Download discussion, notes, guides question, definitions, lectures and more Study notes English in PDF only on Docsity!
iii " © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. "
Table&of&Contents&
Chapter 1 Introduction to Cost Accounting .................................................... 1 Chapter 2 Cost Terminology and Cost Behaviors .......................................... 13 Chapter 3 Predetermined Overhead Rates, Flexible Budgets, and Absorption/Variable Costing .......................................................... 41 Chapter 4 Activity-Based Management and Activity-Based Costing ........... 67 Chapter 5 Job Order Costing ........................................................................... 104 Chapter 6 Process Costing ................................................................................ 136 Chapter 7 Standard Costing and Variance Analysis...................................... 178 Chapter 8 The Master Budget .......................................................................... 223 Chapter 9 Break-Even Point and Cost-Volume-Profit Analysis ................... 261 Chapter 10 Relevant Information for Decision Making .................................. 292 Chapter 11 Cost Allocation for Joint Products and By-Products/Scrap ........ 315 Chapter 12 Introduction to Cost Management Systems .................................. 347 Chapter 13 Responsibility Accounting, Support Department Allocations, and Transfer Pricing ....................................................................... 359 Chapter 14 Performance Measurement, Balanced Scorecards, and Performance Rewards ..................................................................... 397 Chapter 15 Capital Budgeting ............................................................................ 426 Chapter 16 Managing Costs and Uncertainty................................................... 445 Chapter 17 Implementing Quality Concepts .................................................... 466 Chapter 18 Inventory and Production Management ....................................... 493 Chapter 19 Emerging Management Practices .................................................. 512
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly additional legal regulations are enacted that would require retroactive cleanup. Being green may be viewed from a self-serving standpoint: a proactive green strategy may attract environmentally conscious consumers and provide a positive organizational image (which could help attract labor talent). Further, such an approach may actually be less expensive through reduced energy and waste costs. Current research indicates that being green can be profitable to a business. Consumers may, in fact, be willing to pay a bit more for products that are nondamaging to the environment and could cause an organization to refocus on a product differentiation strategy that might be more profitable than a low-cost strategy.
7. Authority is the right, generally because of position or rank, to use resources to ac- complish a task or achieve an objective. Responsibility is the obligation to accomplish a task or achieve an objective. Authority can be delegated, but responsibility must be assumed and maintained by the person to whom it is assigned. However, sufficient authority must accompany responsibility or the assignment of responsibility cannot endure. 8. This statement is false. All firms have capital constraints, although the constraints are more binding for some firms than others. For any firm, as the amount of capital raised through either stock or bond offerings increases, the perceived riskiness of the offer- ings also rises. The perceived risk rises because there is greater uncertainty associated with the new investment relative to the firm’s existing investments. As the perceived risk rises, the rate of return required by the investors also rises. At some point, the rate of return required by the investors will exceed the return that the firm can gener- ate with the new funds. 9. Workforce diversity may affect organizational culture because the work ethic of indi- vidual workers may be less homogeneous, communication may become more diffi- cult, and observation of different religious holidays may create difficulties or new patterns of absenteeism. As workforce diversity increases, organizational culture must change to reflect this diversity. Some potential benefits of workforce diversity include an opportunity to reduce prej- udices, having workers who prefer different holiday schedules (minimizing the need for closure for specific holidays), and having workers who have different workplace characteristics (for example, some cultures may prefer to work in groups; others alone). Some potential difficulties of workforce diversity include the possibility of different work ethics (for example, some cultures may perform at different “speeds,” desire different workplace “formats” such as afternoon siestas, or view communica- tion within the workplace about outside activities differently). There may also be less tolerance if one employee group demands a greater number of religious holidays than another or lacks understanding of why a particular employee (or employee group) does not believe in the need for a specific holiday that the majority observes. 10. A change in laws or regulations may remove a constraint to competition or to a par- ticular strategy. For example, the cost of labor has traditionally been much lower in Mexico than elsewhere in North America. However, tariffs and taxes have historical-
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly ly constrained the extent to which American and Canadian businesses could exploit that labor cost advantage. With the implementation of NAFTA, these costs have been dramatically reduced. Consequently, American and Canadian businesses moved some labor-intensive businesses to Mexico rather than to parts of Asia.
11. An organization’s value chain is the set of processes that converts inputs into prod- ucts and services for the firm’s customers. The value chain includes both internal and supplier processes, and captures the structure of activities by which an organization competes. The value chain and strategy interface because optimizing value is the ob- jective when managers strategize relative to the structure of the value chain. 12. The balanced scorecard is a framework that restates an organization’s strategy into clear and objective performance measures. The balanced scorecard is used to evaluate performance from four perspectives: learning and growth, internal business, cus- tomer values, and financial. These perspectives include financial, quantitative, qualitative, lead and lag indicators, and short- and long-run measures. Managers choosing to apply the balanced scorecard are demonstrating a belief that tradition- al financial performance measures, such as ROI, alone are insufficient to assess how the firm is doing and what specific actions must be taken to improve perfor- mance. When organizations operate globally, it is less likely that a single measure of performance (such as ROI) is sufficient to indicate success because of multiple goals and objectives. 13. Operating in a global environment means that more decision and control variables must be tracked. For example, a firm operating in many countries must track variables such as national rules of income taxation, national corporate governance laws, sets of local laws of commerce (including those for labor and the environment), production and sourcing sites, and currencies. In addition, the multinational firm must monitor markets in many countries, deal with a multitude of local cultures and customs, and be aware of communication differences among languages. For example, product names may not “translate” equally well into different languages. In the pharmaceutical indus- try, nuances in product names may mean the difference between life and death: the FDA indicated that approximately 13 percent of medication errors arise from commu- nication errors and another 13 percent from name confusion (http://www.brandchannel .com/features_effect.asp?pf_id=243). Some other valuable information for the global firm would be currency exchange rates; national inflation rates; details of import/export laws; prices for commodi- ties in likely sourcing sites; distribution costs for various modes of moving goods, components, equipment, and materials; political issues in all relevant markets; and competitors’ prices in all markets. These types of information are important to generating an optimal return on capital. 14. The purpose of this question is to get students to think about the role of laws and eth- ics in conducting business. Among the important points that should be made in the position papers include whether the laws in the firm’s home country or local foreign law should govern the actions of firms, whether ethics or law should be the standard
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
EXERCISES
15. a. The bank would want information about the firm’s ability to repay the loan. Poten- tially, the loan could be repaid from either of two sources: (1) by liquidating assets that are not crucial to business operations or (2) from future operating cash flows. Consequently, the most useful items of information would be a balance sheet, in- come statement, statement of cash flows, and perhaps a cash budget. The balance sheet provides information about the types of assets owned by the firm and the cash commitments for debt repayments and payments to suppliers. The income statement is useful for assessing profitability and projecting future cash flows. The statement of cash flows and the cash budget provide information about the sources and uses of cash. Information about accounts receivable turnover, or the average time to collect ac- counts receivable, can be determined by examining the history of accounts receiv- able collections. How readily accounts receivable can be collected can be assessed by determining the extent to which the accounts receivable are past due. A trend for supplier price and labor cost increases can be assessed by examining purchases and salaries over time. Reading Journal of Accountancy and Strategic Finance will provide information about salary trends. Prices of specific, routine inputs can be obtained from supplier invoices and purchase order data. Qualitative information that would interest the bank might include the character of the partners, their history in handling borrowed funds, management skills in the firm, stability of business conditions, work backlog, financial strength of large- volume customers, and supplier willingness to provide favorable credit terms on purchases. b. An example of accumulating the information to address customers’ complaints re- garding delays in completing financial planning and tax jobs can be found on the customer order documents. The customer order document should be designed to capture the promised time of completion of the job and also to capture the actual completion time. The time variance can be accumulated systematically on a log or, alternatively, can be determined by inspection of the customer order documents. In this way, these documents, that comprise part of the accounting system, can be used to track such nonfinancial data. Price changes are usually justified on the basis of one or more of the following: (1) competitor price changes; (2) willingness by customers to pay higher prices on the basis of quality or other types of differentiation of products and services; (3) gov- ernmental regulations or requirements; and (4) changes in the prices of material, labor, or other costs such as utilities, taxes, and insurance. Information regarding the first three justifications must usually be obtained from sources outside the ac- counting system. However, changes of prices and therefore costs of the factors of production described in justification (4) can be found from accounting records and documents.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly For example, by examining labor time and costs over time, one can assess trends in time to complete specific types of jobs and labor cost increases. Labor cost data may be obtained by examining personnel and payroll records of partners, manag- ers, and staff accountants. Analysis of labor costs may indicate that staff account- ants could be used in place of partners to significantly reduce costs on some jobs. Prices of specific, routine inputs can be obtained from supplier invoices and pur- chase order data. Examining and comparing invoices and tax reports may indicate a trend in utilities, insurance, and tax costs over time. c. Most of the data can be gathered directly from the accounting records or from the documents that support the accounting records such as original transaction docu- ments (invoices, payroll time cards, shipping records, etc.). However, none of the qualitative data could be obtained from the accounting records. The bank would have to acquire this information from other sources such as character references, suppliers, and customers.
16. a. Each student will have a different answer; however, the following items may be mentioned: Then Now “Number cruncher” Decision support specialist Staff member with limited “Business partner” responsibilities Controller of costs Analyst of costs Provider of internal reports Developer of models Impediment to change Implementer of change Provider of data Provider of information Work in relative isolation Member of cross-functional teams Accountant Member of the finance function Reactive Proactive b. Each student will have a different answer; however, the following items may be mentioned: interpersonal skills, communication skills, technological skills, critical thinking and analysis skills, planning and decision-making skills, broad-based learning, performance measurement and evaluation skills, and knowledge of the international marketplace. One source (http://www.careers-in-accounting.com /acskill.htm) indicates the following as necessary skills for management account- ants:
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly c. A mission statement can help an organization strive for a higher level of product quality and customer service in much the same way that it helps promote ethics in the organization—it reinforces these concepts as part of organizational culture and, thus, “demands” the organization to aspire to continual improvement.
22. Each student will have a different answer. No solution is provided. 2 3. a. You might want to have information on the average age of your primary custom- ers, their food preferences, what your competitors offer (quality and price), and the skills of your cook. b. The average age of your customer is important because quiche would probably be more favorably received by younger customers, and rack of lamb would probably be preferred by more affluent customers. Competitors’ offerings would indicate whether you would be able to compete on quality and price, assuming the selec- tions you choose were currently available at your competitors’ restaurants (product differentiation). Your cook’s talent is crucial because, regardless of preference or need, if the cook is unable to prepare the dish properly, customers will not pur- chase it. 24. Each student will have a different answer. No solution is provided. 25. a. Each student will have a different answer, but the following items may be men- tioned: (1) Fiscal, legal/regulatory, and political (2) Fiscal and regulatory (i.e., disposal of cartridges) (3) Fiscal and legal/regulatory (4) Cultural, fiscal, legal/regulatory, and political b. (1) Fiscal: most cities are in some type of economic downturn (2) Fiscal: small businesses usually have budgetary constraints (3) Legal/regulatory: possible unfamiliarity with the legal system (4) Legal/regulatory: laws of multiple countries must be understood and obeyed 26. Each student will have a different answer. No solution is provided. 27. Each student will have a different answer. No solution is provided. 28. Each student will have a different answer, but the following items may be mentioned: a. Employees might be empowered to decide which clients they will advise, how often these clients need to be contacted, what activities need to be performed to provide high-quality financial planning, and what resources are needed to pro- vide these services. Employees are in a much better position to judge these is- sues than an absentee owner.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly b. As the owner, you may retain the billing process as well as the marketing function. You would also probably want to verify customer satisfaction through surveys or telephone calls. These matters will be essential to your business profitability and longevity, and the employees may not have the expertise or ability to handle these matters.
29. Each student will have a different answer. However, the following items may be men- tioned: a. The upstream value chain would include shareholders/bondholders, raw materials suppliers, transportation companies, equipment manufacturers, and so forth. b. Internal activities would include purchasing, receiving, package design, manufac- turing, and so forth. c. The downstream value chain would include distributors, transportation companies, market research, advertising firms, customers, and so forth. 30. a. A strategic alliance would be considered illegal in the United States when it inter- feres with free trade such as colluding with other organizations to fix prices. b. Each student will have a different answer, but the following partners may be men- tioned: establishment of a consistent supply chain (both in quantity and quality), a strong customer base, integration of activity (such as airline, hotel, and car rental alliances), and so forth. c. Each student will have a different answer, but the following partners may be men- tioned: - Catalog production company - Photographer - Wholesale plant distributor - Flower pot manufacturer/designer - Floral arranger - Transportation company 31. a. A balanced scorecard is used to: - clarify or update a business’s strategy, - link strategic objectives to long-term targets and annual budgets, - track the key elements of the business strategy, - incorporate strategic objectives into resource allocation processes, - facilitate organizational change, - compare performance of geographically diverse business units, and - increase companywide understanding of the corporate vision and strategy. b. The majority of value in many modern businesses rests in the intangible assets (of- ten times people and their organizational knowledge). Also, modern companies
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
34. a. Such a law change would reduce costs in the short run. All of the costs of comply- ing with current environmental laws and policies would be eliminated. However, in the long term, it could be argued that costs would rise well above current levels. Higher costs would be reflected in health care; permanent environmental damage to recreational lands, fisheries, and agricultural land; and contamination of surface waters and aquifers. The consequences of this pollution would be dire in the long run and would include the social costs of loss of life and loss of health. There could also be backlash from the environmentally concerned sector of the consum- ers of the output of U.S. production. b. Each student will have a different answer as it would depend upon how important he/she believes environmental laws are for businesses. No solution is provided. c. Each student will have a different answer as it would depend upon how important he/she believes environmental laws are for businesses. However, it is likely that most students would indicate there would be more negative reaction from industri- alized nations than from developing countries. No solution is provided. 35. The purpose of this question is to get students to think about the role of laws and eth- ics in the conduct of business. Among the important points that should be made in the position papers include whether the laws in the firm’s home country or local foreign law should govern the actions of the firm, whether ethics or law should be the stand- ard governing the actions in foreign jurisdictions, and the extent to which “being competitive” should be a criterion in choosing a business course of action. 36. a. If an organization’s management accountant is, in fact, primarily dealing with in- ternal accounting and finance matters, then it is more likely that the financial ac- countant would be more involved in earnings management situations. b. Each student will have a different answer. Some earnings management falls under the heading of normal business decision making, while “abusive” earnings man- agement is viewed as intentional and material manipulation. Past-SEC Chairman Arthur Levitt criticized accounting tactics such as improper revenue recognition, unjustified restructuring charges, and “cookie-jar reserves.” Accountants know all of these (and more) as “accounting irregularities”—intentional misstatements in fi- nancial reports, which should often be regarded as the equivalent of fraud. Fraud is, of course, illegal and unethical. As Warren Buffett once said, “Managers who always promise to ‘make the numbers’ will at some point be tempted to ‘make up’ the numbers.” 37. a. The CEO would be concerned about the earnings management if it were to be con- sidered “abusive.” Under the 2002 Sarbanes-Oxley Act, an organization’s CEO and CFO are personally accountable for the accuracy of their company’s financial reporting.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly b. Yes, whistle-blowing managers in SEC-registered companies are protected from retaliation under Section 806 of the Sarbanes-Oxley Act. Covered disclosures in- clude providing information or assistance in the investigation of conduct believed to be a violation of securities laws or regulations. This section of SOX relates to providing information or assistance to law enforcement, congressional members or committees, and internal organization members with supervisory or investigative authority.
38. a. The quote indicates that the predominant concern of American businesses should be profit generation. There is nothing explicit or implied in the statement to indi- cate that profits must be derived from that set of activities that is legal within the local jurisdiction. Given that the pursuit of profit is constrained to legal activities, Friedman’s statement is merely a pro-capitalism one. b. Ethically, one might feel that the pursuit of profit should be constrained such that profit is not pursued to the detriment of human life, human happiness, the envi- ronment, etc. In short, ethically, one might easily identify several objectives that managers should hold in preference to maximization of profits. c. Taking a long-term view, it might be logical to argue that managers’ profit- maximizing actions are those actions that are both legal and ethical. In the long run, illegal actions draw fines, lawsuits, new regulations, and other costly sanc- tions; unethical acts tarnish business reputation and lose customers and market share. Hence, in the long run, there may be no conflict between Friedman’s state- ment as to managers’ obligations and the legal and ethical obligations of managers. 39. In addition to domestic exchanges, Volkswagen AG lists on the Frankfurt, Basel, Ge- neva, Zurich, Luxembourg, London, and New York stock exchanges. When listing on multiple stock exchanges, the multinational must know and comply with the corpo- rate governance rules of each stock exchange. What is permitted on one stock ex- change may be illegal on another. For example, the Sarbanes-Oxley Act requires a CEO to sign off on the accuracy of financial reports, but this is not required in Japan or London. SOX also requires that a majority of the members of corporate boards of directors be independent from the company; such a requirement does not exist in Ja- pan.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly In all three types of organizations, a period cost is any cost that is not a product cost. These costs are noninventoriable and are incurred in the nonfactory or nonproduction areas of a manufacturing company or in the nonsales or nonservice areas, respective- ly, of a retailer or service company. In general, these costs are incurred for selling and administrative activities. Many period costs are expensed when incurred, although some may be capitalized as prepaid expenses or other nonfactory assets.
6. Conversion costs are all production costs other than direct material costs; thus, con- version costs include the costs of direct labor and manufacturing overhead. These items are called conversion costs because they are needed to convert direct material into a salable product. 7. Factory overhead has been growing most rapidly because of the costs of technology. This cost category includes depreciation of factory and plant equipment, machinery maintenance cost, repair cost, some training costs, utilities expense to operate the ma- chinery, and many costs related to quality control. 8. The only difference between the two systems is in their treatment of overhead. Under an actual cost system, actual overhead is added to production. Because actual over- head cannot be determined until the period ends, the overhead allocation occurs and product cost can be determined only at period-end. Under a normal cost system, a predetermined overhead rate is calculated before a period begins and is then used to apply overhead to products as production occurs. The major advantage of using a normal cost system is that it allows a product’s cost to be determined (estimated) at the time of production. Another major advantage is that a normal cost system provides a product cost that is stable across fluctuating lev- els of production and sales. 9. The cost of goods manufactured is the total production cost of the goods that were completed and transferred to Finished Goods Inventory during the period. This amount is similar to the cost of net purchases in the cost of goods sold schedule for a retailer. Since CGM is used in computing cost of goods sold, it appears on the income statement.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
EXERCISES
10. a. Direct b. Direct c. Direct d. Indirect e. Direct f. Direct g. Indirect h. Direct i. Direct 11. COST OBJECT Notebook Plant Touch pad and buttons Direct Direct Glue Indirect Direct Network connector Direct Direct Battery Direct Direct Paper towels used by line employees (^) Indirect Direct AC adapter Direct Direct CD drive (^) Direct Direct Motherboard Direct Direct Screws Indirect Direct Oil for production machinery Indirect Direct 12. COST OBJECT Kennedy Tax Services Firm a. Four hours of Perkins’s time Direct Unrelated Direct b. Six hours of assistant’s time Direct Direct Direct c. Three hours of Morris’s time Indirect Indirect Direct d. Eight hours of CPE for Tompkin Indirect Direct Direct e. One hour at lunch Unrelated Unrelated Unrelated f. Two hours of Perkins’s time Direct Unrelated Direct g. One-half hour of Tompkin’s time Direct Direct Direct h. Janitorial wages Indirect Indirect Direct i. Seven hours of Tompkin’s time Direct Direct Direct 13. a. Cardboard, $0.40; cloth, $1; plastic, $0.50; depreciation, $0.60; superviors’ sala- ries, $1.60; and utilities, $0.30; total cost, $4.40. b. Cardboard, variable; cloth, variable; plastic, variable; depreciation, fixed; supervi- sors’ salaries, fixed; and utilities, mixed. c. If the company produces 10,000 caps this month, the total cost per unit will in- crease. The variable costs (cardboard, cloth, plastic) will remain constant per unit. The total cost for depreciation and supervisors’ salaries will remain fixed, and,
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly c. The assumption made was that 15,000 tickets would be sold. The fraternity should have been informed that the fixed cost per ticket would vary, depending on the number of tickets sold. By spreading the fixed cost over fewer tickets, the fraterni- ty would make less profit as ticket sales declined. e. Total revenue (20,000 tickets × $20.50) $ 4 10, Total cost: Fixed $ 3 7, Variable (20,000 × $10) 200,000 (237,500) Net profit $ 172,
16. a. ( 1 ) 200 returns: Total cost = $2,000 + ($9 × 200) = $3, Cost per unit = $3,800 ÷ 200 = $19. ( 2 ) 500 returns: Total cost = $2,000 + ($9 × 500) = $6, Cost per unit = $6,500 ÷ 500 = $13. ( 3 ) 800 returns: Total cost = $2,000 + ($9 × 800) = $9, Cost per unit = $9,200 ÷ 800 = $11. b. The fixed cost per unit varies inversely with activity. Therefore, as the activity (tax returns prepared) increases, the fixed cost per unit decreases. c. $15,000 ÷ 200 = $75; $75 + $19 = $94 fee to charge per return $94 × 800 = $75,200 total fees; $75,200 – $9,200 = $66, 17. a. ( 1 ) Number of clients contacted, number of new clients generated, number of miles traveled (if driving), number of nights away from home. ( 2 ) Number of supplies requisitions, number of hours worked, number of copies made ( 3 ) Purchase price of computers and depreciation method chosen (number of hours of computer usage, number of hours worked, expected years of service) ( 4 ) Number of hours worked, number of times maintenance crew visits the ac- counting firm, number of months in period (if maintenance is a strict fixed cost per month) b. The distinction between a cost predictor and a cost driver is whether the activity measure actually causes the cost to be incurred. A cost predictor is merely an activ- ity that changes with changes in the cost. A cost driver causes costs to be incurred. Of the costs addressed in (a), cost drivers that could also be cost predictors would be (1) number of miles traveled, (2) number of times supplies are requisitioned, (3) number of hours worked, and (4) number of times maintenance visited the ac- counting firm. 18. a. Number of patients processed b. Number of patients scheduled
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly c. Number of surgeries scheduled d. Number of surgeries scheduled e. Number of tests ordered f. Number of patients getting tests (if all tests are performed in same lab at the same time) or number of tests ordered (if patient has to be moved to multiple labs or for multiple tests) g. Number of lab tests administered h. Number of patients moved i. Number of surgeries performed j. Number of surgeries performed k. Number of medications administered l. Number of patients moved m. Number of patients discharged (it is possible that not all patients are discharged) n. Number of insurance companies to be billed
19. a. V, PT (could be mixed) b. V, PD c. F, PD d. V, PT e. F, PT f. V, PT (could be fixed if paper towel rolls are replaced at specific intervals regard- less of need) g. F, PD (could be product if assistants are assigned to work on specific projects) h. V, PT (could be fixed) i. V, PT j. V, PT k. F, PT (would be fixed because it was charged for the truckload rather than for an individual piece of furniture; may be considered a period cost and not attached to the individual pieces of furniture) 20. a. F, OH b. V, DM c. V, DM d. V, OH (assuming cost is insignificant) e. V, DM f. F, OH g. V, DM h. F, OH i. F, OH j. V, DM k. V, DL l. V, DM m. V, DM n. V, DM
