Managerial 10e – Chapter 1 – Solutions Manual
Answers To Questions - Chapter 1
1. Financial Accounting Deals With Regulated, Historical, Financial
Information That Pertains To The Whole Company And Is
Designed Primarily To Meet The Information Needs Of Outsiders.
Managerial Accounting Is Concerned With Unregulated Financial,
Economic, And Nonfinancial Data, Which Pertains More To The
Sub-Units Of The Organization, That Is Current And Future
Oriented, And That Is Designed Primarily To Meet The Information
Needs Of Insiders.
2. The Value-Added Principle Means That Management Accountants
Are Free To Engage In Any Information Gathering And Reporting
Activity So Long As The Activity Adds Value In Excess Of Its Cost.
Estimates Of Future Product Costs Are Permissible In Managerial
Accounting Reports For Budgeting And Product Costing But
Would Not Be Allowed By Financial Regulations In Financial
Accounting.
3. The Two Dimensions Of The TQM Program Are: (1) Management
Should Follow a Continuous, Systematic Problem-Solving
Philosophy That Encourages Achievement Of Zero Defects In
Production And Engages All Employees To Eliminate Waste And
Errors And To Simplify The Design And Delivery Of Products And
Services To Customers, And (2) Organizations Need a Strong
Commitment To Customer Satisfaction. TQM Is Being Used In
Business To Maintain Profitability In An Increasingly Competitive
Global Market. In This Environment, Profit Margins Are Tight, And
Therefore, Inefficiencies Can More Easily Erode Business Profits.
To Eliminate Waste, Errors, And Dissatisfied Customers,
Information Must Be Timely And Relevant In Order To Prevent Or
Discover And Correct Mistakes Immediately.
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, Managerial 10e – Chapter 1 – Solutions Manual
4. Both Financial And Managerial Accountants Need Cost
Information About The Company’s Products And Services. In
Managerial Accounting Cost Information Is Useful In Product
Pricing Decisions And Is An Essential Part Of Cost Control
(Comparing Actual Product Cost To Budgeted Product Cost To
Assess Needed Improvement) And Performance Evaluation
(Assess Managers’ Success In Controlling And Eliminating
Unnecessary Cost). In Financial Accounting, Cost Information
About The Product Is Needed To Determine Ending Inventory On
The Balance Sheet And Cost Of Goods Sold On The Income
Statement. Product Costing In Financial Accounting Can Impact
The Decisions Of Not Only Managers But Also Outsiders Such As
Investors, Creditors, And Taxing Authorities. Product Costing
Information In Managerial Accounting Can Affect The Product’s
Selling Price As Well As Management’s Decisions As To Whether
Cost Correction Changes Are Needed.
5. Costs Are Assets Used In The Process Of Earning Revenue But
Not All Costs Of The Earning Process Are Used In The Same
Period In Which They Are Incurred. Therefore, a Cost That Is Used
In The Process Of Earning Revenue Is Recorded As An Expense
(e.g. Administrative Salaries And Product Cost For Products Sold)
And a Cost That Has Future Benefit In The Earning Process Is
Recorded As An Asset In The Period That It Is Incurred.
6. The Cash Paid To Production Workers Has Not Been Used To
Produce Revenue But To Produce Inventory. The Revenue Is
Earned When The Inventory Is Sold At Which Time The Cost Of
Salaries Associated With Those Products Sold Should Be
Expensed As Cost Of Goods Sold.
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, Managerial 10e – Chapter 1 – Solutions Manual
7. Product Costs Associated With Goods That Have Not Been Sold
Are Recorded In The Account Called Inventory. Inventory Cost Is
Shown On The Balance Sheet As An Asset. The Amount Of Total
Assets And Net Income Will Be Higher If a Product Cost Is
Classified As An Asset Than If It Is Expensed. Product Cost
Associated With Goods That Have Been Sold Should Be Recorded
In The Account Called Cost Of Goods Sold. Cost Of Goods Sold Is
An Expense Shown On The Income Statement. The Amount Of
Total Assets And Net Income Will Be Lower If a Product Cost Is
Classified As An Expense As Opposed To Being Classified As An
Asset.
8. An Indirect Product Cost Cannot Be Easily Or Economically
Traced To a Specific Product. Product Costs That Would Be
Considered Indirect Include Costs Such As Production Supplies,
Salaries Of Production Supervisors, And Depreciation, Rent, And
Utilities On Factory Facilities.
9. Product Costs Are All Costs Incurred To Obtain a Product Or
Provide a Service. These Costs Are Treated As Assets, Recorded
In Inventory, And Expensed When The Associated Products Are
Sold. Period Costs Are All Costs Not Associated With a Product.
They Are Associated With The General, Selling, And
Administrative Functions Of The Business And Most Are
Expensed In The Period In Which The Associated Economic
Sacrifice Is Made. A Product Cost Would Be The Cost Of Direct
Materials Used In The Production Of a Product. A Period Cost
Would Be Rent On Administrative Facilities.
1-b-3
, Managerial 10e – Chapter 1 – Solutions Manual
10. The Effects Of Cost Classification On The Financial Statements
Can Have Important Implications With Respect To The Following:
(1) The Availability Of Financing - Investors And Creditors Use
Financial Statement Data To Predict Businesses’ Future
Earnings. Favorable Financial Statements Provide Evidence
Of Favorable Future Performance Whereas Unfavorable
Financial Statements Are An Indication Of Possible Poor
Future Financial Performance. A Company With Favorable
Financial Performance Is More Likely To Generate Sufficient
Cash Flows To Make Interest Payments, To Repay The
Principal Balance Of Its Liabilities, And To Pay Dividends.
Hence, Investors And Creditors Believe They Have a Greater
Probability Of Receiving Interest Payments, The Return Of
Principal, And Return On Investment When Companies Show
Favorable Financial Statements. Since Expenses Reduce
Profit And Financial Performance, Classifying a Cost As An
Expense Will Inhibit The Company’s Ability To Obtain
Financing. Classifying a Cost As An Asset, Which Will
Increase Profit, Total Assets, And Equity, Enhances
Businesses’ Ability To Obtain Financing.
(2) Management Motivation - Executive Compensation May Be
Affected By Financial Statement Data. Many Managers’
Bonuses Are Based On a Percentage Of Net Income. If Costs
Are Classified As Expenses, Net Income Will Be Reduced
Which In Turn Affects Managerial Income. Managers May
Even Be Tempted To Misclassify Costs In Order To
Manipulate Financial Statement Data To Their Advantage.
(3) Income Tax Considerations - With Respect To Taxes,
Managers Prefer To Classify Costs As Expenses Rather Than
Assets. Classifying a Cost As An Expense Reduces Net
Income And In Turn Reduces Income Taxes, Which Are
Determined By Computing a Designated Percentage Of
Taxable Income.
1-b-4
Answers To Questions - Chapter 1
1. Financial Accounting Deals With Regulated, Historical, Financial
Information That Pertains To The Whole Company And Is
Designed Primarily To Meet The Information Needs Of Outsiders.
Managerial Accounting Is Concerned With Unregulated Financial,
Economic, And Nonfinancial Data, Which Pertains More To The
Sub-Units Of The Organization, That Is Current And Future
Oriented, And That Is Designed Primarily To Meet The Information
Needs Of Insiders.
2. The Value-Added Principle Means That Management Accountants
Are Free To Engage In Any Information Gathering And Reporting
Activity So Long As The Activity Adds Value In Excess Of Its Cost.
Estimates Of Future Product Costs Are Permissible In Managerial
Accounting Reports For Budgeting And Product Costing But
Would Not Be Allowed By Financial Regulations In Financial
Accounting.
3. The Two Dimensions Of The TQM Program Are: (1) Management
Should Follow a Continuous, Systematic Problem-Solving
Philosophy That Encourages Achievement Of Zero Defects In
Production And Engages All Employees To Eliminate Waste And
Errors And To Simplify The Design And Delivery Of Products And
Services To Customers, And (2) Organizations Need a Strong
Commitment To Customer Satisfaction. TQM Is Being Used In
Business To Maintain Profitability In An Increasingly Competitive
Global Market. In This Environment, Profit Margins Are Tight, And
Therefore, Inefficiencies Can More Easily Erode Business Profits.
To Eliminate Waste, Errors, And Dissatisfied Customers,
Information Must Be Timely And Relevant In Order To Prevent Or
Discover And Correct Mistakes Immediately.
1-b-1
, Managerial 10e – Chapter 1 – Solutions Manual
4. Both Financial And Managerial Accountants Need Cost
Information About The Company’s Products And Services. In
Managerial Accounting Cost Information Is Useful In Product
Pricing Decisions And Is An Essential Part Of Cost Control
(Comparing Actual Product Cost To Budgeted Product Cost To
Assess Needed Improvement) And Performance Evaluation
(Assess Managers’ Success In Controlling And Eliminating
Unnecessary Cost). In Financial Accounting, Cost Information
About The Product Is Needed To Determine Ending Inventory On
The Balance Sheet And Cost Of Goods Sold On The Income
Statement. Product Costing In Financial Accounting Can Impact
The Decisions Of Not Only Managers But Also Outsiders Such As
Investors, Creditors, And Taxing Authorities. Product Costing
Information In Managerial Accounting Can Affect The Product’s
Selling Price As Well As Management’s Decisions As To Whether
Cost Correction Changes Are Needed.
5. Costs Are Assets Used In The Process Of Earning Revenue But
Not All Costs Of The Earning Process Are Used In The Same
Period In Which They Are Incurred. Therefore, a Cost That Is Used
In The Process Of Earning Revenue Is Recorded As An Expense
(e.g. Administrative Salaries And Product Cost For Products Sold)
And a Cost That Has Future Benefit In The Earning Process Is
Recorded As An Asset In The Period That It Is Incurred.
6. The Cash Paid To Production Workers Has Not Been Used To
Produce Revenue But To Produce Inventory. The Revenue Is
Earned When The Inventory Is Sold At Which Time The Cost Of
Salaries Associated With Those Products Sold Should Be
Expensed As Cost Of Goods Sold.
1-b-2
, Managerial 10e – Chapter 1 – Solutions Manual
7. Product Costs Associated With Goods That Have Not Been Sold
Are Recorded In The Account Called Inventory. Inventory Cost Is
Shown On The Balance Sheet As An Asset. The Amount Of Total
Assets And Net Income Will Be Higher If a Product Cost Is
Classified As An Asset Than If It Is Expensed. Product Cost
Associated With Goods That Have Been Sold Should Be Recorded
In The Account Called Cost Of Goods Sold. Cost Of Goods Sold Is
An Expense Shown On The Income Statement. The Amount Of
Total Assets And Net Income Will Be Lower If a Product Cost Is
Classified As An Expense As Opposed To Being Classified As An
Asset.
8. An Indirect Product Cost Cannot Be Easily Or Economically
Traced To a Specific Product. Product Costs That Would Be
Considered Indirect Include Costs Such As Production Supplies,
Salaries Of Production Supervisors, And Depreciation, Rent, And
Utilities On Factory Facilities.
9. Product Costs Are All Costs Incurred To Obtain a Product Or
Provide a Service. These Costs Are Treated As Assets, Recorded
In Inventory, And Expensed When The Associated Products Are
Sold. Period Costs Are All Costs Not Associated With a Product.
They Are Associated With The General, Selling, And
Administrative Functions Of The Business And Most Are
Expensed In The Period In Which The Associated Economic
Sacrifice Is Made. A Product Cost Would Be The Cost Of Direct
Materials Used In The Production Of a Product. A Period Cost
Would Be Rent On Administrative Facilities.
1-b-3
, Managerial 10e – Chapter 1 – Solutions Manual
10. The Effects Of Cost Classification On The Financial Statements
Can Have Important Implications With Respect To The Following:
(1) The Availability Of Financing - Investors And Creditors Use
Financial Statement Data To Predict Businesses’ Future
Earnings. Favorable Financial Statements Provide Evidence
Of Favorable Future Performance Whereas Unfavorable
Financial Statements Are An Indication Of Possible Poor
Future Financial Performance. A Company With Favorable
Financial Performance Is More Likely To Generate Sufficient
Cash Flows To Make Interest Payments, To Repay The
Principal Balance Of Its Liabilities, And To Pay Dividends.
Hence, Investors And Creditors Believe They Have a Greater
Probability Of Receiving Interest Payments, The Return Of
Principal, And Return On Investment When Companies Show
Favorable Financial Statements. Since Expenses Reduce
Profit And Financial Performance, Classifying a Cost As An
Expense Will Inhibit The Company’s Ability To Obtain
Financing. Classifying a Cost As An Asset, Which Will
Increase Profit, Total Assets, And Equity, Enhances
Businesses’ Ability To Obtain Financing.
(2) Management Motivation - Executive Compensation May Be
Affected By Financial Statement Data. Many Managers’
Bonuses Are Based On a Percentage Of Net Income. If Costs
Are Classified As Expenses, Net Income Will Be Reduced
Which In Turn Affects Managerial Income. Managers May
Even Be Tempted To Misclassify Costs In Order To
Manipulate Financial Statement Data To Their Advantage.
(3) Income Tax Considerations - With Respect To Taxes,
Managers Prefer To Classify Costs As Expenses Rather Than
Assets. Classifying a Cost As An Expense Reduces Net
Income And In Turn Reduces Income Taxes, Which Are
Determined By Computing a Designated Percentage Of
Taxable Income.
1-b-4
