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SUMMARY

This chapter discusses the use of cost accounting in its two primary managerial uses: decision making and performance
evaluation. The following summarizes key ideas tied to the chapter's learning objectives. For example, LO 1-1 refers to the
first learning objective in the chapter.

LO 1-1 Describe the way managers use accounting information to create value in organizations. Managers make decisions to
increase the value of the organization using information from the accounting system. Cost information helps identify value-
increasing alternatives and activities that do not add value to the product or service.

LO 1-2 Distinguish between the uses and users of cost accounting and financial accounting information. Financial accounting
information provides information to users (decision makers) who are not involved in the operations and strategy of the firm.
These users are often external to the firm. While cost accounting information is often used in the financial accounting system,
its primary role is to aid managers inside the firm in making operational and strategic decisions.

LO 1-3 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Cost accounting information can be used for decision making by assessing differential costs associated with alternative
courses of action. Accounting information also can be used to evaluate performance by comparing budget amounts to actual
results.

LO 1-4 Identify current trends in cost accounting. Cost accounting changes with changes in information technology and the
adoption of new operational techniques.

LO 1-5 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Ethical standards exist for management accountants. These standards are related to competence, confidentiality, integrity, and
objectivity.

KEY TERMS

activity-based costing (ABC), 14

benchmarking, 15

budget, 12

cost accounting, 6

cost-benefit analysis, 9

cost driver, 10

cost of quality (COQ), 16

customer relationship management (CRM), 16

differential costs, 10

differential revenues, 10

distribution chain, 5

enterprise resource planning (ERP), 16

financial accounting, 6

generally accepted accounting principles (GAAP), 7

international financial reporting standards (IFRS), 7

just-in-time (JIT) method, 15

lean accounting, 15

nonvalue-added activities, 9

outsourcing, 16

performance measure, 15

responsibility center, 11

supply chain, 5

total quality management (TQM), 16

value-added activities, 4

value chain, 4

APPENDIX: INSTITUTE OF MANAGEMENT ACCOUNTANTS CODE OF ETHICS

In today's modern world of business, individuals in management accounting and financial management constantly face
ethical dilemmas. For example, if the accountant's immediate superior instructs the accountant to record the physical
inventory at its original cost when it is obvious that the inventory has a reduced value due to obsolescence, what should the
accountant do? To help make such a decision, here is a brief general discussion of ethics and the “Statement of Ethical
Professional Practice” by the Institute of Management Accountants (IMA). Ethics, in its broader sense, deals with human
conduct in relation to what is morally good and bad, right and wrong. To determine whether a decision is good or bad, the
decision maker must compare his/her options with some standard of perfection. This standard of perfection is not a statement
of static position but requires the decision maker to assess the situation and the values of the parties affected by the decision.
The decision maker must then estimate the outcome of the decision and be responsible for its results. Two good questions to
ask when faced with an ethical dilemma are, “Will my actions be fair and just to all parties affected?” and “Would I be
pleased to have my closest friends learn of my actions?”

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Individuals in management accounting and financial management have a unique set of circumstances relating to their
employment. To help them assess their situation, the IMA has developed the following “Statement of Ethical Professional
Practice,” which is available on their Web site.

Statement of Ethical Professional Practice

Members of the IMA shall behave ethically. A commitment to ethical professional practice includes overarching principles
that express our values, and standards that guide our conduct.

Principles

IMA's overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in
accordance with these principles and shall encourage others within their organizations to adhere to them.

Standards

A member's failure to comply with the following standards may result in disciplinary action.

I. Competence

Each member has a responsibility to:

1. Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.

3. Provide decision support information and recommendations that are accurate, clear, concise, and timely.
 4. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or
successful performance of an activity.

II. Confidentiality

Each member has a responsibility to:

1. Keep information confidential except when disclosure is authorized or legally required.

2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to
ensure compliance.

3. Refrain from using confidential information for unethical or illegal advantage.

III. Integrity

Each member has a responsibility to:

1. Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of
interest. Advise all parties of any potential conflicts.

2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

3. Abstain from engaging in or supporting any activity that might discredit the profession.

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IV. Credibility

Each member has a responsibility to:

1. Communicate information fairly and objectively.

2. Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the
reports, analyses, or recommendations.

3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with
organization policy and/or applicable law.

Resolution of Ethical Conflict In applying the Standards of Ethical Professional Practice, you may encounter problems
identifying unethical behavior or resolving an ethical conflict. When faced with ethical issues, you should follow your
organization's established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you
should consider the following courses of action:

1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case,
present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next
management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing
authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or
owners. Contact with levels above the immediate superior should be initiated only with your superior's knowledge,
assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or
engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law.

2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial
advisor to obtain a better understanding of possible courses of action.

3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

Source: IMA, http://www.imanet.org/docs/default-source/press_releases/statement-of-ethical-professional-practice_2-2-

12.pdf?sfvrsn=2
REVIEW QUESTIONS

1. 1-1. Explain why it is important to consider the concepts of value and value creation in a textbook about cost
accounting.
 2. 1-2. Explain the differences between financial accounting and cost accounting. Why are these differences important?

3. 1-3. Place the letter of the appropriate accounting cost in Column 2 in the blank next to each decision category in
Column 1.

Column 1 Column 2

____Providing cost information for financial reporting 1. Costs for performance evaluation

____Identifying the best store in a chain 2. Costs for inventory valuation

____Determining which plant to use for production 3. Costs for decision making

4. 1-4. Distinguish among the value chain, the supply chain, and the distribution chain.

5. 1-5. Who are the customers of cost accounting?

6. 1-6. How can cost accounting information together with a classification of activities into those that are value-added and
those that are nonvalue-added help managers improve an organization's performance?

7. 1-7. Identify three key financial managers in an organization and their major responsibilities.

8. 1-8. Does the passage of Sarbanes-Oxley mean that codes of ethics are no longer necessary?

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CRITICAL ANALYSIS AND DISCUSSION QUESTIONS

1. 1-9. After the first day of cost accounting, your friend says, “The role of accountants is to report what happened. Why
do we care about value creation. That's not my responsibility.” Do you agree? Explain.

2. 1-10. An airline executive asks you, “How would you calculate the cost of a passenger?” What will be your first
question to the manager?

3. 1-11. You are considering lending a car to a friend so she can drive to Aspen. What costs would you ask her to
reimburse? How would your answer change, if at all, if you decided to go along? Identify the possible options and
explain your choices.

4. 1-12. “It's not the job of accounting to determine strategy. It is only used to measure results.” Discuss.

5. 1-13. Would you support a proposal to develop a set of “generally accepted” accounting standards for measuring
executive performance that would be used to determine compensation? Why or why not?

6. 1-14. How would cost accounting information help managers in a not-for-profit organization? Is it as important as in a
publicly traded, for-profit firm?

7. 1-15. Airlines are well known for using complex pricing structures. For example, it is often (but not always) less
expensive to buy a ticket in advance than it is on the day of the flight. However, if the airline offered this lower
(“discount”) fare for all seats, it could not remain in business. Why offer fares with different prices? What, if any, costs
are different?

8. 1-16. Nabisco (a unit of Kraft Foods) makes a variety of cookies (OreosTM, for example) just like Carmen's Cookies.
In what ways are the cost accounting issues the same? In what ways are they different?

9. 1-17. What potential conflicts might arise between marketing managers and the controller's staff? How might these
potential conflicts be resolved with a minimum of interference from the chief executive officer?

10. 1-18. Refer to the Business Application discussion of supply chain costs. A colleague says, “We don't have to worry
about other firms in the supply chain. If every firm in the chain minimizes its own cost, we can minimize the total cost
and give the customer the best value.” Do you agree?
 11. 1-19. Refer to the Business Application discussion of options backdating. If stock options and other forms of
performance-based compensation result in some managers engaging in unethical or illegal behavior, why do firms still
use them?

12. 1-20. Why does a cost accountant need to be familiar with new developments in information technology?

13. 1-21. Will studying cost accounting increase the chances that Carmen's Cookies will succeed? How? Will it guarantee
success? Explain.

14. 1-22. Many companies, especially in the travel industry (airlines, hotels, and so on) have so-called loyalty programs
offering members benefits that depend on the frequency of purchase, miles traveled, or amount of money spent among
other measures. One example is upgrades to a better seat or to a better room, for the same price as a regular seat or
regular room. Such upgrades are generally based on availability, meaning the hotel or airline does not believe it will
sell the room or seat. What, if anything, does such an upgrade cost the hotel or airline? Would these costs show up in
the accounting records? Explain.

EXERCISES All applicable Exercises are included in Connect.

1-23. Value Chain and Classification of Costs

(LO 1-1)

Apple Inc., incurs many types of costs in its operations.

Required

For each cost in the following table, identify the stage in the value chain where this cost is incurred:

Cost Stage In the Value Chain

____Programmer costs for a new operating system 1. Marketing

____Costs to ship computers to customers 2. Production

____Call center costs for support calls 3. Customer Service

____Salaries for employees working on new product designs 4. Research and development

____Costs to purchase advertising at university stores 5. Design

____Costs of memory chips to make computers 6. Distribution

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1-24. Supply Chain and Supply Chain Costs

(LO 1-1)

Coastal Cabinets produces cabinets for new home builders. You have been called in to settle a dispute between Coastal
Cabinets and Executive Homes, a builder of custom homes.

Executive Homes buys 20,000 units of a particular cabinet from Coastal Cabinets every year. It insists that Coastal keep a
one-month inventory to accommodate fluctuations in Executive's demand. Coastal does not want to keep any inventory and
says that Executive Homes should buy components in advance and store them.

You determine that the inventory storage costs per unit are $50 at Coastal and $125 at Executive Homes.

Required
How do you suggest the two companies settle their dispute?

1-25. Accounting Systems

(LO 1-2)

McDonald's is a major company in the restaurant business.

Required

For each of the decisions below, indicate whether the decision maker would be more likely to get information from the
financial (F) or cost (C) accounting system of McDonald's (in addition, perhaps, to other information).

1. An investor is deciding whether to purchase stock in McDonald's.

2. A marketing manager at McDonald's is trying to determine whether to offer breakfast items all day long.

3. A fast-food competitor wants to compare her company's financial performance to McDonald's.

4. A labor organization representing workers at McDonald's outlets is deciding whether McDonald's is profitable enough
to negotiate for pay raises.

5. An advertising manager at McDonald's is deciding what media to use for commercials based on the profitability of
different demographic groups.

1-26. Accounting Systems

(LO 1-2)

Ford Motor Company manufactures cars and trucks. Managers at assembly plants must make many decisions, and for this
they use cost accounting information.

Required

For each of the following managers, identify a decision that he or she might make for which cost accounting data would be
useful:

1. Plant manager

2. Purchasing manager

3. Quality supervisor

4. Personnel manager

5. Maintenance supervisor

1-27. Cost Data for Managerial Purposes

(LO 1-3)

As an analyst at Delta Air Lines, you are asked to help the operations staff. Operations has identified a new method of
loading baggage that is expected to result in a 30 percent reduction in labor time but no changes in any other costs. The
current labor cost to load bags is $2 per bag. Other costs are $1 per bag.

Required

1. What differential costs should the operations staff consider for the decision to use the new method next year? What
would be the cost savings per bag using it?
 2. Describe how management would use the information in requirement (a) and any other appropriate information to
proceed with the contemplated use of the new baggage loading method.

1-28. Cost Data for Managerial Purposes

(LO 1-3)

Betty's Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers:
the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban
locations. Betty's CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last
several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down
the City Division's operations. If the City Division is eliminated, corporate administration is not expected to change, nor are
any other changes expected in the operations or costs of the Mall Division.

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Required

What revenues and costs are probably differential for the decision to discontinue the City Division's operations? What will be
the effect on Betty's profits if the division is eliminated? Is there any other information you would like to have before
recommending whether or not to close the City Division?

1-29. Cost Data for Managerial Purposes

(LO 1-3)

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The
new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income
statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis,
which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree
program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating
costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs
of other programs.
Required

What revenues and costs are probably differential for the decision to drop the BBA program? What will be the net effect on
the SUBS contribution (profit) if the BBA program is dropped? Is there any other information you would like to have before
recommending whether or not to drop the BBA program?

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1-30. Cost Data for Managerial Purposes

(LO 1-3)

Refer to the information in Exercise 1-29. The dean of the Business School is considering expanding the BBA program by
offering an evening program in a nearby city. The new evening program would be the same size (in terms of students). The
school's CFO estimates that the combined BBA revenue (on-campus plus the evening program) will be twice the current
revenue, as shown in Exercise 1-29. Because the evening program will be new, advertising expenses for the evening session
will be three times their current level. Faculty salaries will double. Degree operating costs will increase by 50 percent.
Building maintenance and classroom costs will remain unchanged, but classroom space will be rented at a cost of $300,000
per academic year. School administration costs will increase by $30,000, and allocated school administration costs (for both
programs) will be $780,000 per academic year.

Required

1. What will the contribution of the combined BBA program be, given these estimates?

2. Are there other factors the dean should consider before making a decision?

1-31. Cost Data for Managerial Purposes—Budgeting

(LO 1-3)

Refer to Exhibit 1.5, which shows budgeted versus actual costs. Assume that Carmen's Cookies is preparing a budget for the
month ending June 30. Management prepares the budget by starting with the actual results for April 30 that appear in Exhibit
1.5. Next, management considers what the differences in costs will be between April and June.

Management expects the number of cookies sold to be 20 percent greater in June than in April, and it expects all food costs
(e.g., flour, eggs) to be 20 percent higher in June than in April. Management expects “other” labor costs to be 25 percent
higher in June than in April, partly because more labor will be required in June and partly because employees will get a pay
raise. The manager will get a pay raise that will increase the salary from $3,000 in April to $4,000 in June. Rent and utilities
are not expected to change.

Required

Prepare a budget for Carmen's Cookies for June.

1-32. Trends in Cost Accounting

(LO 1-4)
Required

For each cost accounting development listed below, identify one value chain component where it might be used and describe
how it could be used in that component.

1. Activity-based costing

2. Benchmarking

3. Cost of quality

4. Customer relationship management

5. Lean accounting

1-33. Trends in Cost Accounting

(LO 1-4)

The chapter identified five financial management titles with responsibilities.

Required

Match the financial management title in the first column with the major responsibility in the second column of the following
table:

Title Responsibility

____CFO 1. Ensures procurement rules are followed

____Treasurer 2. Evaluates costs of products.

____Controller 3. Determines where to invest cash balances.

____Internal auditor 4. Maintains accounting records.

____Cost accountant 5. Signs off on financial statements.

1-34. Ethics and Channel Stuffing

(LO 1-5)

Continental Condiments is a large food products firm in Pennsylvania. Its sales staff has a strong incentive plan tied to
meeting quarterly budgets. On June 25, Maria Tuzzi, a divisional controller, learns that some of the sales staff asked
customers to take delivery of sizable quantities of products before June 30. The customers were told they could return the
products after July 1 if they determined the items were not needed. (This is referred to as “channel stuffing.”) The sales staff
also offered to reimburse the customers for any storage costs incurred.

Page 29
Required

1. From the viewpoint of the IMA's “Statement of Ethical Professional Practice,” what are Maria's responsibilities?

2. What steps should she take to resolve this problem?

(CMA adapted)

1-35. Ethics and Cost Analysis

(LO 1-5)

Refer to the information in Exercise 1-30. Jon Blake, the cost analyst working in the CFO's office at the Business School,
learns that the building to be rented for the evening program is owned by a company in which the dean is a principal investor.
After some research, Jon also identifies another comparable site, which rents for $75,000 per year.

Required

1. From the viewpoint of the IMA's “Statement of Ethical Professional Practice,” what are Jon's responsibilities?

2. What steps should he take to resolve this problem?

PROBLEMS All applicable Problems are included in Connect.

1-36. Responsibility for Ethical Action

(LO 1-5)

Dewi Hartono is an assistant controller at Giant Engineering, which contracts with the Defense Department to build and
maintain roads on military bases. Dewi recently determined that the company was including the direct costs of work for
private clients in overhead costs, some of which are charged to the government. She also discovered that several members of
management appeared to be involved in altering accounting invoices to accomplish this. She was unable to determine,
however, whether her superior, the controller, was involved. Dewi considered three possible courses of action. She could
discuss the matter with the controller, anonymously release the information to the local newspaper, or discuss the situation
with an outside member of the board of directors whom she knows personally.

Required

1. Does Dewi have an ethical responsibility to take a course of action?

2. Of the three possible courses of action, which are appropriate and which are inappropriate?

(CMA adapted)

1-37. Cost Data for Managerial Purposes

(LO 1-3)

Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at “cost plus
20 percent.” ID operates a manufacturing plant that can produce 66,000 devices per year, but it normally produces 60,000.
The costs to produce 60,000 devices follow:
Based on these data, company management expects to receive $522 (= $435 × 120 percent) per monitor for those sold on this
contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $261,000 (= 500 monitors ×
$522 per monitor).

Page 30

The president of the company received a call from a state auditor, who stated that the per monitor cost should be:

Therefore, the price per monitor should be $324 (= $270 × 120 percent). The state government ignored marketing costs
because the contract bypassed the usual selling channels.

Required

What price would you recommend? Why? (Note: You need not limit yourself to the costs selected by the company or by the
government auditor.)

1-38. Cost Data for Managerial Purposes

(LO 1-3)

You have been asked by two of your friends, Marco and Jenna, to settle a (friendly) argument they are having about splitting
the cost of a road trip during Spring Break. They will take Jenna's car and they have agreed to “share the cost” of the drive.
Based on current fuel prices and the mileage of Jenna's car, the fuel cost is roughly $0.20 per mile. Marco says he should pay
about $0.13 per mile for the fuel, plus a small amount ($0.03) for other variable costs (such as routine maintenance). Jenna
says that he should pay 50 percent of $0.56, which is the current rate the Internal Revenue Service (IRS) allows for the use of
a personal car. In addition to fuel and routine maintenance, the IRS rate is designed to cover “wear and tear” on the
car. Marco argues that the wear and tear would occur whether he went on the trip or not.

Required

1. What would you recommend Marco pay Jenna per mile for sharing the car? Explain briefly.

2. Would your answer to Requirement (a) change depending on whether or not Jenna was going to take the trip, whether
or not Marco went along? Explain briefly.

1-39. Cost Data for Managerial Purposes

(LO 1-3)

T-Comm makes a variety of products. It is organized in two divisions, North and South. The managers for each division are
paid, in part, based on the financial performance of their divisions. The South Division normally sells to outside customers
but, on occasion, also sells to the North Division. When it does, corporate policy states that the price must be cost plus 15
percent to ensure a “fair” return to the selling division. South received an order from North for 600 units. South's planned
output for the year had been 2,400 units before North's order. South's capacity is 3,000 units per year. The costs for producing
those 2,400 units follow:
Required

1. If you are the manager of the South Division, what unit cost would you ask the North Division to pay? Show
calculations.

2. If you are the manager of the North Division, what unit cost would you argue you should pay? Show calculations.

3. What unit cost would you recommend for a sale of units from the South Division to the North Division? Explain
briefly.

1-40. Cost Data for Managerial Purposes

(LO 1-3)

Campus Package Delivery (CPD) provides delivery services in and around Paradise. Its profits have been declining, and
management is planning to add an express service that is expected to increase revenue by $50,000 per year. The total cost to
lease the necessary additional package delivery vehicles from the local dealer is $7,500 per year. The present manager will
continue to supervise all services at no increase in salary. Due to expansion, however, the labor costs and utilities would
increase by 50 percent. Rent and other costs will increase by 20 percent.

Page 31
Required

1. Prepare a report of the differential costs and revenues if the express service is added. (Hint: Use the format of Exhibit
1.3.)

2. Should management start the express service?

3. Are there factors beyond the differential costs and revenues that management should consider?

1-41. Cost Data for Managerial Purposes

(LO 1-3)

KC Services provides landscaping services in Edison. Kate Chen, the owner, is concerned about the recent losses the
company has incurred and is considering dropping its lawn services, which she feels are marginal to the company's business.
She estimates that doing so will result in lost revenues of $150,000 per year (including the lost tree business from customers
who use the company for both services). The present manager will continue to supervise the tree services with no reduction
in salary. Without the lawn business, Kate estimates that the company will save 15 percent of the equipment leases, labor, and
other costs. She also expects to save 20 percent on rent and utilities.

Required

1. Prepare a report of the differential costs and revenues if the lawn service is discontinued. (Hint: Use the format of
Exhibit 1.3.)
 2. Should Kate discontinue the lawn service?

3. Are there factors other than the differential costs and revenues that Kate should consider?

1-42. Cost Data for Managerial Purposes

(LO 1-3)

B-You is a consulting firm that works with managers to improve their interpersonal skills. Recently, a representative of a
high-tech research firm approached B-You's owner with an offer to contract for one year with B-You to improve the
interpersonal skills of a newly hired manager. B-You reported the following costs and revenues during the past year:

Page 32

If B-You decides to take the contract to help the manager, it will hire a full-time consultant at $85,000. Equipment lease will
increase by 5 percent. Supplies will increase by an estimated 10 percent and other costs by 15 percent. The existing building
has space for the new consultant. No new offices will be necessary for this work.

Required

1. What are the differential costs that would be incurred as a result of taking the contract?

2. If the contract will pay $90,000, should B-You accept it?

3. What considerations, other than costs, do you think are necessary before making this decision?

1-43. Cost Data for Managerial Purposes

(LO 1-3)
Tom's Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store owner
has approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues at
Tom's Tax Services follow.

If Tom gets the store's business, he will incur an additional $60,000 in labor costs. Tom also estimates that he will have to
increase equipment leases by about 10 percent, supplies by 5 percent, and other costs by 15 percent.

Required

1. What are the differential costs that would be incurred as a result of adding this new client?

2. Tom would normally charge about $75,000 in fees for the services the store would require. How much could he offer to
charge and still not lose money on this client?

3. What considerations, other than costs, are necessary before making this decision?

1-44. Cost Data for Managerial Purposes—Budgeting

(LO 1-3)

Refer to Exhibit 1.5. Assume that Carmen's Cookies is preparing a budget for the month ending September 30. Management
prepares the budget by starting with the actual results for April that appear in Exhibit 1.5. Then, management considers what
the differences in costs will be between April and September.

Management expects cookie sales to be 20 percent greater in September than in April, and it expects all food costs (e.g.,
flour, eggs) to be 20 percent higher in September than in April because of the increase in cookie sales. Management expects
“other” labor costs to be 25 percent higher in September than in April, partly because more labor will be required in
September and partly because employees will get a pay raise. The manager will get a pay raise that will increase the salary
from $3,000 in April to $3,500 in September. Utilities will be 5 percent higher in September than in April. Rent will be the
same in September as in April.

Page 33

Now, fast forward to early October and assume the following actual results occurred in September:
Required

1. Prepare a statement like the one in Exhibit 1.5 that compares the budgeted and actual costs for September.

2. Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost
items would you investigate to see why actual and budgeted costs are different? Why would you choose those three
costs?

1-45. Cost Data for Managerial Purposes—Budgeting

(LO 1-3)

Refer to Exhibit 1.5, which shows budgeted versus actual costs. Assume that Carmen's Cookies is preparing a budget for the
month ending November 30. Management prepares the budget for the month ending November 30 by starting with the actual
results for April that appear in Exhibit 1.5. Then, management considers what the differences in costs will be between April
and November.

Management expects cookie sales to be 100 percent greater in November than in April because of the holiday season.
Management expects that all food costs (e.g., flour, eggs) will be 120 percent higher in November than in April because of
the increase in cookie sales and because prices for ingredients are generally higher in the high demand holiday months.
Management expects “other” labor costs to be 120 percent higher in November than in April, partly because more labor will
be required in November and partly because employees will get a pay raise. (120 percent higher means that the amount in
November will be 220 percent of the amount in April.) The manager will get a pay raise that will increase the salary from
$3,000 in April to $3,500 in November. Utilities will be 5 percent higher in November than in April. Rent will be the same in
November as in April.

Now, move ahead to December and assume the following actual results occurred in November:
Page 34
Required

1. Prepare a statement like the one in Exhibit 1.5 that compares the budgeted and actual costs.

2. Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost
items would you investigate to see why actual and budgeted costs are different? Why would you choose those three
costs?

1-46. Cost Data for Managerial Purposes—Finding Unknowns

(LO 1-3)

Quince Products is a small company in southern California that makes jams and preserves. Recently, a sales rep from one of
the company's suppliers suggested that Quince could increase its profitability by 50 percent if it introduced a second line of
products, packaged fruit. She offered to do the analysis and show the company her assumptions.

When Quince's management opened the spreadsheet sent by the sales rep, they noticed that there were several blank cells. In
the meantime, the sales rep had taken a job with a competitor and told the managers at Quince that she could no longer advise
them. Although they were not sure they should rely on the analysis, they asked you to see if you could reconstruct the sales
rep's analysis. They had been considering this new business already and wanted to see if their analysis was close to that of an
outside observer. The incomplete spreadsheet follows.

Required

Fill in the blank cells.

INTEGRATIVE CASES
1-47. Identifying Unethical Actions (Appendix)

(LO 1-5)
The managers of Quince Products (Problem 1-46) decide they will hire a management accountant to help them analyze the
decision to expand their product line. They solicit bids from various accountants in the city and receive three proposals. In
describing their qualifications for the job, the three state:

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Accountant A: “I have recently advised the symphony on how to raise money and therefore I know the local area
well.”

Accountant B: “I have advised several small firms on expansion plans.”

Accountant C: “I have advised Pear Company [Quince's main competitor] and can share its experiences and insights
with you.”

All of the proposals have the same price.

Required

1. As the accounting manager of Quince Products, prepare a memo recommending which accountant you would prefer to
retain. Be sure to include your reasons.

2. Which, if any, of the accountants making a proposal are violating the IMA's code of ethics? What is (are) the
violation(s)?

1-48. Cost Data for Managerial Purposes—Finding Unknowns

(LO 1-3)

Miller Cereals is a small milling company that makes a single brand of cereal. Recently, a business school intern
recommended that the company introduce a second cereal in order to “diversify the product portfolio.” Currently, the
company shows an operating profit that is 20 percent of sales. With the single product, other costs were twice the cost of rent.

The intern estimated that the incremental profit of the new cereal would only be 2.5 percent of the incremental revenue, but it
would still add to total profit. On his last day, the intern told Miller's marketing manager that his analysis was on the
company laptop in a spreadsheet with a file name, NewProduct.xlsx. The intern then left for a 12-month walkabout in the
outback of Australia and cannot be reached.

When the marketing manager opened the file, it was corrupted and could not be opened. She then found an early (incomplete)
copy on the company's backup server. The incomplete spreadsheet is shown following. The marketing manager then called a
cost management accountant in the controller's office and asked for help in reconstructing the analysis.

Required

As the management accountant, fill in the blank cells.

1-49. Identifying Unethical Actions (Appendix)

(LO 1-5)

Before Miller Cereals can introduce the new cereal, the board of directors has to give their approval. The marketing manager
really wants to introduce the new product and believes (honestly) that it will be profitable and an important next step in the
firm's evolution. However, she knows that with the forecasted profit, the board will not give their approval.

She asks the management accountant what she can do. He tells her that he has reviewed the numbers generated by the intern
and he thinks they are reasonable. However, he tells her that “other” costs consist of many different things, so it would be
difficult to question a lower number. He suggests that he lower the estimated other costs by an amount sufficient to get board
approval.

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Required

Is the management accountant violating the IMA's code of ethics? If so, what is (are) the violation(s)?

1-50. Responsibility for Unethical Action

(LO 1-5)

The following story is true except that all names have been changed and the time period has been compressed:

Charles Austin graduated from a prestigious business school and took a job in a public accounting firm in Atlanta. A client
hired him after five years of normal progress through the ranks of the accounting firm. This client was a rapidly growing,
publicly held company that produced software for the health care industry. Charles started as assistant controller. The
company promoted him to controller after four years. This was a timely promotion. Charles had learned a lot and was
prepared to be controller.

Within a few months of his promotion to controller, the company's chief financial officer abruptly quit. Upon submitting her
resignation, she walked into Charles's office and said, “I have given Holmes (the company president) my letter of resignation.
I'll be out of my office in less than an hour. You will be the new chief financial officer, and you will report directly to
Holmes. Here is my card with my personal cell phone number. Call me if you need any advice or if I can help you in any
way.”

Charles was in over his head in his new job. His experience had not prepared him for the range of responsibilities required of
the company's chief financial officer. Holmes, the company president, was no help. He gave Charles only one piece of
advice: “You have lots of freedom to run the finance department however you want. There is just one rule: Don't ever cross
me. If you do, you'll never work again in this city.” Charles believed his boss could follow through on that threat because he
was so well-connected in the Atlanta business community.

The end of the company's fiscal year came shortly after Charles's promotion to chief financial officer. After reviewing some
preliminary financial amounts, Holmes stormed into Charles's office and made it clear that the results were not to his liking.
He instructed Charles to “find more sales.” Charles was shocked, but he did as he was told. He identified some ongoing
software installation work that should not have been recorded as revenue until the customer signed off on the job. Charles
recorded the work done as of year-end as revenue, even though the customer had not signed off on the job. He sent an invoice
to the customer for the amount of the improper revenue, then called her to say that the invoice was an accounting error and
she should ignore it.

Next year, Charles's work life was better but his personal life was not. He went through a costly divorce that resulted in
limited time spent with his two small children. Now he was particularly concerned about not crossing his boss because of the
threat that he would never work in Atlanta if he did. He could not bear to look for a new job that would take him away from
his children. Further, it would be difficult to find a job anywhere that came close to paying the salary and benefits of his
current job. With high alimony and child support payments, Charles would feel a dire financial strain if he had to take a cut in
pay.

The company struggled financially during the year. Clearly, the company would not generate the level of revenues and
income that Holmes wanted. As expected, he again instructed Charles to find some way to dress up the income statement. It
did not matter to Holmes whether what Charles did was legal or not.

Charles had exhausted all legitimate ways of reducing costs and increasing revenues. He faced an ethical dilemma. He could
resign and look for a new job, or he could illegitimately record nonexistent sales. He now understood why the former chief
financial officer had resigned so abruptly. He wished that he could talk to her, but she was traveling in Australia and could
not be contacted. The board of directors would be no help because they would take the president's side in a dispute.

After considering his personal circumstances, Charles decided to record the illegitimate sales as the president had instructed.
Charles knew that what he did was wrong. He believed that if the fraud was discovered, Holmes, not he, would be in trouble.
After all, Charles rationalized, he was just following orders.

Required

1. Can you justify what Charles did?

2. What could Charles have done to avoid the ethical dilemma that he faced? Assume that the company president would
have made it impossible for Charles to work in Atlanta in a comparable job.

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3. What if the Securities and Exchange Commission discovered this fraud? Would Charles's boss get in trouble? Would
Charles?

(Copyright © Michael W. Maher, 2017)

SOLUTIONS TO SELF-STUDY QUESTIONS

1. All costs in Exhibit 1.3 would increase 35 percent, as shown in the spreadsheet that follows. Total costs would increase
from $5,450 in the status quo to $7,357.50 (= 135% × $5,450). Profits would increase from $850 in the status quo to
$1,147.50 (= $8,505.00 revenues − $7,357.50 costs). Carmen's profits increase compared to the status quo but not as
much as in Exhibit 1.3 because some of the costs there do not increase proportionately with sales revenue.

2. Examples of questions for which cost accounting information would be useful include these:

For a hospital administrator:

Where should I purchase supplies?

What services cost more than the reimbursements we receive from insurers?

Should we invest in a new CAT scanner?

 For a museum director:

What ticket prices should we charge?

Should we expand the hours of the museum café?

Are opening galas profitable?

For a bank's marketing vice president:

Where should I spend my advertising dollars?

If we lower the rate on checking accounts, how much will we lose when customers switch?

What fees should we set for online banking?

3. Causes of changes include (but are not limited to) the following:

Accounting has become more computerized, thus reducing manual bookkeeping.

Increased competition in many industries, including automobiles and electronic equipment, has increased
management's interest in managing costs.

Development of more highly technical production processes has reduced emphasis on labor and increased
emphasis on overhead cost control.

Developments in new management techniques have affected accounting. For example, by reducing inventory
levels, JIT methods have reduced the need to compute the costs of inventory.

4. The three steps are to discuss, clarify, and consult. Specifically:

DISCUSS the conflict with your immediate superior or the person at the next level in authority.

CLARIFY the relevant issues and concepts by discussions with a disinterested party. You might need to contact
an appropriate and confidential ethics “hotline.”

CONSULT your attorney about your rights and obligations.