Exam (elaborations) TEST BANK FOR Management for Cost Accounting 5th E

Exam (elaborations) TEST BANK FOR Management for Cost Accounting 5th E 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) ABCD 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: ABC 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 ..................................