Redesign design Promotion materials marketing Equipment research and development Sales people bonuses marketing Postage distribution Labor production © The McGraw-Hill Companies, Inc., 1997 6 Cost Accounting, 5/e 1–17. (20 min.) Ethics and altering the books: Amos & Associates a. The unofficial CMA answer comments specifically on competence, confidentiality, integrity, and objectivity with respect to the Standards of Ethical Conduct for Management Accountants. Basically, Elizabeth has a responsibility to perform professional duties in accordance with relevant laws, standards, and GAAP. Elizabeth must communicate both favorable as well as unfavorable information fairly and objectively. She must disclose all relevant information that could influence the users’ understanding of the reports. b. Elizabeth should first follow Amos & Associates’ established policy on the resolution of ethical conflict. (Assuming there is one!) If there isn’t an established policy Elizabeth should confront the next higher level of management that she believes is not involved in the altering of figures. This could be the Chairman of the Board of Directors. If the matter remains unresolved she should take the issue to the Audit Committee and the Board of Directors. Perhaps Elizabeth should seek confidential discussion with an objective advisor. When all levels of internal review have been exhausted without satisfactory results, Elizabeth should resign and submit an informative memorandum to the chairman of the Board of Directors. © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 7 Solutions to Problems 1–18. (30 min.) Responsibility for ethical action: Toxic, Inc. a. As a management accountant Paul has a responsibility to perform his professional duties with competence in accordance with relevant laws and regulations. Clearly, dumping toxic waste is a violation of the law. As such, Paul might have a legal responsibility to take some action. As a professional, he must communicate both favorable and unfavorable information in an objective and fair manner. Thus, he cannot simply ignore the fact that Toxic, Inc. is involved in illegal toxic dumping. b. The first possible course of action was to discuss the situation with the controller. This is an appropriate approach to the problem. Always take a problem to your immediate supervisor first. If the controller indicates that he is aware of the situation and that you should not worry about it, then take the matter up with your controller’s superior. Move up the layers of management until someone is concerned and will deal with the problem. As for the second course of action, the proper authorities should be notified by someone in the company. The local newspaper, however, is not the proper authority. Paul should discuss the matter with the Board of Directors only after exhausting possibilities of discussing the matter with internal management. 1–19. (30 min.) Ethics and inventory obsolescence: Angioplasty Corporation. a. The controller has a responsibility to perform his duties in a competent manner, one that is in accordance with relevant laws, regulations, technical standards, and generally accepted accounting principles. The controller's lack of action regarding the overstatement of inventory is a violation of professional responsibilities. b. Linda should first follow Angioplasty’s established policy on the resolution of ethical conflict. (Assuming there is one!) If there isn’t an established policy, Linda might want to mention to the controller the fact that she believes both the CFO and the external auditors are unaware of the inventory overvaluation. If she is uncomfortable mentioning this to the controller, she should talk directly to the CFO instead. If the situation is still unresolved then Linda should bring it to the attention of the Audit Committee and the Board of Directors. Perhaps Linda should seek confidential discussion with an objective advisor to clarify the issues and possible courses of action. When all levels of internal review have been exhausted without satisfactory results, Linda should resign and submit an informative memorandum to the chairman of the Board of Directors. Except where legally prescribed, the disclosure of such information to outsiders (the media, regulatory bodies, external auditors, etc.) is considered inappropriate. © The McGraw-Hill Companies, Inc., 1997 8 Cost Accounting, 5/e 1–20. (30 min.) Cost data for managerial purposes: Wegrow Fruits, Inc. This problem demonstrates the ambiguity of cost-based contracting and, indeed, the measurement of “cost.” Recommended prices may range from the $42.90 suggested by NASA to the $53.35 charged by Wegrow Fruits, Inc. The key is to negotiate the cost-based price prior to the signing of the contract. Considerations which affect the base costs are reflected in the following options: Options: A. Only the differential costs could be considered as the cost basis. B. The total cost per case for normal production of 80,000 cases could be used as the cost basis. C. The total cost per case for production of 120,000 cases, excluding marketing costs, could be used as the cost basis. D. The total cost per case for production of 120,000 cases, including marketing costs, could be used as the cost basis. Costs Unit Cost Options (One Unit = One Case of Fang) A B C D Materials (var.) $12 $12 $12 $12 $12 Labor (var.) Supplies (var.) 8 8 8 8 8 Indirect costs (fixed) 440,000 N/A 5.50 3.67 3.67 Marketing (var) 2 N/A 2 N/A 2 Administrative (fixed) 160,000 N/A 2 1.33 1.33 Per case cost basis $39 $48.50 $44 $46 Per case price (Cost + 10%) $42.90 $53.35 $48.40 $50.60 We believe the most justifiable options exclude marketing costs and reflect the actual production level of 120,000 cases. These are Options A and C. (As stockholders in Wegrow Fruits, Inc., we would prefer Option C.) © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 9 1–21. (30 min.) Cost data for managerial purposes: Ante Division. This problem demonstrates the ambiguity in measuring “costs.” Ante Division’s controller included the “per unit” fixed costs, calculated for allocation purposes under normal production volume, when it calculated the per unit cost of the additional production. The controller charged Beta Division on that basis, ignoring the differential costs as a basis for inter-division sales. Possible options available are as follows: A. Use the full per unit cost for normal production of 25,000 units. B. Use only differential costs as the cost basis. C. Use differential costs plus a share of fixed costs, based on actual production volume (with Beta’s order) of 37,500 units. Costs Unit Cost Options: A B C Direct materials (var.) $.80 $.80 $.80 $.80 Direct Labor (var.) 4.00 4.00 4.00 4.00 Other variable costs .40 .40 .40 .40 Fixed costs 90,000.00 3.60 N/A 3.00 Per unit cost $8.80 $5.20 $ 8.20 Cost plus 20% 10.56 6.24 9.84 Total price (5,000 units) $52,800 $31,200 $49,200 If fixed costs are not differential and Ante has no alternative uses of the excess capacity (between 37,500 units available capacity and 25,000 units used), then Option B is the most defensible. Options A and C overstate the differential cost of production which could inappropriately affect Beta’s decisions about buying internally or externally, or about pricing its product, among other decisions. © The McGraw-Hill Companies, Inc., 1997 10 Cost Accounting, 5/e 1–22. (20 min.) Cost data for managerial purposes: Amanda's Coffee, Inc. a. (1) (2) (3) Baseline Alternative with Ice Cream Differential Revenues and Costs Sales revenue............ $38,000 $78,000 $40,000 Costs: Food....................... $15,000 $35,000 $20,000 Labor...................... 12,000 18,000a 6,000 Utilities ................... 2,000 3,000a 1,000 Rent ....................... 4,000 4,800b 800 Other costs............. 2,000 2,400b 400 Manager’s salary.... 6,000 6,000 –0– Total costs .......... 41,000 69,200 28,200 Operating profit.......... $ (3,000) $ 8,800 $11,800 aFifty percent higher than baseline. bTwenty percent higher than baseline b. The decision to expand and offer ice cream results in differential profits of $11,800, so it is profitable to expand. Note that only differential costs and revenues figured in the decision. The supervisor's salary did not change, so it was not included. © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 11 1–23. (25 min.) Cost data for managerial purposes: Change Management Corporation. a. The following differential costs would be incurred: Consultant Labor ....... $134,000 Given Equipment Lease....... 4,200 5% of $84,000 Supplies..................... 5,400 10% of $54,000 Other Costs ............... 5,700 15% of $38,000 Total Costs ................ $149,300 b. Technically, since acceptance of the contract would add $700 to operating profits, it would seem that acceptance of the contract is called for. Of course, as a practical matter the amount is so small that it would probably not be worth the effort. c. Other factors would include (1) whether this will enable the company to get into a new, profitable line of business; (2) what other opportunities the company has for expanding; and (3) whether the contract will provide for more revenues in the future. In short, the company must consider the long run as well as the first year’s results. © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 2 13 Chapter 2 Cost Concepts and Behavior Solutions to Review Questions 2–1. Cost is a more general term that refers to a sacrifice of resources and may be either an opportunity cost or an outlay cost. An expense is the write-off of an outlay cost against revenues in a particular accounting period and usually pertains only to external financial reports. 2–2. Product costs are those costs that can be more easily attributed to products, while period costs are those costs that are more easily attributed to time periods. The determination of product costs varies depending on the approach used: full absorption, variable, or managerial costing. See page 44 for definitions of product cost using each approach. 2–3. Yes. The costs associated with goods sold in a period are not expected to result in future benefits. They provided revenues for the period in which the goods were sold; therefore, they are expensed for financial accounting purposes. 2–4. Both accounts represent the cost of the goods acquired from an outside supplier, which include all costs necessary to ready the goods for sale (in merchandising) or production (in manufacturing). The merchandiser expenses these costs as the product is sold, as no additional costs are incurred. The manufacturer transforms the purchased materials into finished goods and charges these costs, along with conversion costs to production (work in process inventory). These costs are expensed when the finished goods are sold. 2–5. Direct materials: Materials in their raw or unconverted form which become an integral part of the finished product are considered direct materials. In some cases, materials are so immaterial in amount that they are considered part of overhead. Direct labor: Costs associated with labor engaged in manufacturing activities. Sometimes this is considered as the labor which is actually responsible for converting the materials into finished product. Assembly workers, cutters, finishers and similar “hands on” personnel are classified as direct labor. Manufacturing overhead: All other costs directly related to product manufacture. These costs include the indirect labor and materials, costs related to the facilities and equipment required to carry out manufacturing operations, supervisory costs, and all other direct support activities. © The McGraw-Hill Companies, Inc., 1997 14 Cost Accounting, 5/e 2–6. Step costs change with volume in steps, such as when supervisors are added. Mixed costs have elements of both fixed and variable costs. Utilities and maintenance are often mixed costs. 2–7. Total variable costs change in direct proportion to a change in volume (within the relevant range of activity). Total fixed costs do not change as volume changes (within the relevant range of activity). 2–8. Prime costs are direct. Direct materials and direct labor are by their very nature directly related to the product. Some overhead costs are treated as indirect for practical reasons—while they might be directly associated with the product (e.g., incidental materials), they are too small in value to be separately measured. Other overhead costs, such as the occupancy costs of the manufacturing plant, are clearly indirect. 2–9. Unit costs are averages only at a given level of production, the relevant range. Since some costs do not change, i.e. fixed costs, within certain production ranges, the average (fixed costs divided by number of units) will change as production changes within those ranges. Thus, to determine the incremental (or differential) cost per unit one must look at the change in total costs because of a change in production activity and divide by the total number of units. 2–10. Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations. 2–11. Knowing which costs would be assigned to the film was important for people who were paid based on a percentage of the film’s net profits. Had they understood how costs of Forrest Gump were to be defined, they may have insisted on a share of revenues or a flat fee instead of profit sharing. 2–12. Answer will depend on the restaurant studied. Examples are: materials—food; labor—meal preparers; overhead—maintenance, utilities, lease on building. Provocative questions include the following: Are napkins and condiments direct or indirect materials? Is the restaurant manager direct or indirect labor? Then ask if the way one categorizes these costs affects managerial decisions. (Probably not.) 2–13. Examples: labor—instructors’ salaries; overhead—departmental office staff’s salaries. © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 2 15 Solutions to Exercises 2–14. (15 min.) Basic concepts. Cost Item Fixed (F) Variable (V) Period (P) Product (R) a. Transportation-in costs on materials purchased .................... V R b. Assembly line workers wages ................................................ V R c. Property taxes on office buildings for administrative staff ...... F P d. Salaries of top executives in the company............................. F P e. Overtime pay for assembly workers....................................... V R f. Sales commissions ................................................................ V P g. Sales personnel office rent..................................................... F P h. Sales supervisory salaries ..................................................... F P i. Controller’s office rental ......................................................... F P j. Administrative office heat and air conditioning....................... F P 2–15. (10 min.) Basic concepts. a. Factory heating and air conditioning. ...................................... C b. Production supervisor’s salary. ............................................... C c. Transportation-in costs on materials purchased..................... P d. Assembly line worker’s salary................................................. B e. Raw materials used in production process. ............................ P f. Indirect materials. ................................................................... C © The McGraw-Hill Companies, Inc., 1997 16 Cost Accounting, 5/e 2–16. (15 min.) Basic concepts. Concept Definition Period costs 5. Costs that can be more easily attributed to time intervals. Indirect costs 9. Costs that cannot be directly related to a cost object. Fixed costs 11. Costs that do not vary with the volume of activity. Opportunity costs 7. The lost benefit from the best forgone alternative. Outlay costs 6. Past, present or near-future cash flow. Direct costs 10. Costs that can be directly related to a cost object. Expense 3. The cost charged against revenue in a particular accounting period. Cost 2. A sacrifice of resources. Variable costs 1. Costs that vary with the volume of activity. Full-absorption cost 8. Costs used to compute inventory value according to GAAP. Product costs 4. Costs that are part of inventory. © The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 2 17 2–17. (15 min.) Basic concepts. Cost Item Fixed (F) Variable (V) Period (P) Product (R) a. Factory security personnel ......................................... F R b. Utilities in controller’s office........................................ F P c. Factory heat and air conditioning ............................... F R d. Power to operate factory equipment .......................... V R e. Depreciation on furniture for company executives ..... F P 2–18. (15 min.) Prepare statements for a merchandising company: PC, Inc. PC, Inc. Income Statement For the Year Ended December 31, This Year Revenue.......................................................................... $5,000,000 Cost of goods sold (see statement below) ...................... 3,060,000 Gross margin................................................................... 1,940,000 Marketing and administrative costs................................. 1,600,000 Operating profit ............................................................... $ 340,000 PC, Inc. Cost of Goods Sold Statement For the Year Ended December 31, This Year Beginning inventory......................................................... $ 500,000 Purchases ....................................................................... $2,600,000 Transportation-in ............................................................. 260,000 Total cost of goods purchased ........................................ 2,860,000 Cost of goods available for sale ...................................... 3,360,000 Ending inventory ............................................................. 300,000 Cost of goods sold .......................................................... $3,060,000 © The McGraw-Hill Companies, Inc., 1997 18 Cost Accounting, 5/e 2–19. (30 min.) Prepare statements for a manufacturing company. We recommend setting up either T-accounts or equations to solve for the missing data. a. Materials Inv. Beginning Direct Direct Ending direct 12,250 x 23,850 direct materials inventory + materials purchased = materials used + materials inventory 13,600 12,250 + X = $23,850 + $13,600 X = $23,850 + $13,600 – $12,250 X = $25,200 b. Finished Goods Inventory Beginning finished goods + Cost of goods = Cost of goods + Ending finished goods 2,250 x 28,000 inventory manufactured sold inventory 3,250 2,250 + X = $28,000 + $3,250 X = $28,000 + $3,250 – $2,250 X = $29,000 c. Work in Process Inventory Beginning work in process + Total manufacturing = Cost of goods + Ending work in process 16,150 x 29,000 * inventory cost manufactured inventory 14,500 16,150 + X = $29,000* + $14,500 X = $29,000 + $14,500 – $16,150 X = $27,350 *From solution