(Solution Manual) Cost Accounting Foundations & Evolutions

Kinney, Raiborn, Dragoo, 10

Business

Solution Manual

10th Edition

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Solution Manual for Cost Accounting Foundations & Evolutions, The downloadable file consists of 534 pages, and the total size of the file is 6.09 MB. Purchase now only for highly discounted price.

Author(s): Kinney, Raiborn, Dragoo

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Cost Accounting Foundations & Evolutions 10e By Kinney, Raiborn, Dragoo (Solutions Manual) 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 iii CHAPTER 1 INTRODUCTION TO COST ACCOUNTING QUESTIONS 1. Management accounting stresses the informational needs of internal users over those of external users (the focus of financial accounting). Because of this perspective, management accounting provides information in a format that is flexible and relevant to a particular manager’s usage. Financial accounting, on the other hand, must pro - vide some uniformity in the manner in which information is presented for it to be comparable among companies and in compliance with generally accepted accounting principles . 2. It is more important to have legally binding cost accounting standards for defense contractors than for other manufacturers because government contracts are often awarded on a low -bid basis. Without legally binding cost accounting standards, dif - ferent bidders could include costs in different categories, making the bids noncompa - rable. With specified cost accounting standards, there is a higher probability (although not absolute certainty) that comparison among bids is consistent. Although contracts for nongovernment manufacturers may be awarded on a bid basis, it is more common in this arena to consider a wide variety of factors in addition to cost. 3. A mission statement is important to an organization because it provides a clearly worded view of what t he organization wants to accomplish and how the organization uniquely meets or plans to meet its targeted customers’ needs with products and ser - vices. Without a mission statement, an organization may veer away from its “view of itself” and find that it is engaging in activities that are not, and can never be, part of what it wants to do. 4. Organizational strategy is the link between a firm’s goals and objectives and its oper - ational plans. Strategy is therefore a specification of how a firm intends to compete and survive. Each organization will have a unique strategy because it has unique goals, objectives, opportunities, and constraints. 5. Core competencies are the special proficiencies possessed and valued by an organiza - tion. I f a particular strategy requires core competencies that are not possessed by a firm, executing such a strategy would be very difficult. For example, a strategy of In - ternet business expansion would be difficult to execute in a firm that does not possess a core competency in web design or web security. Similarly, a growth strategy would be impossible in a not -for-profit that did not have a core competency in attracting volunteers or donors. 6. Although polluting might be less expensive in the short run, there is no guarantee that such a low-cost tactic may continue in the long run, especially if fines are incurred or 1 2 Chapter 1 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 consume rs 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 busi ness. 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. Author ity 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 endur e. 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 o f 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 homogene ous, 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. F or example, the cost of labor has traditionally been much lower in Mexico than elsewhere in North America. However, tariffs and taxes have historical - Chapter 1 3 ly constrained the extent to which American and Canadian businesses could exploit that lab or 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/fe atures_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 m odes 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 4 Chapter 1 governing actions in foreign jurisdictions, and the extent to which “being competi - tive” should be a criterion in choosing a business course of actions. Venezuela was selected because it has not signed the OECD Anti -Bribery Convention; it has also been rated as 172 out of 183 economies for overall “ease of doing business” (http://www.doingbusiness.org/data/exploreeconomies/venezuela). There have been currency devaluations, power and water rationing, nationalization of organizations, and a high level of political instability. All of these issues could result in ethical is - sues for a U.S. company. Chapter 1 5 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 c ash. 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 infor mation 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 ord er 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 determ ined 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 product ion described in justification (4) can be found from accounting records and documents. 6 Chapter 1 For example, by examining labor time and costs over time, one can assess trends in time t o 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 Imple menter 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: Chapter 1 7 People skills Medium Sales skills Low Communication skills High Analytical skills High Ability to synthesize High Creative ability Medium Initiative Medium Computer skills Very high The primary change in the past 10 years has been in the area of technology and, given that, computer skills have emerged as an exceptionally important new part of the skill set of management accountants. 17. Each student will have a different answer. No solution is provided. 18. Each student will have a different answer. No solution is provided. 19. Each student will have a different answer. No solution is provided. 20. a. A mission statement adds strength to an organization’s strategic planning process by providing a clear view of what the organization wants to accomplish and how it uniquely meets customers’ needs with products and services. Without a mission statement, an organization may find that it is engaging in activities that are not, or never can be, part of what it wants to do or is able to do. b. A mission statement should be developed using input from everyone involved in the value chain within the organization. Such an inclusionary process will help en - sure that the statement will become internalized by organizational members and become part of the organizational culture. c. In developing a mission statement, organization members need to consider the or - ganization’s strengths (including core competencies) and weaknesses, opportuni - ties for growth, customer base (current and desired), competition, constraints (physical, financial, technological, etc.), profitability, and employees’ skills (cur - rent and t hose that can be acquired through training or hiring). d. Each student will have a different answer. No solution is provided. 21. a. Not every organization needs a mission statement. However, having one aids the organization by providing a clear statement of wha t the organization wants to ac - complish and how it uniquely meets customers’ needs. Without a mission state - ment, an organization may find that it is engaging in activities that are not part of what it wants to do or is able to do well. b. A mission stateme nt can help an organization encourage ethical behavior by estab - lishing ethical values as an organizational characteristic. By promoting ethical be - havior in the mission statement, the organization is reinforcing ethical behavior as a distinct and critical part of the organizational culture. 8 Chapter 1 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. 23. a. You might want to have information on the average age of your primary custom - ers, their food preferences, what your comp etitors 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 cu stomers. 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 crucia l 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. Chapter 1 9 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 longevit y, 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, integrati on 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 10 Chapter 1 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. recognize that mission success (or competitiveness) is primarily driven by the ide - as and innovations that come from people. Older management practices that are focused solely on financial metrics and production activities are not appropriate in this new environment. Financial metrics are lagging indicators that tell what hap - pened in the past. Knowledge workers communicate and create in complex ways. Managers need a new way to assess how well their organization is functioning, how to predict future perfo rmance, and how to align the organization toward new strategies to achieve breakthrough performance. The balanced scorecard has evolved to support strategic planning and management in this new work environment. The BSC changes the strategic plan from passive document into organizational “marching orders.” It provides a framework that pro - vides performance measurements and helps planners identify what should be measured. It enables e xecutives to truly execute their strategies. c. There are always challenges associated with any innovative management idea or any effort that seeks to change the status quo in a large organization. A compre - hensive BSC is somewhat difficult and time consu ming to implement, and sus - tained top - level support and commitment to develop and implement the system is required. If the organization does not have a high -ranking champion, does not have adequate funding, and is not ready to change, the BSC will be unsu ccessful. 32. a. The IMA guidelines focus on competence, confidentially, integrity, and credibility. Competence means that individuals will develop and maintain the skills needed to practice their profession including ongoing professional education. Confident iality means that the cost accountant will refrain from disclosing company information to inappropriate parties or using such information to generate an illegal or unethical advantage. Integrity means that individuals will not participate in activities tha t would discredit the profession or violate the company’s corporate governance pol - icies. Credibility means that the cost accountant will provide full, fair, and timely disclosure of all relevant information that may affect a user’s decision. b. The cost or management accountant should document which regulation is believed to have been violated and then research and record the appropriate actions that should have been taken. Document the research findings as evidence of violations found. This i nformation should be kept confidential and reported and discussed with a superior who is not involved in the action. If the immediate superior is in - volved, then it may be necessary to communicate with someone higher up the cor - porate ladder (possibly up to the audit committee). Again, it is important to document each communication and finding throughout the process. If the man - agement accountant cannot resolve the matter, then he or she should resign. The management accountant should consult legal couns el before reporting the matter to regulatory authorities. 33. Each student will have a different answer. No solution is provided; however, it is es - sential that students realize that computer software piracy is an illegal as well as un - ethical activity. Pir acy of any intellectual property is theft. Chapter 1 11 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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 a lso 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 fr om 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 fore ign 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 hav e 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 tacti cs 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 t he 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. 12 Chapter 1 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. b. Yes, whistle -blowing managers in SEC -registered companies are protected from retaliatio n 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 informat ion 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 generatio n. 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 t he 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 custo mers 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 govern ance 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 al so 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 accessible website, in whole or in part. CHAPTER 2 COST TERMINOLOGY AND COST BEHAVIORS QUESTIONS 1. The term cost is used to refer to so many different concepts that an adjective must be attached to identify which particular type of cost is being discussed. For example, there are fixed costs, variable costs, period costs, product costs, expired costs, and opportunity costs, to name just a few. 2. A cost object is anything for which management wants to collect or accumulate costs. Before a cost can be specified as direct or indirect, the cost object must be identified. Since direct costs must be conveniently and economically traceable to the cost object, not knowing what the cost object in question is would make it impossible to ide ntify direct costs. For example, if multiple products are made in the same production area, the salary of the area’s manager would be direct to the production area but indirect to the different products. Indirect costs must be allocated in some rational an d systemat - ic manner to the cost object. 3. The assumed range of activity that reflects the company’s normal operating range is referred to as the relevant range . Outside the relevant range, costs may be curvilinear because of purchase discounts, improved worker skill and productivity, worker crowding, loss in employee efficiency during overtime hours, etc. Although a curvi - linear graph is more indicative of real ity, it is not as easy to use in planning or con - trolling costs. Accordingly, accountants choose the range in which these fixed and variable costs are assumed to behave as they are defined (linear) and, as such, repre - sent an approximation of reality. 4. It is not necessary for a causal relationship to exist between the cost predictor and the cost. All that is required is that there is a strong correlation between movement in the predictor and the cost. Alternatively, a cost driver is an activity that actua lly causes costs to be incurred. The distinction between cost drivers and predictors is important because it relates to one of the objectives of managers: to control costs. By focusing cost control efforts on cost drivers, managers can exert control over costs. Exerting control over predic - tors that are not cost drivers will have no cost control effect. 5. A product cost is one that is associated with inventory. In a manufacturing company, product costs would include direct material, direct labor, and overhead. In a merchan - dising company, product costs are the costs of purchasing inventory and the related freight -in costs. In a service company, product costs are those costs that are incurred to generate the services provided such as supplies, service labor, and service -related overhead costs. 13 14 Chapter 2 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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, respect ive- 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. Conve rsion 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 de termined 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 produ cts 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. Chapter 2 15 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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, 16 Chapter 2 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. thus, will result in a higher cost per unit. The utility cost will go down in total but, because it is mixed, it is impossible (without other information) to estimate its total or per -unit cost. Without knowing the cost formula for utility costs, it is imp ossible to determine the total cost of making 10,000 caps. 14. a. and b. Per Unit Per Set Cardboard boxes ($1,000  2,000) $0.50 $ 0.50 Mallets ($12,000  4,000) 3.00 6.00 Croquet balls ($9,000  12,000) 0.75 4.50 Wire hoops ($3,600  24,000) 0.15 1.80 Production worker wages ($8,400  2,000) ? 4.20 Supervisor’s salary ($2,600  2,000) ? 1.30 Building and equipment rental ($2,800  2,000) ? 1.40 Utilities ($1,300  2,000) ? 0.65 Total $20.35 c. Estimated cost per set in March is Cardboard boxes ($1,000  2,000) $ 0.50 Mallets ($12,000  4,000; $3  2) 6.00 Croquet balls ($9,000  12,000; $0.75  6) 4.50 Wire hoops ($3,600  24,000; $0.15  12) 1.80 Production worker wages ($8,400  2,000) 4.20 Supervisor’s salary ($2,600  2,500) 1.04 Building and equipment rental ($2,800  2,500) 1.12 Utilities ($1,400  2,500) 0.56 Total $19.72 15. a. Total fixed cost $ 37,500 Total variable cost (15,000 tickets  $10) 150,000 Total cost $187,500 b. Total cost $187,500 Desired profit margin (15,000 tickets  $8) 120,000 Total sales price $307,500 Divided by assumed number of tickets sold ÷ 15,000 Selling price per ticket $ 20.50 c. Total revenue (5,000 tickets  $20.50) $102,500 Total cost: Fixed $37,500 Variable (5,000  $10) 50,000 (87,500 ) Net profit $ 15,000 Chapter 2 17 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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 woul d make less profit as ticket sales declined. e. Total revenue (20,000 tickets  $20.50) Total cost: $ 410,000 Fixed $ 37,500 Variable (20,000  $10) 200,000 (237,500 ) Net profit $ 172,500 16. a. (1) 200 returns: Total cost = $2,000 + ($9  200) = $3,800 Cost per unit = $3,800 ÷ 200 = $19.00 (2) 500 returns: Total cost = $2,000 + ($9  500) = $6,500 Cost per unit = $6,500 ÷ 500 = $13.00 (3) 800 returns: Total cost = $2,000 + ($9  800) = $9,200 Cost per unit = $9,200 ÷ 800 = $11.50 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 = $66,000 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 b e 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 18 Chapter 2 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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 Chapter 2 19 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 21. a. $600,000 – $60,000 = $540,000 depreciable cost $540,000 ÷ 10 years = $54,000 depreciation per year (480 ÷ 600) ($54,000) = $43,200 is expired cost (part of product OH) b. Cost of goods sold $43,200 Finished goods inventory $10,800 22. a. One month of insurance ($18,600 ÷ 6) $ 3,100 Bonus to corporate president 10,000 Utility cost on headquarters ($20,000  0.40) 8,000 Total $21,100 b. Five months of insurance ($18,600  5/6) $15,500 Seminar fee 1,000 Total $16,500 c. Property taxes ($15,000  1/3) $ 5,000 Utility cost on factory ($20,000  0.60) 12,000 Total $17,000 d. Product costs are assigned to products made; thus, the costs cannot be classified as expired or unexpired because it is not known whether the associated products made during May were sold. If sold, the costs would be expired; if unsold, the costs would be unexpired and be accumulated in the Finished Goods account. 23. a. Mfg. b. Mfg., Mer., Ser. c. Mfg., Mer., Ser. d. Mer. (although manufacturers might refer to Finished Goods Inventory in this manner) e. Mfg., Mer., Ser. f. Mfg. g. Ser. h. Mfg., Mer. i. Mfg., Ser. 24. a. high b. low c. low d. high e. high f. high g. moderate h. high i. high j. moderate or low 20 Chapter 2 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 25. a. Rivets and aluminum = $12,510 + $1,683,000 = $1,695,510 The janitorial supplies and the sealant are indirect materials. b. Aluminum cutters and welders = $56,160 + $156,000 = $212,160 The janitorial wages and factory supervisors’ salaries are indirect labo r. The salespeople’s salaries are period costs. 26. a. Stainless steel, plastic, and wood blocks = $800,000 + $5,600 + $24,800 = $830,400 b. $500,000 (equipment operators) c. $6,000 indirect material (equipment oil and grease) $82,000 + $272,000 = $354,000 indirect labor (mechanics and supervisors) 27. Direct material: Mulch $ 320 Landscaping rock 1,580 Plants and pots 1,950 $3,850 Direct labor: Trumble’s salary ($3,000 ÷ 20 = $150 per day; $150  2 days to design) $ 300 Gardeners’ wages ($3,840 ÷ 20 = $192 per day; $192  5 days to complete) 960 $1,260 Overhead: Allocated depreciation ($200 ÷ 20 work days) $ 10 Construction permit 95 Allocated rent (150 ÷ 3,000 = 5%; $2,400  0.05 = $120; $120 ÷ 30 = $4 per day  2 days) 8* Allocated utility bills ($1,800  0.05 = $90; $90 ÷ 30 =$3 per day  2 days) 6* $ 119 *Note: The rent and utility bills were allocated only because of the designer’s use of space in the company offices. Given the immaterial amount of these allocations, Carolyn Gardens may simply want to treat these costs as period costs rather than at - tempting to trace them to individual jobs. Thus, an answer of $105 for overhead would also be reasonable. 28. a. 6,000 total hours – 5,000 regular hours = 1,000 overtime hours b. Direct labor: 5,000 hours  $9 per hour = $45,000 Overhead: $54,000 – $45,000 = $9,000 Chapter 2 21 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. c. Shift premiums: Second -shift premium: 10%  $9 = $0.90 Overtime premium: 75%  $9 = $6.75 Overhead costs: Second -shift premium: 2,500 hours  $0.90 = $2,250 Overtime premium: 1,000 hours  $6.75 = $6,750 29. a. 32,000 total hours – 27,000 regular hours = 5,000 overtime hours b. Direct labor: 32,000 hours  $12 per hour = $384,000 Overhead: $435,600 – $384,000 = $51,600 c. Shift premiums: Second -shift premium: 8%  $12 = $0.96 Third -shift premium: 12%  $12 = $1.44 Overtime premium: 50%  $12 = $6.00 Manufacturing overhead costs: Second -shift premium: 9,000 hours  $0.96 = $8,640 Third -shift premium: 9,000 hours  $1.44 = $12,960 Overtime premium: 5,000 hours  $6.00 = $30,000 30. a. Property tax overhead cost for February = $48,000 ÷ 12 = $4,000 Property tax OH cost for remainder of 2013 = $44,000 Actual Feb. OH costs = $530,000 – $124,000 – $44,000 + $81,000 = $443,000 b. February OH cost per unit = $443,000 ÷ 50,000 = $8.86 Total product cost in February = $24.30 + $10.95 + $8.86 = $44.11 c. If actual costs are used, product costs will differ each period. For example, January utility cost per unit was ($124,000 ÷ 50,000), or $2.48, compared to February’s cost per unit of ($81,000 ÷ 50,000), or $1.62. However, a normal cost system uses a predetermined overhead rate that provides a smoothing effect to overhead cost variations over an annual period. 31. Direct material used $ 24,000 Direct labor 126,000 Overhead 42,000 Current manufacturing costs $192,000 Less increase in work in process inventory (23,000 ) Cost of goods manufactured $169,000 Since Work in Process Inventory increased by $23,000, current manufacturing costs must have been $23,000 more than cost of goods manufactured. 22 Chapter 2 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 32. a. Beginning WIP inventory Raw material used $612,000 $ 372,000 Direct labor 748,000 Manufacturing overhead 564,000 1,924,000 Total cost to account for $ 2,296,000 Ending WIP inventory (436,000 ) Cost of goods manufactured $ 1,860,000 Note: The beginning and ending balances of Raw Material Inventory are not used because no information is given on raw material purchases for the month but the amount of RM used is specifically provided. b. Beginning FG inventory $ 224,000 Cost of goods manufactured 1,860,000 Cost of goods available for sale $2,084,000 Ending FG inventory (196,000 ) Cost of goods sold $1,888,000 33. a. Irresistible Art Schedule of Cost of Goods Manufactured For the Month Ended July 31, 2013 Beginning WIP inventory $ 146,400 Beginning RM inventory $ 93,200 Raw material purchased 656,000 Raw material available $ 749,200 Ending RM inventory (69,600 ) Raw material used $ 679,600 Indirect material used (plugged) Direct material used (given) (175,600 ) 504,000 Direct labor ($788,000 × 0.75) 591,000 Overhead: Various (given) $ 600,000 Indirect material (from above) 175,600 Indirect labor ($788,000 × 0.25) 197,000 972,600 Total cost to account for $2,214,000 Ending WIP inventory (120,000 ) Cost of goods manufactured $2,094,000 b. Irresistible Art Schedule of Cost of Goods Sold For the Month Ended July 31, 2013 Beginning FG inventory $ 72,000 Cost of goods manufactured 2,094,000 Goods available for sale $2,166,000 Ending FG inventory (104,800 ) Cost of goods sold $2,061,200