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Cornerstones of Cost Management 3rd Edition Hansen Solutions Manual Download:http://testbanklive.com/download/cornerstones-of-costmanagement-3rd-edition-hansen-solutions-manual/ Cornerstones of Cost Management 3rd Edition Hansen Test Bank Download:http://testbanklive.com/download/cornerstones-of-costmanagement-3rd-edition-hansen-test-bank/

CHAPTER 2 BASIC COST MANAGEMEN T CONCEPTS DISCUSSION QUESTIONS 1. An ac c ounting inf orm ation s ys tem is a s ystem c ons is ting of inter r elated m anual and c om puter par ts , us ing proc es s es s uc h as c ollec ting, r ec ording, c las s if ying, s um m ari z- ing, analyzing, and m an aging data to pr ovide output inf or m ation to us er s . 2. T he f inanc ial ac c ounting inf orm ation s ys tem is prim arily c onc erned with produc ing ou t- puts f or ex ternal us ers us ing well - s pec if ied ec onom ic events as inputs and proc es s es that m eet c ertain r ules . T he c os t m anage- m ent s ys tem , on the other hand, produc es outputs f or inter nal us ers , and the c r iteria that govern inputs and pr oc es s es are dir ec tly r elated to m anagem ent obj ec tives . As a r e- s ult, the c os t m anagem ent s ys tem is m ore f lex ib le than the f inanc ial s ys tem . 3. T he three broad obj ec tives of a c os t m a nagem ent inf orm ation s ys tem are: ( 1) to c os t out produc ts , s ervic es , and other c os t o b- j ec ts ; ( 2) to provide inf orm ation f or planning and c ontr ol; and ( 3) to provide inf orm ation f or dec is ion m ak ing. 4. T he c os t ac c ounting inf orm ation s ys tem is a c os t m anagem ent s ubs ys tem des igned to as s ign c os ts to produc ts , s ervic es , and other obj ec ts as m anagem ent needs s pec if y. T he operational c ontr ol inf orm ation s ys tem is a c os t m anagem ent inf orm ation s ubs ys tem des igned to provide ac c urate and tim ely f eedbac k c onc erning the per f

orm anc e of m anagers and others r elative to their pla n- ning and c ontr ol of ac tivities . 5. A c os t obj ec t is anything f or whic h c os ts are m eas ured and as s igned. Ex am ples inc lude: ac tivities , produc ts , plants , and pr oj ec ts . 6. An ac tivity is a bas ic unit of work per f orm ed within an organization. Ex am ples inc lude m ater ials handling, ins pec tion, pur c has ing, billing, and m aintenanc e. 7. A dir ec t c os t is a c os t that c an be eas ily and ac c urately tr ac ed to a c os t obj ec t. An indir ec t c os t is a c os t that c annot be eas ily and ac c u- r ately tr ac ed to c os t obj ec ts . 8. T r ac eability is the ability to as s ign a c os t d ir ec tly to a c os t obj ec t in an ec onom ic ally


f eas ible way us ing phys ic al obs ervation or a c aus al r elations hip. 9. Alloc ation is the as s ignm ent of indir ec t c os ts to c os t obj ec ts bas ed on c onvenienc e or a s- s um ed link ages . 10. Driver tracing uses drivers based on a causal relationship to trace costs to cost objects. Often, this m eans that costs are first traced to activities using resource drivers and then to cost objects using activity drivers. 11. Tangible products are goods that are made by converting raw materials into a final product through the use of labor and capital inputs. 12. A service is a task or activity perform ed for a custom er or an activity perform ed by a cu stom er using an organization’s products or f a- cilities. Services differ from tangible products on three im portant dim ensions: intangibility, perishability, and inseparability. Intangibility m eans that buyers of services cannot see, feel, taste, or hear a service before it is bought. Perishability m eans that services cannot be stored. Inseparability m eans that producers of services and buyers of services m ust be in direct contact (not true for tang ible products). 13. T hree exam ples of product cost defin itions are value-chain, operating, and traditional def- initions. T he value-chain definition includes cost assignm ents for research and develop- m ent, production, m ark eting, and custom er service (all value-chain activities). Operational product costs include all costs except for r e- search and developm ent. T raditional product costs include only production costs. Different costs are needed because they serve differ- ent m anagerial objectives. 14. T he three c os t elem ents are dir ec t m at er ials , dir ec t labor, and overhead. 15. T he inc om e s tatem ent f or a s ervic e f ir m does not need a s uppor ting c os t of goods m anuf ac tured s c hedule. Sinc e s ervic es c a n- not be s tored, the c os t of s ervic es pr oduc ed equals the c os t of s ervic es s old ( n ot nec e s- s arily true f or a m anuf ac turing f ir m ) .


CORNERSTONE EXERCISES Cornerstone Exercise 2 .1 1. Unit pri me c os t = (Dire c t ma teri a ls + Dire c t la bor )/Units = ($ 120 ,0 0 0 + $ 6 0 ,0 0 0 )/5 0 ,0 0 0 = $ 3 .6 0 2. Unit c onve rs ion c os t = (Dire c t la bor + V a ria ble ove rhe a d + Fix e d ove rhe a d)/U nits = ($ 6 0 ,0 0 0 + $ 25 ,0 0 0 + $ 220 ,0 0 0 )/5 0 ,0 0 0 = $ 6 .1 0 3. Unit va ria ble produc t c os t = (Dire c t ma teri a ls + Dir e c t la bor + V a ria ble ove rhe a d)/U nits = ($ 120 ,0 0 0 + $ 6 0 ,0 0 0 + $ 25 ,0 0 0 )/5 0 ,0 0 0 = $ 4 .1 0 4. Unit product c os t = (Dire c t ma teri a ls + Dire c t la bor + V a ria ble ove rhe a d + Fix e d ove r he a d)/U nits = ($ 120 ,0 0 0 + $ 6 0 ,0 0 0 + $ 25 ,0 0 0 + $ 220 ,0 0 0 )/5 0 ,0 0 0 = $ 8 .5 0 5. Total direct materials, total direct labor, and total variable overhead w ould all increaseby10percentsincetheunits increased by 10 percent and these are strictly variable costs. Total fixed overhead w ould remain the same. Unit prime cost w ould increase by 10 percent since both directmaterialsanddirectlabor are strictly variable, and 10 percent more units w ould require 10 percent more variable cost. How ever, unit conversion cost w ould increase by less than 10 percent because of the presence of fixed costs. New unit product c os t = [($ 120 ,0 0 0 + $ 6 0 ,0 0 0 + $ 25 ,0 0 0 )(1 .1 0 ) + $ 220 ,0 0 0 )]/ 55 ,0 0 0 = $ 8 .1 0


Cornerstone Exercise 2.2 1 . P ie tro Froze n Foods , Inc . S tateme nt of Cos t of G oods Ma nufa c ture d For the Coming Ye a r Dire c t ma teri a ls Begi nning inve ntory ................................ Add: P urc ha s e s ................................ .................. ......................... Ma teri a ls a va il a ble ................................

$ 5 ,6 0 0 1 1 9 ,3 0 0 $ 1 2 4 ,9 0 0 4 ,9 0 0

..................... Le s s : E nding inve ntory Dire................................ c t ma teri a l s us ............. e d in produc tion $ 120 , 0 .............................. 00 6 0 ,0 0 Dire c t la bor ................................ ................................ ...... 0 ,0 0 0 Ma nufa c turing (Fa c tory) ove rhe a d 245 ................................ Tota l ma nufa c turing c os ts a dded $ 425 , 0 ................................ . 00 1 2 ,5 0 Add: Be ginning w ork in pr oc e s s ................................ ... i n proc e s s ................................ 0 Le s s : E nding w ork 1 4 ,6 0 ....... Cos t of goods ma nufa c ture d ................................ $ 402 2 ,9 0 ......... 0 2. If the e nding inve ntory of dire c t ma teri a ls were$2,000higher,thenthedirect materi a ls us e d in produc tion w ould be $ 2 ,0 0 0 s ma ll e r, the total ma nufa c tu r- ing c os ts a dded w ould be $ 2 ,0 0 0 low e r, a nd the c os t of goods ma nufactured wouldbe$2,000lower.Noother li ne i tems w ould be a ffec ted.

Cornerstone Exercise 2.3 1 . P ie tro Ma nufa c turing, I nc . S tateme nt of Cos t of G oods S old For the Coming Ye a r Cos t of goods ma nufa c ture d ................................ ............................... Add: Be ginning finis he d goods ................................ ........................... Cos t of goods a va il a ble for s a le ................................ .......................... Le s s : E nding finis he d goods ................................ ............................... Cos t of goods s old ................................ ................................ ...............

$ 4 2 2 ,9 0 0 4 2 ,5 0 $ 406 5 ,4 0 0 3 4 ,0 0 $ 403 1 ,4 0 0


2. If be ginning finis he d goods w e re $ 5 ,0 0 0 low e r, the n the c os t of goods s old w ould be $ 5 ,0 0 0 l ow e r.


Cornerstone Exercise 2 .4

P ie tro Ma nufa c turing, I nc . Inc ome S tateme nt For the Coming Ye a r P e rc e nt

S a le s ($ 12. 5 0 Ă— 4 9 ,3 00 ) .............................. Cos t of goods s old ................................ .... Gros s ma rgin ................................ ............. Le s s ope ra ting e x pe ns e s : S e ll ing e x pe ns e s $ 26 ,0 0 ................................ 01 34 ,0 Admini s trative e x ..pe ns e s Ope..................... ra ting inc ome ................................ ...... 0 0

$ 6 1 6 ,2 5 0 4 3 1 ,4 $ 1 08 04 ,8 5 0

1 0 0 .0 0 7 0 .0 0 3 0 .0 0

1 60 ,0 $20 40 ,8 5 0

2 5 .9 6 4 .0 3

2. If the c os t of goods s old ha s be e n 6 5 pe rc e nt ofsalesforthepastfewyears, managersw ould probably be c once rne d. Cos t of goods s oldhasrisenby5%, andprofithasprobably de c li ne d. Ma na ge rs s hould inve s tig a te to s eewhy theincreaseoccurred,andtakes teps to de c re a s e produc t c os ts or i nc re a s e pric e , if pos s i ble , in the c oming ye a r.

Cornerstone Exercise 2 .5 1. Unit pri me c os t = (Di re c t ma teri a ls + Dire c t la bor)/U nits = ($ 2 7 ,0 0 0 + $ 4 7 2 ,5 0 0 )/1 5 ,0 0 0 = $ 3 3 .3 0 2. Unit c onve rs ion c os t = (Dire c t la bor + V a ria ble ove rhe a d + Fix e d ove rhe a d)/U nits = ($ 4 7 2 ,5 0 0 + $ 1 5 ,0 0 0 + $ 1 8 ,0 0 0 )/1 5 ,0 0 0 = $ 3 3 .7 0 3. Unit va ria ble s e rvic e s produc tion c os t = (Dire c t ma teri a ls + Dir e c t la bor + V a ria ble ove rhe a d)/U nits = ($ 2 7 ,0 0 0 + $ 4 7 2 ,5 0 0 + $ 1 5 ,0 0 0 )/1 5 ,0 0 0 = $ 3 4 .3 0


Cornerstone Exercise 2 4. .4 Unit s e rvic e s produc tion c os t = (Dire c t ma teri a ls + Dire c t la bor + V a ria ble ove rhe a d + Fix e d ove r he a d)/U nits = ($ 2 7 ,0 0 0 + $ 4 7 2 ,5 0 0 + $ 1 5 ,0 0 0 + $ 18 ,0 0 0 )/1 5 ,0 0 0 = $ 3 5 .5 0


5. S inc e offic e re nt is a fix e d c os t , no va ria blecostwouldbeaffected,andprime costa nd total va ria ble c os t s tay the s a me . S inc e c onversioncostincludes thenewhigherfix e d ove rhe a d, it w ould inc re a s e . S imi la rly, totalunitservice costwouldincreaseass how n be low . Unit s e rvic e s p roduction c os t = ($ 2 7 ,0 0 0 + $ 4 7 2 ,5 0 0 + $ 1 5 ,0 0 0 + $ 1 9 ,5 0 0 )/1 5 ,0 0 0 = $ 3 5 .6 0

Cornerstone Exercise 2.6 1 . Happy Home He lpe rs , Inc . S tateme nt of Cos t of S e rvic e s P roduce d For the Coming Ye a r Dire c t ma teri a ls Begi nning inve ntory ................................ .................. $ 4 , 0 00 Add: P urc ha s e s ................................ ......................... 2 5 , 6 00 Ma teri a ls a va il a ble ................................ $ 29 , 6 00 ..................... Le s s : E nding inve ntory 2 ,6 00 Dire................................ c t ma teri a ls us e d in pr oduction $ 27 ,0 0 0 ............. .............................. Dire c t la bor ................................ ................................ ...... 472 , 5 00 Cle a ning ove rhe a d ................................ .......................... 3 3 ,0 0 0 2 ,5 Tota l s e rvic e s produc tion c os ts a dded $ 53 ........................ 00 Add: Be ginning w ork i n proc e s s * ................................ 0 .Le s s : E nding w ork i n proc e s s ................................ 0 ....... Cos t of s e rvic e s produc e d ................................ $ 53 2 ,5 0 ............. 0 * The beginning and ending w ork -in-process amountscouldclearlybeeliminated. They are show n here to reinforce the concept that forthisfirm,withnoworkin process,total services production cost equals cost of services produced. 2. If purc ha s e s of dire c t ma teri a ls inc re a s e d to$30,000,andmaterialsinventoriesre ma ine d uncha nged, the n the dire c t ma teri a lsusedinproduction,the totalservices produc tion c os ts a dded, a nd the c os t of s e rvicesproduced wouldallincreaseby$4,4 0 0 ($ 3 0 ,0 0 0 – $ 2 5 ,6 0 0 ) .


Cornerstone Exercise 2 .7

1. Happy Home He lpe rs , Inc . S tateme nt of Cos t of S e rvic e s S old For the Coming Ye a r Cos t of s e rvic e s produc e d ................................ ................................ $ 53 2 ,5 ... Add: Begi nning finis he d goo ds * ................................ ......................... 00 0 Le s s : E nding finis he d goods ................................ ............................... 0 Cos t of s e rvic e s s old ................................ ................................ ........... $ 53 2 ,5 00 *The be ginning a nd e nding finis he d goods a mountscouldclearlybeeliminated. Theyare s how n he re to re inforce the c once pt tha t for thisfirm,withnofinished goodsinventory, total c os t of s e rvic e s produc e d e qual s the c os t of s e rvic e s s old. 2. Unli k e a s e rvic e firm, w e w ould e x pe c t a ma nufa c turing firm to ha ve be gi n- ning a nd e nding finis he d goods inve ntory.

Cornerstone Exercise 2 .8 1 . Happy Home He lpe rs , Inc . Inc ome S tateme nt For the Coming Ye a r S a le s ($ 4 5 Ă— 1 5 ,0 0 0 ) ................................ ......................... Cos t of s e rvic e s s old ................................ ...................... Gros s ma rgin ................................ ................................ ... Le s s ope ra ting e x pe ns e s : S e ll ing e x pe ns e s ................................ $ 2 2 ,0 ........................ 0 50 3 ,0 Admini s trative e x pe ns e s ................................ 00 Ope........... ra ting inc ome ................................ ............................

$ 675 ,0 0 053 2 ,5 00 $ 14 2 ,5 00 75 ,0 0 0 $67,5 00

2. If the pric e inc re a s e d to $ 5 0 , s a le s w ould be $ 7 5 0 ,0 0 0 , a $ 7 5 ,0 0 0 inc re a s e . This w ould inc re a s e gros s ma rgin a nd oper a ting inc ome by $ 7 5 ,0 0 0 . The ne w ope ra ting inc ome w ould be $ 1 4 2 ,5 0 0 .


EXERCISES Exercise 2.9 1. The obje c tive of the dis hw a s hing s ys tem is toprovideclean,germ-freedishes,glas s e s , a nd s il ve rw a re . P roc e s s e s inc lude : s c rapinguneatenfoodoff dishesintodis posa l, loa ding the ra c k s , w a s hing the dis he s , a nd unloa ding the ra c k s . 2. The ite ms a re c la s s ifie d a s follow s : a. Automa tic dis hw a s he r —inter re la ted pa r t b. Ra c k s to hold the dirty gla s s e s , s il ve rw a re , a nd dis he s — inter re la ted pa rt c. E le c tric it y—input d. W a te r —input e. W a s te di s posa l —inter re la ted pa rt f. S ink s a nd s pra ye r s —inter re la ted pa rts g. Dis h de terge n t—input h. G a s he a ter to he a t w a ter to 1 8 0 de gre e s Fa hre nhei t—inter re la ted pa rt i. Conve yor be l t—inter re la ted pa rt j. P e rs ons 1 , 2 , 3 , a nd 4 —inter re la ted pa rts k. Cle a n, ge rm -free dis he s — outputs l. Dirty dis he s —inputs m. Ha lf-e a ten di nne r — inputs n. Aprons —inter re la ted pa rts 3. Ope ra tional Model : D is hw a s hing S ys tem Inputs : Dis h d e terge nt W a ter E le c tric ity Dirty dis he s Hal f-e a ten di nner

P roc e s s e s : S c ra ping off food Loadi ng ra c k s W a s hing Unloa ding

Output: Cle a n dis he s

4. The c os t ma na ge me nt informa tion s ys tem is s imilarinthatithasinterrelated parts:

proc

e

s

s

e

s

,

obje

c

tive

s

,

inputs

,

a

nd


outputs.Thedifferencesare:inputs aree c onomic e ve nts a nd the re a re us e rs of information.Theoutputofthe costmanage me nt s ys tem produc e s us e r a c tions. Output c anactasthebasis foractionorcanconfirm that a c tions a lre a dy ta k e n ha d the intende d e ffe c ts.


Exercise 2.10 1. a. Inter re la ted pa rts: Cos t a c c ounting pe rs onnel , c ompute r, printer b. P roc e s s e s : Cos t a s s ignme nt: ma teri a ls , la bor, a nd ove rhe a d c. Obje c tive s : Cos ting out of products d. Inputs : Dire c t ma teri a ls , dire c t la bor, de pre c ia tion, pow e r a nd ma teri a l s ha ndling e. Outputs : P roduct c os t re port f. Use r a c tions: S ubmis s ion of a bid, ma k e -or -buy de c is ion 2. Ope ra tional Mode l: Cos t Ac c ounting S ys tem Inputs : Dire c t ma teri a ls Dire c t la bor Depre c ia tion P ow e r Ma teri a l s ha ndling

P roc e s s e s : Cos t a s s ignme nt: Dire c t ma teri a ls Dire c t la bor Ove rhe a d

Output: P roduct c os t Bidding de c is ion Ma k e -or -buy de c is ion

3. The inputs c onsi s t of only produc tion c os ts s ugges ting a tradi tional produc t c os t definition.

Exercise 2.11 a. Dire c t tra c ing b. All oc a tion c. Dire c t tra c ing d. Dire c t tra c ing e. Drive r tra c ing; potentia l drive r —ma c hine hours or ma intena nc e hours f. Dire c t tra c ing g. Dire c t tra c ing h. All oc a tion i. Drive r tra c ing; potentia l dri ve r —number of orde rs j. Drive r trac ing ; potentia l drive r —number of e ngine e ring hours k. All oc a tion


l. Drive r tra c ing; potentia l drive r —number of e mploye e s or di re c t la bor hours m. All oc a tion n. All oc a tion


Exercise 2.12 a. V a lue -c ha in. This is a s trate gi c de c is ion a nd involve s a c tivitie s a nd c os ts throughout the e ntire va lue c ha in. b. Ope ra ting. At this point, the c os ts of de s ignanddevelopmentaresunkcosts; thedec is ion to produc e s hould c onsi de r the c os ts ofproduction,marketing, andservicing the p roduct. c . V a lue -c ha in . The pric e ne e ds to c ove r a ll productcosts,includingthecosts ofdeve loping, s e ll ing, a nd s e rvic ing. d. P roduct. This a pproac h is ma ndated for e x terna l re porting. e . V a lue -c ha in . P roduct mix de c is ions s hould considerallcostsandthemix thatisthe mos t profita ble i n the long run s hould be s e le c ted. f. Ope ra ting. The de s igns s hould be drive n by the e ffe c t the y ha ve on produ c- tion, ma rk e ting, a nd s e rvic ing c os ts. Thus, the oper a ting c os t de fin i tion is the mos t re le va nt. g. P roduct. This a pproac h is ma ndated for e x terna l re porting. h. Ope ra ting. Res e a rc h a nd de s ign c os ts a re notrelevantforapricedecision i nvolving a n e x is ting produc t. P roduction, marketing,andservicingcostsare releva nt, how e ve r. i . Ope ra ting. Any s pe c ia l orde r s hould c ove r its c os ts w hic h pote ntia ll y i nc lude produc tion, ma rk e ting, a nd s e rvic ing c os ts.

Exercise 2.13 1. 2.

Dire c t ma teri a ls us e d = $ 2 5 ,9 0 0 + $ 2 5 6 ,9 0 0 – $ 18 ,0 0 0 = $ 2 6 4 ,8 0 0 Dire c t ma teri a ls ................................ ................................ .............. $ 2 6 4 ,8 Dire c t la bor ................................ ................................ ..................... 0 10 7 6 ,0 00 Ove rhe a d ................................ ................................ ......................... 3 08 , 40 0 Tota l ma nufa c turing c os t ................................ .............................. $7 4 9 ,2 Add: Be ginning W IP ................................ ................................ ....... 0 04 4 ,7 002 , 7 Le s s : E nding W IP ................................ ................................ ........... (2 00 Cos t of goods ma nufa c ture d ................................ ........................ $7 7 )1 ,2 00 Unit c os t of goods ma nufa c ture d = $ 7 7 1 ,2 0 0 / 4 0 ,0 0 0 = $ 1 9 .2 8


Exercise 2.13 (Concluded) 3. Dire c t la bor = P roduct c os t – Dire c t ma teri a ls – Ove rhe a d = $ 1 9 .2 8 – $ 6 .6 2 – $ 7 .7 1 = $ 4 .9 5 P rim e c os t = Dire c t ma teri a ls + Dire c t la bor = $ 6 .6 2 + $ 4 .9 5 = $ 1 1 .5 7 Conve rs ion c os t = Dire c t la bor + O ve rhe ad = $ 4 .9 5 + $ 7 .7 1 = $ 1 2 .6 6

Exercise 2.14 1. Begi nning inve ntory + P urc ha s e s – E nding i nve ntory = D ire c t ma teri a ls us e d $ 2 ,5 0 0 + $ 7 8 ,3 0 0 – E nding inve ntory = $ 7 3 ,5 0 0 E nding inve ntory = $ 7 ,3 00 2. Units i n be ginning finis he d goods inve ntory = $ 3 , 422 / $ 5 .9 0 = 580 S inc e 14 ,0 0 0 units w e re ma nufa c ture d a nd 580wereinbeginningfinished goodsinve ntory, 1 4 ,5 8 0 units w e re a va il a ble for s a le .But14,120unitswere sold,soending finis he d goods inve ntory i s 460 . 3. Cos t of goods ma nufa c ture d = $ 3 4 9 ,0 0 0 + $ 116 ,0 0 0 – $ 1 1 7 ,3 0 0 = $ 3 4 7 ,7 0 0 4. P rim e c os t = $ 55 = Dire c t ma teri a ls + Dire c t la bor Dire c t ma teri a ls = $ 55 – Dire c t la bor Conve rs ion c os t = $ 84 = Dire c t la bor + O ve rhe a d Ove rhe a d = $ 84 – Dire c t la bor


P roduct c os t = ($ 55 – Dire c t la bor) + Dire c t la bor + ($ 84 – Dire c t la bor) = $ 105 Dire c t la bor = $ 34 Dire c t ma teri a ls + Dire c t la bor = $ 55 Dire c t ma teri a ls + $ 34 = $ 55 Dire c t ma teri a ls = $ 21 5. Tota l ma nufa c turing c os ts + BW IP – E W IP = COGM $ 4 1 2 ,0 0 0 + $ 7 6 ,0 0 0 – E W IP = $ 4 3 4 ,0 0 0 E W IP = $ 5 4 ,0 00 P rim e c os t + O ve rhe a d = Total ma nufa c turing c os ts $ 6 4 ,0 0 0 + O ve rhe a d = $ 4 1 2 ,0 0 0 Ove rhe a d = $ 3 4 8 ,0 0 0


Exercise Exercise 2.11 2.11

1. Le Ma ns Compa ny S tateme nt of Cos t of G oods Ma nufa c ture d For the Month of J une Dire c t ma teri a ls : Begi nning inve ntory ................................ .................. $ 6 2 ,4 0 0 Add: P urc ha s e s ................................ 346 ,0 0 0 ......................... Ma teri a ls a va il a ble ................................ $ 4 0 8 ,4 0 0 ..................... Le s s : E nding inve ntory 63 , 0 00 Dire................................ c t ma teri a ls us e............. d in produc tion .............................. Dire c t la bor ................................ ................................ ...... Ma nufa c turing ove rhe a d ................................ ................ Tota l ma nufa c turing c os ts a dded ................................ . i n proc e s s ................................ Add: Be ginning w ork ... s s : E nding w ork i n proc e s s ................................ Le ....... Cos t of goods ma nufa c ture d ................................ .........

$ 3 4 5 ,4 00 143 ,0 0 0 3 7 5 ,8 0 $08 6 4 ,2 0 0 3 3 ,9 00 (37 , 500 $ )8 6 0 ,6 00

2. Le Ma ns Compa ny S tateme nt of Cos t of G oods S old For the Month of J une Cos t of goods ma nufa c ture d ................................ ............................... Add: Be ginning finis he d goods inve ntory ................................ .......... Cos t of goods a va il a ble for s a le ................................ .......................... Le s s : E nding finis he d goods inve ntory ................................ .............. Cos t of goods s old ................................ ................................ ...............

$ 860 ,6 00 5 5 ,6 00 $ 9 1 6 ,2 0 0 5 0 ,8 0 $ 806 5 ,4 0 0


Exercise Exercise 2.12 2.12

1. Units e nding finis he d goods = 3 ,4 0 0 + 3 0 ,0 0 0 – 31 ,0 0 0 = 2 ,4 0 0 Finis he d goods e nding inve ntory = 2 ,4 0 0 × $ 39 * = $ 9 3 ,6 0 0 *S inc e the unit c os t of be ginning finis he d goodsandtheunitcostofcurrent produc tion both e qual $ 39 , the unit c os t of e nding finis he d goods mus t a ls o e qual $ 39 . 2. Kilde e r Compa ny S tateme nt of Cos t of G oods S old For the Ye a r E nded Dec e mbe r 3 1 Cos t of goods ma nufa c ture d ($ 3 9 × 3 0 ,0 0 0 ) ................................ $ 1 ,1 7 0 ,0 ...... Be ginning finis he d goods i nve ntory................................ .......... 0 01 3 2 ,6 0 Add: Cos t of g oods a va il a ble for s a le ................................ $ 10,3 0 2 ,6 .......................... 0 0 9 3 ,6 0 Le s s : E nding finis he d goods inve ntory ................................ .............. 0 0 9 ,0 Cos t of goods s old ................................ ................................ ............... $ 1 ,2 00 3. Kilde e r Compa ny Inc ome S tateme nt: Abs orption Cos ting For the Ye a r E nded Dec e mbe r P e rc e 31 nt S a le s (31 ,0 0 0 × $ 5 2 ) ................................ .................. $ 1 ,6 1 2 ,0 0 0 1 0 0 .0 0 Cos t of goods s old ................................ ................... 1 ,2 0 9 ,0 0 0 7 5 .0 0 Gros s ma rgin ................................ ............................ $ 4 0 3 ,0 0 0 2 5 .0 0 Le s s ope ra ting e x pe ns e s : Commi s s ions ( 31 ,0 0 0 × $ 1 .3 0 ) ........................... $ 4 0 ,3 0 0 Adve rtis ing c o -pa ys ................................ ............ 9 5 ,0 0 0 Admini s trative e x pe ns e s ................................ .... 183 ,0 0 0 3 1 8 ,3 0 0 1 9 ,7 5 Ope ra ting i nc ome ................................ ..................... $ 8 4 ,7 0 0 5 .2 5


Exercise Exercise 2.13 2.13

1. Anglin Compa ny S tateme nt of Cos t of G oods Ma nufa c ture d For the Ye a r E nded Dec e mbe r 31 Dire c t ma teri a ls : Begi nning inve ntory ................................ Add: P urc ha s e s ................................ .................. ......................... Fre ight-in on m a teri a ls ................................ .....a ls a va il a ble ................................ Ma teri ..................... Le s s : E nding inve ntory Dire................................ c t ma teri a ls us e d in pr oduction ............. .............................. Dire c t la bor ................................ Ma nufa c turing ove rhe a d: ................................ ...... Fa c tory s upplie s ................................ ........................

Fa

c

tory

util

itie

s

................................ .......................... Fa c tory s uper vis ion a nd indir e c t la bor ................... Ma teri a ls Tota l ove rhe a d c os ts ................................ hal ma ndling ................................ ..................... ................. Tota nufa c turing c os ts a dded ................................ . i n proc e s s Add: Be ginning w ork ................................ ... i n proc e s s ................................ Le s s : E nding w ork ....... Cos t of goods ma nufa c ture d ................................ .........

$ 3 7 ,2 0 0 3 7 8 ,8 9 0 7 ,5 0 0 $ 4 2 3 ,5 9 0 3 4 ,6 0 0 $ 3 8 8 ,9 9 0 4 9 5 ,9 0 0 $ 1 8 ,5 0 0 5 4 ,0 0 0 1 6 5 ,0 00 1 6 ,9 0 0

2 5 4 ,4 0 $ 10,1 3 9 ,2 9 02 0 1 ,0 0 0 1 7 ,4 (1 $ 100 ,2)2 2 ,8 90

2. Anglin Compa ny S tateme nt of Cos t of G oods S old For the Ye a r E nded Dec e mbe r31 Cos t of goods ma nufa c ture d ................................ ............................... $ 1 ,2 2 2 ,8 Add: Be ginning finis he d goods inve ntory ................................ .......... 9 0 5 9 ,2 0 0 8 2 ,0 Cos t of goods a va il a ble for s a le ................................ $ 1 ,2 .......................... 9 0 62, 700 Le s s : E nding finis he d goods inve ntory ................................ .............. Cos t of goods s old ................................ ................................ ............... $ 1 ,2 1 9 ,3 90


Exercise Exercise 2.14 2.14 1.

Begi nning inve ntory, ma teri a ls ................................ ..................... $ 1 ,0 5 0 + P urc ha s e s ................................ ................................ ................. ,4 – E nding inve ntory, ma teri a ls ................................ ..................... (91150) Ma teri a ls us e d in s e rvic e provis ion ................................ ............. $ 1 150,5 5 0

2.

P rim e c os t = $ 1 1 ,5 5 0 + $ 2 5 ,5 7 0 = $ 3 7 ,1 2 0

3. Conve r s ion c os t = $ 2 5 ,5 7 0 + $ 1 8 ,1 3 0 = $ 4 3 ,7 0 0 4. Dire c t ma teri a ls ................................ ................................ .............. Dire c t la bor ................................ ................................ ..................... Ove rhe a d ................................ ................................ ........................ Cos t of s e rvic e s ................................ ................................ ............. 5.

$ 11 , 5 502 5 , 57 0 8 ,1 3 1 $ 05 5 ,2 5 0

S e nd it P a c k ing Inc ome S tateme nt For the Month E nded Ma y 3 1

S a le s re ve nues ................................ ................................ ..................... $ 102 ,1 00 Cos t of s e rvic e s s old ................................ ................................ ........... 5 5 ,2 5 0 Gros s ma rgin ................................ ................................ ........................ $ 46 ,8 5 0 Ope ra ting e x pe ns e s : Adve rtis ing ................................ ................................ ....................... (2, 750 )(5 ,1 0 Fra nc his e fe e (0 .0 5 Ă— $ 102, 100) ................................ 5 ) (3, ...................... Other a dmini s trative e x pe ns e s 0 )4 Ope................................ ra ting i nc ome ................................ ................................ ................. $ 365 5 ,3 ...................... 5 6 . Cle a rly, the re nt, ins ura nc e , a nd util itie sareindirectcosts.Nomatterhow manypac k a ge s La k e e s ha a nd he r w ork e rs pa c k a ge a nd s endofffordelivery, therent,utilities, a nd ins ura nc e w il l be the s a me . The a mount

pa

idtoUPS

andFedEx,however,forthepacka

gedeliveryisadirectcost.Thisamount, w hic h is c ol le c te d by S e nd it P a c k ing , is a directcostofeachpackage.Itwill change from month to month a c c ording to the number a ndtypeofpackages thatcustomersdrop off.


Exercise Exercise 2.15 2.15

1. S he ll y is inter e s ted in the ma nufa c turing c ostsofGlaxane.Inparticular,the costs of dire c t ma teri a ls , dire c t la bor, a nd ove rheadwillbecalculatedto budgetforGlax a ne produc tion. 2. Le s li e w il l be c once rne d w ith a ll c os ts a longthevaluechain.Clearly,the after-s a le c os ts w il l be a n important fac tor in pric ingsincethepotentialfor fatalsideeffe c ts w il l le a d to both la w s uits a nd the w ithdrawalofGlaxane fromthemarket.Howe ve r, Le s li e mus t a ls o be c once rne d w ith the c ostsof research,development,andproduc tionsincepharmaceuticalcompanies atte mpt to li nk a ll of t he s e c os ts to a drug to jus tify thei r pri c ing s trate gie s . 3. Dante w il l be prima ril y c once rne d w ith the overallresearchanddevelopment costsa nd the e ve ntua l re ve nue from the s uc c e s s ful drugs.Anyindividualpo- tentialdrugcan turn out to ha ve no va lue a s long a s s ome drug projectsare successfulandcanjustify the total e fforts.

Exercise 2.20 1. Gi ve n the de s c ription provide d, it a ppea rs thatJazonusesatraditionalcost manage me nt s ys tem. Firs t, produc t c os ts a re de terminedonlybyproduction costs.Appare ntly, the financ ia l a c c ounting s ys tem is drivingthetypeof productcostinforma tion be ing produc e d. S e c ond, only dire c t la borhours,a unit-baseddriver,areusedto a s s ign ove rhe a d c os ts. S inc e ma ny ove rhe a d c os ts a re li k e ly to be c a us e d by nonunit drivers,thissuggestsastrong reliance on a ll oc a tion for c os t a s s ignme nt. Third, thecompany’scontrol systemfocusesonde pa rtmental , ra the r tha n firm -w ide , pe rformanceand reliesonfinancialmeasure s . 2. P roduct c os ting a c c ura c y c a n be impr ove d by placingmoreemphasison tracingandless on a ll oc a tion. Ther e is e nough informa tion providedtoreveal thatthetwoproductsma k e quite diffe re nt de ma nds on c e rtai n a c tivities. Setup,receiving,andpurchas ing re s ourc e s a re c onsume d d iffe re ntly by the twoproducts,anditisdoubtfulthat directlaborhourswouldhaveanything to do w ith the tw o produc ts’ pa tte rns of re s ourceconsumptionforthese threeac tivitie s . Thus, us ing a c tivity drive rs tha tbetterreflectthedifferential resourc e c onsumption w ould impr ove the c os t a s s ignments.Jazonwould


Exercise Exercise 2.16 2.16 needtoassigncosts to the a c tivitie s us ing dire c t trac ing a nd resource driversandthenassignthecost of the a c tivitie s to the tw o produc ts us ing a c tivity drive rs . J a zon a ls o s hould c onsi derthepossibilityofcomputing differe nt—more ma na ge ria ll y re le va nt —produc t c ostssuchasvalue-chain costsandopera tional c os ts.


3. J a zon w ould ne e d to c ha nge its c ontrol foc us frommanagingcoststomanagingac tivitie s . This w ould e nta il s hifting e mpha s is from de pa rtmental pe r- forma nc e ma x imi za tion to s ys tem -w ide pe rforma nc e ma x imi zation.Tobring aboutthischange,Jazonw il l ne e d to provide de tail e d informa tion c oncerning activities.Sinceactivitiesc a us e c os ts, ma na ging a c tivitie s is a more logic a l a pproac h to c ontroll ing c os ts.

Exercise 2.21 1. 2.

3.

Dire c t ma teri a ls us e d = $ 68 ,0 0 0 + $ 278 ,0 0 0 – $ 7 0 ,4 0 0 = $ 2 7 5 ,6 0 0 Dire c t ma teri a ls ................................ ................................ .............. Dire c t la bor ................................ ................................ ..................... Ove rhe a d ................................ ................................ ........................ Tota l ma nufa c turing c os t ................................ .............................. Add: Be ginning w ork i n proc e s s ................................ .................. Le s s : E nding w ork i n proc e s s ................................ ...................... Cos t of goods ma nufa c ture d ................................ ........................ Unit c os t of goods ma nufa c ture d = $ 9 7 7 ,0 0 0 / 10 0 ,0 0 0 = $ 9 .7 7 Dire c t la bor pe r uni t = $ 9 .7 7 – $ 2 .7 0 – $ 5 .3 0 = $ 1 .7 7 P rim e c os t = $ 2 .7 0 + $ 1 .7 7 = $ 4 .4 7 Conve rs ion c os t = $ 1 .7 7 + $ 5 .3 0 = $ 7 .0 7

$ 2 7 5 ,6 0189 0 ,0 0 0 523 ,0 0 $09 8 7 ,6 0 02 9 ,4 0 0 0 ,0 0 (4 $0 9 )7 7 ,0 00

Exercise 2.22 1.

2.

Cos t of goods ma nufa c ture d ................................ ........................ Add: Be ginning finis he d goods inve ntory ................................ ... Le s s : E nding finis he d goods inve ntory ................................ ....... t of goods s old ................................ ................................ ........ Cos

$ 9 77 ,0 0 0 4 3 ,2 0 0 4 2 ,1 0 $ 907 8 ,1 0 0

E ll e rs on Compa ny Inc ome S tateme nt S a le s ................................ ................................ ................................ ...... $1, 312 ,0 0 For the Ye a r E nded Dec e mbe r Cos t of goods s old ................................ 3................................ ............... 0 9 7 8 ,1 0 1 Gros s ma rgin ................................ ................................ ........................ $ 3 03 3 ,9 0 0 Le s s : S e ll ing a nd a dmini s trative e x pe ns e s 2 0 4 ,6 ................................ ....... 00


Ope ra ting i nc ome ................................ ................................ ................. $ 1 2 9 ,3 0 0


CPA- TYPE EXERCISES

Exercise 2.23 b.

Exercise 2.24 b.

Exercise 2.25 d.

Exercise 2.26 b.

Exercise 2.27 c. Dire c t ma teri a ls $ 8 0 ,0 0 0 Dire c t la bor Fa c tory ove rhe a d Tota l ma nufa c turing c os ts

4 0 ,0 0 70 4 ,0 0 0 $ 1 9 4 ,0 00 Cos t of goods ma nufa c ture d e qual s $ 1 9 4 ,0 0 0 s inc e be ginning a nd e nding inve n- torie s of w ork i n proc e s s w e re ze ro. E nding finis he d goods inve ntory = $ 1 9 4 ,0 0 0 + $ 9 ,6 5 0 - $ 1 7 4 ,6 0 0 = $ 2 9 ,0 5 0


PROBLEM S Problem 2.28 1. 2.

Dire c t ma teri a ls = $ 1 2 4 ,0 0 0 + $ 2 5 0 ,0 0 0 – $ 1 0 2 ,0 0 0 = $ 2 7 2 ,0 0 0 P rim e c os t = $ 2 7 2 ,0 0 0 + $ 1 4 0 ,0 0 0 = $ 4 1 2 ,0 0 0

3.

Firs t, c a lc ula te tota l ove rhe a d c os t: $ 4 5 ,0 0 Depre c ia tion on fa c tory e qu ipme nt ................................ 0 .......... Depre c ia tion on fa c tory buil ding 3 0 ,0 0 Fa c tory i ns ura nc.............. e ................................ ................................ ...... 15 ................................ 0 Fa c tory prope rty ta x e s ................................ .............................. 2 0 ,0 0 0 Fa c tory utili tie s ................................ ................................ .......... 3 4 ,0 0 Indir e c t la bor s a la rie s ................................ 105 6 ,0 0 ................................ Tota l ove rhe a d ................................ ................................ ........... $03 0 0 ,0 00 Conve rs ion c os t = $ 1 4 0 ,0 0 0 + $ 3 0 0 ,0 0 0 = $ 4 4 0 ,0 0 0

4.

Brody Compa ny S tateme nt of Cos t of G oods Ma nufa c ture d For La s................................ t Ye Dire c t ma teri a ls ................................ a r .............. Dire c t la bor ................................ ................................

$ 2 7 2 ,0 0 0 ..................... Ove rhe a d ................................ ................................ ........................ 3 10 4 0 ,0 0 0 Tota l ma nufa c turing c os t ................................ .............................. $ 7 1 2 ,0 0 Add: Begi nning w ork i n proc e s s ................................ .................. 0 1 2 4 ,0 0 0 3 0 ,0 0 Le s s : E nding w ork i n proc e s s ................................ (1 ...................... Cos t of goods ma nufa c ture d ................................ ........................ $07)0 6 ,0 0 0 Unit product c os t = $ 7 0 6 ,0 0 0 /1 0 0 ,0 0 0 units = $ 7 .0 6 5.

Brody Compa ny S tateme nt of Cos t of G oods S old For La s t Ye a r Cos t of goods ma nufa c ture d ................................ ........................ Add: Begi nning inve ntory, Finis he d goods ................................ Le s s : E nding inve. ntory, Finis he d goods ................................ ..... Cos t of goods s old ................................ ................................ ........

$ 7 0 6 ,0 00 (8 82 4 ,0 0 0 ) 0 $ 7 0 8 ,0 00


Problem 2.28 (C on clud ed ) 6.

Firs t, c ompute s e ll ing e x pe ns e a nd a dmini s trative e x pe ns e : Util itie s , s a le s offic e ................................ ................................ ... S a le s offic e s a la rie s ................................ S a l e s c ommi s s................................ ions ($ 1 ,2 0 0 ,0 0 ... 0 Ă— 0 .0 5 ) ................................ ... S e ll ing e x pe ns e ................................ ................................ .......... Depre c ia tion on hea dquarte rs buil ding ................................ ... P rope rty ta x e s , he a dquarte rs ................................ .................... Admini s trative s a la rie s ................................ .............................. Admini s trative e x pe ns e ................................ .............................

$ 1 ,8 0 0 9 0 ,0 0 0 ,0 6 $ 10501 ,8 00 $ 5 0 ,0 0 0 1 8 ,0 10500 ,0 $0201 8 ,0 00

Brody Compa ny Inc ome S tateme nt For La s t Ye a r

S a le s ................................ .............................. Cos t of goods s old Gros s ma rgin ................................ ................................ ....... ................ Le s s : Ope ra ting e x pe ns e s S e ll ing e x pe ns e s ................................ ..... Admini s trative e x pe ns e s ........................ Ope ra ting inc ome ................................ .........

$ 1 ,2 0 0 ,0 0700 8 ,0 $ 40902 ,0 0 0 $211581,0 ,8 00 $ 12 20 ,2 0 0

P e rc e nt 1 0 0 .0 0 5 9 .0 0 4 1 .0 0 1 2 .6 5 1 8 .1 7 1 0 .1 8


Problem 2.29 1. The decision to add plastic cups w as made assumingthatthefixedcostpool would remain

unchanged.

How

ever,

management

failedtorealizethat

additionaldemands on activities w ould be made by the new productline.Their failuretorecognize this w as due to the fact that they did not understandthat costscanbedrivenby factors that are unrelated to the number of units produced.Forexample,materials handling costs are apparently driven by the number of moves, inspection c osts by the numberofbatches,purchasing costsbythe number of orders, and accounting costs by thenumberof transactions.Demandfor these activities increased and so supply of the activitieshadtobeincreased;each activity evidently did not have eno ugh idle capacity to handle the increased demands. 2. An activity-based cost management system provides information about both unitbased and non-unit-based drivers and isconcernedwithtracingthese coststo the individual product lines. Using this system,theneedforadditional resources w ould have been revealed, leading to a betterdecision.Because previously,the factory

had

made

only

one

type

of

product,

it

surelydidnot

haveanABCsystem,anddid not need one. Now , it is unlikely that the significant cost of installing such a system w ould be w orth it. Instead, the company’s accountant

could

use

his/her

knowledgeofABCconceptstowork

withall

departments to figure out w hich activities andcostswouldincrease duetothe addition of the plastic cups line. This w ay, theheadsofproduction, thematerials storeroom,

purchasing,

inspection,

and

accountingcouldhave

suggestedtheneed for additional resources. These resource costscouldthen havebeenincorporated into the planning for the additiona l product, leading to a better decision.


Problem 2.30 1. Tra ditional Cos t Sys tem: a. Inter re la ted pa rts: Cos t a c c ounting s taff, c ompute r, printer b. P roc e s s e s : Cos t a s s ignme nt: Dire c t tra c ing: Ma teri a ls , la bor Drive r tra c ing: None All oc a tion (us ing d ire c t la bor hours for a s s ig n- me nt): S e tup c os ts, purc ha s ing c os ts, ma teri a l s ha ndling c os ts, pla nt d e pre c ia tion c. Obje c tive s : Cos ting out of products d. Inputs : Dire c t ma teri a ls c os t, dir e c t la bor c os t, s e tup c os t, purc ha s ing c os t, ma teri a l s ha ndling c os t, pla nt d e- pre c i a tion e. Outputs : P roduct c os t re port f. Use r a c tions: S ubmis s ion of a bid, ma k e -or -buy de c is ion Note: A tradi tional s ys tem w ould not us e non -unit-driverssuchasnumberof setups, move s , a nd orde rs to a s s ign ove rhe a d c os ts toproducts.Thisleaves directlabor hours, a unit -ba s e d drive r, a s the only poss ibil ity. S inc e dire c t l a- bor hours is not a good drive r for the ove rhe a d a c tivitie s li s ted, the n a ll oc a- tion is the princ ipa l me a ns of c os t a s s ignme nt. Furthe rmore , a tradi tional costsystemwouldnotassignsales orservicecoststoproducts,sothese two ite ms c a nnot be i nputs for the s ys tem. Ac tivity-Bas e d Cost S ys tem: a. Inter re la ted pa rts: Cos t a c c ounting s taff, c ompute r, printer b. P roc e s s e s : Cos t a s s ignme nt:

c. Obje c tive s : d. Inputs :

Dire c t tra c ing: ma ter ia ls , la bor Drive r tra c ing: S e tup c os ts (number of s e tups ), purc ha s ing c os ts (number of orde rs ), ma teri a l s ha ndling c os ts (number of move s ), c ommi s s sions (units s old), e rvic e c os ts (number of c ompla ints) All oc a tion: P la nt de pre c ia tion (dire c t la bor hours tinga out Dire c )t Cos ma teri ls c of osproducts t, dir e c t la bor c os t, s e tup c os t, purc ha s ing c os t, ma teri a l s ha ndling c os t, c ommi s-


s ions , c us tome r s e r vic e c os t, pla nt de pre c ia tion


Problem 2 .30 ( C ontinued) 2. The differences between the two systems are foundintheprocesses.TheABC systemis driver-intensive; non-unit drivers are usedtotracecoststoproducts, whereas this is not part of the traditional system (whichisallocation-intensive). TheABC system also assigns marketing and customer service costs to products, giving a more comprehensive view of product costs. Thus, althoughboth systemsprovideproduct cost reports, the content of the reports willdiffer.The increasedaccuracyof cost assignments because of driver tracing and the additional marketing and customer service cost information providedbytheABC systemshouldincrease the quality of the bidding and make-or-buy decisions (i.e.,reducetheerrorin decisions of this type). 3 . Ope ra tional Mode l: Tra ditional Cos t Ac c ounting S ys tem Inputs P roc e s s e s Output Cos ts of: Dire c t ma teri a ls Dire c t la bor Dire c t tra c ing: S e tups Dire c t ma teri a ls P urc ha s ing Dire c t la bor Ma teri a l s ha ndling All oc a tion: P la nt de pre c ia tion Ove rhe a d Cos ting out pro duct Fe e dbac k Ac tions E va lua tion Use rs Bidding de c is ion, Ma k e -or -buy de c is ion


Problem 2 .30 ( C on clud ed) Ope ra tional Mode ABC Cos t Ac c ounting S ys l: tem P roc e s s e s Inputs Cos ts of: Dire c t tra c ing: Dire c t ma teri a ls Dire c t ma teri a ls Dire c t la bor Dire c t la bor All oc a tion: P la nt de pre c ia P la nt de pre c ia tion tion Drive r tra c ing: S e tups S e tups P urc ha s in g P urc ha s ing Ma teri a l s ha Ma teri a l s ha ndling ndling Commi s s ions Commi s s ions Cus tome r s e Cus tome r s e rvic e rvic e Fe e dbac k

Output

Cos ting out p roduct

Ac tions E va lua tion Use rs Bidding de c is ion, Ma k e -or -buy de c is ion

4 . The oper a tional mode ls re ve a l tha t the ABC c ostsystemismorecomplex, requiresmore inputs , a nd us e s more c ompli c a ted proc e s s e stotransformthe inputs.Thus,wewouldex pe c t this s ys tem to be more c os tly to

oper

a

te.On

theotherhand,theincreasedcomple

xityprovidesincreasedaccuracyanda ric he r s e t of poss ible produc t c os t de finitions.TheABCsystemcanprovide both tra ditional a nd oper a ting produc t c os t information.Boththesefactors should provide a n a dva nta ge w he n it c ome s to ma na ge rialdecisionmaking. (Thecostofmaking ba d de c is ions is re duce d.) Choosi ng the ABC system dependsonwhetherthebenefitsof improveddecisionmakingoutweighthe inc re a s e d me a s ur e me nt c os ts.


Problem Problem 2.24 2.24

Tra ditional Control S ys tem: Ac tions J us tific a tion a P e rforma nc e , orga niza tional s ubunit; ma na ging c os ts b Rew a rds ma na ge r for s ubunit pe rforma nc e d E mpha s ize s pe rforma nc e of orga niza tional s ubunit g E mpha s is on c ontroll ing c os ts j Rew a rd ba s e d on c ontroll ing c os ts (s ubunit pe rforma nc e ) l E mpha s is on c ontroll ing c os ts o E mpha s is on s ubunit pe rforma nc e ; c ontroll ing c os ts Ac tivity-Bas e d Control S ys tem: Ac tions J us tific a tion c Ac tivity-ba s e d c os t use d a s i nput for a c tivity c ontrol e E mpha s is on a c tivity a na lys is f E mpha s is on ma na ging a c tivitie s (a c tivity a na lys is ) h Ma na ging a c tivitie s i Drive r a na lys is k Drive r a na lys is ; a c tivity ma na ge me nt m Nonfina nc ia l me a s ure of p e rforma nc e n Drive r a na lys is ; a c tivity pe rforma nc e


Problem Problem 2.25 2.25

S pe nc e r Compa ny S tateme nt of Cos t of G oods Ma nufa c ture d 1. Dire c t ma teri a For the Ye a r E nded Dec e mbe r ls : 31 Begi nning inve ntory ................................ ............. $ 2 9 0 ,0 0 0 Add: P urc ha s e s ................................ .................... 2 , 35 0 ,0 0 0 Ma teri a ls a va il a b le ................................ ............... $ 2 , 640 ,0 0 0 Le s s : E nding inve ntory ................................ ........ 1 1 2 ,0 0 0 Dire c t ma teri a ls us e d in pr oduction ........................ $ 2 ,5 2 8 ,0 0 0 Dire c t la bor ................................ ................................ 1 , 1 0 0 ,0 0 0 Ma nufa c turing ove rhe a d: Indir e c t la bor ................................ ........................ $ 334 ,0 0 0 Depre c ia tion, fac tory buil ding ............................. 525 ,0 0 0 Depre c ia tion, fac tory e quipme nt ........................ 416 ,0 0 0 P rope rty ta x e s on fac tory ................................ .... 6 5 ,0 0 0 Util itie s , fac tory ................................ .................... 1 5 0 ,0 0 0 Ins ura nc e on fac tory ................................ ............ 200 ,0 0 0 1 ,6 9 0 ,0 0 0 Tota l ma nufa c turing c os ts a dded ............................ $ 5 ,3 1 8 ,0 0 0 Add: Be ginning w ork i n proc e s s .............................. 4 5 0 ,0 0 0 Le s s : E nding w ork i n proc e s s ................................ .. (75 0 ,0 0 0 ) Cos t of goods ma nufa c ture d ................................ .... $ 5 ,0 1 8 , 000 2. Unit c os t = $ 5 ,0 1 8 ,0 0 0 / 20 0 ,0 0 0 = $ 2 5 .0 9 3. S pe nc e r Compa ny Inc ome S tateme nt: Abs orption Cos ting For the Ye a r E nded Dec e mbe r 31

P e rc e nt

S a le s (1 9 1 ,0 0 0 * Ă— $ 3 6 ) ................................ .... $ 6 ,8 7 6 ,0 0 0 1 0 0 .0 0 Cos t of goods s old: Cos t of goods ma nufa c ture d ................. $ 5 ,0 1 8 ,0 0 0 Add: Be g. fini s he d goods inve ntory ...... 1 0 7 ,5 0 0 Goods a va il a ble for s a le ......................... $ 5 ,1 2 5 ,5 0 0 Le s s : E nd. finis he d goods inve ntory..... 4 8 8 ,7 5 0 4 ,6 3 6 ,7 5 0 6 7 .4 3 Gros s ma rgin ................................ ................. $ 2 ,2 3 9 ,2 5 0 3 2 .5 7


Le s2.26 s : S 2.26 a la ry, s a le s s uper vis or ..................... $ 8 5 ,0 0 0 Problem Problem Commi s s ions , s a le s pe rs ons .............. 2 1 6 ,0 0 0 Adve rtis ing ................................ ........... 5 0 0 ,0 0 0 8 0 1 ,0 0 0 1 1 .6 5 Admini s trative e x pe ns e s .................... 3 9 0 ,0 0 0 5 .6 7 Ope ra ting i nc ome ................................ .......... $ 1 ,0 4 8 ,2 5 0 1 5 .2 5 * 2 ,5 0 0 + 2 0 0 ,0 0 0 – 1 1 ,5 0 0 = 1 9 1 ,0 0 0 units s old


Problem Problem 2.27 2.27

1. Mythic , Inc . S tateme nt of Cos t of G oods Ma nufa c ture d For the P re vious Ye ar Dire c t ma teri a ls ................................ ................................ ............... $ 5 ,0 0 0 Dire c t la bor ................................ ................................ ......................30,000a Manufac turing ove rhe a d ................................ ................................ . 110 ,000a Totalcurrentmanufacturingcosts ................................ ................ $ 145 ,0 0 0 Add: Be ginning w ork i n proc e s s ................................ ................... 1 5 ,0 0 0

b

Le s s : E nding w ork i n proc e s s ................................ ....................... (6 ,0 0 0 )b Cos t of goods ma nufa c ture d ................................ ......................... $ 154 ,0 0 0 a Conve

rs ion c os t = 4 × P rim e c os t $ 14 0 ,0 0 0 = 4 (Dire c t ma teri a ls + Dire c t la bor) $ 1 4 0 ,0 0 0 = 4 ($5 ,0 0 0 + Dire c t la bor) = $ 2 0 ,0 0 0 + 4 (Dire c t la bor) Dire c t la bor = $ 3 0 ,0 0 0 Ove rhe a d = Conve rs ion c os t – Dire c t l a bor Ove rhe a d = $ 1 4 0 ,0 0 0 – $ 3 0 ,0 0 0 Ove rhe a d = $ 110 ,0 0 0 bE

nding W IP = 0. 4 × Be ginning W IP ($5 ,0 0 0 + $ 3 0 ,0 0 0 + $ 1 1 0 ,0 0 0 ) + Beg. W IP – (0. 4 × Be g. W IP ) = $ 154 ,0 0 0 Begi nning W IP = $ 1 5 ,0 0 0 ; E nding W IP = 0. 4 × $ 1 5 ,0 0 0 = $ 6 ,0 0 0

2. Mythic , Inc . S tateme nt of Cos t of G oods S old For the P re vious Ye ar Cos t of goods ma nufa c ture d ................................ ......................... $ 154 ,0 0 0 Add: Be ginning finis he d goods ................................ ..................... 22 ,4 0 0 Cos t of goods a va il a ble for s a le ................................ .................... $ 1 7 6 ,4 00 Le s s : E nding finis he d goods ................................ ......................... 7 ,0 0 0 a


Problem Problem 2.28 2.28 Cos t of goods s old ................................ ................................ .......... $ 1 6 9 ,4 0 0 aE

nding finis he d goods = $ 1 7 6 ,4 0 0 – $ 1 6 9 ,4 0 0 = $ 7 ,0 0 0 t of goods s old = 1 .1 0 × $ 154 ,0 0 0 = $ 1 6 9 ,4 0 0

b Cos

b


Problem Problem 2.29 2.29

1. Ma s on, Dura nt, a nd W e s tbrook S tateme nt of Cos t of S e rvic e s S old For the Ye a r E nded J une 30 Dire c t ma teri a ls us e d* ................................ ................................ $ 46, 5 00* .......... Dire c t la bor ................................ ................................ 1 ,4 0 0 ,0 ............................ Ove rhe a d ................................ ................................ ............................... 1 00 0 0 ,0 0 0 Tota l s e rvic e c os ts a dded ................................ ................................ $ 1 ,5 4 6 ,5 .... Be ginning w ork i n proc e s s ................................ 00 44 ,0 0 0 Add: ......................... Le s s : E nding w ork i n proc e s s ................................ (13 ,0 0 0 ............................. Cos t of s e rvic e s s old ................................ ................................ $ 1 ),5 7 7 ,5 ............ 00 * Bec a us e a ll othe r da ta for the s tateme nt a re given,youcanworkbackwardfrom thecostofs e rvic e s s old to ge t the dire c t ma teri a ls us e d. Inthistypeoffirm, directmaterials probably inc lude s s upplie s s uc h a s pa pe r, tone r, file folde rs , e nve lope s , e tc. 2. The domina nt c os t is dire c t la bor (for the 15 professionals).Althoughlaboris thema jor c os t of providing ma ny s e rvic e s , it is notalwaysthecase.For example,the domina nt c os t for s ome me dic a l s e rvic e s ma y beoverhead (e.g.,CATscans).Insomese rvic e s , the domina nt c os t ma y be ma teri a ls (e .g., fune ra l s e rvic e s ). 3. Ma s on, Dura nt, a nd W e s tbrook Inc ome S tateme nt For the Ye a r E nded J une 30 S a le s ( 3 ,0 0 0 Ă— $ 85 0) ................................ ........................ Cos t of s e rvic e s s old ................................ ...................... Gros s ma rgin ................................ ................................ .. Le s s ope ra ting e x pe ns e s : S e ll ing e x pe ns e s ................................ ....................... Admini s trative e x pe ns e s ................................ Ope.......... ra ting i nc ome ................................ ...........................

$ 2 ,5 5 0 ,0 010,5 7 7 ,5 $00 9 7 2 ,5 00 $ 6 5 ,0 0 025 7 ,0 00

3 2 2 ,0 0 0 , 5 00 $ 650


Problem 2.34 ( C oncluded) 4. Services have three attributes that are not possessedbytangibleproducts: (1) intangibility, (2) perishability, and (3) inseparability. Intangibility means that the buyers of services ca nnot see, feel, hear, or taste a service before it is bought. Perishability means that services cannotbestored.Therefore,there will never be any finished goods inventories, making the cost of services pr o- duced equal to cost of services sold. Inseparabi litymeansthatprovidersand buyersof services must be in direct contact for an exchange to take place. The average cost of preparing one tax return last year w as $ 526 ($1,577,500/3,000 returns). How ever, it w ill be difficult for MDW to use this figure in budgeting. Some of its accountants are no doubt more experiencedthan others,capableof completing a return in less time and w ith lessresearch.The returnsthemselves differ in complexity. In addition, the seeminglycontinual changesinthetaxlaw may affect certain of its clients more than others, ma k- ing those clients’ returns more difficult to prepare.


Problem 2.35 1. Orm a n Compa ny S tateme nt of Cos t of G oods Ma nufa c ture d For La s t Ye ar Dire c t ma teri a ls : Begi nning inve ntory ................................ .................. $ 3 ,4 5 0 Add: P ur c ha s e s ................................ ......................... 1 8 3 ,7 5 0 Le s s : E nding inve ntory ................................ ............. (2 ,7 0 0 ) Dire c t ma teri a ls us e d in pr oduction .............................. $ 1 8 4 ,5 0 0 Dire c t la bor ................................ ................................ ...... 138 ,0 0 0 Ma nufa c turing ove rhe a d: P la nt de pre c ia tion ................................ ..................... $ 1 9 ,5 0 0 S a la ry, produc tion s uper vis or ................................ .. 4 7 ,0 0 0 Indir e c t la bor ................................ .............................. 6 8 ,3 0 0 Util itie s , f a c tory ................................ .......................... 1 5 ,7 0 0 Depre c ia tion, fac tory e quipme nt .............................. 32 ,0 0 0 S upplie s (0 . 4 Ă— $ 1 8 ,0 0 0 ) ................................ ............ 7 , 2 00 1 8 9 ,7 0 0 Tota l ma nufa c turing c os ts a dded ................................ . $ 5 1 2 ,2 0 0 Add: Be ginning w ork i n proc e s s ................................ ... 1 3 ,2 5 0 Le s s : E nding w ork i n proc e s s ................................ ....... (28 ,2 5 0 ) Cos t of goods ma nufa c ture d ................................ ......... $ 4 9 7 ,2 0 0

2. Orm a n Compa ny Inc ome S tateme nt: Abs orption Cos ting For La s t Ye ar


................... Cos t of goods s old:

0

$ 1 1 3 ,0 00 ntory........................ Add: Cos t of goods ma nufa c $497 610,2 ,20 Goods a va il a ble for s a le ................................ ture d ........................... 0 00 ........... Le s s : E nding finis he d goods inve 8 5 ,0 Gros s ma2.35 rgin ................................ ................................ .. Problem ntory................... Le s s ope ra ting e x pe ns e s : 00 S e ll ing e x pe ns e s * ................................ $ 1 7 1 ,4 ...................... 0106 8 ,0 Admini s trative e x pe ns e s ................................ Ope.......... ra ting i nc ome ................................ ........................... 0 0

525 ,2 0 0 $ 4 2 5 ,0 5 0

Begi nning finis he d goods inve

3 3 9 ,4 0 $ 805 ,6 5 0

*$ 4 2 ,0 0 0 +(0 .6 Ă— $ 1 8 ,0 0 0 ) + $ 7 5 ,0 0 0 + $ 4 3 ,6 0 0 = $ 1 7 1 ,4 0 0


2. 36 PRODUCT C OST DEFINIT IONS ETHICS CASE 1. The c onsume r groups a re us ing a c os t de finitionthatreliesonmanufacturing cos ts. The phar ma c e utic a l c ompa nie s ’ de finition of c os t is ba s e d on the va l- ue c ha in. They inc lude the c os ts of re s e a rc h a nd de velopment,andpossibly thecostofsell ing a nd post -s a le s s e rvic e . It s e e ms quite reasonabletoin- cludethecostsofresea rc h a nd de ve lopme nt w he n dis c us s ing the c os tofa drug.Forthecostofalife-saving drug, s uc h a s Beta s e ron, the c os t of ma r- k e ting w ould not be re le va nt. E ither a pa tie nt hasadiseasethatwouldbe helpedbythe drug, or not. 2. As the a c c ounta nt c ompil ing c os ts for the drug,itisreasonabletoincludeall costs re la ted to re s e a rc h, de ve lopme nt , a nd ma nufactureofthedrug.The relevantcostof s e ll ing a nd de li ve ring the drug w ould a ls o beincluded.Allocationofcostsacross the c orpora tion w ould be le s s de fens ible . For e x a m- ple , the c ompa ny no doubt ha s a dve rtisingexpendituresthataremore genera l a nd be ne fit the c ompa ny a s a w hole . Thes e w ouldbedifficulttotrace tothedrugunder c onsi de ra tion. This is a c a s e tha t s upports the ne e d for d i- re c t a nd drive r trac ing. As a re s ult, the I MA S tateme nt of E thic a l P rofes sional Practice(seeChapter1)wouldcome intoplay.Inparticular,competenceand c re dibil ity w ould be important. Compe tenc e requirestheaccountanttocon- tinually de ve lop k now le dge a nd s k il ls . Credi bili ty requirestheaccountantto discloseall informa tion tha t c ould a ffe c t the us e r' s understandingofthein- formationandthe a bili ty to ma k e de c is ions ba s e d on tha t informa tion.

CYBER RESEARCH CASE 2. 37 Answ ers w ill vary.


The Coll a bora tive Le a rning E x e rc is e S olutions c a n be found on the i n- s tructor w e bs ite a t http: // login. c e ngage .c om.


The foll ow ing proble ms c a n be a s s igne d w ithin Ce ngage NOW a nd a re a uto - gra de d. S e e the la s t page of e a c h c ha pte r for de s c riptions of the s e ne w a s s ig n- me nts . Ana lyzing Re la tionships – Cost o f G o o d s Man u f a ctu red a n d Co st o f G oods S o ld Integra tive P roble m – B a sic Cost Co n ce p ts, Co st B e h a vior, a n d A ctivity B a se d Cost ing (Co ve rin g ch a p te rs 2 , 3 , a n d 4 ) Blue print P ro ble m – Cost A ssign m e n t, P rod u ct, a n d S e rvice Cost s Blue print P roble m – In co m e S ta te m e n t f o r Ma n u f a ctu rin g Firm s: Cost o f G o o d s Ma n u f a ctu red Blue print P roble m – S yste m s Fram e wo rk


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