CHAPTER 2
DISCUSSION QUESTIONS
Q2-1. (a) Cost is the current monetary value of portion of the machinery cost to product
economic resources given up or to be cost (inventory). When the product is sold,
given up in obtaining goods and services. the depreciation becomes a part of the
Economic resources may be given up by cost of goods sold which is an expense.
transferring cash or other property, Depreciation of plant machinery during an
issuing capital stock, performing services, unplanned and unproductive period of idle-
or incurring liabilities. ness, such as during a strike, should be
Costs are classified as unexpired or classified as a loss. The term “expense”
expired. Unexpired costs are assets and should preferably be avoided when making
apply to the production of future rev- reference to production costs.
enues. Examples of unexpired costs are (4) Organization costs are those costs
inventories, prepaid expenses, plant and that benefit the firm for its entire period of
equipment, and investments. Expired existence and are most appropriately
costs, which most costs become eventu- classified as a noncurrent asset. When
ally, are those that are not applicable to there is initial evidence that a firm’s life is
the production of future revenues and are limited, the organization costs should be
deducted from current revenues or allocated over the firm’s life as an
charged against retained earnings. expense or should be amortized as a loss
Expense in its broadest sense includes when a going concern foresees termina-
all expired costs; i.e., costs which do not tion. In practice, however, organization
have any potential future economic benefit. costs are often written off in the early
A more precise definition limits the use of years of a firm’s existence.
the term “expense” to the expired costs (5) Spoiled goods resulting from normal
arising from using or consuming goods and manufacturing processing should be
services in the process of obtaining rev- treated as a cost of the product manufac-
enues; e.g., cost of goods sold and market- tured. When the product is sold, the cost
ing and administrative expenses. becomes an expense. Spoiled goods
(b) (1) Cost of goods sold is an expired cost resulting from an abnormal occurrence
and may be referred to as an expense in should be classified as a loss.
the broad sense of the term. On the Q2-2. Cost objects are units for which an arrange-
income statement, it is most often identi- ment is made to accumulate and measure
fied as a cost. Inventory held for sale cost. They are important because of the need
which is destroyed by an abnormal for multiple dimensions of data (e.g., by prod-
casualty should be classified as a loss. uct, contract, or department) to accomplish
(2) Uncollectible accounts expense is usu- the various purposes of cost accounting,
ally classified as an expense. However, including cost finding, planning, and control.
some authorities believe that it is more Q2-3. (a) To classify costs as direct or indirect, the
desirable to classify uncollectible accounts cost accountant must first know the
as a direct reduction of sales revenue (an answers to the questions “Directly traced
offset to revenue). An uncollectible account to what?” and “Indirectly identified with
which was not provided for in the annual what?” Otherwise, there is no way to
adjustment, such as bankruptcy of a major assess the direct or indirect nature of a
debtor, may be classified as a loss. cost. It is the choice of a cost object that
(3) Depreciation expense for plant machin- answers those two questions.
ery is a component of factory overhead (b) For example, the cost of a department
and represents the reclassification of a manager’s salary cannot be classified as
2-1
, 2-2 Chapter 2
direct or indirect without selecting the and (d) procedures for implementing and con-
cost object first. If the cost object is a trolling these plans.
product unit produced in the manager’s Q2-7. A chart of accounts is necessary to classify
department, then the salary is indirect. If accounting data, so that the data may be uni-
the cost object is the department, the formly recorded in journals and posted to the
salary is direct. ledger accounts.
Q2-4. (a) The product unit, batch, or lot is the cost Q2-8. Advantages of the electronic data processing
object. (Be careful about the lack of system for record keeping are: speed, larger
clarity of the term “the product” when it is storage, single entry of multiple transactions,
not known whether it is intended to mean automatic control features, and flexibility in
(a) a single unit, batch, or lot of a product, report formats.
as opposed to (b) any large number of Q2-9. The following perceived weaknesses were
identical units. It could easily be taken to mentioned in the text:
mean, say, product #321, as opposed to (a) Traditional measures attempt to serve
some other item in the company’s catalog, many purposes, and as a result they are
and that could suggest the grand total of all not universally regarded as serving any
identical pieces of #321 produced during one purpose ideally.
the entire product life cycle. The signifi- (b) Traditional measures are affected by
cance of this distinction is that some costs, accounting choices that are not always
such as product design, prototyping, and relevant to the purpose at hand; exam-
initial worker training, are direct costs with ples of these choices are cost flow
respect to the total of all units ever pro- assumptions and arbitrary fixed cost allo-
duced, but are indirect with respect to a cations.
single unit, batch, or lot.) (c) Traditional measures are calculated by
(b) A disaggregation of overhead would be systems that are usually slow to respond
useful for any study of how to better man- to changing conditions.
age costs, or of what causes costs to be (d) Traditional measures of plant utilization
incurred. Relatively few of the costs can seem to encourage overutilization of
incurred in a factory are caused by the capacity.
routine production of one more unit of one (e) Traditional measures of efficiency are
product. often reported too late, are too aggregat-
(c) (1) A batch of identical units. ed, and are easy to misinterpret.
(2) The sum of all identical units ever Q2-10. Nonfinancial performance measures are
produced. based on simple counts or other physical data
(3) An activity or process carried out in rather than allocated accounting data, they
production. are unconnected to the general financial
(4) A group or “cell” of machines and accounting system, and they are chosen to
workers within a department. reflect one specific aspect of performance.
(5) A department in which production Q2-11. Four examples of nonfinancial performance
occurs. measures given in the text, and the aspects of
(6) A plant or other production facility. performance they might be used to monitor,
(7) A strategic goal of the firm (e.g., are
improved quality). (a) scrap weight as a percentage of total
Q2-5. A cost system is a combination of procedures shipped weight; to monitor efficiency of a
and records designed to provide the various process, particularly efficiency of material
types of information required in the conduct of usage
the enterprise; including cost finding, plan- (b) processing time as a percentage of total
ning, and control. time; to monitor cycle efficiency or
Q2-6. A good information system requires the inventory velocity
establishment of (a) long-range objectives; (b) (c) distance moved by a unit while inside the
an organization plan showing delegated plant; to monitor simplification of a process
responsibilities in detail; (c) detailed plans for (d) suggestions per year per employee; to
future operations, both long- and short-term; monitor employee involvement
DISCUSSION QUESTIONS
Q2-1. (a) Cost is the current monetary value of portion of the machinery cost to product
economic resources given up or to be cost (inventory). When the product is sold,
given up in obtaining goods and services. the depreciation becomes a part of the
Economic resources may be given up by cost of goods sold which is an expense.
transferring cash or other property, Depreciation of plant machinery during an
issuing capital stock, performing services, unplanned and unproductive period of idle-
or incurring liabilities. ness, such as during a strike, should be
Costs are classified as unexpired or classified as a loss. The term “expense”
expired. Unexpired costs are assets and should preferably be avoided when making
apply to the production of future rev- reference to production costs.
enues. Examples of unexpired costs are (4) Organization costs are those costs
inventories, prepaid expenses, plant and that benefit the firm for its entire period of
equipment, and investments. Expired existence and are most appropriately
costs, which most costs become eventu- classified as a noncurrent asset. When
ally, are those that are not applicable to there is initial evidence that a firm’s life is
the production of future revenues and are limited, the organization costs should be
deducted from current revenues or allocated over the firm’s life as an
charged against retained earnings. expense or should be amortized as a loss
Expense in its broadest sense includes when a going concern foresees termina-
all expired costs; i.e., costs which do not tion. In practice, however, organization
have any potential future economic benefit. costs are often written off in the early
A more precise definition limits the use of years of a firm’s existence.
the term “expense” to the expired costs (5) Spoiled goods resulting from normal
arising from using or consuming goods and manufacturing processing should be
services in the process of obtaining rev- treated as a cost of the product manufac-
enues; e.g., cost of goods sold and market- tured. When the product is sold, the cost
ing and administrative expenses. becomes an expense. Spoiled goods
(b) (1) Cost of goods sold is an expired cost resulting from an abnormal occurrence
and may be referred to as an expense in should be classified as a loss.
the broad sense of the term. On the Q2-2. Cost objects are units for which an arrange-
income statement, it is most often identi- ment is made to accumulate and measure
fied as a cost. Inventory held for sale cost. They are important because of the need
which is destroyed by an abnormal for multiple dimensions of data (e.g., by prod-
casualty should be classified as a loss. uct, contract, or department) to accomplish
(2) Uncollectible accounts expense is usu- the various purposes of cost accounting,
ally classified as an expense. However, including cost finding, planning, and control.
some authorities believe that it is more Q2-3. (a) To classify costs as direct or indirect, the
desirable to classify uncollectible accounts cost accountant must first know the
as a direct reduction of sales revenue (an answers to the questions “Directly traced
offset to revenue). An uncollectible account to what?” and “Indirectly identified with
which was not provided for in the annual what?” Otherwise, there is no way to
adjustment, such as bankruptcy of a major assess the direct or indirect nature of a
debtor, may be classified as a loss. cost. It is the choice of a cost object that
(3) Depreciation expense for plant machin- answers those two questions.
ery is a component of factory overhead (b) For example, the cost of a department
and represents the reclassification of a manager’s salary cannot be classified as
2-1
, 2-2 Chapter 2
direct or indirect without selecting the and (d) procedures for implementing and con-
cost object first. If the cost object is a trolling these plans.
product unit produced in the manager’s Q2-7. A chart of accounts is necessary to classify
department, then the salary is indirect. If accounting data, so that the data may be uni-
the cost object is the department, the formly recorded in journals and posted to the
salary is direct. ledger accounts.
Q2-4. (a) The product unit, batch, or lot is the cost Q2-8. Advantages of the electronic data processing
object. (Be careful about the lack of system for record keeping are: speed, larger
clarity of the term “the product” when it is storage, single entry of multiple transactions,
not known whether it is intended to mean automatic control features, and flexibility in
(a) a single unit, batch, or lot of a product, report formats.
as opposed to (b) any large number of Q2-9. The following perceived weaknesses were
identical units. It could easily be taken to mentioned in the text:
mean, say, product #321, as opposed to (a) Traditional measures attempt to serve
some other item in the company’s catalog, many purposes, and as a result they are
and that could suggest the grand total of all not universally regarded as serving any
identical pieces of #321 produced during one purpose ideally.
the entire product life cycle. The signifi- (b) Traditional measures are affected by
cance of this distinction is that some costs, accounting choices that are not always
such as product design, prototyping, and relevant to the purpose at hand; exam-
initial worker training, are direct costs with ples of these choices are cost flow
respect to the total of all units ever pro- assumptions and arbitrary fixed cost allo-
duced, but are indirect with respect to a cations.
single unit, batch, or lot.) (c) Traditional measures are calculated by
(b) A disaggregation of overhead would be systems that are usually slow to respond
useful for any study of how to better man- to changing conditions.
age costs, or of what causes costs to be (d) Traditional measures of plant utilization
incurred. Relatively few of the costs can seem to encourage overutilization of
incurred in a factory are caused by the capacity.
routine production of one more unit of one (e) Traditional measures of efficiency are
product. often reported too late, are too aggregat-
(c) (1) A batch of identical units. ed, and are easy to misinterpret.
(2) The sum of all identical units ever Q2-10. Nonfinancial performance measures are
produced. based on simple counts or other physical data
(3) An activity or process carried out in rather than allocated accounting data, they
production. are unconnected to the general financial
(4) A group or “cell” of machines and accounting system, and they are chosen to
workers within a department. reflect one specific aspect of performance.
(5) A department in which production Q2-11. Four examples of nonfinancial performance
occurs. measures given in the text, and the aspects of
(6) A plant or other production facility. performance they might be used to monitor,
(7) A strategic goal of the firm (e.g., are
improved quality). (a) scrap weight as a percentage of total
Q2-5. A cost system is a combination of procedures shipped weight; to monitor efficiency of a
and records designed to provide the various process, particularly efficiency of material
types of information required in the conduct of usage
the enterprise; including cost finding, plan- (b) processing time as a percentage of total
ning, and control. time; to monitor cycle efficiency or
Q2-6. A good information system requires the inventory velocity
establishment of (a) long-range objectives; (b) (c) distance moved by a unit while inside the
an organization plan showing delegated plant; to monitor simplification of a process
responsibilities in detail; (c) detailed plans for (d) suggestions per year per employee; to
future operations, both long- and short-term; monitor employee involvement
