Solutions Manual for Managerial Accounting 8th Edition By Hansen
Mowen (All Chapters Arranged Reverse 18-1)
CHAPTER 18
INTERNATIONAL ISSUES IN
MANAGEMENT ACCOUNTING
QUESTIONS FOR WRITING AND DISCUSSION
1. Differences among countries in terms of the U.S. government grants exemptions from or
political, legal, and cultural environment can reductions in custom duties levied on
all affect the firm. The management reexported goods. Many U.S. firms have
accountant may find that practices that work embraced the maquiladora because of the
well in the home country do not work as well low-cost labor, the flexible ownership
(or at all) in other countries. It is necessary structure, and the opportunity to locate close
for the management accountant to be aware to an increasingly important Mexican
of all facets of business and to be market.
knowledgeable and creative in applying
6. The exchange rate is the amount for which
accounting concepts in various business
one currency can be traded for another. The
environments.
spot rate is the exchange rate in effect at the
2. A foreign trade zone is an area that is current time. There are also future exchange
physically on U.S. soil but is considered to rates, which describe the rates in effect for
be outside U.S. commerce. As a result, future delivery.
goods imported into a foreign trade zone are
7. These three types of risk relate to the impact
free of tariff or duty until they leave the zone.
on the firm of changing exchange rates.
Therefore, companies located in a foreign
Transaction risk refers to the possibility that
trade zone can postpone payment of tariff
future cash transactions will be affected by
and the associated loss of working capital.
changing exchange rates. Economic risk
Additionally, the company does not pay duty
refers to the possibility that a firm’s present
on defective materials or inventory that has
value of future cash flows can be affected by
not been included in the finished product.
exchange fluctuations. Translation risk is the
3. Outsourcing is the payment by a company degree to which a firm’s financial statements
for a business function that was formerly are exposed to exchange rate fluctuations.
done in-house. In an international context,
8. Currency appreciation means that the home
outsourcing refers to the location of
country’s currency strengthens against
business functions in another country.
another currency. In other words, one unit of
Frequently, the work outsourced is to a
the home currency purchases more units of
lower-wage country. The company receives
another currency than it did previously.
a comparable quality of work but at a lower
Currency appreciation makes the products
cost.
of a foreign country cheaper than before,
4. Joint ventures are partnerships between two and thus, it is easier for a company in the
or more companies. The enterprise is co- home country to import goods.
owned. A company may find joint ventures
9. Currency appreciation makes the home
advantageous when another company has
country currency more expensive to foreign
expertise that the first company lacks. In
customers, thereby making the products of
addition, restrictions by certain countries on
the home country firm more expensive than
foreign ownership of business may mean
they were before. For example, if the
that a joint venture is the only avenue open
exchange rate is one home country unit to
to a company wishing to expand into the
one foreign country unit and the currency
foreign country.
appreciates, then the exchange rate might
5. Maquiladoras are manufacturing plants become one home country unit to two
located in Mexico that process imported foreign units. That is, the home country unit
materials and reexport them to the United buys more foreign currency as it
States. Maquiladoras are exempt from appreciates. Put differently, the foreign
Mexican laws governing ownership, and the
101
, currency buys less as the home country currency, thereby locking in the exchange
currency appreciates. rate and insuring against adverse exchange
rate fluctuations.
10. If Mexico devalues the peso, a dollar will
buy relatively more pesos, making the cost 12. Disagree. The manager of a subsidiary
of Mexican labor cheaper. As the controller, should not be evaluated on the basis of
you will revise your estimates of labor costs factors over which he or she has no control.
in the maquiladora downward. The These factors may include transfer prices,
proposed new production facility will be currency fluctuations, local taxes, and so on.
more attractive. The subsidiary manager should be
evaluated on the basis of revenues and
As a local labor union leader, you would be
costs.
displeased by the potential devaluation. If
Mexican wages go down relative to U.S. 13. Environmental factors that may affect the
wages, Mexican labor will be relatively more performance of divisional managers include
attractive, and more jobs may be outsourced economic, legal, political, social, and
to Mexico. educational variables.
11. Hedging is a way of insuring against gains 14. Internal Revenue Code Section 482 outlines
and losses on foreign currency exchange. the transfer pricing methods acceptable for
The company that imports the material may income tax purposes. The four acceptable
be afraid that the exchange rate will change methods are the comparable uncontrolled
in 90 days and that the home currency will price method, the resale price method, the
weaken against the foreign currency. In that cost-plus method, and any method jointly
case, the company may hedge by acceptable to the IRS and the company.
purchasing a forward contract for the foreign
102
, EXERCISES
18–1
Your friend will take the traditional accounting and business courses required for
a major in accounting. Naturally, these would include international business
courses, such as international accounting and international finance. In addition,
she/he would be well advised to take classes relating to other cultures, including
history, philosophy, literature, and foreign language(s). No individual class is
critical; instead, it is the sum of the classes that is important. In other words, your
friend will learn a little about other countries in each class. Over time, that little
bit will add up, giving your friend the background to understand business
practices overseas and to fit business transactions into a cultural context.
Suppose your friend is just about to graduate and cannot afford to spend more
time in college? Then she/he should do what all management accountants need
to do—stay up to date by reading books and articles in a variety of international
business areas, including information systems, marketing, management, politics,
and economics.
Note to Instructors: Your students may want to read Daniel M. Hrisak’s “Global
Challenges Call for More CMAs and CFMs,” Strategic Finance (June 2001): pp.
44–49.
18–2
1. e 4. c
2. b 5. a
3. d
18–3
1. e 4. b
2. c 5. a
3. d
103
, 18–4
1. $14,200,000 0.30 = $4,260,000
2. $4,260,000 9/12 0.10 = $319,500
18–5
1. $14,200,000 0.85 0.30 = $3,621,000
2. Savings = ($4,260,000 – $3,621,000) + $319,500
= $639,000 + $319,500 = $958,500
18–6
Tariff savings = ($3,750,000 0.06 0.25) = $56,250 per year
Because broken items will never be sold outside the foreign trade zone, Bulwar
will not owe a tariff on them.
18–7
1. 70,100 pesos/10.9 = $6,431
2. 70,100 pesos/11.4 = $6,149
3. There is an exchange gain of $282 ($6,431 – $6,149).
104
Mowen (All Chapters Arranged Reverse 18-1)
CHAPTER 18
INTERNATIONAL ISSUES IN
MANAGEMENT ACCOUNTING
QUESTIONS FOR WRITING AND DISCUSSION
1. Differences among countries in terms of the U.S. government grants exemptions from or
political, legal, and cultural environment can reductions in custom duties levied on
all affect the firm. The management reexported goods. Many U.S. firms have
accountant may find that practices that work embraced the maquiladora because of the
well in the home country do not work as well low-cost labor, the flexible ownership
(or at all) in other countries. It is necessary structure, and the opportunity to locate close
for the management accountant to be aware to an increasingly important Mexican
of all facets of business and to be market.
knowledgeable and creative in applying
6. The exchange rate is the amount for which
accounting concepts in various business
one currency can be traded for another. The
environments.
spot rate is the exchange rate in effect at the
2. A foreign trade zone is an area that is current time. There are also future exchange
physically on U.S. soil but is considered to rates, which describe the rates in effect for
be outside U.S. commerce. As a result, future delivery.
goods imported into a foreign trade zone are
7. These three types of risk relate to the impact
free of tariff or duty until they leave the zone.
on the firm of changing exchange rates.
Therefore, companies located in a foreign
Transaction risk refers to the possibility that
trade zone can postpone payment of tariff
future cash transactions will be affected by
and the associated loss of working capital.
changing exchange rates. Economic risk
Additionally, the company does not pay duty
refers to the possibility that a firm’s present
on defective materials or inventory that has
value of future cash flows can be affected by
not been included in the finished product.
exchange fluctuations. Translation risk is the
3. Outsourcing is the payment by a company degree to which a firm’s financial statements
for a business function that was formerly are exposed to exchange rate fluctuations.
done in-house. In an international context,
8. Currency appreciation means that the home
outsourcing refers to the location of
country’s currency strengthens against
business functions in another country.
another currency. In other words, one unit of
Frequently, the work outsourced is to a
the home currency purchases more units of
lower-wage country. The company receives
another currency than it did previously.
a comparable quality of work but at a lower
Currency appreciation makes the products
cost.
of a foreign country cheaper than before,
4. Joint ventures are partnerships between two and thus, it is easier for a company in the
or more companies. The enterprise is co- home country to import goods.
owned. A company may find joint ventures
9. Currency appreciation makes the home
advantageous when another company has
country currency more expensive to foreign
expertise that the first company lacks. In
customers, thereby making the products of
addition, restrictions by certain countries on
the home country firm more expensive than
foreign ownership of business may mean
they were before. For example, if the
that a joint venture is the only avenue open
exchange rate is one home country unit to
to a company wishing to expand into the
one foreign country unit and the currency
foreign country.
appreciates, then the exchange rate might
5. Maquiladoras are manufacturing plants become one home country unit to two
located in Mexico that process imported foreign units. That is, the home country unit
materials and reexport them to the United buys more foreign currency as it
States. Maquiladoras are exempt from appreciates. Put differently, the foreign
Mexican laws governing ownership, and the
101
, currency buys less as the home country currency, thereby locking in the exchange
currency appreciates. rate and insuring against adverse exchange
rate fluctuations.
10. If Mexico devalues the peso, a dollar will
buy relatively more pesos, making the cost 12. Disagree. The manager of a subsidiary
of Mexican labor cheaper. As the controller, should not be evaluated on the basis of
you will revise your estimates of labor costs factors over which he or she has no control.
in the maquiladora downward. The These factors may include transfer prices,
proposed new production facility will be currency fluctuations, local taxes, and so on.
more attractive. The subsidiary manager should be
evaluated on the basis of revenues and
As a local labor union leader, you would be
costs.
displeased by the potential devaluation. If
Mexican wages go down relative to U.S. 13. Environmental factors that may affect the
wages, Mexican labor will be relatively more performance of divisional managers include
attractive, and more jobs may be outsourced economic, legal, political, social, and
to Mexico. educational variables.
11. Hedging is a way of insuring against gains 14. Internal Revenue Code Section 482 outlines
and losses on foreign currency exchange. the transfer pricing methods acceptable for
The company that imports the material may income tax purposes. The four acceptable
be afraid that the exchange rate will change methods are the comparable uncontrolled
in 90 days and that the home currency will price method, the resale price method, the
weaken against the foreign currency. In that cost-plus method, and any method jointly
case, the company may hedge by acceptable to the IRS and the company.
purchasing a forward contract for the foreign
102
, EXERCISES
18–1
Your friend will take the traditional accounting and business courses required for
a major in accounting. Naturally, these would include international business
courses, such as international accounting and international finance. In addition,
she/he would be well advised to take classes relating to other cultures, including
history, philosophy, literature, and foreign language(s). No individual class is
critical; instead, it is the sum of the classes that is important. In other words, your
friend will learn a little about other countries in each class. Over time, that little
bit will add up, giving your friend the background to understand business
practices overseas and to fit business transactions into a cultural context.
Suppose your friend is just about to graduate and cannot afford to spend more
time in college? Then she/he should do what all management accountants need
to do—stay up to date by reading books and articles in a variety of international
business areas, including information systems, marketing, management, politics,
and economics.
Note to Instructors: Your students may want to read Daniel M. Hrisak’s “Global
Challenges Call for More CMAs and CFMs,” Strategic Finance (June 2001): pp.
44–49.
18–2
1. e 4. c
2. b 5. a
3. d
18–3
1. e 4. b
2. c 5. a
3. d
103
, 18–4
1. $14,200,000 0.30 = $4,260,000
2. $4,260,000 9/12 0.10 = $319,500
18–5
1. $14,200,000 0.85 0.30 = $3,621,000
2. Savings = ($4,260,000 – $3,621,000) + $319,500
= $639,000 + $319,500 = $958,500
18–6
Tariff savings = ($3,750,000 0.06 0.25) = $56,250 per year
Because broken items will never be sold outside the foreign trade zone, Bulwar
will not owe a tariff on them.
18–7
1. 70,100 pesos/10.9 = $6,431
2. 70,100 pesos/11.4 = $6,149
3. There is an exchange gain of $282 ($6,431 – $6,149).
104
