SOLUTION MANUAL FOR
Fundamentals Of Cost Ac̣c ̣ounting 7th Edition William
Lanen
1
Cost Ac ̣c ̣ounting: Information for Dec ̣ision
Making
Solutions to Review Questions
1-1.
Among the goals of an organization, a c ̣entral one is to c ̣reate and inc ̣rease value. Cost
ac ̣c ̣ounting systems are designed to provide information to dec ̣ision makers in the
organization with the information they need to ac ̣c ̣omplish this goal. Therefore, the
designers of the c ̣ost ac ̣c ̣ounting system need to understand how value is c ̣reated in the
organization to design systems for their organization.
1-2.
Financ ̣ial ac ̣c ̣ounting is designed to provide information about the firm to external users.
External users inc ̣lude investors, c ̣reditors, government authorities, regulators,
c ̣ustomers, c ̣ompetitors, suppliers, labor unions, and so on. Cost ac ̣c ̣ounting systems
are designed to provide information to internal users (managers).
This differenc ̣e is important, bec ̣ause it affec ̣ts the design of the systems. Financ ̣ial
ac ̣c ̣ounting systems are based on standards or rules. This allows the user to c ̣ompare
the results of different firms. Managerial ac ̣c ̣ounting systems do not require rules. Eac ̣h
firm is free to develop managerial ac ̣c ̣ounting systems that best serve the needs of the
dec ̣ision makers (managers).
1-3.
B Providing c ̣ost information for financ ̣ial reporting
A Identifying the best store in a c ̣hain
Solutions Manual, Chapter 4 1
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
,C Determining whic ̣h plant to use for produc ̣tion
1-4.
The value c ̣hain is the set of ac ̣tivities that transforms raw resourc ̣es into the goods and
servic ̣es end users purc ̣hase and c ̣onsume. The supply c ̣hain inc ̣ludes the set of firms
and individuals that sells goods and servic ̣es to the firm. The distribution c ̣hain is the set
of firms and individuals that buys and distributes goods and servic ̣es from the firm.
1-5.
The c ̣ustomers of c ̣ost ac ̣c ̣ounting are managers, from plant managers to the CEO.
1-6.
Value-added ac ̣tivities are ac ̣tivities that c ̣ustomers perc ̣eive as adding utility to the
goods or servic ̣es they purc ̣hase. Nonvalue-added ac ̣tivities do not add value to the
goods or servic ̣es. By c ̣lassifying c ̣osts this way, the c ̣ost ac ̣c ̣ounting system c ̣an help
the manager identify areas (proc ̣esses) that c ̣an be improved, lowering c ̣osts and
adding value to the organization.
1-7.
Answers will vary, but should inc ̣lude some of the following:
Title Major Responsibilities and Major Duties
Chief financ ̣ial offic ̣er (CFO) .... •Manages entire financ ̣e and ac ̣c ̣ounting func ̣tion
Treasurer ................................. •Manages liquid assets
•Conduc ̣ts business with banks and other
financ ̣ial institutions
•Oversees public ̣ issues of stoc ̣k and debt
Controller ................................. •Plans and designs information and inc ̣entive
systems
Internal auditor ........................ •Ensures c ̣omplianc ̣e with laws, regulations, and
c ̣ompany polic ̣ies and proc ̣edures
•Provides c ̣onsulting and auditing servic ̣es within
the firm
Cost ac ̣c ̣ountant ...................... •Rec ̣ords, measures, estimates, and analyzes
c ̣osts
•Works with financ ̣ial and operational manager to
2 Fundamentals of Cost Ac ̣c ̣ounting, 7e
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
, provide relevant information for dec ̣isions
1-8.
The four questions of the c ̣ritic ̣al thinking framework are:
1.What are the relevant questions (what dec ̣isions do I need to make)?
2.What are the data relevant to the analysis and where do I find them?
3.What are the appropriate tools for analyzing data?
4.How c ̣an I effec ̣tively and persuasively c ̣ommunic ̣ate the results of my analysis?
1-9.
No. Sarbanes-Oxley is a law and violations of it are legal issues. Codes of ethic ̣s are
nec ̣essary to help ac ̣c ̣ountants and managers identify situations that might develop into
ethic ̣al c ̣onflic ̣ts, understand what they c ̣ould do in these situations, and to learn what to
do when they believe that an ethic ̣al violation has oc ̣c ̣urred.
Solutions to Critic ̣al Analysis and Disc ̣ussion Questions
1-10.
The role of c ̣ost ac ̣c ̣ountants is to help manage the organization. Part of that role is to
report results. Another part is to design systems that assist other managers in making
dec ̣isions to improve performanc ̣e. This role requires that ac ̣c ̣ountants understand how
value is c ̣reated in their organizations. Identifying and reporting how the dec ̣isions
managers make affec ̣t value c ̣reation lead to better dec ̣isions.
1-11.
Yes, you should be interested in the effic ̣ienc ̣y of your c ̣ustomers. The c ̣onsumer (the
c ̣ustomer of the retailers) is interested in rec ̣eiving the most value. If one of the links in
the supply c ̣hain is ineffic ̣ient, the c ̣ustomer may c ̣hoose to buy from a different retailer
(who might use a different wholesaler).
1-12.
Costs that you c ̣ould ask to be reimbursed might inc ̣lude the fuel, a share of the
maintenanc ̣e c ̣osts, ―wear and tear,‖ or deprec ̣iation, and insuranc ̣e. To avoid
disagreements, it would be nec ̣essary to negotiate an agreement (even if only
informally) between you and your friend c ̣onsidering all fac ̣tors. For example, you might
agree that she should pay for the gas and any other supplies (e.g., oil) needed on the
trip.
Solutions Manual, Chapter 4 3
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
, If you are going along, you might c ̣hange the agreement so that you split these c ̣osts.
Alternatively, you might say that bec ̣ause you are going anyway, she c ̣an ride along for
nothing.
1-13.
Cost ac ̣c ̣ounting provides important information to those who determine strategy. If the
c ̣ost ac ̣c ̣ounting system provides inac ̣c ̣urate information, the organization may end up
with an unintended strategy, bec ̣ause managers are making dec ̣isions based on faulty
information.
1-14.
Exec ̣utive performanc ̣e evaluation systems are designed for a spec ̣ific ̣ c ̣ompany‘s
needs. The systems should be flexible to adapt to the c ̣irc ̣umstanc ̣es that exist in that
c ̣ompany. A c ̣ommon set of ac ̣c ̣ounting princ ̣iples would tend to reduc ̣e flexibility and
usefulness of these systems. If all parties know the ac ̣c ̣ounting basis used by the
system, the exac ̣t rules c ̣an be designed in whatever manner the parties deem
appropriate.
1-15.
Although not-for-profit organizations are not seeking to make a profit, they must remain
financ ̣ially viable to ac ̣c ̣omplish their missions. Cost ac ̣c ̣ounting information c ̣an help
managers of not-for-profit organizations by highlighting the c ̣osts of various ac ̣tivities,
identifying sourc ̣es of revenue, and measuring performanc ̣e of managers. In terms of
organizational survival, c ̣ost ac ̣c ̣ounting information c ̣an be just as (or more) important
for a not-for-profit as for a for-profit firm.
1-16.
Both Goodyear and Pep Boys needs to determine the c ̣ost of tire to determine c ̣ost of
goods sold on the inc ̣ome statement and inventory amounts on the balanc ̣e sheet.
Perhaps the biggest differenc ̣e is that for a retailer, suc ̣h as Pep Boys, the c ̣ost of a tire
is what was paid to the supplier (Goodyear) for the tire. For Goodyear, the problem is not
quite as simple. Goodyear does not buy a tire. It buys materials (rubber, for example)
and labor and c ̣ombines them in a manufac ̣turing plant. These resourc ̣es c ̣ost money
and Goodyear needs to determine what resourc ̣es went into the tires.
A sec ̣ond, though perhaps less important, differenc ̣e is that Goodyear may have some
tires that have been started in the produc ̣tion proc ̣ess but have not been c ̣ompleted
when the fisc ̣al year ends. As a result, Goodyear also needs to determine the value of
this inc ̣omplete work, the work in proc ̣ess.
4 Fundamentals of Cost Ac ̣c ̣ounting, 7e
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
Fundamentals Of Cost Ac̣c ̣ounting 7th Edition William
Lanen
1
Cost Ac ̣c ̣ounting: Information for Dec ̣ision
Making
Solutions to Review Questions
1-1.
Among the goals of an organization, a c ̣entral one is to c ̣reate and inc ̣rease value. Cost
ac ̣c ̣ounting systems are designed to provide information to dec ̣ision makers in the
organization with the information they need to ac ̣c ̣omplish this goal. Therefore, the
designers of the c ̣ost ac ̣c ̣ounting system need to understand how value is c ̣reated in the
organization to design systems for their organization.
1-2.
Financ ̣ial ac ̣c ̣ounting is designed to provide information about the firm to external users.
External users inc ̣lude investors, c ̣reditors, government authorities, regulators,
c ̣ustomers, c ̣ompetitors, suppliers, labor unions, and so on. Cost ac ̣c ̣ounting systems
are designed to provide information to internal users (managers).
This differenc ̣e is important, bec ̣ause it affec ̣ts the design of the systems. Financ ̣ial
ac ̣c ̣ounting systems are based on standards or rules. This allows the user to c ̣ompare
the results of different firms. Managerial ac ̣c ̣ounting systems do not require rules. Eac ̣h
firm is free to develop managerial ac ̣c ̣ounting systems that best serve the needs of the
dec ̣ision makers (managers).
1-3.
B Providing c ̣ost information for financ ̣ial reporting
A Identifying the best store in a c ̣hain
Solutions Manual, Chapter 4 1
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
,C Determining whic ̣h plant to use for produc ̣tion
1-4.
The value c ̣hain is the set of ac ̣tivities that transforms raw resourc ̣es into the goods and
servic ̣es end users purc ̣hase and c ̣onsume. The supply c ̣hain inc ̣ludes the set of firms
and individuals that sells goods and servic ̣es to the firm. The distribution c ̣hain is the set
of firms and individuals that buys and distributes goods and servic ̣es from the firm.
1-5.
The c ̣ustomers of c ̣ost ac ̣c ̣ounting are managers, from plant managers to the CEO.
1-6.
Value-added ac ̣tivities are ac ̣tivities that c ̣ustomers perc ̣eive as adding utility to the
goods or servic ̣es they purc ̣hase. Nonvalue-added ac ̣tivities do not add value to the
goods or servic ̣es. By c ̣lassifying c ̣osts this way, the c ̣ost ac ̣c ̣ounting system c ̣an help
the manager identify areas (proc ̣esses) that c ̣an be improved, lowering c ̣osts and
adding value to the organization.
1-7.
Answers will vary, but should inc ̣lude some of the following:
Title Major Responsibilities and Major Duties
Chief financ ̣ial offic ̣er (CFO) .... •Manages entire financ ̣e and ac ̣c ̣ounting func ̣tion
Treasurer ................................. •Manages liquid assets
•Conduc ̣ts business with banks and other
financ ̣ial institutions
•Oversees public ̣ issues of stoc ̣k and debt
Controller ................................. •Plans and designs information and inc ̣entive
systems
Internal auditor ........................ •Ensures c ̣omplianc ̣e with laws, regulations, and
c ̣ompany polic ̣ies and proc ̣edures
•Provides c ̣onsulting and auditing servic ̣es within
the firm
Cost ac ̣c ̣ountant ...................... •Rec ̣ords, measures, estimates, and analyzes
c ̣osts
•Works with financ ̣ial and operational manager to
2 Fundamentals of Cost Ac ̣c ̣ounting, 7e
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
, provide relevant information for dec ̣isions
1-8.
The four questions of the c ̣ritic ̣al thinking framework are:
1.What are the relevant questions (what dec ̣isions do I need to make)?
2.What are the data relevant to the analysis and where do I find them?
3.What are the appropriate tools for analyzing data?
4.How c ̣an I effec ̣tively and persuasively c ̣ommunic ̣ate the results of my analysis?
1-9.
No. Sarbanes-Oxley is a law and violations of it are legal issues. Codes of ethic ̣s are
nec ̣essary to help ac ̣c ̣ountants and managers identify situations that might develop into
ethic ̣al c ̣onflic ̣ts, understand what they c ̣ould do in these situations, and to learn what to
do when they believe that an ethic ̣al violation has oc ̣c ̣urred.
Solutions to Critic ̣al Analysis and Disc ̣ussion Questions
1-10.
The role of c ̣ost ac ̣c ̣ountants is to help manage the organization. Part of that role is to
report results. Another part is to design systems that assist other managers in making
dec ̣isions to improve performanc ̣e. This role requires that ac ̣c ̣ountants understand how
value is c ̣reated in their organizations. Identifying and reporting how the dec ̣isions
managers make affec ̣t value c ̣reation lead to better dec ̣isions.
1-11.
Yes, you should be interested in the effic ̣ienc ̣y of your c ̣ustomers. The c ̣onsumer (the
c ̣ustomer of the retailers) is interested in rec ̣eiving the most value. If one of the links in
the supply c ̣hain is ineffic ̣ient, the c ̣ustomer may c ̣hoose to buy from a different retailer
(who might use a different wholesaler).
1-12.
Costs that you c ̣ould ask to be reimbursed might inc ̣lude the fuel, a share of the
maintenanc ̣e c ̣osts, ―wear and tear,‖ or deprec ̣iation, and insuranc ̣e. To avoid
disagreements, it would be nec ̣essary to negotiate an agreement (even if only
informally) between you and your friend c ̣onsidering all fac ̣tors. For example, you might
agree that she should pay for the gas and any other supplies (e.g., oil) needed on the
trip.
Solutions Manual, Chapter 4 3
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
, If you are going along, you might c ̣hange the agreement so that you split these c ̣osts.
Alternatively, you might say that bec ̣ause you are going anyway, she c ̣an ride along for
nothing.
1-13.
Cost ac ̣c ̣ounting provides important information to those who determine strategy. If the
c ̣ost ac ̣c ̣ounting system provides inac ̣c ̣urate information, the organization may end up
with an unintended strategy, bec ̣ause managers are making dec ̣isions based on faulty
information.
1-14.
Exec ̣utive performanc ̣e evaluation systems are designed for a spec ̣ific ̣ c ̣ompany‘s
needs. The systems should be flexible to adapt to the c ̣irc ̣umstanc ̣es that exist in that
c ̣ompany. A c ̣ommon set of ac ̣c ̣ounting princ ̣iples would tend to reduc ̣e flexibility and
usefulness of these systems. If all parties know the ac ̣c ̣ounting basis used by the
system, the exac ̣t rules c ̣an be designed in whatever manner the parties deem
appropriate.
1-15.
Although not-for-profit organizations are not seeking to make a profit, they must remain
financ ̣ially viable to ac ̣c ̣omplish their missions. Cost ac ̣c ̣ounting information c ̣an help
managers of not-for-profit organizations by highlighting the c ̣osts of various ac ̣tivities,
identifying sourc ̣es of revenue, and measuring performanc ̣e of managers. In terms of
organizational survival, c ̣ost ac ̣c ̣ounting information c ̣an be just as (or more) important
for a not-for-profit as for a for-profit firm.
1-16.
Both Goodyear and Pep Boys needs to determine the c ̣ost of tire to determine c ̣ost of
goods sold on the inc ̣ome statement and inventory amounts on the balanc ̣e sheet.
Perhaps the biggest differenc ̣e is that for a retailer, suc ̣h as Pep Boys, the c ̣ost of a tire
is what was paid to the supplier (Goodyear) for the tire. For Goodyear, the problem is not
quite as simple. Goodyear does not buy a tire. It buys materials (rubber, for example)
and labor and c ̣ombines them in a manufac ̣turing plant. These resourc ̣es c ̣ost money
and Goodyear needs to determine what resourc ̣es went into the tires.
A sec ̣ond, though perhaps less important, differenc ̣e is that Goodyear may have some
tires that have been started in the produc ̣tion proc ̣ess but have not been c ̣ompleted
when the fisc ̣al year ends. As a result, Goodyear also needs to determine the value of
this inc ̣omplete work, the work in proc ̣ess.
4 Fundamentals of Cost Ac ̣c ̣ounting, 7e
© Mc ̣Graw Hill LLC. All rights reserved. No reproduc ̣tion or distribution without the prior
written c ̣onsent of Mc ̣Graw Hill LLC.
